Transfer of Going Concern under GST: How GST Exemption Applies but ITC Reversal and Documentation Still Matter
1. Introduction
The expression “Transfer of Going Concern is not taxable under GST” is commonly used in practice. However, the technically correct position is that transfer of a business as a going concern, as a whole or as an independent part thereof, is treated as an exempt supply of service under GST and is taxable at Nil rate, subject to the condition that what is transferred is a live, running and independently capable business undertaking.
The expression “Transfer of Going Concern is not taxable under GST” is relevant in many practical situations such as business takeover, conversion, merger, demerger, slump sale, transfer of a unit, transfer of a division, or transfer of an entire running business. In such transactions, the value of business transfer is usually substantial and, if not properly examined, a heavy GST liability may arise. Therefore, before treating any transaction as transfer of going concern, proper legal screening, documentation and tax precautions are necessary.
In this article, I have explained how a business can be transferred as a going concern without payment of GST, subject to fulfilment of the prescribed conditions. I have also discussed the practical applicability, reporting requirements, ITC-02 compliance, registration implications, documentation safeguards, and key precautions relating to ITC reversal under Rule 42 and Rule 43 of the CGST Rules.
In case you have any doubt after reading this article, or if you feel that any practical aspect requires further discussion, you may contact me at the contact details mentioned at the end of this article.
Technically, transfer of going concern is not outside GST altogether. It is covered within the GST framework as an exempt supply of service under Entry No. 2 of Notification No. 12/2017-Central Tax (Rate), dated 28.06.2017. Therefore, no GST is payable on such transfer, provided the transaction is genuinely a transfer of a live and functional business as a whole or as an independent part thereof.
This exemption is highly beneficial, but it should be claimed carefully. If the transaction is merely a sale of individual assets such as machinery, stock, land, building, furniture, goodwill or brand name, without transfer of a functional business undertaking, the Department may dispute the exemption and treat the transaction as a taxable supply of goods or services.
2. Statutory Framework
| Provision | Legal Position |
| Section 7(1)(a), CGST Act, 2017 | Supply includes sale, transfer, barter, exchange, licence, rental, lease or disposal made for consideration in the course or furtherance of business. |
| Schedule II, Para 4(c), CGST Act, 2017 | Where a person ceases to be a taxable person, business assets are deemed to be supplied unless the business is transferred as a going concern to another person. |
| Entry No. 2 of Notification No. 12/2017-Central Tax (Rate) | Services by way of transfer of a going concern, as a whole or an independent part thereof, are exempt / taxable at Nil rate. |
| Section 18(3), CGST Act read with Rule 41, CGST Rules | Unutilised ITC may be transferred to the transferee through FORM GST ITC-02, where there is specific provision for transfer of liabilities. |
| Section 22(3), CGST Act | The transferee / successor is liable to take registration from the date of transfer or succession of business. |
| Section 31(3)(c), CGST Act | A registered person supplying exempt goods or services shall issue a Bill of Supply instead of a tax invoice. |
| Section 85, CGST Act | Transferor and transferee are jointly and severally liable for GST dues up to the date of transfer. |
3. Meaning of Transfer of Going Concern
A “going concern” means a business which is live, running and capable of being continued by the purchaser as an independent business.
In M/s Rajashri Foods Pvt. Ltd., In re – Advance Ruling No. KAR ADRG 06/2018 dated 23.04.2018, the Karnataka AAR held that transfer of one unit as a going concern amounts to supply of service and is covered under Entry No. 2 of Notification No. 12/2017-Central Tax (Rate), provided the unit is actually a going concern. The ruling also observed that a going concern means a running business capable of being carried on by the purchaser as an independent business.
Similarly, in SCV Sky Vision, AAR No. 04/AP/GST/2021 dated 12.01.2021, it was observed that two conditions must exist simultaneously: there must be a transfer, and the transfer must be of a going concern.
Accordingly, the use of the phrase “going concern” in the agreement is not sufficient by itself. The substance of the transaction must establish that a running business undertaking has actually been transferred.
4. Essential Conditions for Claiming GST Exemption
The exemption should be claimed only when the following conditions are satisfied:
4.1 There must be transfer of business
There should be a real transfer of business from the transferor to the transferee. It may be through sale, slump sale, merger, amalgamation, demerger, transfer of undertaking, transfer of unit, transfer of division, or lease of a business undertaking. Mere sale of machinery, stock, furniture, land, building, brand name or goodwill will not normally qualify unless such assets are transferred as part of a functional business undertaking.
4.2 Business must be live and running
The business should be active on or around the date of transfer. Evidence such as sales, purchases, work orders, pending contracts, employees, inventory, receivables, payables, licences and business records should show that the undertaking was operational. A closed, discontinued or non-functional unit may not qualify as a going concern.
