GST Update on exemption on transfer of business from one state to another as going concern 97/2020-21

The increased competition in the global market has prompted the Indian companies to go for mergers and acquisitions as an important strategic choice. The increased participation of the Indian companies in the global corporate sector has further facilitated the merger and acquisition activities in India. Business restructuring is a comprehensive process, be it financial or technological or market or organisational.

In the present update we will focus on the recent ruling as pronounced by AAR Andhra Pradesh in the case of M/s Shilpa Medicare Limited wherein the authority said that sale or transfer of a business classified as going concern would be classified as supply of service under the GST, but it would be exempt from the tax. This would be applicable to running units sold wholly or its independent parts. A going concern is a concept of accounting and applies to the business of the company as a whole. Transfer of a going concern means transfer of a running business which is capable of being carried on by the purchaser as an independent business.

In the instant case, the authority stated that Part 4 (c) of Schedule II of the CGST Act, 2017 refers to the ‘transfer of business assets’. A plain reading of the same clarifies that the transfer of business assets is ‘supply of goods’. But in case of M/s Shilpa Medicare Limited, the business in its entirety is transferred or sold along with capital assets. Thus, it disqualifies the going concern’ to be grouped under ‘supply of goods’ as per the above-mentioned clause 4(e).

The definition of services qualifies ‘anything other than goods’ as service. In this context it is obvious that the ‘going concern’, which was excluded form list of ‘supply of goods’ as discussed above, would automatically fall under ‘supply of services’.

Similar ruling also came in the case of M/s Rajashri Foods Pvt Ltd Karnataka bench of the AAR wherein the applicant wanted to sell one of its units along with fixed and current assets as well as liabilities, including bank loans, for a lump sum consideration.

Even in the earlier tax regime it was a settled legal proposition based on judiciary in case of Shree Cement Limited 2002 CESTAT-DEL, Flex Laminator 2002 CESTAT-DEL that in case of merger/demerger, credit would be available to the transferee company even if the invoice of the vendors were in the name of the transferor company.

Recently, board has also issued a Circular no.133/03/2020 dated 23^rd march 2020 clarifying the apportionment of ITC in case of demerger of units and transition of such ITC by the transferor. Issuance of theses clarifications is welcomed as it would resolve various anomalies around the calculations of the ratio for the apportionment of unutilised ITC and filing of ITC-02. The business re-organisations are very frequent in today’s time. The circular also clarified that the formula for the apportionment of unutilised credit shall apply in all the cases i.e. in case of slump-sale or transfer of business as a going concern.

Entry 2 of Notification No. 12/2017-Central Tax (Rate), dated 28th June, 2017 provides an exemption from GST for services by way of transfer of going concern, as a whole or an independent part thereof. Similar exemption was available also in service tax regime. In clause 4(c) transfer of business as a going concern shall constitute supply of service and the applicant can file the Form ITC-02 as prescribed by Rule-41 for transferring of credit which is subject to the condition that the liability of the business is also transferred along with the assets, along with the details of unutilised input tax credit lying in the hands to the transferee.

The AAR rightly held that the activity of transfer of business as a going concern should not attract GST.

The ruling should aid in offering clarity to GST implications on conventional hiving off/demerger transactions. This ruling categorising the transaction of transfer of running business as an exempt supply of service would also force amalgamating company for proportionate reversal of common input tax credits.

Revival of companies will definitely be more cost effective than setting up a new structure altogether. Also this will give a push to the investors to take over such companies and create more job opportunities in India.

This is solely for educational purpose.

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GST Update on exemption on transfer of business from one state to another as going concern 97/2020-21

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