August 25, 2021 / GST

GST IMPLICATIONS ON DISCONTINUATION OF BUSINESS

Table of Contents

GST IMPLICATIONS ON DISCONTINUATION OF BUSINESS

BRIEF INTRODUCTION

Many businesses change their structure for various reasons and purposes like for betterment of business from declining phase or to extend the worth of their business or to possess potency in market competition. In recent times after the COVID 19 crisis, more businesses are restructured thanks to continuous losses or thanks to difficulties in continuation of business.

A business also can be discontinued thanks to various reasons like death of proprietor/partner causing dissolution of legal entity, intentional closure of the firm/company, transfer of business to another person etc.

Discontinuation of Business are often undertaken using the following ways: –

Closing of business operation, without transferring the stock or other assets.
Transfer of business to legal heir with none consideration
Sale/transfer of business for:

1. Payment Consideration i.e. slump sales of business
2. Itemized sale, i.e., when separate consideration is charged for various assets.

GST ON SALE OF STOCK IN HAND AND OTHER ASSETS

In such scenarios, as stock and assets are sold within the regular course of business, therefore, GST at applicable rates must be charged at the time of supply. Further, as no supply of products is going down at the time of closure of business, therefore, no GST is applicable on the identical.

TREATMENT OF BALANCE REMAINING THE ENTITIES ELECTRONIC CREDIT LEDGER

In case of clearance of all stocks and assets before discontinuation, balance in Electronic credit ledger will be remained because of various reasons like sale of stock on losses, reduction in GST rates on goods proscribed, e.g., GST @ 18% was applicable at the time of purchase of stock and afterward reduced to 12% etc.

In such cases, no refund of balance lying in Electronic Credit Ledger shall be granted and therefore the person may still surrender his GST registration number.

TRANSFER OF BUSINESS TO LEGAL HEIR, WITHOUT CONSIDERATION

This scenario generally arises just in case of discontinuation of business because of death of proprietor and consequently the complete business is being transferred to the legal heir/successor of the proprietor. In such a scenario, the legal heir would be available with the options to either to continue the business of the deceased proprietor by transferring his assets and liabilities. Just in case of continuation of business, the legal heir shall obtain a new GSTIN and he may transfer ITC lying within the Electronic Credit Ledger of the deceased proprietor to his GSTIN. Legal heir shall even be to blame for payment of GST liability of the deceased proprietor.

Where such a business is discontinued, legal heir shall be liable for payment of GST on stock or capital goods prevailing on the date of cancellation of GST registration of deceased proprietor.

GST ON SLUMP SALES / LUMP SUM CONSIDERATIONS

Transaction of transfer of business with all assets and liabilities for a lump sum consideration, i.e., where values don’t seem to be assigned to every asset and liabilities separately, is understood as Slump sale.

SLUMP SALE

Slump sale will have the identical treatment as normal supply. Under the GST regime tax is payable by the registered taxable person on the provision of goods and/or services.
The transfer of business is amounted to transfer of a component of the assets and not the entire business. Moreover, para 4(c) of the schedule II specifies that just in case business is transferred as a going concern then it’d not constitute as supply.
However, in pursuance of Notification No. 12/2017 Central tax (rate) dt 28.06.2017 services, which are provided by way of transfer of a going concern as a full or an independent part thereof, are exempted from GST. Thus, no GST would applicable on slump sale transaction as transfer of business on a going concern basis.

TREATMENT OF SLUMP SALE UNDER GST

Question whether transfer of business for payment consideration is taken into account as “Sale of Goods” and “Sales of service” may be a matter of dispute since beginning and various Advance Ruling has been sought on this issue.

Points considered in relevant case law –

As per Section 7 of CGST Act, 2017, “Supply” includes activities like sales, transfer, bater, exchange, etc. made for a consideration within the course or furtherance of business.
Activity involving transfer of business as a going concern and made for a payment consideration doesn’t constitute as a supply in the course or furtherance of business. However, as per the Section 7, an inclusive definition of term “Supply” has been provided, whether or not resulting in transfer of business as a going concern has not been distributed in course or furtherance of business the identical shall still be considered as “Supply” under GST.

Under Schedule II of CGST Act, 2017, it was provided that there are certain specified Activities or Transactions that shall be treated as Supply of products or Supply of Services.

According to Entry No. 4(c) of Schedule II of CGST Act, 2017 the following has been provided –

“4 Transfer of business asset:

In case a person ceases to be a taxable person, the goods standing as assets of any business carried on by him shall be deemed to be supplied by him, and the same is sought to be made in the course or furtherance of his business immediately preceding the date of cessation as taxable person unless:
the business is transferred as a going concern to a different person; or

Thus, as per the above explanation, transfer of goods forming a part of business shall be considered as “Transfer of Business Asset”, in case such person ceases to be a taxable person. However, the said provision shall not apply to cases, where the business is transferred to someone else, as a going concern.

