Introduction
The transfer of unutilized Input Tax Credit (ITC) during a demerger is a critical aspect of the Goods and Services Tax (GST) regime in India. A demerger, which involves the division of a company into two or more distinct entities, necessitates the seamless transfer of ITC to ensure the continuity of tax benefits and compliance with GST regulations. The Government of India has outlined specific procedures and rules for this process, detailed in Circular No. 133/03/2020-GST, issued on March 23, 2020, by the Ministry of Finance, Department of Revenue, Central Board of Indirect Taxes & Customs, GST Policy Wing.
This circular provides clarity on the treatment of unutilized ITC during a demerger, ensuring that the transition is handled smoothly and efficiently. One of the key components in this process is the GST FORM ITC-02, which facilitates the transfer of ITC from the demerged entity to the resulting entities.
In this discussion, we will delve into the concept of demerger, outline the procedures and rules specified in Circular No. 133/03/2020-GST, and explain the filing of GST FORM ITC-02, including the supporting documents required. Additionally, a case study will be presented to illustrate the practical application of these guidelines, providing a comprehensive understanding of the process involved in the transfer of unutilized ITC during a demerger.
To gain a comprehensive understanding of the transfer of unutilized Input Tax Credit (ITC) during a demerger, we will discuss the following topics:
- Definition and Concept of demerger
- Overview of Circular No. 133/03/2020-GST
- Comprehensive Analysis of Circular No. 133/03/2020-GST and Detailed Case Study with Example
- Comprehensive Guide to Filing Form GST ITC-02 for Transfer of Unutilized Input Tax Credit During a Demerger
- Steps to File Form GST ITC-02 for Transferring Input Tax Credit (ITC)
- Conclusion
Definition and Concept of demerger
A demerger is a corporate strategy in which a company transfers one or more of its business divisions into a new, separate entity. This process allows the original company and the new entity (or entities) to operate independently. Here’s a detailed explanation of the concept:
Key Characteristics of Demergers:
Separation of Business Units: The primary aspect of a demerger is the separation of different business units or divisions. This can involve splitting off a subsidiary or a specific division into a standalone company.
Creation of Independent Entities: The demerged entity or entities become independent from the parent company, with their own management, financials, and operations. They may or may not be publicly traded, depending on the structure of the demerger.
Shareholder Value: In many cases, shares of the new entity are distributed to the shareholders of the parent company. This means shareholders of the original company end up owning shares in both the original company and the new, separate entity.
Strategic Focus: Demergers allow both the parent company and the new entity to focus more effectively on their respective core businesses. This can lead to better management, improved efficiency, and potentially higher value creation.
Types of Demergers:
Spin-off: The parent company distributes shares of the new entity to its existing shareholders, creating a new independent company.
Split-off: Shareholders are given the option to exchange their shares in the parent company for shares in the new entity.
Equity Carve-out: The parent company sells a portion of its interest in a subsidiary to the public through an initial public offering (IPO). The parent company usually retains a controlling interest.
Conclusion:
Demerger strategies are employed by companies seeking to enhance focus, operational efficiency, and shareholder value. By creating independent entities, companies can better manage their business units and potentially realize higher market valuations.
Overview of Circular No. 133/03/2020-GST
Circular No. 133/03/2020-GST, issued by the Government of India, Ministry of Finance, Department of Revenue, Central Board of Indirect Taxes & Customs, GST Policy Wing. This circular was dated March 23, 2020.
Key Points of Circular No. 133/03/2020-GST:
Subject:
The circular provides clarification on the apportionment and transfer of input tax credit (ITC) in cases of business reorganization under Section 18(3) of the Central Goods and Services Tax (CGST) Act, 2017, read with Rule 41(1) of the CGST Rules, 2017.
Context:
It addresses the transfer of unutilized ITC in the event of a business reorganization such as a merger, demerger, amalgamation, lease, or transfer of business with specific provisions for transfer of liabilities.
Relevant Provisions:
Section 18(3) of the CGST Act, 2017: According to sub-section (3) of section 18 of the CGST Act, “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.”
