‘Business Transfer’ here is referred for Slump sale transactions where a running business units or business as a whole are transferred for a lumpsum consideration without assignment of values to individual assets and liabilities’. In this regard, we have witnessed an important AAR as well in the case of M/s. Rajashri Foods Private Limited. However, the few questions are still un-answered which we will discuss in the writeup.
Exemption
As per the Entry no. 2 of Notification No. 12/2017- Central Tax (Rate) dated 28 June 2017, ‘services by way of transfer of a going concern, as a whole or an independent part thereof’ is taxable at Nil rate of tax. In other words, such supplies are treated as exempt supply under the provisions of GST law. The Authority for advance ruling of Karnataka in the case of M/s. Rajashri Foods Private Limited has also given ruling that transaction of transfer of business as a whole of one of the units of the Applicant in the nature of a going concern amounts to supply of service and such supply of service is treated as Nil rated supply under entry no. 2 of Notification no. 12/2017-Central Tax (Rate).
However, the below prime conditions are important to understand forthwith:
1. The business should be transferred as a WHOLE or INDEPENDENT PART thereof;
2. The business should be transferred as GOING CONCERN;
Business transfer of Whole or Independent Part
When we talk about Whole or Independent part thereof then it means that all assets and liabilities of the whole business or a single unit shall be transferred to the new owner.
Going Concern
Though the Going Concern is an Accounting term. But to understand this is simple words, this implies that the business should have continuity, regularity and permanency. In the above context, entire ongoing activity will get transferred, which would include assets of the business, like debtors, stock in trade, cash in hand, debtors along with the liabilities attached to the business.
Further, transfer of a going concern means transfer of a running business which is capable of being carried on by the purchaser as an independent business.
Such transfer of business will comprise comprehensive transfer of immovable property, goods, employees, goodwill etc. The above parameters must be kept in mind to qualify the above transaction as ‘Transfer of business as going concern’.
What NOT exempt
The business transfer qualifying the above conditions for exemption given under entry no. 2 of Notification no. 12/2017-Central Tax dated 28 June 2017 shall be treated as Nil Rated Supply.
However, as per schedule II of CGST Act, the following supplies of business asset transfer shall be qualified as supply of goods or supply of services, as the case may be:
(a) where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person;
(b) where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, the usage or making available of such goods is a supply of services;
(c) where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless—
(i) the business is transferred as a going concern to another person; or
(ii) the business is carried on by a personal representative who is deemed to be a taxable person.
Reversal of ITC in relation to Exempt Supplies:
As per Section 17(2) of CGST Act provides that:
“Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.”
Accordingly, the supplies of goods or services or both which are used directly in relation to supply of business transfer shall not be eligible for input tax credit. Also, the proportionate input tax credit of common supplies shall also be reversed.
The exempt supply for the purpose of section 17(2) does not exclude the Slump sale or business transfer as a whole or part thereof. Therefore, ITC shall be required to be reversed in case of Business Transfer which are exempted under above discussed notification.
There is no clarification brought in by the Authorities on this part which hits the businesses very badly.
What about the accumulated ITC pertaining to transfer or of the Business:
Filing of Form ITC 02 for transfer of ITC
1. Form ITC 02 shall be filed by the TRANSFER OR as per Rule 41 of CGST Rules read with Section 18(3) of CGST Act for transfer of un-utilized ITC;
2. Chartered Accountant certificate certifying that the transfer of business is done with a specific provision for the transfer of liabilities;
3. The TRANSFEREE shall accept the ITC so transferred by the TRANSFEROR;
4. The inputs and capital goods shall be accounted for by the TRANSFEREE;
Disclaimer: The entire contents of this document have been prepared based on relevant provisions and as per the information existing at the time of the preparation. The observations of the authors are personal view and this cannot be quoted before any authority without the written permission of the authors. This article is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this article will be accepted by authors. It is recommended that professional advice be sought based on the specific facts and circumstances. This article does not substitute the need to refer to the original pronouncements on GST.
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