Max Baucus, a famous US Senator, once said "Tax complexity itself is a kind of tax". GST laws are not alien to this adage. The present legislative framework is riddled with complicated provisions which require periodic fine tuning and patchwork. Having said that, Central Government has proactively through its various circulars have attempted to bring in clarity on the interpretations of the legal provisions and procedures. In certain cases, in addition to providing clarity, these circulars have opened up certain new questions which were not thought of hitherto. Through this Article, the authors will attempt to critically analyze the contours of one such Circular[1] which has been issued recently in respect of transfer of unutilized input tax credit on account of transfer of business.
Before going into the intricacies of the clarifications provided by the circular, it becomes necessary to outline the relevant legal provisions concerning the issues addressed therein.
Relevant legal provision
Section 18(3) of the CGST Act, 2017 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, then the assessee shall be allowed to transfer the unutilized input tax credit to such sold, merged, demerged, amalgamated, leased or transferred business [hereinafter be collectively referred to as transferred business and the registered person who transfers the said business will be referred to as transferor and the registered person to whom such business is transferred will be referred to as the transferee] in a prescribed manner.
The methodology for transfer of credit has been prescribed in Rule 41 of the CGST Rules, 2017. In terms of Rule 41(1), the transferor shall, in the event of change in its constitution, furnish the details of such change in Form GST ITC-02, electronically on the common portal along with a request for transfer of unutilized input tax credit to the transferee.
Further, in terms of proviso to Rule 41(1), in cases where a business is transferred by way of demerger, it has been provided that 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.
The said provision was specifically drafted for business reorganization by way of demerger for the reason that in case of demerger, only a part of business of an assessee is transferred and therefore it becomes imperative for the legislature to provide for a mechanism for apportionment of credit pertaining to such transferred business.
Issues
At the time of effecting business transfers, among other things, the taxpayers have been facing the following issues in the context of transfer of unutilized input tax credit:
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Lack of prescription of the manner of apportionment of unutilized credit for any kinds of business reorganizations, except demerger. For example, in case of slump sale through a business transfer agreement, like demerger, only a specific division/vertical/unit of the business of the assessee may be transferred; hence in such a scenario, it becomes necessary to apportion the credit pertaining to the transferred business by an appropriate mechanism;
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Further, even in the case of demergers, while applying the said formula there is no clarity on the following aspects:
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Whether the ratio of value of assets transferred should be determined at the individual registration level or on a whole at the entity level?
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What meaning is to be given to the term value of assets viz., would it mean the value as per books of accounts or the market value or any other value?
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Considering the manner in which the businesses function, not all credits relating to the transferred business would be duly accounted by the transferor as on the date of business transfer. Some credits will be accounted only after such transfer; for e.g., credit relating to imported/indigenous goods which are in transit during such transfer, credit relating to debit notes received post business transfer, genuine credits not availed due to inadvertence prior to such transfer, credits availed belatedly after transfer due to delay in receipt of invoice from the supplier etc.
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Consequently, the issue that has been bothering the taxpayers is the cutoff date for arriving at the quantum of unutilized input tax credit to be transferred. The reason being if the cutoff date is the date of transfer, then only the unutilized input tax credit accumulated as on such date shall be eligible for transfer to the transferee and all the credits relating to the transferred business availed thereafter cannot be transferred.
Clarification provided by the circular and its impact
The clarifications provided by the circular (tabulated below) on various aspects in connection with transfer of input tax credit does indeed throw some light on the aforesaid issues; however, the clarifications provided have their own share of grey areas as well.
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Aspects
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Clarification
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Impact/Issues
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Whether the asset based formula for transferring the credits apply only to de-merger or can it be applied to all forms of business reorganization?
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The said formula shall be applicable for all forms of business reorganizations including demerger.
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Impact
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In the authors view, this is a beneficial clarification for the taxpayers as in case of other forms of business reorganizations such as slump sale of a part of the business/business vertical, there was a lack of clarity as to the mechanism to be followed for determining the quantum of credit to be transferred to the transferee.
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For apportionment of credit, whether the proportion of value of assets transferred should be determined at the registration level or entity level?
