Implications of GST on transfer of business
Nowadays corporate restructuring has become a need for change in the organizational structure, or business model of a company. It is done majorly to revive a declining business, increase a company’s value or to gain a competitive advantage. Post this Covid-19 pandemic as well, we may notice major corporate restructuring because of the covid effect. One of the forms of corporate restructuring is the transfer of existing business/part of the business to a different entity. As it would be a major event/change/decision for the company, one must evaluate the GST implications on such transfer before taking any decision in this regard. In this article an attempt is made to discuss the GST implications involved in transfer of business.
Transfer of business is majorly done in any one of the following ways –
a) Slump sale
b) Itemized sale
As per Sec. 2(42C) of the Income Tax Act, 1961, “slump sale”, means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sale.
Where values are assigned to each of the assets transferred, then such transfer is called itemized sale.
Whether transfer of business is goods or a service?
In terms of Sec. 2(52) of CGST Act, 2017, “goods means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply”. Therefore, to be called as goods, it has to be movable property. As business cannot be said to be movable, transfer of business cannot be said to be a transfer of goods.
Now, we shall examine whether the said transaction can be called as service.
In terms of sec. 2(102), services mean anything other than goods. The term service is wider in its scope. As it covers anything other than goods, transfer of business which cannot be considered transfer of goods will fit into the definition of “service”. Further, in case of the judgment given by Andhra Pradesh High Court in case of Paradise Food Court v. State of Telangana 2017 VIL 238 AP in the context of VAT Law, it was held that the “business” is not movable property and is, therefore, not goods. Hence, based on the above we can conclude that transfer of business is a service.
In the case of itemized sale, if the business is not transferred as a going concern then the same shall be treated as sale of goods in accordance with entry no. 4(c) of Schedule II of CGST Act, 2017. (detailed discussion follows in subsequent paras).
Whether the activity of transfer of business satisfies the definition of supply?
As per Sec. 7 of CGST Act, 2017, supply includes all forms of supply of goods or services or both such as sale, transfer…….in the course or furtherance of business. As the definition of supply covers transfer, the activity of transfer of business can be said to be covered under the definition of supply.
However, a question may arise whether the activity is in the course or furtherance of business. As per sec. 2(17)(d) of the CGST Act, 2017, business includes – supply or acquisition of goods including capital goods and services in connection with commencement or closure of business. Hence, transfer of assets during transfer of business is included in the definition of business and the activity of transfer of business is in the nature of supply which is in the course or furtherance of business.
Further, as per Entry No. 4(C) of Schedule II of the CGST Act, 2017, where any person ceases to be a taxable person, then 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 business unless the business is transferred as a going concern to another person. Hence, wherever business is transferred as a going concern, it is not to be treated as supply as per this clause. However, one must note that the reference to schedule II cannot be made to conclude whether a transaction/activity is a supply or not. It is merely a clarificatory in nature to conclude if the transactions are to be classified as supply of goods or supply of service.
Similar view is taken in the advance ruling given by Haryana Authority of Advance Ruling in case of M/s. B. M. Industries, 33, Industrial Estate, Phase II, Yamunanagar, Haryana – HAR/HAAR/R/2018-19/02.
Is the activity of transfer of business, taxable?
As per Entry No. 2 of Notification No. 12/2017–Central Tax (Rate) dated 28th June 2017, services by way of transfer of a going concern as a whole or an independent part thereof is exempted from GST.
Hence, in order to avail the above exemption, the following conditions shall be satisfied –
Now let us analyze what is meant by the word going concern. The term going concern is not defined in the GST law. Reference can be made to Accounting Standard (AS 1) issued by the Institute of Chartered Accountants of India according to which “the enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations”. Based on this we can conclude that if any enterprise is having the intention to continue the business it could be said to be a going concern. It is not necessary that all the assets and liabilities shall be transferred, it is sufficient if only those assets which are essential to continue the business are transferred, but what is being transferred should be capable of being considered as a whole or an independent part
Further, in AAR No. 10/2019 given by the Advance Ruling Authority of the state of Uttarakhand in case of M/s. Rajeev Bansal & Sudarshan Mittal it was held that transfer of business as a going concern is the sale of business including assets. In terms of Financial transaction “going concern” has the meaning that at the point in time to which the description applies, the business is live or operating and has all parts and features necessary to keep it in operation. Thus, transfer of a going concern in a simple way can be described as transfer of a running business which is capable of being carried on by the purchaser as an independent business.
