GST LIABILITY IN CASE OF TRANSFER OF BUSINESS (PART-2)

[Dr. Sanjiv Agarwal]

Transfer without consideration

It may be noted that as per section 7 read with Schedule I of CGST Act, 2017, permanent transfer or disposal of business assets where input tax credit has been availed on such assets shall be treated as supply even if made without consideration.

For such transfer to be taxable, following conditions are mandatory:

• There should be transfer or disposal of business assets i.e., transfer of business in parts.
• Such transfer should be permanent i.e., ownership should be legally transferred
• Input tax credit should have been availed .

Exemption to transfer on ‘going concern’ basis

Notification No. 12/2017-CT (Rate) dated 28.06.2017 provides exemption under GST. Entry No. 2 thereof provides exemption to transfer of business on a going concern basis. Accordingly, GST shall not be leviable on transfer of business as a going concern.

The term ‘going concern’ implies that enterprise has intention for continuing the operation for foreseeable future. Foreseeable means coming one or two years. In other words, neither there is intention of discontinuance of business, nor necessity of liquidation of organization and discontinuance of major operations of the business.

It may be noted that ‘going concern’ is one of the fundamental accounting assumptions under 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.

Further, as per Ind AS-1 on presentation of financial statements, it has been provided that when preparing financial statements, management shall make an assessment of an entity’s ability to continue as a going concern. An entity shall prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, the entity shall disclose those uncertainties.

When an entity does not prepare financial statements on a going concern basis, it shall disclose that fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern.

In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period. The degree of consideration depends on the facts in each case. When an entity has a history of profitable operations and ready access to financial resources, the entity may reach a conclusion that the going concern basis of accounting is appropriate without detailed analysis. In other cases, management may need to consider a wide range of factors relating to current and expected profitability, debt repayment schedules and potential sources of replacement financing before it can satisfy itself that the going concern basis is appropriate.

It may be noted that if individual assets are sold or transferred on which GST as applicable has been charged and paid will not get covered under section 85 of CGST Act, 2017 for tax liability of past period of the transferor.

The transferor is liable for any liability only for the period upto transfer of such business. The time of determination of such liability would not matter. But for the period post such transfer, transferor will have no such liability.

Registration by transferee

Where whole or part of business is transferred, following points may be borne in mind:

1. Where the transferee is not registered, he should apply for fresh registration post transfer, in his name as transferee cannot continue with the business after transfer in the name of transferor.
2. Where the transferee is already registered, he has two options:

1. Apply for separate registration for the transferred business or
2. Amend the existing registration and consider new business as an additional place of business

Transfer of business in the event of death of proprietor: CBIC Clarification

There could be situations where business has to be transferred in case of death of the sole proprietor of the business entity. In such cases, the effect on tax liability has been clarified by CBIC vide Circular No. 96/15/2019-GST dated 28.03.2019. The following is the relevant extract of the Circular:

“2. Clause (a) of sub-section (1) of section 29 of the CGST Act provides that reason of transfer of business includes “death of the proprietor”. Similarly, for uniformity and for the purpose of sub-section (3) of section 18, sub-section (3) of section 22, sub-section (1) of section 85 of the CGST Actand sub-rule (1) of rule 41 of the CGST Rules, it is clarified that transfer or change in the ownership of business will include transfer or change in the ownership of business due to death of the sole proprietor.”

The said Circular also clarifies the provisions in respect of transfer of unutilised input tax credit lying in electronic credit ledger to the transferee, the liability to pay any tax, interest and/or penalty due from the transferor. The procedure prescribed in the circular is as follows:

• Registration liability of transferee / successor: As per the  provisions of section 22(3) of the CGST Act the transferee /successor is liable to be registered with effect from  the date of such transfer or succession by filing application in FORM GST REG-01. While filing the application, the applicant is required to mention the reason to obtain registration as “death of the proprietor”.

•  Cancellation of registration on account of death of the proprietor: As per clause (a) of section 29(1) of the CGST Act the legal heirs have to file the application for cancellation of registration in FORM GST REG-16 electronically on common portal on account of transfer of business for any reason including death of the proprietor. In FORM GST REG-16, reason for cancellation is required to be mentioned as “death of sole proprietor”. The GSTIN of transferee to whom the business has been transferred is also required to be mentioned to link the GSTIN of the transferor with the GSTIN of transferee.

• Transfer of input tax credit and liability: Section 18(3) of the CGST Act, allows the transfer of the unutilized input tax credit lying in electronic credit ledger of transferor to the transferee in the manner prescribed in rule 41 of the CGST Rules, where there is specific provision for transfer of liabilities. It is also clarified that the transferee / successor shall be liable to pay any tax, interest and/ or any penalty due from the transferor in cases of transfer of business due to death of sole proprietor.

• Manner of transfer of credit (Rule 41(1) of the CGST Rules):

• A registered person shall file FORM GST ITC-02 electronically on the common portal with a request for transfer of unutilized input tax credit lying in his electronic credit ledger to the transferee. In case of transfer of business on account of death of sole proprietor, the transferee / successor shall file FORM GST ITC-02 in respect of the registration which is required to be cancelled on account of death of the sole proprietor. FORM GST ITC-02 is required to be filed by the transferee/successor before filing the application for cancellation of such registration in FORM GST REG- 16.
• The transferee /successor shall accept the details so furnished on the common portal. On acceptance, the un-utilized input tax credit specified in FORM GST ITC-02 shall be credited to the electronic credit ledger of the transferee / successor.
• The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account.