There is no specific provision under the Goods and Services Tax (GST) Act on how to convert a proprietorship into a partnersh. Still, there are various mentions in the Act on converting a proprietorship into partnership firm. It includes obtaining GST registration for partnership, transfer of unutilised Input Tax Credit (ITC) to partnership firm, and cancellation of proprietorship GST registration.
1. Prerequisites for New GST Registration
It is essential to create a partnership firm to convert the proprietorship entity into a partnership firm and obtain the partnership firm's PAN, GST registration and bank accounts. To start with, partners have to write an agreement called "Partnership Deed", which specifies all the terms and conditions under which such partnership comes into force. Once the partnership deed is ready, the taxpayer has to apply for the PAN number with the income tax department as it is a mandatory prerequisite to apply for registration under GST.
2. Obtaining GST Registration for Partnership
Once the partnership firm's PAN has been obtained, apply for GST registration in form REG-01. The following list of documents needed to apply under GST:
- PAN card of the firm
- Partnership deed
- PAN card of all partners
- Aadhaar Card/passport/driving license/voter ID of all partners with the appropriate address which is given in partnership deed
- Photos of all partners
- Authorisation letter to make a partner as an approved signatory for GST registration on behalf of the partnership
- A document evidencing the company's business place(s) address
- Utility bill/Property Tax Receipt (latest of two months) of such business place
- Bank account statement/passbook
- A copy of certificate of registration under any other act
After obtaining all of the above documents, apply for the GST registration for the partnership firm.
3. Filing of Returns by Proprietorship & Partnership
While submitting the cancellation for GST registration of proprietorship, the taxpayer has to give the date from which the registration is to be cancelled. Also, while applying for new GST registration of the partnership firm, the taxpayer has to submit the date on which liability to register arises. The taxpayer has to make sure that both the above dates are the same, and this will be the effective date for GST registration of partnership.
Therefore, the proprietorship entity has to file all GST returns till the new GST registration date is announced. The partnership firm has to start filing the GST returns from the date of new GST registration.
4. Transfer of Business to Partnership Firm
The transfer of stock or other assets while converting an existing proprietorship entity into a new partnership firm is exempted under GST, because such goods/assets are transferred for the continuance of the same business. This exemption has been specified in Schedule II of the CGST Act. This benefit is available when the existing firm ceases to be a taxable person after such conversion. Further, the transfer of a going concern is exempted as per the CGST (Rate) notification 1/2017. Hence, it is clear that the transfer of a going concern shall not be taxable under GST.
5. Transfer of Unutilised ITC to Partnership
After completing the filing of the pending returns, the taxpayer can transfer the unutilised ITC to the partnership firm. Following are the steps for transferring unutilised ITC to the partnership firm:
- Form GST ITC-02 has to be filed by the proprietorship business to transfer the unutilised ITC to the electronic credit ledger of the partnership firm.
- Proprietorship entity shall also file a copy of a certificate issued by a practising Chartered Accountant or Cost Accountant certifying that the business has been transferred with a specific provision for the transfer of liabilities.
- The partnership shall accept the information so provided by the proprietorship company on the GST portal and, upon such approval, the unutilised ITC specified in Form GST ITC-02 shall be credited to its electronic credit ledger.
- The inputs and capital goods, thus transferred, shall be adequately accounted for in its books of account by the partnership firm.
6. Transfer of Balance in Electronic Cash Ledger
There is no provision under the GST Act to transfer balance in electronic cash ledger from one entity to another entity. Hence, the taxpayer has to file the Form RFD-01 with a refund type of either "Refund of Excess Balance in Electronic Cash Ledger" or "Refund on Account of Any Other Reasons" to get the refund of balance in electronic cash ledger.
7. Cancellation of GST Registration of Proprietorship
Once the pending returns were filed, and all tax dues have been paid off, request for the cancellation of the GST registration in Form GST REG 16 citing reasons as 'Changing the company's legal framework'. It will also ask for the new partnership firm's GST number.
This is the whole process of converting a proprietorship firm into a partnership business. It should also be noted that the same procedures mentioned above apply in other cases, where one legal entity converts into another legal form. Such as converting a partnership firm into a proprietorship firm, a private limited/OPC/public limited or vice versa.