When a business changes hands, GST takes a nuanced stance. Understanding going concern exemptions, ITC transfers, and valuation rules is critical for both transferors and transferees.
India's remarkable journey towards economic prosperity remains closely intertwined with the ever-evolving landscape of business expansions within the country. While many corporations have experienced substantial organic growth, a growing number have opted to explore the acquisition route. In recent years, mergers and acquisitions have become a prominent fixture in the market, reshaping the corporate landscape.
One pivotal development has been the introduction of the Goods and Services Tax (GST), which has taken a neutral stance on the taxation of these transactions — exempting them from the purview of GST, similar to previous norms wherein the transfer of a business on a going concern basis remained non-taxable under both service tax and value-added tax.
This article delves into the intricacies of GST implications concerning the transfer of a business or business vertical on a going concern basis, spanning the perspectives of both the transferor and the transferee.
Supply or Not?
In the realm of GST, the determination of 'supply' serves as a pivotal starting point. For a transfer of business to qualify as a supply, it must satisfy three critical criteria:
- It must involve a good or service.
- There must be a consideration involved.
- The activity must be carried out in the course or furtherance of business.
Under GST, goods are defined as 'every kind of movable property', while services are categorized as 'anything other than goods.' A business or business segment — not being movable property — falls under the purview of services. In a typical business sale transaction, the transferee agrees to remunerate the transferor, clearly fulfilling the requirement of consideration.
The definition of 'business' under section 2(17) of the CGST Act, 2017 is comprehensive, encompassing supply or acquisition of goods — including capital goods and services — in connection with the commencement or closure of business. In summary, the transfer of a business qualifies as a service and falls well within the purview of supply, making it subject to GST.
Value of Supply
Once it is established that the activity of transferring a going concern constitutes a supply of services, the next crucial step is determining the applicable value. The valuation process may differ based on the relationship between the parties involved.
Value — In Case of Unrelated Parties
Section 15(1) of the CGST Act prescribes the transaction value — i.e., the price actually paid or payable for the supply where the price is the sole consideration — as the value of supply.
Value — In Case of Related Parties
Rule 28 of the CGST Rules 2017 prescribes the valuation scheme applicable for related parties, providing three ways to determine valuation: (a) open market value of such supply; (b) if the open market value is not available, the value of supply of goods or services of like kind and quality; (c) if the value is not determinable under (a) or (b), the value as determined by the application of Rule 30 or Rule 31, in that order.
Applying the rationale of a slump sale, each slump sale is unique, making it challenging to find services of like kind and quality. Given these considerations, Rule 28 may not always serve the purpose. Rule 31 of the CGST Rules 2017 then comes into play — allowing the value to be determined using reasonable means consistent with the principles of section 15 and the general provisions of GST law. The value adopted for any other statute (accounting standards, income tax laws, company law, etc.) may be used if it aligns with GST law and is deemed reasonable.
Rate of GST
The government has notified various supplies exempt from GST vide Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017. SI. No. 2 of the notification covers services in relation to transfer of business on a going concern — making such supply exempt from GST:
| Sl. No. | Chapter / Heading | 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 |
Accordingly, the sale via slump sale, if treated as sale of business on a going concern basis, falls under entry 2 of the Notification and is exempt under GST. This view has been supported by multiple advance rulings across the country, including M/s Airport Authority of India (Gujarat Authority), M/s Pico2femto Semiconductor Services Private Limited (Karnataka Authority), and M/s Rajashri Foods Private Limited (Karnataka Authority).
Input Tax Credit (ITC) Transfer
The provisions of the law stipulate that a registered person is entitled to transfer any unutilized input tax credit from their electronic credit ledger to a business that is sold, merged, demerged, amalgamated, leased, or transferred. When such a transfer of credit occurs, the registered person must furnish details electronically on the common portal using 'FORM GST ITC-02'.
The transferor is also required to submit a certificate issued by a practicing Chartered Accountant (CA) or Cost Accountant (CMA), certifying that the sale/merger/transfer has been conducted with a specific provision for the transfer of liabilities as a going concern. Upon the transferee's acceptance via the common portal, the unutilized credit is credited to the transferee's electronic credit ledger.
It is imperative that the transferee properly accounts for the inputs and capital goods transferred to them in their books of accounts.
Essentials of a Going Concern
The term 'going concern' has not been defined under GST laws. Various sources provide the following understanding:
- Under the Income Tax Act (ICDS): an assumption that the person has neither the intention nor the necessity of liquidation or materially curtailing the scale of the business, and intends to continue for the foreseeable future.
- Prem and Saharay's Judicial Dictionary: a business that is in actual operation and working order, and the transfer of ownership does not interrupt the running of the business.
- Cambridge English Dictionary: when a company is sold as a going concern, it is sold while operating normally.
- ICAI Auditing Standards: an accounting concept implying that the business will continue to exist and operate for an indefinite period in the future.
- Accounting Standard AS-1 (ICAI): the enterprise is normally viewed as continuing in operation for the foreseeable future without the intention or necessity of liquidation or materially curtailing the scale of operations.
The Education Guide of CBIC (para 7.11.15) clarifies that 'Transfer of a going concern' refers to the transfer of a running business capable of being operated independently by the purchaser — but does not cover the mere or predominant transfer of an activity comprising a service.
Conclusion
“The transfer of a business in a slump sale model qualifies as a supply under GST — and is exempt if transferred as a going concern, with ITC seamlessly transferable to the new owner.”
— Sharp & Stellar Advisory
Furthermore, any ITC associated with the business segment can be transferred to the transferee through the GST common portal by submitting 'Form GST ITC-02'. This regulatory framework not only recognizes the transfer of business as a supply but also ensures a smooth transition of unutilized ITC to the new owner, streamlining the process of business transfers within the purview of GST regulations.
Disclaimer. This article constitutes a part of the Firm's internal resource materials and is made accessible on the Firm's website with the intention of offering knowledge and awareness to its employees and clients. The opinions and information provided in this article are not legally binding on any governing authority. The article takes into account the prevailing GST provisions as of its publication date. Any party other than those explicitly mentioned above should seek prior written advice from the Firm or the article's author before relying on the content for the purpose of making any commercial decisions.