In case of slump sale, the complete business is transferred on a going concern basis. Therefore, such transfer isn’t to be considered as “Transfer of Goods”

Notification No. 12/2017-Central Tax (Rates) dated 28th June, 2017 contains an inventory of services exempted which are exempted under GST.

S. NO.	CHAPTER	DESCRIPTION OF SERVICES	RATE (%)	CONDITION
2	CHAPTER 99	SERVICES BY WAY OF TRANSFER OF A GOING CONCERN, AS A WHOLE OR AN INDEPENDENT PART THEREOF.	NIL	NIL

Therefore, as per Entry No. 2 of N/No. 12.2017-Central Tax (Rates), Transfer of business on going concern basis is taken into account as “Supply of Service” which is exempt.

Therefore, if a business is transferred on a going concern basis, then such a transaction is taken into account as “Supply of Service”.

GST RATE ON SLUMP SALE

According to the notification number. 12/2017-Central Tax (Rate), transfer of business on going concern basis is exempted from GST liability and that too without any condition. In case of slump sale, if business is transferred on a going concern basis, then the identical shall be considered as “Exempted Supply”.

IMPLICATION OF BALANCE LYING IN ELECTRONIC CREDIT LEDGER

After considering the above discussions, it is cleared that as per Section 18(3) of CGST Act read with Rule 41 of CGST Rules, balance in Electronic Credit Ledger of the transferor shall be transferred to the transferee by filing Form GST ITC-02 on GST portal subject to fulfillment of other conditions discussed above.

COMPUTATION OF ITC TO BE TRANSFERRED, PARTIAL TRANSFER OF BUSINESS IS MADE

Where the transfer involves, transfer of the full business, the transferor is entitled to transfer the whole balance of unutilized ITC lying within the Electronic credit ledger to the transferee. However, where the transfer involves transfer of partial transfer of business, the transferor shall be eligible to transfer only proportional ITC.

As per the Rule 41 of CGST Act, 2017, the ITC shall be apportioned within the ratio useful of transferred assets with the whole value of Assets. the identical is understood by the subsequent formula:

ITC allowed to be transferred = Balance of ITC * Value of Assets, being transferred / Total Value of Assets

For example A GST business is partially transferred with the worth of assets transferred is Rs. 4 crores out of total assets of Rs. 10 crores. ITC available within the credit ledger is Rs. 1 crore. In such a case, ITC transferred shall be Rs. 1*4/10= Rs. 0.4 crore

ITEM WISE SALE

In case, the assets and liabilities of a business are transferred, by assigning certain price to every item, the same is known as itemized sale.
Under this, the disposal of key or selected business assets is involved. Under the merger and amalgamation, value of every asset is calculated separately i.e. the full business is transferred but item wise.
Transaction of itemized sale is meant as supply under the ambit of GST and individual asset would cover under the definition of goods as per schedule II of the CGST Act. Thus, the said transaction shall be leviable to GST.
In case of Itemized sales, the complete business isn’t transferred to someone, rather few assets are transferred and where the worth is assigned to every asset
According to Entry No. 4(a) of Schedule II of CGST Act, 2017 -“4. Transfer of business assets
In case, the goods forming as the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as not to make part of those assets, such transfer or disposal may be a supply of goods by the person;”

Therefore, as per Entry No. 4(a) of Schedule II of CGST Act, transfer of business assets is taken into account as “Supply of Goods” and GST on the identical shall be charged at the applicable rate.
Also, as there’s no transfer of business happening, therefore, there’s no provision given for transfer of unutilized balance in Electronic Credit Ledger.

OTHER IMPLICATION OF GST ON TRANSFER OF BUSINESS

Prologue: Any sought Corporate transaction involving amalgamation, mergers, acquisition and takeovers are subject to GST. Thus, the industries are required to investigate the provisions of the GST Law and its impact on their business.
Registration: According to the 22(3) of the CGST Act, in case, a business, being carried on by a taxable registered person is transferred, the transferee or the successor shall be compulsorily required to undertake fresh registered under GST, with effect from such transfer or succession.

The transferee will be required to obtain such registration from the date on which the Registrar of Companies issues a certificate of incorporation.

SALE OF SECURITIES

In most case, the same old mode is that the acquiring of company by making a proposal by the transferee company to the shareholders of the transferor company to get their securities, within the transferor company, at a price stated for the aim.
The definition of products still as services under the GST regime don’t cover the securities, therefore GST wouldn’t be levied on the sale of securities.

