In the fast-changing business dynamics, business restructuring has become a norm whereby businesses undertake activities such as merger – wherein two or more entities come together to form a new entity, resulting in the old entities ceasing to exist; or amalgamation – wherein one or more entities are subsumed into an existing entity such that the subsumed entities cease to exist. Another mode of business restructuring is de-merger, where only specific business divisions are transferred to a new entity or are sold to an existing entity.
Generally, a business restructuring transaction is designed in such a manner that there is the transfer of assets and liabilities as per the terms of transfer of the business or part thereof which is being transferred to the transferee. However, transaction of demerger has its own set of challenges under GST, ranging from who is required to get GST Registration, input tax credit implications, filing of Annual Returns & Final Returns, the liability of transferor and transferee in case of such transfers, etc.
In this blog, we will touch upon some aspects and the issues which concern the GST implications around business restructuring. Below mentioned are some of the crucial aspects impacted by GST in a business transfer.
Section 22 of the CGST Act, 2017 pertains to registration under GST Law. As per section 22(3) of the CGST Act, when a business is transferred as a going concern the transferee is liable to get themselves registered with effect from the date of such transfer. However, as per Sub-Section (4) of Section 22, in a case of transfer under the sanction of a scheme or an arrangement for amalgamation or as the case may be, the demerger of more than two companies according to an order of a Tribunal or otherwise, a High Court, the transferee will be liable to be registered, w.e.f. the date on which the Registrar of Companies provides a certificate of establishment giving effect to that order of a Tribunal or a High Court.
- Input Tax Credit
Input Tax Credit is one of the most discussed topics among taxpayers planning to take over an existing company? What happens to ITC when the business ownership is transferred? Section 18(3) of the CGST law Act permits the transfer of unutilized GST credit by the transferor to the transferee in the case of transfer of business. The transfer of credit is subject to the condition that the liabilities of the business are also transferred along with the assets.
Further, Rule 41 of the CGST Rules prescribes Form ITC-02 which is required to be submitted by the transferor furnishing complete details of the sale, merger, demerger, amalgamation, etc. (as the case may be), along with the details of unutilized input tax credit lying in the hands to the transferee. The transferee is required to accept the details so furnished by the transferor on the common GST portal and upon such acceptance, the un-utilized credit specified in FORM GST ITC-02 shall be credited to his electronic credit ledger the inputs and capital goods so transferred must be duly accounted for by the transferee in his books of accounts. The transfer will submit a copy of the certificate provided by a practicing chartered or cost accountant certifying that merger, de-merger, sale, amalgamation, transfer, or lease of business has been complete with a particular provision for transfer of liabilities.
Likewise, various provisions related to the filing of Annual Returns, Final Return, Liabilities of ongoing investigations, or legal proceedings are also provided under the GST law associated with business restructuring. More of such provisions shall be discussed in the next connected blog.
This content is meant for information only and should not be considered as an advice or legal opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.
CA Tarun Kapoor
AKGVG & Associates