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The proportion of value of assets transferred has to be determined at the registration level and not at the entity level and consequently, the transfer of credit from each registration shall be effected at the proportion determined for such registration.
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Impact
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At the outset it becomes relevant to appreciate the reasons as to why a clarification was required on this issue. GST being a registration specific law wherein each registration is treated as a distinct person[2] and the term used in the concerned provision being “registered person”, a doubt arose whether value of assets is to be determined at the registration level or entity level.
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By virtue of the said clarification, every entity reconstituting its business would have to prepare a balance sheet for each registration where there is a business reorganization and thus identify the value of assets pertaining to such registration.
Open issues
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In case of entities following centralized accounting [especially in the case of debtors], whether assets accounted in the centralized unit be apportioned to the different registrations to which such assets relate to or be considered as the asset of the centralized unit which may not be transferred per se?
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Besides, in cases of entities having a separate Head Office should the assets of the Head Office be also apportioned to the various units solely for the reason that the Head Office is in essence only supporting the operations of such units and nothing more?
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Is the Form GST ITC 02 required to be filed in all states where the transferor is registered?
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No. The Form GST ITC 02 is required to be filed only in those states where both transferor and transferee are registered.
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Open issues
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In our view, the following issue may arise as a result of this clarification; say for example, if X [transferor] has an HO in TN and a factory in Maharashtra (both being registered under GST) and Y [transferee] only has a factory-cum-HO in Maharashtra (registered under GST), then in such cases if certain assets of HO of X are transferred to Y’s unit in Maharashtra, HO of X cannot transfer its unutilized input tax credit to Y based on this clarification.
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Further, in case of amalgamations or mergers where the transferor will not be in existence post business transfer, clarity is required on the date and manner in which the said Form GST ITC – 02 is to be filed.
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Whether the proportion of value of assets transferred should be applied for each head of input tax credit or for the consolidated input tax credit lying unutilized?
Further, if the proportion should be applied for the consolidated input tax credit, then how shall the input tax credit that is to be transferred from each head be determined?
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The proportion should be applied for the total amount of unutilized input tax credit.
Further, out of the total input tax credit to be transferred as determined above, the transferor is at liberty to determine the quantum of credit to be transferred from each head [including cess]. However, the quantum of credit determined for each head should not exceed the total credit available under the said head.
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Impact
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This is a beneficial clarification and taxpayers can take a commercial call in strategically transitioning the credit depending on the tax-category wise credit accumulation.
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In our view, this clarification is also in line with the legal provisions under GST since the definition of ‘input tax credit’ under the CGST Act/IGST Act/SGST Acts includes credit availed on all taxes put together. Further, even for the purpose of claiming refund of the unutilized input tax credit under Rule 89(4) & 89(5) of the CGST Rules, it has been clarified vide Circular[3] that the formula for refund of input tax credit mentioned in the said Rule would be applied on the consolidated amount of input tax credit.
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What is the relevant date for determining the amount of input tax credit to be transferred to the transferor?
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The transferor shall apply the apportionment formula to the unutilized ITC available with them in their electronic credit ledger as on the date of filing ITC 02.
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Impact
Open Issue
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The circular does not specifically clarify on the number of times the said Form GST ITC 02 may be filed by the transferor. There may be situations wherein taxpayers may have missed out on availment for certain credits (as discussed above) at the time of filing Form GST ITC - 02. Therefore, a specific clarification may be provided for filing of said From more than once.
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What is the relevant date for determining the ratio of value of assets?
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In case of de-merger, the it shall be the appointed date as fixed under the Companies Act.
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Open Issue
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Conclusion
Having given appropriate clarifications for some of the unsettled issues, the law in this field is still unclear on certain other aspects as enumerated above. Hence, in such cases it is advisable for the taxpayers to file representations with the Board seeking clarity on the above issues as well. Unlike the erstwhile central excise and service tax law wherein offline credit availment was permissible, GST being a system driven taxation regime requiring availment of credit through matching in GST portal, it is imperative for the Government to provide clarifications and suggest appropriate course of action to ensure that the valuable right of input tax credit is not lost due to system rigidity.
The views expressed in this article are strictly personal
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B. Venkatramanan (Senior Associate) & Rohan Muralidharan (Principal Associate)
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