GST UPDATE ON REQUIREMENT OF CREDIT REVERSAL ON SALE OF BUSINESS AS GOING CONCERN 98/2020-21

In our earlier update no. 97/2020-21, we had discussed that sale of business as a ‘going concern’ is an exempt service in terms of serial no. 2 of the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 and consequently, the provisions contained in Rule 42 of the CGST Rules, 2017 would apply. We have received lot of messages regarding the issue raised by us and so we attempt to discuss this point in the present update.

If the definition of ‘exempt supply’ as given in section 2(47) of the CGST Act, 2017 is referred, it is found that it includes services which attracts nil rate of tax or which is wholly exempt from tax under section 11. Consequently, there is no doubt as regards the fact that the transfer of business by way of going concern is an exempted service. Furthermore, as per the amended CGST Act, 2017, Explanation to section 17(3), value of exempt supply shall not include the value of activities or transactions specified in Schedule III, except those specified in paragraph 5 of the said Schedule. Consequently, the only exception where provisions of credit reversal would not apply is transactions specified in Schedule III subject to paragraph 5. Hence, as per legal provisions in force, provisions of credit reversal as contained in Rule 42 would apply even in cases of transfer of business by way of going concern. It is understandable that this provision is very harsh and illogical but still the assessees need to abide by the same. Now, the next question arises is what will be the mechanism for computation of the credit reversal in such cases? Well, there is no express provision in this regard but we can infer that one may at the most require to reverse common credit availed in the tax period in which such transfer is taking place. However, this will lead to credit reversal at extremely higher side as the exempted value would be the transfer value whereas the denominator would be total turnover for the said tax period which is not at all justifiable. Hence, it is practically impossible to comply with the requirement of credit reversal in cases where business is transferred as going concern and so the government should either carve out exception in the explanation to section 17(3) of CGST Act, 2017 by including it in Schedule III to CGST Act, 2017 or provide mechanism for credit reversal, though it appears to be logically incorrect.

In our opinion, there should not be requirement of complying with the credit reversal provisions in case of transfer of business as going concern but the interpretation of law indicates so. However, in this context, we wish to point out that there is no logic for requiring the transferor to reverse input tax credit as the transferee would be paying GST on the stock transferred or will use the machinery for supplying goods liable for GST. This situation can be very well co-related with the issue of credit reversal by job-worker in the erstwhile regime which was finally settled in favour of the assessee. In the erstwhile era, one of the common issue raised was requirement to reverse credit by the job-worker on clearance of job-worked goods as the said goods were not liable to central excise duty in terms of notification no. 214/86-CE. However, the matter reached upto High Court and was settled in the case of COMMISSIONER VERSUS STERLITE INDUSTRIES (I) LTD. [2009 (244) E.L.T. A89 (BOM)] wherein it was ruled that as far as central excise duty is being paid by the principal manufacturer and ultimately tax is being received by the government, there is no requirement for reversing credit by the job worker. We can contend that similar analogy applies in the present situation also because as far as the transferee is paying GST, the transferor should not be required to reverse credit, merely because the said transaction is exempted from levy of GST by way of exemption notification. We hope that the anomaly as pointed is considered by the government soon so that unwarranted litigation is not instigated by the department.

This is solely for educational purpose.

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GST UPDATE ON REQUIREMENT OF CREDIT REVERSAL ON SALE OF BUSINESS AS GOING CONCERN 98/2020-21

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