Rule 41(1) of the CGST Rules, 2017: Specifies the procedural details for such transfer, requiring the furnishing of details in FORM GST ITC-02 on the common portal, and in cases of demerger, the ITC is to be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme.
Clarifications Provided:
(a) The circular clarifies that the ratio of the value of assets, as specified in the demerger scheme, should be used to apportion ITC.
(b) The transferor needs to file FORM GST ITC-02 only in states where both transferor and transferee are registered.
(c) The apportionment formula for ITC applies to all forms of business reorganization resulting in partial transfer of business assets and liabilities.
(d) The ratio of value of assets should be applied to the total unutilized ITC of the transferor, including CGST, SGST/UTGST, and IGST credits.
(e) The date relevant for calculating the ITC balance of the transferor is the date of filing FORM GST ITC-02.
(f) For determining the ratio of value of assets, the “appointed date of demerger” as specified in the demerger scheme should be used.
Comprehensive Analysis of Circular No. 133/03/2020-GST and Detailed Case Study with Example
AR Ltd, having its head office in Hyderabad and a number of branches in Chennai, Tirupati, and Bangalore, decided to demerge and form a new company named ZX Ltd. The head office of ZX Ltd will be in Chennai, with branches in Hyderabad, Thiruvananthapuram, and Madurai.
The transferor is AR Ltd and the transferee is ZX Ltd. The unutilized credit to be transferred to ZX Ltd is determined based on the asset sharing ratio: 40% in Hyderabad, 30% in Chennai, 25% in Tirupati, and 15% in Bangalore.
The date of the proposed demerger scheme is 01.05.2024, and the effective date of implementation is 22.05.2024. Form GST ITC-02 was filed on 15.05.2024. Following are the details:
| Unutilized ITC Available Before Transfer in AR Ltd | ||||
| Particular | CGST | SGST | IGST | Total |
| Hyderabad | 5,00,000 | 5,00,000 | 5,00,000 | 15,00,000 |
| Chennai | 5,00,000 | 5,00,000 | 5,00,000 | 15,00,000 |
| Tirupathi | 5,00,000 | 5,00,000 | 10,00,000 | 20,00,000 |
| Bangalore | 10,00,000 | 10,00,000 | 10,00,000 | 30,00,000 |
Questions
1) Should the value of assets of the new units be considered at the State level or at the all-India level?
Ans. According to the provisions of the CGST Act, an individual or company with the same PAN is obligated to acquire separate registration in various states. Each registration is treated as a separate entity under the Act. Consequently, when apportioning Input Tax Credit (ITC) following a demerger as per sub-rule (1) of rule 41 of the CGST Rules, the valuation of assets of the new units should be assessed at the state level, considering each registration as a distinct entity, rather than at the national level.
| Proportion of Sharing of ITC to ZX Ltd | |||
| Particular | Asset Ratio of ZX Ltd | Unutilized ITC Available at AR Ltd. |
ITC Transferred to ZX Ltd |
| Hyderabad | 40% | 15,00,000 | 6,00,000 |
| Chennai | 30% | 15,00,000 | 4,50,000 |
| Tirupathi | 25% | 20,00,000 | 5,00,000 |
| Bangalore | 15% | 30,00,000 | 4,50,000 |
Based on the rule specified, the apportionment of Input Tax Credit (ITC) to ZX Ltd should be done considering the asset ratio of ZX Ltd in each location where ITC is available. Here’s how the split-up would be explained:
Hyderabad:
Asset Ratio of ZX Ltd: 40%
Unutilized ITC Available at AR Ltd: 1500000
ITC Transferred to ZX Ltd: 600000
Chennai:
Asset Ratio of ZX Ltd: 30%
Unutilized ITC Available at AR Ltd: 1500000
ITC Transferred to ZX Ltd: 450000
Tirupathi:
Asset Ratio of ZX Ltd: 25%
Unutilized ITC Available at AR Ltd: 2000000
ITC Transferred to ZX Ltd: 500000
Bangalore:
Asset Ratio of ZX Ltd: 15%
Unutilized ITC Available at AR Ltd: 3000000
ITC Transferred to ZX Ltd: 450000
2) Is the transferor required to file FORM GST ITC-02 in all the States where it is registered?
