TRANSFER OF CREDIT IN CASE OF BUSINESS RE-ORGANIZATION

1) Background

In the present scenario, where most of the business organizations are unable to survive alone; on account of the liquidity crunches, weak management, etc; Business Re- Organization; is the need of the hour where most probably the strong concerns have an opportunistic takeover of the weak firms to revive the latter. Business Re‑

Organization may take place in various forms; such as merger, demerger, acquisition, change in ownership of business; etc. Under such re­structuring, there is also an impact on the GST

Input Tax Credit and various questions emerges as

How, How Much, & How to transfer the unutilized credit. To leave no iota of doubt, CBIC has issued

Circular No.133 03/2020 – GST – Dated 23.03.2020 addressing the various representations received from various organizations.

2) LEGAL POSITION: Section 18(3) of the CGST Act, 2017 read with Rule

41(1) of the CGST Rules, 2017 deals with the apportionment and transfer of CREDIT.

Section 18(3) of the CGST Act,2017:

  • “Where there is 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 unutilized in his electronic credit ledger to such
  • sold,merged,demerger,amalgamated,
  • leased or transferred business
  • in such manner as may be prescribed.”

Rule 41 of the CGST Rules,2017:

1) 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 (i.e. value of entire assets of the business, whether or not ITC has been availed thereon) of the new units as specified in the demerger scheme..

In short, ITC to be apportioned =

Unutilized ITC in electronic credit ledger * Value of assets transferred in the scheme of demerger

Total Value of assets before transfer

2) The transferor shall also submit a certificate issued by a practicing

  • Chartered accountant or
  • Cost accountant

Certifying that the sale, merger, demerger, amalgamation, lease or transfer of a business has been done with a specific provision for the transfer of liabilities.

3) The transferee shall, on the common portal, accept the details so furnished by the transferor, and upon such

  • acceptance the unutilized credit specified in Form GST ITC-02 shall be
  • credited to his electronic credit ledger

File Form GST

4) The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account.

Journal Entries in the books of Transferee Company:-
Business Purchase A/c……Dr To Transferor Company (being business purchased)
If Purchase Consideration > Net assets acquired:-
Assets A/c………………………Dr

ITC A/c………………………… Dr

Goodwill (Bal. figure)………….Dr

To Liabilities

To Business Purchase

(being net assets taken over)

OR,

If Purchase Consideration < Net assets acquired:-

Assets A/c………………………Dr ITC A/c………………………… Dr To Capital Reserve (Bal. figure) To Liabilities

To Business Purchase

(being net assets taken over)

Transferor Company……Dr To Share Capital A/c

To Securities Premium A/c To Bank A/c

(being purchase consideration discharged)

Above adjustment entries, need to be made in the books of account of the Transferee Company to give effect to transfer of the business.

3) DOUBTS: The various doubts arising amongst the business organizations are as follows:

1) While calculating the ratio for apportionment, whether value of assets of the new units is to be taken at

  • state level or
  • All India level?

2) Is the transferor required to file Form GST-ITC-02 in all states in which he is registered?

3) Proviso to Rule 41(1) explicitly mentions ‘demerger’. So whether this proviso applies to:

  • other forms of business re-organization or
  • transfer as a going concern or
  • Partial transfer of assets along with liabilities?

4) Whether the ratio for apportionment applies to each head of ITC, viz:

  • CGST
  • SGST
  • IGST or
  • Sum of (CGST+SGST+IGST)?

5) How to determine the amount of ITC to be transferred by the transferor while filing Form GST ITC -02 under each head of tax, viz

  • CGST
  • SGST
  • IGST?

6) To calculate the amount of ITC to be transferred, which date unutilized ITC balance in the ELECTRONIC CREDIT LEDGER of the transferor to be taken?

7) Which date shall be relevant to calculate the ratio of the value of assets as prescribed in proviso to Rule 41 (1)?

4)CLARIFICATIONS: Such doubts arising from the various tax payers has been clarified by vide CIRCULAR No 133 03/2020 – GST dated 23rd March, 2020.

Q1) In case of multiple registrations, ratio for the apportionment of ITC is to be calculated at state level Or at all INDIA level?

→ For the purpose of apportionment of ITC, ratio to be calculated at state level.