4.3 Transfer may be of whole business or independent part
The exemption is available not only for transfer of the entire business, but also for transfer of an independent part of business. For example, transfer of one manufacturing unit, one branch, one division or one business vertical may qualify if it is capable of independent operation.
4.4 Transferee must be capable of continuing the business
The undertaking transferred should be capable of being continued by the transferee immediately or substantially immediately after transfer. It is not necessary that every single asset or employee must be transferred, but the transferred package must be sufficient to operate the business.
4.5 Transaction should not be structured as item-wise asset sale
If the agreement separately sells machinery, stock, furniture, vehicles and other assets, without transfer of business continuity, the Department may treat it as sale of individual assets and deny the going concern exemption. Asset schedules may be attached for identification, accounting, valuation or stamp duty purposes, but the legal character of the transaction should remain transfer of a business undertaking.
4.6 Continuity of business should be demonstrable
There should be documentary evidence that the business was continued or was capable of being continued by the transferee. Post-transfer invoices, continuation of customers, transfer of contracts, employee absorption, use of same premises or licences, and continuation of the same line of business are important supporting factors.
5. Indicators Supporting Going Concern Treatment
The following factors strongly support the claim that the transaction is a transfer of going concern:
| Supporting Factor | Relevance |
| Transfer of plant, machinery, furniture, stock and operating assets | Shows transfer of business infrastructure |
| Transfer of business premises / lease rights | Enables continuation of operations |
| Transfer or absorption of employees | Supports operational continuity |
| Transfer of customers, contracts, purchase orders or work orders | Shows live business |
| Transfer of vendor arrangements | Shows continuity of supply chain |
| Transfer of licences, approvals or registrations, wherever transferable | Supports ability to continue business |
| Transfer of receivables and payables | Shows ongoing business cycle |
| Transfer of goodwill, trade name, brand or customer base | Shows transfer of commercial identity |
| Transfer of books, records and operational data | Supports handover of business |
| Post-transfer continuation by buyer | Strong evidence of going concern |
All factors may not exist in every case, but the overall transaction should show that the transferee has received a functional business undertaking and not merely isolated assets.
6. Situations Where Exemption May Be Denied
| Situation | Risk |
| Sale of only land and building | Not transfer of business |
| Sale of only plant and machinery | Asset sale, not going concern |
| Sale of only stock-in-trade | Not sufficient by itself |
| Transfer of only brand name / goodwill | No running business transferred |
| Transfer of closed or discontinued unit | Not a live business |
| No transfer of employees, contracts or customers | Weak continuity evidence |
| Separate asset-wise tax invoices | Indicates piecemeal asset sale |
| Buyer uses assets for a different business | Continuity not proved |
| Agreement does not contain going concern clause | Documentation risk |
| No evidence of continuation by transferee | Exemption may be challenged |
7. Business Transfer Agreement: Clauses to Include
The Business Transfer Agreement should be drafted carefully. It should preferably contain the following clauses:
| Clause | Purpose |
| Transfer as going concern | Core exemption condition |
| Description of undertaking | Identifies the business being transferred |
| Assets transferred | Shows operating capability |
| Liabilities transferred / retained | Supports going concern and ITC transfer |
| Employees / manpower transition | Supports continuity |
| Customer contracts, vendor contracts and work orders | Shows live business |
| Licences and approvals | Supports ability to continue operations |
| Consideration clause | Preferably lump-sum for the undertaking |
| Appointed date / closing date / effective date | Fixes transfer date and compliance responsibility |
| GST clause | Mentions exemption under Entry No. 2 of Notification No. 12/2017 |
| ITC transfer clause | Required where FORM GST ITC-02 is to be filed |
| Past tax indemnity | Necessary due to Section 85 exposure |
| Records handover | Supports business continuity |
| Cooperation clause | Useful for GST notices, audits, ITC-02 and return reconciliation |
| Non-compete / goodwill clause | Supports transfer of commercial identity |
8. GST Forms and Compliances Required
There is no separate GST form for claiming the going concern exemption. The exemption is supported through proper agreement, Bill of Supply, return disclosure, registration compliance and ITC transfer compliance, wherever applicable.
