Availability of ITC in case of sale, merger, demerger, amalgamation, lease or transfer of the business

For availing the benefits of synergy, there is need for change in the organizational structure or business model of a business entity. Restructuring is considering an important step to expand the business. In this process, one thing which is more important i.e. unutilized Input Tax Credit (ITC), according to GST law, the unutilized Input Tax Credit (ITC) is transferred during the restructuring process.

According to section 18(3) of Central Goods and Services Tax Act, 2017 (CGST Act) read with Rule 41 and 41A of Central Goods and Services Tax Rules, 2017 (CGST Rules) provides an option to transfer ITC in consequent to merger, demerger, spin-off, or split. The important note is that the transferee has to get himself/ itself registered under GST prior to transfer of ITC.

According to sub- section (3) of section 18 of the CGST Act:

• “Where there is a change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provisions for transfer of liabilities, the said registered person shall be allowed to transfer the input tax credit which remains unutilized in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in such manner as may be prescribed”.

Further, according to sub-rule (1) of rule 41 of the CGST Rules:

• A registered person shall, in the event of sale, merger, de-merger, amalgamation, lease or transfer or change in the ownership of business for any reason, furnish the details of sale, merger, de-merger, amalgamation, lease or transfer of business, in FORM GST ITC-02, electronically on the common portal along with a request for transfer of unutilized input tax credit lying in his electronic credit ledger to the transferee:

Provided that in the case of demerger, the input tax credit shall be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme

Explanation:- For the purpose of this sub-rule, it is hereby clarified that the “value of assets” means the value of the entire assets of the business, whether or not input tax credit has been availed thereon.

• The transferor shall also submit a copy of a certificate issued by a practicing chartered accountant or cost accountant certifying that the sale, merger, de-merger, amalgamation, lease or transfer of business has been done with a specific provision for the transfer of liabilities.
• The transferee shall, on the common portal, accept the details so furnished by the transferor and, upon such acceptance, the un-utilized credit specified in FORM GST ITC-02, shall be credited to his electronic credit ledger
• The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account.”

So as per the above provisions, a registered taxpayer can apply for transfer the ITC available in the electronic credit ledger to another business entity in case of transfer of business by way of sale of business/ merger by filing of ITC declaration in Form GST ITC-02. However, the following requirements should be fulfilled with:

• ITC should be available in the electronic credit ledger of transferor, as on effective date of merger/ acquisition/ amalgamation/ lease/ transfer.
• Both, transferor and transferee should be registered under the GST.
• All returns for the past periods have been filed by transferor. There should be no pending.
• The transferor shall also submit a copy of a certificate issued by a practicing CA or cost accountant certifying that the sale, merger, transfer of business has been done with a specific provision for the transfer of liabilities.
• Thereafter, the transferee shall, on the common portal, accept the details so furnished by the transferor and, upon such acceptance, the un-utilized credit specified in Form GST ITC-02 shall be credited to his electronic credit ledger.
• Also, the inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account.

The process of transferring unutilized ITC is broadly divided into two steps:

• The transferor has to file Form GST ITC-02 at GST portal, specifying the available ITC in each major head.
• The transferee shall accept or rejects the same in GST portal.