Implication of GST on demerger of business

What Is Demerger?

A demerger is a form of corporate restructuring in which the entity’s business operations are segregated into one or more components. It is the converse of a merger or acquisition.

Implication of GST on demerger of Company

In GST Act, In case of demerger of company, the registered person shall be allowed to transfer its unutilised input tax credit to resulting company through ITC-02. For this purpose input tax credit shall be transferred to the resulting company in the ratio of the value of assets held by them at the time of registration.

Keeping in mind the aforesaid situation, your reputed client may ask you the following question along with ITC-02.

1. Whether the value of assets is to be considered registration wise or the total assets of all the registrations are to be considered?

2. Is it mandatory to file FORM GST ITC-02 & CA certificate with respect to units having no input tax credit?

3. Whether demerged company would be required to file the annual return for the FY 2017-18, 2018-19 and 2019-20 for its registrations which will be cancelled subsequent to the demerger order? Let assume appointment date of demerger is 01.04.2017 and effective date for the date is 04.07.2019.

4. What is the manner in which ITC can be re-availed by resulting company with respect to the input tax credit which was reversed by demerged company on account of non-payment of consideration to the vendor within 180 days?

5. Open issue: – The transaction of transfer of business / independent unit as a going concern is exempt from the supply of services. Now question that remains open is whether the demerged company has to undertake proportionate reversal of input tax credits as the said activity is an exempt supply.

Brief discussion of aforesaid issue is provide under-

Issue-1:-

Whether the value of assets is to be considered registration wise or the total assets of all the registrations are to be considered?

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. The transferee would accept the details so furnished by the transferor on the Common Portal and, upon such acceptance, the unutilized credit would be credited to his electronic credit ledger.

In the case of demerger, the input tax credit would be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme.

[Explanation:- For the purpose of this sub-rule, it is hereby clarified that the ―value of assets means the value of the entire assets of the business, whether or not input tax credit has been availed thereon.]

On conjoint reading of the above, a registered person is required to apportion the unutilised input tax credit in the ratio of value of the assets of the new units as specified in the demerger scheme. Wherein value of assets means the value of the entire assets of the business of the registered person, whether or not input tax credit has been availed thereon.

As we all know that as per section 25(4) of CGST Act, A person who has obtained or is required to obtain more than one registration, whether in one State or more than one State shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act. On conjoint reading of rule 41 of CGST Rules, we will find the rule is talking about the entire business of registered person rather than entire business of the company.

Note: Such an explanation clause also exist in Rule 41A of CGST rules, wherein transfer of unutilised input tax credit is allowed where A registered person who has obtained separate registration for multiple places of business in accordance with the provisions of rule 11 of CGST rules.

Therefore, in nutshell, with keeping in mind the aforementioned discussion, value of entire assets of the business shall be considered at GSTIN wise rather than company as a whole.

Issue-2:-

Is it mandatory to file FORM GST ITC-02 & CA certificate with respect to demerged company having no input tax credit?

In this regard, it has been observed that Section 18 (3) of the CGST/SGST Act, 2017, provides as under:-

“(3) Where there is a change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provisions for transfer of liabilities, the said registered person shall be allowed to transfer the input tax credit which remains unutilised in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in such manner as may be prescribed.”

Further manner of transfer is specified in Rule 41 of the CGST Rules, 2017, provides as under:-

“RULE 41. Transfer of credit on sale, merger, amalgamation, lease or transfer of a business:

• A registered person shall, in the event of sale, merger, de-merger, amalgamation, lease or transfer or change in the ownership of business for any reason, 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 for transfer of unutilized input tax credit lying in his electronic credit ledger to the transferee:

Provided that 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.

[Explanation:- For the purpose of this sub-rule, it is hereby clarified that the ―value of assets means the value of the entire assets of the business, whether or not input tax credit has been availed thereon.]