The second part of the exemption entry says that the transfer of business shall be as a whole or as an independent part thereof. It means that the business which is being transferred shall be capable of running a business activity on its own and the business which is being transferred shall be an independent unit.
Thus, if the above conditions are satisfied, that is the business which is being transferred is a going concern and is transferred as an independent part thereof, then GST exemption can be claimed for the same.
If the exemption is claimed, whether ITC is required to be reversed?
If any person is transferring the business as a going concern, then the same will be treated as an exempted supply in terms of above discussed notification. Further, as per sec. 17 read with rule 42 of CGST Rules, 2017, in case any registered person is having any exempted supplies, then ITC pertaining to such exempted supplies shall be reversed proportionately.
How Input Tax Credit (ITC) balance can be transferred?
Sec. 18(3) of the CGST Act, 2017 states that, where there is a change in the constitution of a registered person on account of sale,……or transfer of the business with the specific provision for transfer of liabilities, the ITC which remains unutilized in his electronic credit ledger shall be transferred to the resultant entity.
Rule 41 of CGST Rules, 2017 as amended states that such transfer of credit can be done by filing form ITC-02 electronically on the common portal and such application shall be accompanied by a copy of a certificate issued by a practicing CA or CMA certifying that the liabilities are also transferred at the time of transfer of business as it is one of the basic condition to be satisfied in order to transfer the ITC in accordance with Sec. 18(3) of CGST Act, 2017.
Later, the transferee shall on the common portal accept the details furnished in Form ITC-02, then the ITC shall be transferred to the transferee’s electronic credit ledger.
How the ITC to be transferred shall be calculated in case of partial transfer of business?
As per Rule 41 of CGST Act, 2017, the ITC shall be apportioned in the ratio of the value of the assets which is being transferred to the total value of the assets of the business. The total value of assets means the value of the entire assets of the business whether ITC has been availed thereon.
For an instance, assume that –
Recently, CBIC has issued a Circular No. 133/03/2020-GST dated 23rd March 2020 clarifying various issues in apportionment of ITC in case of business reorganization. Few of such issues are discussed below –
|At the time of calculation of ITC to be transferred, whether the value of the assets shall be taken at state level or at all India level?||The value of the assets shall be taken at state level and accordingly ITC available at each state shall be apportioned based on the assets transferred at each state.|
|Is the transferor required to file ITC-02 in each state where it is registered?||The transferor is required to file ITC-02 only in those states where transferor and transferee are registered.|
|Whether the ITC to be apportioned shall be calculated independently for CGST, SGST and IGST?||No. The ITC to be apportioned shall be calculated on overall basis i.e.., total of CGST, SGST and IGST and not independently.|
|How to determine the amount of ITC that is to be transferred to the transferee under each tax head (IGST/CGST/SGST) while filing of FORM GST ITC – 02 by the transferor?||The total ITC to be transferred shall not exceed the ITC amount to be transferred in accordance with Rule 41 of CGST Rules, 2017. However, the transferor is at his liberty to decide the amount to be transferred under each head subject to the ITC balance available with the transferor under the respective tax head –
For instance, as per our earlier example, the ITC to be transferred is Rs. 4 cr.
Following is the amount of ITC balance under each head and the ITC that can be transferred –
Care must be taken that the total ITC to be transferred shall not exceed 4 cr.
|ITC balance as on which date shall be taken for apportionment?||ITC balance as on the date of filing ITC-02 shall be considered for the purpose of apportionment of the same to the transferee.|
|Which date shall be relevant to calculate the ratio of value of assets?||The date to be taken is the appointed date of demerger/any business reorganization.|
Whether transferring the business as itemized sale or as a whole has to be determined taking into account the availability of ITC to the buyer or credit to be reversed by the seller. There will be other aspects to be considered such as rate of tax, classification, valuation etc. At the time of any business restructuring, a business man shall not only analyze business impact but also has to consider the impact of GST on the same before taking any decision and it would be beneficial to obtain expert advice before taking any decision on business transfer as it involves many complications. The financial implications of mistake made, if any, could be very high. Even if the details are intimated to the department, the department will have around 4 years to issue show cause notice and recover short-levy with interest and there will be costly litigation.
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