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Treatment of ITC on Transfer of Business

Updated on: Jun 22nd, 2021


5 min read

There will be multiple amalgamations/mergers/transfer of business prior to, and after the implementation of GST on 1 July 2017. The transferor in these cases will have available ITC which will need to be passed to the transferee at the time of amalgamation/merger/transfer of business.

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 unutilized 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 unutilized 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.

The input tax credit would be reversed in the following two situations

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.

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Quick Summary

The transfer of business under GST involves passing the unutilized Input Tax Credit (ITC) from transferor to transferee. Exceptions apply for demergers. Specific procedures and forms must be followed for successful ITC transfer. Reversal of ITC is required in certain situations such as composition scheme usage or registration cancellation. Proper calculation and documentation are essential for ITC processes.

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