Mergers and Slump sales are not defined in the GST law. In General, a “Merger” involves a process of combining two or more companies into one single entity.
Example: Company A and Company B agree to merger and create Company C.
As per Section 2(42C) of the Income-tax Act 1961, ‘slump sale’ means the transfer of one or more undertakings for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. E.g., Company A sells its business unit (either whole or part of it) to Company B for a lumpsum amount.
Generally, in Mergers as well as in Slump Sale transactions, business is transferred as a going concern. A going concern is a concept of accounting that applies to the business of the company. Transfer of a going concern means the transfer of a running business that is capable of being carried on by the purchaser as an independent business.
[Rajashri Foods Pvt. Ltd., Karnataka AAR dated 23rd April 2018].
Under such transactions, each business asset would not be given valuations.
Provisions under GST law:
- Registration:
By Section 22(3) of the CGST Act, 2017, 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.
- GST Liability on merger/slump sale:
As per Schedule II of CGST Act, 2017, transfer of business assets is the supply of goods except in the case where business is transferred on a going concern. In such a case, backed by the definition of services under section 2 (102) of CGST Act, 2017 (anything other than goods is a service), transfer of business on a going concern basis would be treated as supply of services.
As per Sr. No. 2 of Notification No. 12/2017- Central Tax (Rate) dated 28th June 2017, rate of GST would be Nil in case of “Services by way of transfer of a going concern, as a whole or an independent part thereof.”
If there is any supply of goods or services or both, between any two or more of such companies (merged, amalgamated, etc.), between the date of effect of such order and the date of the order, such supply and receipt will be included in the turnover or receipt of the respective companies, and they shall be liable to pay taxes. Such Companies would be treated as “distinct persons” for this Act.
- Input Tax Credit (ITC):
Section 18 of the CGST Act, 2017 enshrines the provisions regarding availing of ITC by the taxable person. Section 18(3) of CGST Act, 2017 as well as Rule 41 of CGST Rules, 2017 stipulates that in case of change of constitution of a registered taxable person on account of the sale, merger, demerger, amalgamation, lease, or transfer of business, the registered person would be allowed to transfer the unutilized ITC.
In this context, the registered person is required to furnish the details of sale, merger, de-merger, amalgamation, lease, or transfer of business in the Form GST ITC-02 electronically on the Common Portal along with a request to transfer the unutilized ITC lying in his electronic credit ledger to the transferee.
- Reversal of ITC:
Transfer of business as a going concern to different persons qualifies exemption from GST, a pivotal question that arises here is the requirement of reversal of ITC.
As per Section 17(2) of CGST Act, 2017, where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies, and partly for effecting exempt supplies, the amount of ITC shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.
Since services by way of transfer of going concernedhave been specifically exempted, as per law, there is a requirement of reversalof ITC attributable to such exempt supply. The impact of the same appears to be very harsh on businesses, especially where the businesses are making 100% taxable supply.
The GST Law (via Explanation to Rule 42 and 43 of the CGST Rules) contemplates certain supplies which are excluded from the purview of exempt supplies for ITC apportionment. Such supplies include services by way of accepting deposits, extending loans or advances in so far as the consideration is represented by way of interest or discount,and services by way of transportation of goods by a vessel from the customs station of clearance in India to a place outside India. However, no such exclusion has been made for slump sale/ transfer of a business as a going concern.
The consideration for which a unit is being sold could be very high compared to annual turnover and reversal of ITC in this manner would be unfair. There has been no clarification from the Government on the reversal of ITC in case of transfer of a business as a going concern. This, also being a legacy issue, (Transfer of business as a going concern was exempt under Service Tax too) should have been plugged by the Government long back.
- Transfer of business as a going concern within distinct persons:
QUES.: Whether transfer of a business as a going concern to a distinct person is exempt supply as per Sr. No. 2 of Notification No. 12 / 2017 – Central Tax (Rate) dated 28th June 2017? Whether transfer of Input Tax Credit allowed via Form ITC-02?
ANS.:The above has been analyzed by the Appellate Authority of Advance Ruling, Andhra Pradesh in the ruling of Shilpa Medicare Ltd.,dated 10th November 2020 wherein the Appellate Authority has observed and ruled as follows:
“The establishments of a person with separate registrations whether within the same State/UT or in different States/UTs are considered as distinct persons”.
Para 4(c) of Schedule II of CGST Act, 2017 does not apply in caseswhere there is the transfer of a business as a going concern to distinct persons. This is because the seller and buyer are holders of the same PAN.
Also, Section 18(3) of CGST Act, 2017 relating to the transfer of Input Tax Credit via Form GST ITC-02 starts with “Where there is a change in the constitution of a registered person on account of the sale, merger……..”. In the case of “transfer of a business as a going concern to a distinct person,” there is no change in the constitution and hence the transferor cannot transfer the ITC to the transferee.
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Posted by
CA Tarun Kapoor
AKGVG & Associates