Ans. The transferor is required to file FORM GST ITC-02 only in those, States where both transferor and transferee are registered.
To determine in which states FORM GST ITC-02 should be filed based on the given rule and the situation of AR Ltd demerging to form ZX Ltd, we need to identify the states where both the transferor (AR Ltd) and the transferee (ZX Ltd) are registered.
Entities and their Locations:
AR Ltd:
Head office: Hyderabad (Telangana)
Branches: Chennai (Tamil Nadu), Tirupati (Andhra Pradesh), Bangalore (Karnataka)
ZX Ltd:
Head office: Chennai (Tamil Nadu)
Branches: Hyderabad (Telangana), Thiruvananthapuram (Kerala), Madurai (Tamil Nadu)
Step-by-Step Analysis:
Telangana:
AR Ltd: Registered in Hyderabad
ZX Ltd: Registered in Hyderabad
FORM GST ITC-02 is required to be filed in Telangana.
Tamil Nadu:
AR Ltd: Registered in Chennai
ZX Ltd: Registered in Chennai and Madurai
FORM GST ITC-02 is required to be filed in Tamil Nadu.
Karnataka:
AR Ltd: Registered in Bangalore
ZX Ltd: Not registered in Karnataka
FORM GST ITC-02 is NOT required to be filed in Karnataka.
Andhra Pradesh:
AR Ltd: Registered in Tirupati
ZX Ltd: Not registered in Andhra Pradesh
FORM GST ITC-02 is NOT required to be filed in Andhra Pradesh.
Kerala:
AR Ltd: Not registered in Kerala
ZX Ltd: Registered in Thiruvananthapuram
FORM GST ITC-02 is NOT required to be filed in Kerala.
Conclusion:
Based on the analysis above, FORM GST ITC-02 should be filed in the following states where both AR Ltd and ZX Ltd are registered:
Telangana
Tamil Nadu
3) Should the ratio of the value of assets, as prescribed under the proviso to rule 41(1) of the CGST Rules, be applied to each head of input tax credit (i.e., CGST, SGST, IGST, and Cess) separately?
Ans. To determine the proportion of Input Tax Credit (ITC) to be allocated to ZX Ltd based on the provided asset ratios and the unutilized ITC available at AR Ltd, we will apply the asset ratios to the total amount of unutilized ITC across all locations. According to the proviso to sub-rule (1) of rule 41 of the CGST Rules, the asset ratio is applied to the overall unutilized ITC without distinguishing between the different categories of ITC (CGST, SGST/UTGST, and IGST).
| Unutilized ITC Available Before Transfer in AR Ltd | ||||||
| Particular | CGST | SGST | IGST | Total | Asset Transfer Ratio of ZX Ltd |
ITC Transferred to ZX Ltd |
| Hyderabad | 5,00,000 | 5,00,000 | 5,00,000 | 15,00,000 | 40% | 6,00,000 |
| Chennai | 5,00,000 | 5,00,000 | 5,00,000 | 15,00,000 | 30% | 4,50,000 |
| Tirupathi | 5,00,000 | 5,00,000 | 10,00,000 | 20,00,000 | 25% | 5,00,000 |
| Bangalore | 10,00,000 | 10,00,000 | 10,00,000 | 30,00,000 | 15% | 4,50,000 |
The unutilized ITC available before transfer in AR Ltd for each state is calculated by summing the CGST, SGST, and IGST. This total value is then multiplied by the asset ratio of ZX Ltd for each respective state.
4) How does the total amount of ITC to be transferred to the transferee (i.e., the sum of CGST, SGST/UTGST, and IGST credits) comply with the limitation specified under sub-rule (1) of rule 41 of the CGST Rules? when filing FORM GST ITC-02?
Ans. The total amount of ITC to be transferred to the transferee (i.e., the sum of CGST, SGST/UTGST, and IGST credits) must not exceed the amount determined under sub-rule (1) of rule 41 of the CGST.
