GST LAWS & PROCEDURE ON DEATH OF PROPRIETOR

[Ramandeep Bhatia]

Introduction

The transfer of business is very often transactions which are taking place in the economic world. There are various events where the transfer of business takes places such as the sale of the business as going concern, merger, de-merger, etc, however, this article is written to specifically guide the GST law and procedures to be followed in case of death of the proprietor. There can be two situations commonly in case of death of proprietor either the business is transferred as going concern to legal heir or business may be discontinued. In this article, I have tried to cover both the scenarios for the benefit of the readers. 

Scenario –I Business is continued by the legal heir

1.      Obtaining the New Registration :

Registration liability of the transferee/successor: As per provisions of sub-section (3) of section 22 of the CGST Act,

“Where a business carried on by a taxable person registered under this Act is transferred, whether on account of succession or otherwise, to another person as a going concern, 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.”

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 an 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".

The date on which liability will arise has to be the date of death of the proprietor since on this day the succession has taken place. While applying for the registration, death certificate of the deceased is needed to be uploaded apart from all other formality required in case of new registration.

2.      Transfer of input tax credit :

In case of death of the sole proprietor, if the business is continued by any person being transferee or successor of business, it shall be construed as a transfer of business. Sub-section (3) of section 18 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.

Section 18(3) of CGST says

(3) Where there is a change in the constitution of a registered person on account of the 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.

The procedure for transfer of Input tax credit is prescribed in Rule-41 of the CGST rules, which is as below:

Rule- 41. Transfer of credit on sale, merger, amalgamation, lease or transfer of a business.-

(1)       A registered person shall, in the event of a sale, merger, de-merger, amalgamation, lease or transfer or change in the ownership of the business for any reason, furnish the details of the 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 practising 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.

Important points to note: The above form ITC-02 is required to be filed only when there is some balance in electronic credit ledger which is required to be transferred. If there is no ITC left than there is no need to file ITC-02 form. There is no time limit prescribed for filling the above form. The transferor will submit the form ITC-02 which needs to be accepted by the transferee.   “CA certificate” needs to be uploaded as per Rule 41(2) at the time of filling ITC-02.  Once the ITC-02 form is accepted by the transferee the credit will be transferred immediately.

3.      Cancellation of registration :

Cancellation of registration on account of the death of the proprietor: Clause (a) of sub-section (1) of section 29 of the CGST Act, allows the legal heirs in case of death of sole proprietor of a business, to file an application for cancellation of registration in FORM GST REG-16 electronically on the common portal on account of transfer of business for any reason including death of the proprietor. In FORM GST REG-16, the reason for cancellation is required to be mentioned as "death of sole proprietor".

The GSTIN of the 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 the transferee.

The detailed procedure for applying cancellation is prescribed in Rule -20 of the CGST Rule which is as below,

Rule - 20. Application for cancellation of registration.-A registered person, other than a person to whom a registration has been granted under rule 12 or a person to whom a Unique Identity Number has been granted under rule 17, seeking cancellation of his registration under sub-section (1) of section 29 shall electronically submit an application in FORM GST REG-16, including therein the details of inputs held in stock or inputs contained in semi-finished or finished goods held in stock and of capital goods held in stock on the date from which the cancellation of registration is sought, liability thereon, the details of the payment, if any, made against such liability and may furnish, along with the application, relevant documents in support thereof, at the common portal within a period of thirty days of the occurrence of the event warranting the cancellation, either directly or through a Facilitation Centre notified by the Commissioner.

Important points to note: In case the business if continued by the legal heir than the inputs held in stock or inputs contained in semi-finished or finished goods held in stock and of capital goods held in stock on the date is transferred to the legal heir and there will be no stock at the point of cancellation, hence there will be no need of payment of tax on the same. In case of closure of the business, tax payment will be required on the stock as per section 29(5) at the point of cancellation.

4.      Transfer of liability :

 As per sub-section (1) of section 85 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 cases of transfer of business "in whole or in part, by sale, gift, lease, leave and license, hire or in any other manner whatsoever".

Furthermore, sub-section (1) of section 93 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, 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 the death of the sole proprietor.

Scenario –II Business is closed by the legal heir

In this scenario, the following points will be common as mentioned in the above scenario

1.    Cancellation of registration & payment of tax contained in the stock:

Sub-section (5) of section 29 of the CGST Act, read with rule 20 of the CGST Rules states that the taxpayer seeking cancellation of registration shall have to pay, by way of debiting either the electronic credit or cash ledger, the input tax contained in the stock of inputs, semi-finished goods, finished goods and capital goods or the output tax payable on such goods, whichever is higher. For the purpose of this calculation, the stock of inputs, semi-finished goods, finished goods and capital goods shall be taken as on the day immediately preceding the date with effect from which the cancellation has been ordered by the proper officer i.e. the date of cancellation of registration.

