Claiming Input Tax Credit (ITC) on transfer of business is a crucial aspect for businesses that undergo mergers, acquisitions, or any other form of transfer. When a business transfers, it needs to transfer its assets and liabilities, including its tax credits. A registered taxpayer may transfer the input tax credit that is accessible and unutilised in his electronic credit ledger to another business in case of a business transfer by way of sale, merger, or demerger by filing a declaration in GST Form ITC-02. To claim ITC on transfer of business, the new business entity needs to register for Goods and Services Tax (GST) and provide the necessary documentation, including a transfer agreement, to the GST authorities.
The ITC-02 form is used to facilitate the transfer of 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. However, there is no time restriction to do so.
After the introduction of 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 they 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.
To be qualified to submit the FORM GST ITC-02, the following requirements must be satisfied:
Here are the steps to follow while filing Form GST ITC-02:
The transferor or the acquiring entity should go to the official GST Portal and the GST Home page will appear.
Enter your login details and the taxpayer’s dashboard will appear.
Go to the Services tab and click on the Return option. Then select ‘ITC Forms’ and the GST ITC forms page will appear.
Click on the Prepare Online option under the GST ITC-02 tile. Choose whether to transfer all or partial ITC and fill in the amount of matched ITC that needs to be transferred.
Enter the GSTIN of the transferee. Then enter the amount of the matched Input Tax Credit to be transferred under each major heading under the ‘Details of ITC to be transferred’ section.
Enter the required details for the Certifying Chartered Accountant or Cost Accountant in the certifying firm.
Attach a copy of the certificate either in JPEG or PDF format, but the file size of the attachment should not exceed 500 KB.
Click on ‘Save’ to upload both the data and the attachment to the GST Portal. Check the statement box to confirm that the furnished information is true and correct.
Select the authorised signatory from the drop-down list.
File the form using the DSC or EVC option. If DSC has been selected, ensure that it is signed using the Digital Signature of the selected authorised signatory. On the other hand, If EVC is selected, an OTP will be sent to the authorised signatory’s registered mobile number that needs to be entered.
Click on the Proceed option on the warning pop-up message.
Enter the OTP sent and click on Verify.
Once verified, a confirmation message will appear on the successful filing of the Form GST ITC-02. This message will also contain the system-generated ARN, and a copy of the form can be downloaded by clicking on the Downloads button.
From the ‘Services’ tab, click on ‘User Services’ and select ‘ITC 02 – Pending for actions’ option
Click on the ARN link displayed on the new page.
Review the details of all the matched ITC and accept or reject the transfer request.
If you accept the request, a confirmation message will be displayed and you will be prompted to proceed with filing the response.
Check the declaration statement and select the authorised signatory from the drop-down list.
File the form using the DSC or EVC option, and if EVC is selected, enter the OTP sent to the authorised signatory’s registered mobile number.
Click on the ‘Proceed’ option on the warning pop-up message.
Enter the OTP sent and click on ‘Verify’ option. Once verified, the system displays a confirmation message with the system generated ARN.
This will take you back to the ITC-02 Pending for actions screen. You can now view the changed status as ‘Accepted’.
Transfer of business involves a range of legal and financial aspects that need to be carefully considered and addressed to ensure a smooth and successful transfer. Some of the critical aspects that businesses need to consider include transfer of assets and liabilities, employee transfer, tax implications, intellectual property rights transfer, customer and vendor contracts transfer, and compliance with regulatory requirements. Each of these aspects requires a thorough understanding of the legal and financial implications and the proper procedures to be followed to avoid any disputes or penalties.
Under section 22 (3) of the CGST Act 2017, a person undertaking the practice of 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.
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.
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.
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.
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.
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.
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. If a business is transferred as a going concern, or if a whole or independent portion of the business is transferred, then GST will not apply.
The process of transfer of business includes two steps:
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.
The transfer of Input Tax Credit (ITC) is an important process for businesses in India that undergo changes in ownership. Form GST ITC-02 is used for this purpose, and businesses need to follow a step-by-step process to transfer the ITC successfully.Using a robust GST Accounting Software like BUSY is beneficial in claiming ITC correctly, as it takes care of a lot of the compliance work required for ITC.