Implication of GST on Transfer of Business

  • Prologue
    • Corporate transaction in pursuance of amalgamation, arrangement, mergers, acquisition and takeovers are also affected by GST. Thus, the industries are required to analyze the provisions of the GST Law and its impact on their business.
  • Registration
    • By virtue of section 22(3) of the CGST Act, where a business carried on by a taxable person registered is transferred, the transferee or the successor would be liable to be registered with effect from such transfer or succession and he will have to obtain a fresh registration with effect from the date of such transfer or succession.
    • The transferee would be liable to obtain registration from the date on which the Registrar of Companies issues a certificate of incorporation giving effect to such order of the High Court or Tribunal.
  • Input Tax Credit
    • Section 18 enshrines the provisions regarding availment of input tax credit by taxable person. Section 18(3) of the CGST Act as well as rule 41 of the CGST Rules stipulates that in case of change of constitution of a registered taxable person on account of sale, merger, demerger, amalgamation, lease or transfer of business, the registered person would be allowed to transfer the unutilized input tax credit to transferor.
    • In this context, the registered person is required to furnish the details of sale, merger, de-merger, amalgamation, lease or transfer of business in Form GST ITC-02 electronically on the Common Portal along with a request to transfer the unutilized input tax credit lying in his electronic credit ledger to the transferee.
    • Rule 41
    • In the case of demerger, the input tax credit shall be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme
    • The transferor shall also submit a copy of a certificate issued by a practicing-chartered accountant or cost accountant certifying that the sale, merger, de-merger, amalgamation, lease or transfer of business has been done with a specific provision for the transfer of liabilities.
  • Itemized Sales
    • Where assets and liabilities of a business are transferred by way of assigning a value to each item then it is called as itemized sale.
    • Such sale involves the disposal of key or selected business assets. Under the merger and amalgamation, value of each asset is calculated separately i.e. the whole business is transferred but item wise.
    • Transaction of itemized sale is supposed as supply under the ambit of GST and individual asset would covered under the definition of goods as per schedule II of the CGST Act. Thus, GST would levy on itemized sale.
  • Slump Sale
    • Slump sale will have the same treatment as normal supply. Under the GST regime tax is payable by the registered taxable person on the supply of goods and/or services.
    • The transfer of business is amounted to transfer of a part of the assets and not the whole business. Moreover, para 4(c) of the schedule II specifies that in case business is transferred as a going concern then it would not constitute as supply.
    • However, in pursuance of Notification No. 12/2017 Central tax (rate) dt 28.06.2017 services, which are provided by way of transfer of a going concern as a whole or an independent part thereof, are exempted from GST. Thus, no GST would applicable on slump sale transaction as transfer of business on a going concern basis.
  • Sale of Securities
    • In most case, the usual mode is the acquiring of company by making an offer by the transferee company to the shareholders of the transferor company to purchase their securities, in the transferor company, at a price stated for the purpose.
    • The definition of goods as well as services under the GST regime do not cover the securities, therefore GST would not be levied on the sale of securities.
  • Conclusion
    • Goods and Services Tax have impact on each and every industry and business in India. Transfer of business under mergers, amalgamation and acquisitions do not attract any tax liability under GST regime, they are unlikely to impacted by indirect taxation.
    • For calculating the Capital gains, the holding period is calculated from the date of original purchase of shares. The companies who opt for merger and acquisition, the liability to register arises on the date of transfer for transferee of a business as going concern.
    • Further, GST Law stipulates transfer or sale of business assets can take place either as a slump sale or itemized sale. In case of change of constitution of a registered person on account of sale, merger, demerger etc, the unutilized ITC would be allowed to be transferred to transferee. Thus, GST Law brought the immense clarity on the taxability of business transfer and related aspect thereof.

Disclaimer:"The information contained herein is only for informational purpose and should not be considered for any particular instance or individual or entity. We have obtained information from publicly available sources, there can be no guarantee that such information is accurate as of the date it is received or it will continue to be accurate in future. No one should act on such information without obtaining professional advice after thorough examination of particular situation."

Prepared By

Prajwal.B.R.

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Ankit C Shetty

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