Scheme Demerger
1)Transferor Company XYZ Registered in M.P and U.P
2)Total Value of assets of XYZ M.P. = 60cr U.P.    = 40cr
Total = 100cr
3) Transferee Company ABC
4)Assets transferred pursuant to the scheme of demerger M.P. = 30cr U.P.    = 10cr
Total = 40cr
5) Formula for apportionment of ITC: (a) * (b)

C

(where, a = unutilized ITC in the electronic credit ledger of the respective state;

b = value of assets of new units in the respective state; c = total value of assets in the respective state before transfer)

6) Unutilized ITC in the state of M.P to be apportioned in the ratio of:- Value of assets of new unit in M.P                       

Total value of assets in M.P i.e. 30/60 = 0.5

7) Similarly in the state of U.P:- 10/40 = 0.25

CRUX: At the State level and NOT at all India level.

Q2) In case of multiple registration, Form GST ITC-02 is required to be filed by the transferor in all the states?

No, only in the states where both the transferor and the transferee is registered.

Q 3) Proviso to Rule 41(1) explicitly mentions “demerger”. Whether other forms of business reorganization where part of the business is hived off or transferred as a going concern or where there is partial transfer of assets along with liabilities?

→ Yes, the formula prescribed in the proviso to Rule 41(1) is applicable to all forms of business re-organization, where there is partial transfer of assets along with liabilities.

Q4) Whether the ratio is to be applied to each head of ITC viz,CGST, SGST, IGST,Cess separately or together?

→The ratio is to be applied to the sum of unutilized (CGST+SGST+IGST) of the transferor.

Scheme Demerger
1)Transferor Company ZYX Registered in M.P
2) Unutilized ITC balance in the ELECTRONIC CREDIT LEDGER of the transferor CGST = 5 lakhs SGST = 5 lakhs IGST = 10 lakhs  Total = 20 lakhs
3) Ratio of assets transferred 60%
4) Amount of ITC to be transferred 60% of 20 lakhs i.e. 12 lakhs

CRUX: Apply ratio to the TOTAL of the Unutilized ITC.

Q5) How to determine the total amount of ITC to be transferred under each head (viz. CGST, SGST, IGST) while filing Form GST ITC-02 by the transferor?

Step:1 Calculate the ratio:

Ratio = value of assets of new units

total value of assets before demerger

Step:2 Calculate the total ITC to be transferred: ITC to be transferred to the transferee

= Ratio (as calculated in Step:1)

* Total unutilized ITC (sum of CGST+SGST+IGST)

Step:3 Determine the amount of ITC to transferred under each head:

Amount of ITC to be transferred under each head (viz CGST, SGST, IGST) left to be decided by the transferor ,but shall not EXCEED:

  • Total amount of unutilized ITC balance in the ELECTRONIC CREDIT LEDGER of the transferor and
  • ITC Balance in the individual ITC head.

llustration: State: Rajasthan Ratio of assets transfer: 70%

Tax head ITC Balance of transferor (pre-appo rtionment) ITC transferred ITC balance of transferor (post-appo rtionment)
CGST 10,00,000 10,00,000 0
SGST 10,00,000 10,00,000 0
IGST 30,00,000 15,00,000 15,00,000
Total 50,00,000 35,00,000 (i.e. 70% of 50,00,000) 15,00,000

CRUX: Do analysis and transfer ITC to the transferee under each head in the best possible manner.

Q6) For the purpose of proviso to Rule 41(1), which date unutilized balance of ITC of the transferor to be taken?

→ Unutilized ITC balance on the date of filing of the Form GST ITC-02 is to be considered for the purpose of proviso to Rule 41 (1).

Q7) On which date, the ratio of the value of assets to be considered?

→ The ratio of the value of assets to be taken on the “appointed date of demerger” (i.e. the date on which the scheme of demerger comes into force and such date is specified in the scheme of Demerger).

DISCLAIMER: This article is based on the personal understanding and legal interpretation of the author and does not render any professional advice.

In case of any queries or doubts, please feel free to ask at visheshsurana@yahoo.com

Author Bio

Qualification: CA in Practice
Company: Surana Vishesh & Associates
Location: Guwahati, Assam, IN
Member Since: 12 Apr 2020 | Total Posts: 2

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