INPUT TAX CREDIT

Section 18 provides for the provisions regarding availment of ITC by taxable person. As per Section 18(3) of CGST Act, it was provided that in case of change of constitution of a registered taxable person on account of sale, merger, demerger, amalgamation, lease or transfer of business, the said registered person will be required to transfer the unutilized input tax credit to transferee.
Also, the said registered person shall be liable to furnish the main points of sale, merger, de-merger, amalgamation, lease or transfer of business in Form GST ITC-02 electronically on the Common Portal together with asking to transfer the unutilized input tax credit lying in his electronic credit ledger to the transferee.

RULE 41

Where the case involves demerger, the ITC shall be apportioned in the ratio of the value of assets being allotted to the newly established units, in accordance with the demerger scheme.
The transferor is also required to provide a Certificate from a practicing-Chartered Accountant or comptroller, certifying that the sale, merger, de-merger, amalgamation, lease or transfer of business has been finished a particular provision for the transfer of liabilities and the same be made available in duplicate form.
All the businesses transferring their business under GST will have to furnish the particulars within the form GST ITC-02 through the common portal together with an invitation for transferring the unutilized ITC to the electronic credit ledger of the transferee.

Exception: where there is a demerger of an organization, the ITC shall be apportioned in the ratio of the value of assets allotted to the newly established units.

For example, XYZ private limited undergone demerger. XYZ be demerged into three separate units X, Y, Z. The assets of XYZ have been apportioned in the ratio of 4:3:3. Thus, the ITC available with XYZ would be apportioned in the ratio of 4:3:3.

Once the transferee has validated the small print entered by the transferor within the Form GST ITC-02, the quantity of unutilized input tax credit would be transferred to his electronic credit ledger.

The input tax credit would be reversed within the following two situations.

When a taxpayer registered under the composition scheme utilizes input tax credit on goods and services, or both, which became wholly or partly exempt from tax, then the number similar to the quantity of ITC on inputs held in stock, semi-finished and finished goods held in stock, and capital goods are going to be debited to the electronic credit ledger or electronic cash ledger. The said amount of ITC shall be calculated on the basis of corresponding invoices relating to which the credit is available to the registered taxable person.

For example:

ABC Enterprise sold handmade jute works to Sam for Rs 2,00,000. ITC utilized on the said inputs were Rs 30,000. Assuming that ABC Enterprise opts for composition scheme under GST and we know that handmade jute products are exempt from GST. Thus, the amount of ITC i.e., Rs 30,000 is required to be debited from the electronic credit or cash ledger belonging to Amar Enterprise.

Where a taxpayer’s GST registration is canceled by the authority, the amount of ITC in respect of goods held in stock, capital goods, semi-finished and finished goods will be required to be debited from the electronic credit ledger or electronic cash ledger on the day preceding day of cancellation of registration.

*ITC on Capital goods lying in stock should be calculated on the pro-rata basis of residual life and therefore the residual life is assumed to be 5 years. Capital goods also are to be reduced by 5% per quarter or the part thereof from the date of invoice or other document specifying the receipt of such capital goods by the recipient.

The amount in respect of credit available shall be calculated separately in respect of IGST and CGST. Just in case there isn’t any tax invoices for the input held in stock, capital goods, semi-finished and finished goods than the number shall be calculated on the premise of prevailing market value of goods. the details of the above input tax credit must be furnished within the form GST ITC-03 and also within the form GSTR 10 if the quantity of ITC is reversed due to the cancellation of registration.

CONCLUSION

Goods and Services Tax have impact on each and each industry and business in India. Transfer of business involving mergers, amalgamation and acquisitions do not attract any sought of GST liability, hence, they are unlikely to be impacted from the same.
In order to calculate Capital gains, holding period shall be calculated from the date of original purchase of shares. the businesses who choose merger and acquisition, the liability to register arises on the date of transfer for transferee of a business as going concern.
Further, GST Law stipulates transfer or sale of business assets can occur either as a slump sale or itemized sale. just in case of change of constitution of a registered person on account of sale, merger, demerger etc., the unutilized ITC would be allowed to be transferred to transferee. Thus, GST Law has provided immense clarity in respect of the taxability of business transfer and its related aspect.
Therefore, where the case involves closure or dissolution of business and the same has been caused due to death of proprietor or winding up of Company, mere surrendering a GST registration shall not suffice. Cancellation of GST registration doesn’t put an end to liabilities of somebody and appropriate action are often taken against such person in future date. Therefore, before surrendering GST registration, an individual is required to appear in the end possible GST liability and applicable compliances.

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