| Situation | Form / Document | Responsible Person | Requirement |
| Transfer of business as going concern | Business Transfer Agreement / Slump Sale Agreement | Transferor and transferee | Mandatory as primary evidence |
| Exempt supply by transferor | Bill of Supply | Transferor | Required if transferor is registered |
| Reporting exempt supply | GSTR-1 | Transferor | To be reported as Nil-rated / exempt supply |
| Summary reporting | GSTR-3B | Transferor | To be reported as Nil-rated / exempt outward supply |
| Transfer of unutilised ITC | FORM GST ITC-02 | Transferor; accepted by transferee | Required only if ITC is transferred |
| Certificate for ITC transfer | CA / CMA Certificate | Transferor | Required if ITC-02 is filed |
| Fresh registration by buyer | FORM GST REG-01 | Transferee | Required if fresh registration is needed |
| Amendment in existing registration | FORM GST REG-14 | Transferee | Required where place/division/particulars are amended |
| Cancellation of seller’s registration | FORM GST REG-16 | Transferor | Required if registration is to be cancelled |
| Annual reporting | GSTR-9 / GSTR-9C | Transferor | As applicable |
Therefore, where no unutilised ITC is transferred, FORM GST ITC-02 is not required. In such cases, the main compliances are Business Transfer Agreement, Bill of Supply, reporting in GSTR-1/GSTR-3B, and registration amendment/cancellation wherever applicable.
Where unutilised ITC is transferred, FORM GST ITC-02, CA/CMA certificate and acceptance by the transferee become important..
9. Transfer of ITC through FORM GST ITC-02
Transfer of unutilised ITC is governed by Section 18(3) of the CGST Act read with Rule 41 of the CGST Rules.
1. There should be sale, merger, demerger, amalgamation, lease or transfer of business.
2. The business transfer agreement should contain a specific provision for transfer of liabilities.
3. The transferor should file FORM GST ITC-02 electronically.
4. A certificate from a Chartered Accountant or Cost Accountant should be uploaded, certifying that the transfer includes specific provision for transfer of liabilities.
5. The transferee should accept ITC-02 on the GST portal.
6. The transferee should account for transferred inputs and capital goods in its books.
CBIC Circular No. 133/03/2020-GST clarifies important points relating to apportionment of ITC in business reorganisation cases. In case of partial transfer / demerger, the value of assets is to be considered at the State level and not at the all-India level. The transferor is required to file ITC-02 only in those States where both transferor and transferee are registered. The unutilised ITC balance is considered as on the date of filing FORM GST ITC-02.
10. Registration Issues for Transferee and Transferor
Under Section 22(3) of the CGST Act, where a business carried on by a taxable person is transferred as a going concern, the transferee / successor is liable to be registered from the date of transfer or succession.
| Situation | GST Action |
| Transferee has no GST registration in the relevant State | Fresh registration in FORM GST REG-01 |
| Transferee already has GST registration in same State | Amendment / addition of place of business through REG-14 |
| Transferor closes business completely | Cancellation application in REG-16 |
| Transferor continues other business | Registration may continue, subject to amendment if required |
| Merger / demerger sanctioned by tribunal/court | Registration consequences to be examined with reference to Section 22(4) |
The date of registration/amendment should be aligned with the appointed date, closing date and actual date of business transfer. If the transferee starts issuing invoices before proper registration or amendment, customer ITC and output tax reporting may be disputed.
11. Bill of Supply and Return Reporting
Since transfer of going concern is an exempt supply of service, a registered transferor should issue a Bill of Supply and not a tax invoice.
Suggested description in Bill of Supply: “Transfer of business undertaking as a going concern, exempt under Entry No. 2 of Notification No. 12/2017-Central Tax (Rate), dated 28.06.2017.”
The transaction should also be disclosed in GST returns as exempt / Nil-rated outward supply. It should not be omitted merely because no tax is payable.
12. Valuation: Why It Still Matters Despite Nil GST
Even though GST is payable at Nil rate, valuation remains important for several reasons:
1. Disclosure in GSTR-1 and GSTR-3B.
2. Annual return and reconciliation.
3. Rule 42 / Rule 43 ITC reversal calculation.
4. Aggregate turnover computation.
5. Related party scrutiny.
6. Stamp duty and income-tax consistency.
7. Internal accounting and audit trail.
Where parties are unrelated and price is the sole consideration, the transaction value is normally relevant under Section 15. However, where parties are related or consideration is partly non-monetary, valuation should be examined carefully.
For going concern treatment, a lump-sum consideration for the undertaking is generally safer. Asset-wise values may be kept as supporting schedules for accounting, stamp duty or income-tax purposes, but the main agreement should not appear to be a piecemeal sale of assets.
13. ITC Reversal under Rule 42 / Rule 43
This is one of the most important practical issues. Since transfer of going concern is an exempt supply, the transferor must examine whether proportionate reversal of common ITC is required under Section 17(2) read with Rule 42 / Rule 43.
