Introduction: The transfer of an existing business, whether in entirety or a portion thereof, involves several crucial considerations, one of which is the transfer of unutilized Input Tax Credit (ITC). Under the GST regime, the framework laid out by Section 18(3) of the CGST Act, 2017, and Rule 41 of the CGST Rules, 2017, facilitates this process, allowing the transferor to pass on this valuable asset to the transferee. This provision is pivotal for maintaining the continuity and financial health of the business post-transfer. It ensures that the economic value embedded in the unutilized ITC is not lost but rather transferred alongside the business, preserving the capital efficiency and aiding the smooth transition of operational capabilities.
In the case of transfer of existing business as a whole or part of business the transferor is allowed to transfer the unutilized input tax credit which is a crucial asset for any business to the transferee under the GST regime.
The relevant provisions in this regard are as under:
As per Section 18(3) of the CGST Act, 2017:
“(3) Where there is a 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 unutilised in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in such manner as may be prescribed.”
As per 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 of the new units as specified in the demerger scheme.
[Explanation: – For the purpose of this sub-rule, it is hereby clarified that the “value of assets” means the value of the entire assets of the business, whether or not input tax credit has been availed thereon]
(2) The transferor shall also submit a copy of a certificate issued by a practicing chartered accountant or cost accountant certifying that the sale, merger, de-merger, amalgamation, lease or transfer of 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 un-utilized credit specified in FORM GST ITC- 02 shall be credited to his electronic credit ledger.
(4) The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account.”
Further, Circular 133/2020 dated 23.03.2020 was issued clarifying apportionment of input tax credit (ITC) in cases of business reorganization under section 18 (3) of CGST Act read with rule 41(1) of CGST Rules
The said circular clarified the following points:
- For the purpose of apportionment of ITC, pursuant to a scheme of demerger under sub-rule (1) of rule 41 of the CGST Rules, the value of assets of the new units is to be taken at the State level (at the level of distinct person) and not at the all-India level.
- The transferor is required to file FORM GST ITC-02 only in those States where both transferor and transferee are registered.
- The ratio of value of assets, as prescribed under proviso to sub-rule (1) of rule 41 of the CGST Rules, shall be applied to the total amount of unutilized input tax credit (ITC) of the transferor i.e. sum of CGST, SGST/UTGST and IGST credit. The said formula need not be applied separately in respect of each heads of ITC (CGST/SGST/IGST). Further, the said formula shall also be applicable for apportionment of Cess between the transferor and transferee. The transferor shall be at liberty to determine the amount to be transferred under each tax head (IGST, CGST, SGST/UTGST) within this total amount, subject to the ITC balance available with the transferor under the concerned tax head.
- Relevant date for calculation of unutilized ITC balance of transferor: The apportionment formula shall be applied on the ITC balance of the transferor as available in electronic credit ledger on the date of filing of FORM GST ITC – 02 by the transferor.
- Relevant date for calculation of value of assets: The ratio of the value of assets should be taken as on the “appointed date of demerger”.
Practical issue: In case where the transferor and the transferee are in different states the transfer of ITC is not currently allowed by the GST common portal and the circular also restricts the same. However, the same is not restricted in the CGST Act, 2017 as well as in CGST Rules, 2017 and it is a settled law that a circular cannot override the provisions of the law. Hence, the ITC balance available should have been allowed to be transferred in different states as well. Also, in the case of M/s Shilpa Medicare Limited (Citation: 2020 (39) G. S. T. L. 334 (A. A. R. – GST – A. P.)) dated 24.02.2020, the Authority for Advance Ruling, Andhra Pradesh after interpreting the provisions of law and as per Section 18(3) of the CGST Act, 2017 and Rule 41 of the CGST Rules, 2017 held that in case where the business of the applicant i.e., Shilpa Medicare Limited of Andhra Pradesh unit, as a whole along with the capital assets was transferred as going concern to Shilpa Medicare Limited of Karnataka Unit for a monetary consideration, the applicant could file GST ITC-02 return and transfer unutilised ITC from Vizianagaram, Andhra Pradesh unit to Bengaluru, Karnataka Unit. Hence, even as per the AAR the ITC was allowed to be transferred between different states, hence, restricting the same by way of a circular is against the one tax one nation regime and is leading to blockage in seamless flow of input tax credit between states which is otherwise permitted in accordance with the law laid down.
Conclusion: The mechanism for the transfer of unutilized Input Tax Credit in the event of a business transfer under the GST framework exemplifies the regime’s flexibility and its foresight in accommodating the dynamics of business restructuring. By allowing the transfer of ITC, the GST law ensures that businesses undergoing transformations such as mergers, acquisitions, or demergers do not suffer a setback in terms of tax credits, which could otherwise impact their cash flows and operational efficiency. The detailed procedural requirements, including the filing of FORM GST ITC-02 and adherence to specified conditions, underscore the importance of compliance and accuracy in the execution of such transfers. Despite practical challenges and interpretational issues, the legal provisions underpinning the transfer of ITC reflect the broader objectives of the GST regime: to foster a seamless and unified tax landscape that supports the continuity and growth of businesses across India.
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