Special circumstances

Section 18 of the Central Goods and Services Tax Act, 2017 (‘Act’ for short) provides for allowability of input tax credit in special circumstances subject to conditions.  Section 18(3) provides that 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.

Transfer of credit

Rule 41 of Central Goods and Services Tax Rules, 2017 (‘Rule’ for short) provides the procedure for transfer of credit in case of transfer of a business.  The procedure involved in transfer of credit is as follows-

• 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.
• In the case of demerger, the input tax credit shall be apportioned in the ratio of the value of assets (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) of the new units as specified in the demerger scheme.
• 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.
• 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.
•  The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account.

Death of a sole proprietor

Queries have been raised by the stakeholders whether the provisions of section 18(3) of the Act or Rule 41 in case of death of a sole proprietor.    The Board has come with a clarification for the said queries in their circular No. 96/15/2019-GST, dated 28.03.2019.

Circular

In the circular the Board relied on section 29(1) of the Act.  Section 29(1) of the Act provides for the cancellation of registration in which it is provided that the proper officer may, either on his own motion or on an application filed by the registered person or by his legal heirs, in case of death of such person, cancel the registration, in such manner and within such period as may be prescribed, having regard to the circumstances where-

•  the business has been discontinued, transferred fully for any reason including death of the proprietor, amalgamated with other legal entity, demerged or otherwise disposed of; or
•  there is any change in the constitution of the business; or
•  the taxable person, other than the person registered under section 25(3), is no longer liable to be registered under section 22 or section 24.

Provided that during pendency of the proceedings relating to cancellation of registration filed by the registered person, the registration may be suspended for such period and in such manner as may be prescribed.

The Board clarified that for the purpose of uniformity,  the 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 will also be applicable to-

• Section 18(3);
• Section 22(3);
• Section 85(1); and
• Rule 44(1).

Procedure of transfer

The circular provides the procedure for the transfer of unutilized input tax credit in case of death of sole proprietor if the business is continued by any person being transferee or successor, the input tax credit which remains un-utilized in the electronic credit ledger-

• As per provisions of section 22(3) of the CGST Act, the transferee or the successor, as the case may be, shall be liable to be registered with effect from the date of such transfer or succession, where a business is transferred to another person for any reasons including death of the proprietor. While filing application in Form GST REG-01 electronically in the common portal the applicant is required to mention the reason to obtain registration as ‘death of the proprietor’.
• Section 29(1)(a) of the CGST Act, allows the legal heirs in case of death of sole proprietor of a business, to file 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.
• In case of death of sole proprietor, if the business is continued by any person being transferee or successor of business, it shall be construed as transfer of business.Section 18(3) of the CGST Act, allows the registered person to transfer the unutilized input tax credit lying in his electronic credit ledger to the transferee in the manner prescribed in rule 41 of the CGST Rules, where there is specific provision for transfer of liabilities. As per section 85(1) of the CGST Act, the transferor and the transferee / successor shall jointly and severally be liable to pay any tax, interest or any penalty due from the transferor in casesof transfer of business ‘in whole or in part, by sale, gift, lease, leave and license, hire or in any other manner whatsoever’. Furthermore,section 93(1) of the CGST Act provides that where a person, liable to pay tax, interest or penalty under the CGST Act, dies, then the person who continues business after his death, shall be liable to pay tax, interest or penalty due from such person under this Act. It is therefore clarified that the transferee / successor shall be liable to pay any tax, interest or any penalty due from the transferor in cases of transfer of business due to death of sole proprietor.
• As per 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 the event of sale, merger, de-merger, amalgamation, lease or transfer or change in the ownership of business for any reason. 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. Upon acceptance by the transferee / successor, the un-utilized input tax credit specified in Form GST ITC-02 shall be credited to his electronic credit ledger.