Treatment of ITC on Transfer of Business

When two companies merge, questions arise on what will happen to the Input Tax Credit (ITC) balance of the transferor. Understanding impact of GST on mergers and amalgamation becomes utmost important so the right treatment of such accumulated ITC can be taken. GST law provides rules and steps to transfer ITC from transferor to transferee business. Following the process, taxpayer can ensure there is no ITC leakage and uninterrupted business operations. In this article, let's explore the following subjects-

• Modes of transfer of business
• Legal provisions defining GST on transfer of business
• What happens to ITC on transfer of business?
• When is reversal of ITC needed for transfer of business?
• Payment of tax
• Assessment/Notices
• FAQs

Modes of transfer of business

It is essential to understand the different types of transfers that may or may not amount to transfer of entire business and accordingly has different treatments under the GST law.

1. Sale of assets of the business- itemised sale of assets will not amount to transfer of business  
2. Transfer of undertaking- Transferring assets and liabilities that may be considered an independant business activity
3. Merger- Acquiring company takes over the acquired company and hence the identify of acquiring company remains whereas the latter's cease to exist.
4. Amalgamation- In this case, two or more companies come together to form single entity and hence each company will cease to exist and will not have a separate identity.
5. Demerger- In this case, one entity is transferred to another such that the transferor's identiy remains.
6. Acquisition of equity shares- It is not considered transfer of business as the acquiring company purchases equity shares in the target company.
7. Transfer as going concern- It means transfer of current running business as independant concern for the purchaser to continue running the entity. It does not cover mere/predominant transfer of entity including the service. It involves sale of immovable property, goods, employees, goodwill and unexecuted orders.
8. Slump sale- Slump sale refers to the transfer of one or more entities for a lump sum consideration. No values are assigned to the individual assets and liabilities in slump sale. 

Legal provisions defining GST on transfer of business

Under the GST law, shares are covered under securities. The definition of goods and services exclude ‘Securities’. Therefore, there shall be no GST payable on the sale of securities.

Section 7 of the CGST Act defines ‘Supply’. It covers sale, transfer, barter, exchange on a consideration in continuance of business. It further mentions that Schedule II list of transactions will be supply of goods or services as the case may be.

'Transfer of business' is covered by Schedule II at serial number 4. Transfer of business assets is considered as supply of goods. It implies only part of assets of the business are transferred and not in entirety. Further the serial number 4(c) conveys that transfer of business as a going concern is not supply of goods. So we can conclude that transfer of entire business is not supply of goods. Accordingly, sale of business assets is taxable under GST. 

CGST (Rates) Notification No. 12/2017 dated 28th June 2017 exempts transfer of business as a going concern (whole or independant). Accordingly, no GST applies on the slump sale.

Refering to Section 87 of the CGST Act, it is told that in case of merger/amalgamation by the order of Court or Tribunal, it will be considered effective from the date earlier to the order date. Any supply of goods or services between date of effect of order and order date is subject to GST as it must be included in turnover calculation. The provision further explains that GST registration will be cancelled from date of order. Until then, these will be considered distinct companies.

Section 22(4) of the CGST Act imposes applicability of GST registration on the transferee or successor with effect from the date of such transfer. Suppose the Court/Tribunal orders, then date of registration must be effective the date on which RoC issues incorporation certificate.

Section 18 of the CGST Act mentions that whenever the business constitution changes due to merger, amalgamation, demerger or transfer of business, the law allows transfer of ITC unutilised in the electronic credit ledger. In furtherance, CGST Rule 41 provides form ITC-02 for enabling the same.

CGST Circular No 133 dated 23rd March 2020 directs taxpayer apportionate ITC based on the value of assets of new units at state level (distinct person) and not at pan-India level.

Treatment of ITC on Transfer of Business

All the companies transferring their business under GST will need to furnish the particulars in the form GST ITC-02 through the common portal along with a request for transferring the unutilised input tax credit to the electronic credit ledger of the transferee.

Exception: In the case of the demerger of a company, the input tax credit shall be apportioned in the ratio of the new assets of the units.

For example, ABC private limited went through a demerger. ABC would be demerged into three separate units A, B, C. Sharing ratio of assets among the units is 4:3:3. The ITC available would be apportioned in the ratio of 4:3:3. A copy of the certificate issued by a practicing chartered accountant or cost accountant certifying the transfer of business/amalgamation/merger etc. has been done with a specific provision inserted for the transfer of liability.

Once the transferee has validated the details entered by the transferor in the Form GST ITC-02, the amount of unutilised input tax credit would be transferred to his electronic credit ledger. The transferee’s books of should have details of input and capital goods transferred.

Reversal of ITC in transfer of business

1. When a taxpayer registered under the composition scheme utilizes input tax credit on goods and services, or both, which have become wholly or partly exempt from tax, then the amount equivalent to the amount of ITC on inputs held in stock, semi-finished and finished goods held in stock, and capital goods will be debited to the electronic credit ledger or electronic cash ledger. The input tax credit shall be calculated proportionately on the basis of corresponding invoices on which credit had been availed by the registered taxable person on such input.

For example:

Ajay Works sold handmade jute works to Charlie for Rs 1,00,000. ITC utilized on the inputs for above order was Rs 15,000. Let’s say Ajay Works Private Limited has opted for composition scheme under GST. Some time after this transaction, handmade jute works were made exempt under GST. Now, the ITC of Rs 15,000 will be debited to the electronic credit or cash ledger belonging to Ajay Works Private Limited. ITC would be calculated on the basis of invoice for the sale to charlie.

2. When a taxpayer’s GST registration is canceled then an amount equivalent to the input tax credit on inputs held in stock, capital goods, semi-finished and finished goods shall be debited to the electronic credit ledger or electronic cash ledger on the preceding day of cancellation of registration. 
*ITC on Capital goods lying in stock has to be calculated on the pro-rata basis of residual life and the residual life is assumed to be 5 years.Capital goods are also to be reduced by 5% per quarter or the part thereof from the date of invoice or other document specifying the receipt of such capital goods by the recipient. For example:

For example:

Anuj has capital goods used in his factory for 3 years,6 months and 20 days. The value of capital goods before use was Rs 5 lakh. ITC on such goods available was Rs 4 lakh.  ITC is available for 18 months on a pro-rata basis excluding part of the month.ITC allowed will be 18/60 *4,00,000 = Rs 1,20,000.

The amount of credit should be calculated separately for IGST and CGST. In case there are no tax invoices for the input held in stock, capital goods, semi-finished and finished goods than the amount shall be calculated on the basis of prevailing market price of goods. The details of the above input tax credit have to be furnished in the form GST ITC-03 and also in the form GSTR 10 if the amount of ITC is reversed due to the cancellation of registration.

Payment of tax

In case the Court/Tribunal may define a date with effect from which merger/amalgamation will take place. Where the Court does not specify a particular date, date of amalgamation is date mentioned in the scheme as the transfer date.

Assessment/Notices

Upon amalgamation, the entity amalgamating becomes non-existant. Any proceedings initiated against it is void ab initio.