The transferor, AR Ltd, will transfer the unutilized credit to the transferee, ZX Ltd, based on the asset sharing ratio. The determined amounts are as follows: 40% in Hyderabad (₹6,00,000), 30% in Chennai (₹4,50,000), 25% in Tirupati (₹5,00,000), and 15% in Bangalore (₹4,50,000). The total amount of ITC to be transferred to the transferee must not exceed the specified limits.
The total amount of ITC to be transferred to the transferee (i.e., the sum of CGST, SGST/UTGST, and IGST credits) must not exceed the amount of ITC available for transfer as determined by the asset sharing ratio.
The following table shows AR Ltd determined to transfer and the amount transfer limit to transferee ZX Ltd:
| Proportion of Sharing of ITC to ZX Ltd | |||
| Particular | Asset Sharing Ratio of ZX Ltd | ITC Determined to Share ZX Ltd By AR Ltd | ITC Transferred to ZX Ltd by AR Ltd |
| Hyderabad | 40% | 6,00,000 | Up to 6,00,000 |
| chennai | 30% | 4,50,000 | Up to 4,50,000 |
| Tirupathi | 25% | 5,00,000 | Up to 5,00,000 |
| Bangalore | 15% | 4,50,000 | Up to 4,50,000 |
5) Does the transferor have the discretion to allocate the ITC amounts under each tax category (IGST, CGST, SGST/UTGST) within the overall total, provided that the ITC balance available under each respective tax category permits such allocation?
Ans. Yes, under sub-rule (1) of rule 41 of the CGST Rules the transferor retains the discretion to allocate the ITC amounts among the various tax categories (IGST, CGST, SGST/UTGST) within the overall total, provided that the available ITC balance for each respective tax category allows for such allocation.
AR Ltd is transferring unutilized Input Tax Credit (ITC) to ZX Ltd based on the proportionate ratio of asset transfer. The following outlines the asset transfer ratio for each location and the corresponding distribution of the unutilized ITC across CGST, SGST, and IGST:
| Proportion of Asset Transfer Ratio & Apportionment formula for ITC pertains to tax credit allocation. | |||||
| Particular | Asset Transfer Ratio of ZX Ltd | CGST | SGST | IGST | Total |
| Hyderabad | 40% | 20% | 60% | 20% | 100% |
| Chennai | 30% | 30% | 50% | 20% | 100% |
| Tirupathi | 25% | 50% | 25% | 25% | 100% |
| Bangalore | 15% | 20% | 20% | 60% | 100% |
–
| Proportion of Transfer of Difference Heads of Unutilized ITC to ZX Ltd | ||||||
| Particular | Unutilized ITC of AR Ltd |
Asset Transfer Ratio of ZX Ltd | ITC Transf-erred to ZX Ltd |
CGST | SGST | IGST |
| Hyderabad | 15,00,000 | 40% | 6,00,000 | 1,20,000 | 3,60,000 | 1,20,000 |
| Chennai | 15,00,000 | 30% | 4,50,000 | 1,35,000 | 2,25,000 | 90,000 |
| Tirupathi | 20,00,000 | 25% | 5,00,000 | 2,50,000 | 1,25,000 | 1,25,000 |
| Bangalore | 30,00,000 | 15% | 4,50,000 | 90,000 | 90,000 | 2,70,000 |
6) To calculate the amount of transferable ITC, the apportionment formula under the proviso to rule 41(1) of the CGST Rules must be applied to the unutilized ITC balance of the transferor. Which date is relevant for calculating the amount of unutilized ITC balance of the transferor?
