Claiming ITC on Transfer of Business

A registered taxpayer may transfer the input tax credit that is accessible and unutilized in his electronic credit ledger into another business in case of a business transfer by way of sale, merger, or demerger by filing a declaration Form GST ITC-02.

Different Aspects in the Transfer of Business

Registration under GST

Under section 22 (3) of the CGST Act 2017, a person purchasing another company must claim a new ownership document and a new registration under GST.

Nevertheless, under section 22(4), if a transfer is made as part of a merger, amalgamation, or demerger scheme, the transferee will be required to register, and the registration's commencement date will be the day the incorporation certificate is received.

ITC on Transfer of Business

The input tax credit is one of the essential aspects of GST as it helps lower the outward GST liability.

According to section 18(3) of the CGST Act, if a business is transferred, the transferor may offer the transferee a credit for any unused ITC as long as the transferee is responsible for all of the transferred business's liabilities. Additionally, ITC-02 is the mandatory form for claiming unused ITC on business transfer, according to Rule 41 of the CGST Rules.

Itemised Transactions

When a business is transferred, itemised transactions are those in which a value is allocated to each asset and liability. The transferee will be required to pay GST on each transaction because each item has a separate value.

Slump or Crash sale

According to section 2 (42C) of the Income Tax Act, a slump sale is defined as transferring one or more businesses in exchange for a lump-sum payment; assets and liabilities are not given separate values. The transferee in a slump sale is exempt from GST.

Accountability of Business

Before the date of the court's final ruling approving the transfer of business, two or more companies that are merging or amalgamating engage in specific transactions, including the exchange of products and services. The CGST Act will be applied in this situation, and the companies must pay taxes on the supply transactions between them.

Trading of Securities

Another method of obtaining business is trading or buying the majority of the stock in a firm. The transferor company's shareholders can exchange their shares for shares in the transferee company.

Taxation on different types of Transfer

When a company is described as a part of a going concern, it signifies that it is currently running or operating, either entirely or independently. When a business is transferred as a going concern or when a whole or independent portion of the business is transferred, the GST will not apply.

GST ITC-02

The ITC-02 form is used to transfer the Input Tax Credit (ITC) balance from one GSTIN to another GSTIN as a result of mergers and acquisitions. The transferor must file it, and the transferee must take action. In accordance with the Act and Rules, there is no time restriction.

After the introduction of the GST, numerous amalgamations, mergers, and demergers have occurred. In certain situations, a business transferor will have unused ITC sitting in the electronic credit ledger. Only by submitting GST ITC-02 can he transfer this ITC to the new company. The unused credit of the transferor will be transferred to the transferee's electronic credit ledger upon filing GST ITC-02.

Preconditions for filing ITC-02

To be qualified to submit the FORM GST ITC-02, the following requirements must be satisfied:

• Any time a registered entity is acquired by a sale, merger, de-merger, amalgamation, lease, or other transfer, the acquiring firm must submit a Form GST ITC-02 ITC Declaration for Transfer of ITC.

• At the time of the merger, acquisition, amalgamation, leasing, or transfer's effective date, the acquired or transferor entity had to have a matching input tax credit available in the electronic credit ledger.

• Both the transferor (the transferor) and the transferee (the transferee) must be GST registered.

• All returns for the prior periods must have been appropriately filed by the acquired entity (transferor).

• The merging company should accept, reject, or modify all transactions listed as "Pending for action," and any liabilities resulting from the returns submitted by the transferor must be settled.

• The transfer of a firm should include a clear transfer of liabilities clause. A certificate must support it from a Chartered Accountant or Cost Accountant. In this situation, liabilities would consist of claims that have been stayed related to tax matters, litigation, or recovery cases.

Procedure of Transfer

The process of transfer of business includes two steps:

1. The transferor must submit Form ITC-02 with all necessary information, including the total amount of unused ITC that will be transferred. On the GST portal, the form needs to be submitted.

2. The transferee will receive the form and must decide whether to accept or reject it.

Reversal of ITC on Transfer of Business

A business transfer treated as a going concern is not subject to GST and is therefore referred to as an exempt supply. The ITC on any exempted supplies will be proportionately reversed if a taxpayer makes any, according to section 17 and Rule 42 of the CGST Rules.

Conclusion

As a result, the business transfer process and the use of input tax credits have become streamlined and efficient with the introduction of GST.

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