Transfer of Input Tax Credit of GST in case of Demerger

Note on Transfer of ITC on account of Demerger

Reference: Circular No.133/03/2020-GST

This article is made to brought some clarity in transaction regarding Transfer of ITC in case of Demerger of a Business Unit as per Section 18(3). Before getting into topic it is important to have a brief of Section 18(3).

As per Section 18(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 unutilized in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in such manner as may be prescribed.”

The Section speaks not only about de-merger but different forms of change in constitution of Business, but here we will talk only about De-Merger as Sub-Rule (1) of Rule 41 says

 “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, demerger, amalgamation, lease or transfer of business, in FORM GST ITC-02, electronically on the ` Circular No.133 03/2020-GST Page 2 of 6 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.”

The points which was uncleared in the above-mentioned rule were:

1. Whether the apportionment is to be made for the business as a whole unit or is to be made state-wise as under GST separate registration in different States is to be obtained and each such registration is considered a distinct person for the purpose of the Act;

2. Whether the Apportion to be done for Total ITC or for Each Head of ITC separately;

3. Determination of ITC to be Transferred to the Transferee;

4. Relevant Date for calculation of Unutilized Credit as given Section 18(3);

5. Which date shall be relevant to calculate the ratio of value of assets?

To give clarity to the above-mentioned points, Government has issued Circular No.133/03/2020-GST as on 23.03.2020.

Hereby we are just explaining the clarity given by Government to avoid any doubts.

1. Apportionment of Credit State-Wise or for total Business: We know under GST a person has to obtain separate registration in different state. So, if A is transferor having Registration in UP and MP having two assets in each State, B is Transferee having Registration in UP and MP. If all assets of A are to be Transferred to B’s Business Unit having Registration in UP. So, whether it would be logical to transfer ITC under Rule 41(1) to both the units of B?

No, as the asset is to be used by B’s Business Unit having Registration in UP so same must be transferred only to B’s Business Unit having Registration in UP not to the B’s Business Unit having Registration in MP.

So, we will do the transfer of unutilized credit State-Wise. But the same requires determination that which asset is to be transferred to which state of Transferee before filing of ITC-02.

2. Further, as per circular the transferor is required to file FORM GST ITC-02 only in those States where both transferor and transferee are registered. Earlier there were some confusions regarding the situation where in demerger if 1 Business unit of transferee is in a state where no business unit of transferor exists. But circular specifically says that ITC-02 is to be filed for GSTN of those states where transferor and transferee both are registered. So, iर total ITC that should be transferred under Rule 41(1). Further, 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 transferred.

4. The date for calculation of Unutilized ITC as given in Section 18(3) would be the date of filing of ITC-02 as the system will take unutilized credit automatically as on the date of filing of ITC-02.

5. The date for calculation of apportionment of value of asset would be the appointed date of demerger.

The purpose of this article was to highlight the major points regarding the subject matter those were, first the non-involvement of Transferor and Transferee of two different state and second was to highlight the State-Wise apportionment of ITC in case of Demerger. The logic behind both the things is to avoid loss of revenue to the respective State Government. But, this can be resulted into a good loss to a taxpayer, so if your are going for a merger , so take care of your GST Credit too.

In case of any query, kindly leave your comments.