In the today’s scenario, with increase in the pace of globalization and with industries venturing into new domains, the processes of amalgamation, merger, transfer of business and demerger are significantly on the rise than ever before.
With the passage of more than three years from the introduction of GST law, the Government of India has issued various notifications and circulars to bring clarity on a gamut of issues faced by the industry. However, one of the tax issues pertaining to merger or transfer of businesses has still remained unanswered and the transition phase of the process of merger is left with full of uncertainties.
In this article, we will address the uncertainties faced by the businesses due to the provisions of GST law relating to cancellation of the GST registration post transfer of business or merger.
In terms of Section 87 of the CGST Act, 2017 (‘CGST Act’), the registration certificate of the amalgamating or merged companies shall be cancelled with effect from the date of order.
While as per Section 29(1) of the CGST Act read with Rule 20 of the CGST Rules, 2017 (‘CGST Rules’), the registered person is required to make an application for cancellation of the GST registration in case of discontinuance of business or transfer of business or amalgamation within a period of 30 days of the occurrence of the event.
From the plain reading of these provisions, it can be inferred that Section 87 of the CGST Act provides that the registration certificate of the transferor company shall be cancelled with effect from the date of NCLT or High Court order. On the other hand, Section 29(1) provides that the application for cancellation of the registration should be made within a period of 30 days of the occurrence of the event such as merger, amalgamation or discontinuance of business.
Consequently, the first doubt which arises is relating to time period as to when the transferor company is required to make an application for cancellation of the GST registration and what should be the effective date of cancellation of GST registration? In other words, the issue which arises is as to whether the effective date of cancellation of GST registration should be the date of NCLT or High Court order or the effective date of merger or transfer of business.
With effect from the date of NCLT or High Court order:
In case, one takes a view that the transferor company is required to apply for the cancellation of GST registration with effect from the date of NCLT or High Court order which is to take effect from a later date, the question arises on the treatment of business activity from the date of NCLT or High Court order till the effective date of merger.
The next question which follows is as to how the transferor company would undertake GST compliances (e.g. filing of returns, issuance of invoices for the period prior to the merger) or transfer unutilized input tax credit appearing in its electronic credit ledger by filing FORM GST ITC-02 (‘ITC-02’) to the transferee company.
Whether the transferor company can be made liable for non-compliance for the period prior to the merger?
With effect from the effective date of merger or transfer of business:
Nevertheless, if contrary view is taken that the effective date for cancellation of GST registration should be the effective date of merger between the transferor company and transferee company, a doubt arises as to when the transferor company should actually make an application for cancellation of registration on the common portal.
In case, application for cancellation of GST registration is made within 30 days of the effective date (i.e. merger), question arises as to whether the registration of the transferor company can be cancelled from the retrospective date i.e. date of merger.
It is worthy to note that in terms of Section 29(2) of the CGST Act, proper officer can cancel the registration from retrospective date under the specific cases. As the cases of merger or amalgamation or transfer of business or discontinuance of business are not specified under the section, doubt remains as to whether registration of the transferor company can be cancelled with effect from the retrospective date.
Also, in case, application for cancellation of GST registration is made on the effective date of merger, another question that arises is as to whether the transferor company would thereafter be allowed to file ITC-02 on the common portal for transfer of unutilized input tax credit to the transferee company. It is worthy to note that FORM ITC-02 requires to mention the GSTIN of both the transferor company and transferee company. In other words, transferor company should have a valid registration on the date of transfer of unutilised input tax credit.
CBIC vide circular dated 26.10.2018 had clarified that it might be difficult in some cases to exactly identify or pinpoint the day on which such an event occurs. For instance, a business may be transferred/disposed over a period of time in a piece meal fashion. In such cases, the 30-day deadline may be liberally interpreted and the taxpayers’ application for cancellation of registration may not be rejected because of the possible violation of the deadline.
It is to be noted that the circular has not clarified as to what should be the effective date of cancellation of registration. Whether registration of the transferor company can be cancelled with effect from the retrospective date when application is made within or after the 30 days of the occurrence of the merger or transfer of business. Whether unutilized input tax credit can be transferred by the transferor company without having GST registration.
Filing of Returns:
Other tax issue which can arise is with respect to filing of details in GSTR-10 (i.e. final return which is to be furnished within three months of the date of cancellation or date of order of cancellation of registration, whichever is later). A doubt is whether the transferor company who has transferred its business is required to furnish details of inputs, semi-finished goods and finished goods for reversal of input tax credit or payment of tax liability in GSTR-10.
Similarly, there is no clarity on the procedure of filing annual return in case of merger of two companies. Whether separate or consolidated annual return is required to be filed by the transferee company for the business of transferor company pertaining to the period prior to merger.
Therefore, on the concluding note, under the current situation due to COVID-19, where the economy is under threat and with news of companies shifting their base from China or other countries to India, the government, in order to boost the confidence of businesses and to further strengthen economic condition of the country, should issue appropriate clarification on the issues in order to simplify the process of business restructuring and to fulfill the promise of ease of doing business in India.
 Circular No. 69/43/2018-GST dated 26.10.2018