If the value of the going concern transfer is large, it may significantly increase exempt turnover and distort the ITC reversal ratio for the relevant tax period. Therefore, the exemption from output GST should not be viewed in isolation. The impact on common ITC reversal must be separately examined.
| Step | Practical Working |
| Step 1 | Identify total ITC availed during the tax period. |
| Step 2 | Exclude ITC exclusively attributable to non-business use, exempt supplies and blocked credits, wherever applicable. |
| Step 3 | Identify common ITC used partly for taxable and partly for exempt supplies. |
| Step 4 | Compute exempt turnover, including the value of transfer of going concern, wherever treated as exempt supply for the relevant period. |
| Step 5 | Apply the Rule 42 ratio: exempt turnover divided by total turnover, and apply it to common ITC to compute the reversal attributable to exempt supplies. |
| Step 6 | For capital goods, examine Rule 43 separately because capital goods credit is spread over the prescribed useful life for reversal purposes. |
| Step 7 | Prepare annual true-up / reconciliation wherever required and ensure disclosure in returns and annual return. |
Illustration: If normal taxable turnover for a month is Rs. 50 lakh and transfer of going concern value is Rs. 10 crore, the exempt turnover becomes very high. If common ITC has been availed, a separate Rule 42 / Rule 43 working should be prepared to examine whether any proportionate ITC reversal is required.
14. Aggregate Turnover Impact
Transfer of going concern is an exempt supply. Under GST law, aggregate turnover includes taxable supplies, exempt supplies, exports and inter-State supplies computed on all-India PAN basis.
Therefore, the value of transfer of going concern may affect:
1. Aggregate turnover.
2. GSTR-9 / GSTR-9C applicability.
3. QRMP / monthly return eligibility.
4. E-invoicing threshold analysis.
5. Departmental scrutiny due to high exempt turnover.
Accordingly, the transaction should be considered while preparing turnover-based GST compliance workings.
15. Section 85: Past GST Liability and Due Diligence
Under Section 85 of the CGST Act, where a taxable person transfers business in whole or in part, the transferor and transferee are jointly and severally liable for tax, interest or penalty due up to the time of transfer, whether determined before transfer or determined later.
Therefore, the transferee should conduct GST due diligence before completing the transaction. The following documents should be checked:
1. GST return filing status.
2. Electronic liability ledger.
3. Electronic credit ledger.
4. Pending notices, audit, scrutiny, summons or investigations.
5. Past demands and litigation.
6. ITC mismatch exposure.
7. E-way bill / e-invoice compliance status.
8. Reconciliation of GSTR-1, GSTR-3B, books and annual returns.
9. Indemnity clause for past GST liabilities.
A proper indemnity clause should be included in the agreement to allocate responsibility for past dues and future demands relating to the pre-transfer period.
16. E-Way Bill and Movement of Goods
E-way bill is not the deciding factor for going concern exemption. The main test is whether a live business undertaking capable of independent operation has been transferred.
However, if physical goods such as stock, machinery, furniture or capital goods are moved after the transfer, e-way bill requirement should be examined depending on the nature, value and movement of goods.
The movement documentation should be aligned with the business transfer agreement and should not contradict the going concern position.
17. Practical Final Checklist
Before finalising a transfer of going concern, the following three workings should be prepared:
| Working | Purpose |
| Eligibility Note | To establish that the transaction is transfer of a running business undertaking and not sale of individual assets. |
| Compliance Note | To cover Bill of Supply, GSTR-1, GSTR-3B, REG-01 / REG-14 / REG-16, ITC-02, CA/CMA certificate and annual return reporting, wherever applicable. |
| ITC and Turnover Impact Note | To cover Rule 42 / Rule 43 reversal, aggregate turnover impact, GSTR-9 / GSTR-9C applicability, e-invoicing threshold and reconciliation. |
18. Conclusion
Transfer of a business as a going concern is exempt under GST under Entry No. 2 of Notification No. 12/2017-Central Tax (Rate), provided the transfer is of a live and functional business as a whole or as an independent part thereof. The exemption is not available for mere sale of individual assets.
The most important requirement is that the agreement, records, valuation, transfer of assets and liabilities, employee / contract transition, GST reporting, ITC-02 compliance and post-transfer conduct should all support the position that a running business undertaking has been transferred.
Therefore, although no GST is payable on such transfer, the transaction must be properly documented and reported. The assessee should also examine ITC reversal, aggregate turnover impact, registration compliance, ITC transfer, valuation, annual return reporting and Section 85 liability exposure.
A professionally drafted Business Transfer Agreement, proper Bill of Supply, accurate GST return disclosure and complete supporting file are essential to defend the exemption in case of future GST scrutiny.
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