Ans. Apportionment formula for ITC pertains to tax credit allocation. Here we allocate unutilized ITC of each state in the following proportion: Proportion of Asset Transfer Ratio & Apportionment formula for ITC pertains to tax credit allocation to ZX Ltd.
| Proportion of Asset Transfer Ratio & Apportionment formula for ITC pertains to tax credit allocation. | |||||
| Particular | Asset Transfer Ratio of ZX Ltd | CGST | SGST | IGST | Total |
| Hyderabad | 40% | 20% | 60% | 20% | 100% |
| Chennai | 30% | 30% | 50% | 20% | 100% |
| Tirupathi | 25% | 50% | 25% | 25% | 100% |
| Bangalore | 15% | 20% | 20% | 60% | 100% |
A combined interpretation of subsection (3) of section 18 of the CGST Act and sub-rule (1) of rule 41 of the CGST Rules suggests that the apportionment formula should be applied to the ITC balance of the transferor as reflected in the electronic credit ledger on the date when FORM GST ITC-02 is filed by the transferor.
In this case, AR Ltd filed FORM GST ITC-02 on 15.05.2024. Therefore, the ITC balance available in the electronic credit ledger of AR Ltd as of 15.05.2024 will be used to calculate the amount of unutilized ITC that can be transferred to ZX Ltd.
7) Which date is relevant for calculating the ratio of the value of assets as prescribed in the proviso to rule 41(1) of the CGST Rules, 2017?
Ans. The statement specifies how the effectiveness of a scheme is determined based on an appointed date. Let’s break it down for clarity:
The “appointed date of demerger” refers to the date from which the demerger scheme becomes effective, as specified in the relevant demerger scheme. Accordingly, for the purpose of apportioning Input Tax Credit (ITC) under sub-rule (1) of rule 41 of the Central Goods and Services Tax (CGST) Rules, the ratio of the value of assets should be determined as of the “appointed date of demerger.”
Appointed Date: The scheme must specify a particular date (the “appointed date”) on which it will start being effective. This date is clearly indicated in the scheme documentation.
Effectiveness of the Scheme: Once the appointed date is set and declared, the scheme is considered effective from this date.
No Retroactive Effect: The scheme will not be deemed effective from a date before the appointed date. This means any actions, transactions, or legal implications related to the scheme cannot be considered as having started before this appointed date.
No Delayed Effect: The scheme will also not be considered effective from a date after the appointed date. This ensures that the scheme becomes operational exactly from the appointed date and not from any later date.
Date of Proposal (Date of Effectiveness): This is the date when the demerger scheme is formally proposed and legally recognized as effective. All legal, financial, and operational aspects are considered from this date.
Date of Implementation: This is the date when the practical steps to execute the scheme start, which might be later than the date of effectiveness.
Specific Dates Given
Date of Proposal/Effectiveness: 01.05.2024
Date of Implementation: 22.05.2024
Filing of Form GST ITC-02: 15.05.2024
Clarification
Appointed Date of Demerger: Since the date of proposal is considered the date of effectiveness, the appointed date of demerger is 01.05.2024. This date is used for apportioning ITC under sub-rule (1) of rule 41 of the CGST Rules.
Comprehensive Guide to Filing Form GST ITC-02 for Transfer of Unutilized Input Tax Credit During a Demerger
Form GST ITC-02 is used for declaring the transfer of Input Tax Credit (ITC) in cases of sale, merger, demerger, amalgamation, lease, or transfer of a business under sub-section (3) of section 18. Here are the details you need to fill in the form:
Details of Transferor and Transferee:
GSTIN of the transferor (demerging entity)
Legal name and trade name of the transferor
GSTIN of the transferee (resulting entity)
Legal name and trade name of the transferee
Transfer Details:
Date of transfer (effective date of demerger)
Nature of the transfer (specific details of the demerger)
Proportion of ITC to be transferred (as per the demerger plan)
ITC Details:
Amount of unutilized ITC to be transferred
Breakdown of ITC by major heads (CGST, SGST, IGST, and Cess)
Details of ITC ledger balances before and after the transfer
Supporting Documents:
Copy of the demerger scheme or agreement
Certification by a Chartered Accountant or Cost Accountant verifying the ITC amount to be transferred.
Particulars of Certifying Chartered Accountant or Cost Accountant:
Name of the firm issuing the certificate
Name of the certifying Chartered Accountant/Cost Accountant
Membership number
Date of issuance of the certificate to the transferor
Attachment (option for uploading the certificate)
Declaration:
Declaration by the transferor and transferee affirming the correctness of the details provided and compliance with GST regulations.