• The transferor shall also submit a copy of a certificate issued by a practicing-chartered accountant or cost accountant certifying that the sale, merger, demerger, amalgamation, lease or transfer of business has been done with a specific provision for the transfer of liabilities.
• The transferee shall, on the common portal, accept the details so furnished by the transferor and, upon such acceptance, the un-utilized credit specified in FORM GST ITC02 shall be credited to his electronic credit ledger.
• The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account. “

Thus, it is evidently clear that there are provisions in the law, where in case of demerger, a registered person, by filing Form GST ITC-02, electronically on common portal, can transfer un-utilized input tax credit lying in his electronic credit ledger to the transferee. Here it is to be noted that these provisions pertain to transfer of unutilized input tax credit. These provisions are not applicable to un-utilized balance lying in electronic cash ledger or for transfer of any other amount.

Moreover registered person shall be allowed to transfer the input tax credit which remains unutilised in his electronic credit ledger in such a manner as prescribed in Rule 41 of CGST rule by filing ITC-02. Therefore in case where un-utilized balance does not lying in electronic credit ledger, demerged company is not required to file ITC-02, as ITC 02 is required to file only where demerged company wishes to transfer unutilised input tax credit.

Issue 3:-

Whether demerged company would be required to file the annual return for the FY 2017-18, 2018-19 and 2019-20 for its registrations which will be cancelled subsequent to the demerger order?  Let assume appointment date of demerger is 01.04.2017 and effective date for the date is 04.07.2019.

As per Legal provision of Section 44(1) of CGST Act, every registered person shall be required to file GSTR-9. Hence, even if the status of taxpayer is not registered as on 31st March 2018 but he was registered between July-17 to March-18, he shall be required to file GSTR-9 providing details for the period during which he was registered.

For easy reference, 44(1) of the CGST Act respectively, is reproduced as under:

“Every registered person, other than an Input Service Distributor, a person paying tax under section 51 or section 52, a casual taxable person and a non-resident taxable person, shall furnish an annual return for every financial year electronically in such form and manner as may be prescribed on or before the thirty-first day of December following the end of such financial year”.

Therefore demerged company is required to file GSTR-9 along with Reconciliation statement for all those financials years in which it was/is register even for the single day.

Issue 4:-

What is the manner in which ITC can be re-availed by resulting company with respect to the input tax credit which was reversed by demerged company on account of non-payment of consideration to the vendor within 180 days?

The input tax credit can be availed by a registered person if-

1. Inward supply of goods or services or both must be used or intended to be used in the course or furtherance of business.

2. The pre-requisites for availing credit by registered person are:

1. 1. He is in possession of tax invoice or any other specified tax paying document.
   2. He has received the goods or services. “Bill to ship” scenarios also included.

3. Tax is actually paid by the supplier.

4. He has furnished the return.

5. Input tax credit shall be availed by a registered person only if all mentioned particulars are contained in the said document-

• Amount of tax charged
• Description of goods or services
• Total value of supply of goods or services or both
• GSTIN of the supplier and recipient
• Place of supply.

Resulting company cannot re-avail Input Tax Credit on payment of consideration to the vendor where Input Tax Credit was reversed by the demerged company on account of non-payment of consideration to vendor within 180 days from the date of Invoice (Second proviso to Section 16(2) of CGST Act) due to below mentioned reasons-

1. In case of demerger, a registered person, by filing Form GST ITC-02, electronically on common portal, can transfer un-utilized input tax credit lying in his electronic credit ledger to the transferee. Here it is to be noted that these provisions pertain to transfer of unutilized input tax credit. These provisions are not applicable to un-utilized balance lying in electronic cash ledger or for transfer of any other amount. In other words in case of Demerger, GST Act doesn’t provide any mechanism to transfer any amount other than which is reflected in electronic credit ledger.
   

2. Even after the demerger, resulting company cannot re-avail Input Tax Credit on payment of consideration to the vendor where Input Tax Credit was reversed by the demerged company on account of non-payment of consideration to vendor within 180 days from the date of Invoice as original invoice does not contain the GSTIN of resulting company despite the fact that resulting company would qualify as a recipient for the supplies as he has paid the consideration to its vendors.
   

Open issue: – The transaction of transfer of business / independent unit as a going concern is exempt from the supply of services. Now question that remains open is whether the demerged company has to undertake proportionate reversal of input tax credits as the said activity is an exempt supply.