The requirement to debit the electronic credit and/or cash ledger by suitable amounts should not be a prerequisite for applying for cancellation of registration. This can also be done at the time of submission of final return in FORM GSTR-10. In any case, once the taxpayer submits the application for cancellation of his/her registration from a specified date, he/she will not be able to utilize any remaining balances in his/her electronic credit/cash ledgers from the said date except for discharging liabilities under GST Act up to the date of filing of final return in FORM GSTR-10.

2.    Filling of Form GSTR-10

In case the final return in FORM GSTR-10 is not filed within the stipulated date, then notice in FORM GSTR-3A has to be issued to the taxpayer. If the taxpayer still fails to file the final return within 15 days of the receipt of notice in FORM GSTR-3A, then an assessment order in FORM GST ASMT-13 under section 62 of the CGST Act read with rule 100 of the CGST Rules shall have to be issued to determine the liability of the taxpayer under sub-section (5) of section 29 on the basis of information available with the proper officer. If the taxpayer files the final return within 30 days of the date of service of the order in FORM GST ASMT-13, then the said order shall be deemed to have been withdrawn. However, the liability for payment of interest and late fee shall continue.

3.    Transfer of liability :

 Point no. b of sub-section (1) of Section 93 provides that where a person, liable to pay tax, interest or penalty under this Act, dies, then if the business carried on by the person is discontinued, whether before or after his death, his legal representative shall be liable to pay, out of the estate of the deceased, to the extent to which the estate is capable of meeting the charge, the tax, interest or penalty due from such person under this Act whether such tax, interest or penalty has been determined before his death but has remained unpaid or is determined after his death.

Clarifications on the application for cancellation of registration (Both scenarios)

Clarifications on various issues in relation to the processing of the applications for cancellation of registration filed by taxpayers in FORM GST REG-16.

(CIRCULAR NO.69/43/2018-GST DATED 26-10-2018 AS AMENDED BY CIRCULAR NO. 88/07/2019-GST, DATED 1-2-2019)

While initiating the application for cancellation of registration in FORM GST REG-16, the Common portal captures the following information which has to be mandatorily filled in by the applicant:

(a) Address for future correspondence with mobile number and email address;

(b) Reason for cancellation;

(c) Date from which cancellation is sought;

(d) Details of the value and the input tax/tax payable on the stock of inputs, inputs contained in semi-finished goods, inputs contained in finished goods, stock of capital goods/plant and machinery;

(e) In case of transfer, the merger of business, etc., particulars of registration of the entity in which the existing unit has been merged, amalgamated, or transferred (including the copy of the order of the High Court/transfer deed);

(f) Details of the last return filed by the taxpayer along with the ARN of such return filed.

On successful submission of the cancellation application, the same appears on the dashboard of the jurisdictional officer. Since the cancellation of registration has no effect on the liability of the taxpayer for any acts of commission/omission committed before or after the date of cancellation, the proper officer should accept all such applications within a period of 30 days from the date of filing the application, except in the following circumstances:

(a) The application in FORM GST REG-16 is incomplete, i.e. where all the relevant particulars, as detailed in para 4 above, have not been entered;

(b) In case of transfer, merger or amalgamation of business, the new entity in which the applicant proposes to amalgamate or merge has not got registered with the tax authority before submission of the application for cancellation.

In all cases other than those listed at (a) and (b) above, the application for cancellation of registration should be immediately accepted by the proper officer and the order for cancellation should be issued in FORM GST REG-19 with the effective date of cancellation being the same as the date from which the applicant has sought cancellation in FORM GST REG-16. In any case, the effective date cannot be a date earlier to the date of application for the same.

In situations referred to in (a) or (b) in para above, the proper officer shall inform the applicant in writing about the nature of the discrepancy and give a time period of seven working days to the taxpayer, from the date of receipt of the said letter, to reply. If no reply is received within the specified period of seven working days, the proper officer may reject the application on the system, after giving the applicant an opportunity to be heard, recording reasons for rejection in the dialogue box that opens once the 'Reject' button is chosen. If the reply to the query is received and the same on examination is found satisfactory, the Proper Officer may approve the application for cancellation and proceed to cancel the registration by issuing an order in FORM GST REG-19.

If the reply to the query is found to be not satisfactory, the Proper Officer may reject the application for cancellation on the system, after giving the applicant an opportunity to be heard. The Proper Officer must also record his reasons for rejection of the application in the dialogue box that opens when the 'Reject' button is chosen.

Disclaimers & Conclusion:

I have tried to compile detailed rules and law of GST that will be useful in case of transfer of business on account of the death of the proprietor. Hope you may find useful, though I have tried my best to make this article error-free in case any arise than it is purely unintentional and you are requested to take appropriate professional advice before acting based on the above document. Your feedbacks are welcome at my email id caramandeep.bhatia@gmail.com. 

                                            

Compiled by: CA Ramandeep Singh Bhatia is practising professional and also faculty NACIN & IDTC ICAI.