Additional Information:
Any other information as required by the GST authorities to process the ITC transfer efficiently
By ensuring accurate and complete information in Form GST ITC-02, businesses can facilitate the smooth transfer of unutilized ITC during a demerger, in accordance with the guidelines set forth in Circular No. 133/03/2020-GST.
Verification: Declare that the information provided is true and correct to the best of your knowledge and belief. Sign and provide the name and designation/status of the authorized signatory along with the date.
Please note that the form requires accurate details to facilitate the transfer of ITC. If you have any specific questions or need further assistance.
Steps to File Form GST ITC-02 for Transferring Input Tax Credit (ITC)
Form GST ITC-02 is crucial for transferring the Input Tax Credit (ITC) balance from one GSTIN to another due to mergers, acquisitions, or other business transfers. Here are the detailed steps to file Form GST ITC-02 on the GST portal:
Log in to the GST Portal:
Visit the GST Portal: Open your web browser and navigate to the official GST portal.
Log in Using Your Credentials: Enter your username and password to access your GST account.
Navigate to ITC Forms:
Click on “Services”: From the dashboard, click on the “Services” tab.
Select “Returns”: Under the “Services” menu, select the “Returns” option.
Choose “ITC Forms”: Within the “Returns” section, find and select “ITC Forms.”
Prepare Online:
Click on “Prepare Online”: Find Form GST ITC-02 in the list of available forms and click on the “Prepare Online” button next to it.
Provide Details:
Enter GSTIN, Trade Name, and Legal Name: Provide the GSTIN, trade name, and legal name for both the transferor (seller) and transferee (buyer).
Specify Total ITC Available: Indicate the total amount of unutilized ITC available for transfer.
Enter ITC Amounts by Major Head: Detail the ITC amounts to be transferred under each major head (CGST, SGST, IGST, and Cess).
Certifying CA or Cost Accountant Details: Include the details of the Chartered Accountant (CA) or Cost Accountant certifying the transfer.
Submit the Form:
Review the Information: Carefully review all the entered details to ensure accuracy.
Submit the Form: Once verified, submit the form on the portal.
Key Considerations:
Valid GST Registrations: Ensure that both the transferor and transferee have active and valid GST registrations.
Available ITC: The transferor must have sufficient ITC in their electronic credit ledger to facilitate the transfer.
Compliance with GST Returns: Both parties should ensure all applicable GST returns are filed, and there are no pending compliance issues.
Pending Transactions: Resolve any pending transactions related to the merger or business transfer to avoid complications.
By following these steps and considerations, businesses can effectively transfer unutilized ITC during mergers, acquisitions, or other business restructuring activities, ensuring compliance with GST regulations.
Conclusion
The process of transferring unutilized Input Tax Credit (ITC) during a demerger is essential for maintaining tax compliance and ensuring the continuity of tax benefits under the Goods and Services Tax (GST) regime in India. Circular No. 133/03/2020-GST, issued by the Ministry of Finance, provides clear guidelines to facilitate this transfer smoothly and efficiently. The key to this process is the proper filing of GST FORM ITC-02, which enables the seamless transition of ITC from the demerged entity to the resulting entities. By following the procedures outlined in the circular and ensuring that all necessary supporting documents are provided, businesses can navigate the complexities of demergers with greater confidence and compliance. The practical application of these guidelines, as illustrated in the case study, highlights the importance of meticulous adherence to regulatory requirements to achieve a successful and compliant demerger.
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Disclaimer
This discussion provides a general overview of the procedures and rules for transferring unutilized Input Tax Credit (ITC) during a demerger under the Goods and Services Tax (GST) regime in India, based on Circular No. 133/03/2020-GST. It is intended for informational purposes only and should not be construed as legal or tax advice. Businesses should consult with professional tax advisors or legal counsel to obtain advice tailored to their specific circumstances and to ensure compliance with all applicable laws and regulations. The case study presented is hypothetical and for illustrative purposes only; actual scenarios may vary.
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