Transfer of ITC in case of Merger /Demerger / Business
Reorganization / Apportionment of Input Tax Credit (ITC)
In the dynamic world of
business, changes like mergers, demergers, sales, or even transfers of business
are common. Such changes raise a crucial question under the Goods and Services
Tax (GST) law: What happens to the Input Tax Credit (ITC) accumulated in the
books of the outgoing or reorganized business entity?
To address this, Rule 41
of the CGST Rules, 2017 provides a clear mechanism for transferring unutilized
ITC from the old (transferor) to the new (transferee) entity during such
reorganizations. Let’s explore this rule in detail.
What is
Rule 41 of the CGST Rules?
Rule 41 deals with transfer
of unutilized ITC when a business undergoes sale, merger, demerger,
amalgamation, lease, or transfer of ownership. It allows a registered
person to shift ITC to the new entity, provided certain conditions are
fulfilled.
Key Points
of Rule 41:
1. FORM
GST ITC-02 Filing:
o The
transferor (the existing business) must file FORM GST ITC-02 on the common
GST portal.
o This
form contains details of the transaction (sale, merger, etc.) and requests for
the transfer of unutilized ITC from the electronic credit ledger.
2. Apportionment
in Case of Demerger:
o In
case of demerger, the ITC is to be apportioned in the ratio of the value of
assets transferred.
o This
ratio must be as specified in the demerger scheme.
3. Definition
of 'Value of Assets':
o “Value
of assets” includes all assets of the business, regardless of whether
ITC has been availed on them or not.
4. Certificate
Requirement:
o The
transferor must also upload a certificate from a Chartered Accountant or
Cost Accountant certifying that the transfer includes transfer of
liabilities.
5. Acceptance
by Transferee:
o The
transferee (new entity) must accept the details furnished in ITC-02 on the GST
portal.
o Once
accepted, the ITC gets credited to their electronic credit ledger.
6. Books
of Account Requirement:
o The
transferee must duly account for the inputs and capital goods transferred in
their books.
Important
Clarifications by CBIC (Circular No. 133/03/2020-GST)
To eliminate ambiguity,
CBIC issued a circular clarifying several practical aspects of Rule 41 and
Section 18(3) of the CGST Act. Here's what was clarified:
Apportionment is
State-Specific
Under GST, each
registration in a different State is considered a distinct person. Hence:
- Apportionment of ITC is to be done at
State level, not at the all-India level.
- Example: If XYZ Ltd. operates in MP
and UP with assets of ₹60 Cr and ₹40 Cr respectively, and transfers ₹30 Cr
and ₹10 Cr worth of assets respectively in a demerger, the ratio would be:
- MP: 30/60 = 50%
- UP: 10/40 = 25%
- Not 40/100 = 40% at all-India level.
ITC
Apportionment Applies to All Types of Business Reorganization
Even if it’s not a
classic “demerger”, any business reorganization involving partial transfer of assets
along with liabilities (e.g., hive-off, slump sale, transfer as going concern)
will follow the same ITC apportionment formula.
ITC Apportionment is Not
Tax-Head Wise
- The apportionment ratio applies to
the total unutilized ITC, not separately for CGST, SGST, IGST or Cess.
- For instance, if the total ITC is ₹20
lakhs and 60% of assets are transferred, then ₹12 lakhs will be
transferred. You don’t have to calculate 60% of each head individually.
Allocation Among Tax
Heads is Flexible
- While filing ITC-02, the transferor
is free to allocate the apportioned ITC under different tax heads (CGST,
SGST, IGST) as per availability in the ledger.
- Example:
- If ₹35 lakhs is to be transferred,
it can be 10L CGST + 10L SGST + 15L IGST, as long as it does not exceed
the total apportioned amount.
Relevant
Dates for Calculation
- ITC Balance: The unutilized ITC
should be taken as on the date of filing FORM GST ITC-02.
- Asset Ratio: The ratio of value of
assets should be as per the appointed date of the demerger, as defined in
the scheme (Companies Act, 2013).
Step-by-Step
Procedure for ITC Transfer
1. Prepare
Scheme & Appoint CA:
o Have
a legally backed scheme (e.g., scheme of demerger/merger).
o Appoint
a Chartered Accountant or Cost Accountant to certify that the scheme involves transfer
of liabilities.
2. Calculate
ITC Transfer Amount:
o Determine
ITC balance in electronic credit ledger.
o Apply
asset ratio (as on appointed date) to determine amount to be transferred.
3. File
FORM GST ITC-02:
o Log
in to the GST portal.
o Navigate
to ITC-02 form and fill details of business reorganization and ITC to be
transferred.
o Upload
CA certificate.
4. Transferee
to Accept:
o Transferee
must accept the form submission.
o Once
accepted, ITC is auto-credited to transferee’s credit ledger.
5. Update
Books of Accounts:
o Transferee
should duly record the inputs and capital goods received in their books.
Practical
Examples
Example 1 – Simple
Demerger
ABC Ltd. (registered in
Delhi) demerges 70% of its business to DEF Ltd.
- Total ITC of ABC in Delhi:
- CGST: ₹10L, SGST: ₹10L, IGST: ₹30L =
Total: ₹50L
- Transfer to DEF (70% of business):
₹35L
- Allocation can be flexible, e.g.:
- CGST: ₹10L, SGST: ₹10L, IGST: ₹15L
Example 2 – Transfer in
Multiple States
XYZ Ltd. is in MP and UP.
In demerger:
- Transfers 50% of assets in MP →
Transfer 50% of MP’s ITC
- Transfers 25% of assets in UP →
Transfer 25% of UP’s ITC
XYZ files ITC-02 only
in MP and UP, not in other states.
Legal Backing
- Section 18(3)
of CGST Act: Allows transfer of unutilized ITC in case of reorganization
involving transfer of liabilities.
- Rule 41 of CGST Rules:
Lays down the procedure and conditions.
- Circular No. 133/03/2020-GST:
Clarifies doubts about interpretation and implementation.
Conclusion
Rule 41 plays a vital
role in preserving the continuity of tax credit during business
reorganizations. It ensures that legitimate ITC is not lost simply because the
structure of a business has changed.
Key Takeaways:
- File GST ITC-02 in the state where
both transferor and transferee are registered.
- Use state-wise asset ratio for
demerger cases.
- Apply the formula to total ITC, not
tax heads separately.
- Use appointed date of reorganization
for asset ratio, but ITC ledger date for actual credit.
By following this rule
properly, businesses can undergo structural changes without losing valuable ITC,
ensuring smooth transitions and GST compliance.
Disclaimer: All
the Information is based on the notification, circular and order issued by the
Govt. authority and judgement delivered by the court or the authority
information is strictly for educational purposes and on the basis of our
best understanding of laws & not binding on anyone.
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