Transfer of ITC in case of sale, merger, demerger amalgamation, lease or transfer of business:-

  • As per section 18(3) of CGST Act, 2017 in case of change in the constitution of registered person on account of sale, merger, demerger, amalgamation, lease or transfer of business with specific provision of transfer of liabilities, the transferor shall be allowed to transfer ITC which remains Unutilized in his electronic credit ledger (as on the date of filing GST ITC-02) to the transferee.
  • As per Rule 41(1) of CGST Rules, 2017, the transferor has to file GST ITC -02 on common portal regarding the details of transfer along with a request to transfer the unutilized ITC to the transferee.
  • The transferor shall be at liberty to determine the amount to be transferred under each head (CGST, SGST, IGST and compensation cess) subject to the ITC balance available with the transferor as on effective date of merger and acquisition as clarified in circular No. 133 03/2020-GST.
  • The transferor is required to file GST ITC-02 only in those states where both the transferor and transferee are registered as clarified in Circular No. 133 03/2020-GST. Let’s understand this with the help of an example. ABC is transferor having registration in UP and MP having two assets in each state. XYZ is the transferee having registration in UP and MP. If all the assets of ABC are to be transferred to XYZ’s business unit having registration in UP, whether it would be logical to transfer ITC under Rule 41(1) to both the units of XYZ? As the asset is to be used by XYZ’s business unit having registration in UP so same must be transferred only to XYZ’s business unit having registration in UP not to the XYZ’s business unit having Registration in MP. Thus in the above case, ABC is required to file GST ITC-02 only for his registration in the state of U.P.
  • Proviso to rule 41(1) is applicable for all forms of business organization that results in partial transfer of business assets along with liabilities. In case of demerger, ITC (CGST+SGST+IGST) as available in electronic credit ledger as on date of filing form GST ITC-02 shall be apportioned in the ratio of value of assets of new units as specified in the demerger scheme.

As per the explanation to rule inserted WEF 29.03.2019 “Value of assets” means  the value of  the entire assets of the business (Whether or not ITC has been availed thereon ) as on the appointed date of demerger as specified in demerger Scheme.

Value of assets shall be taken on state level basis and not at the all India level. E.g. A Company ABC is registered in two states of Gujarat and Maharashtra. Its total value of assets is worth Rs.100 crore, while its assets in State of Gujarat and Maharashtra are Rs 60 crore and Rs 40 crore respectively. It demerges a part of its business to company XYZ. As a part of such demerger, assets of ABC amounting to Rs 30 Crore are transferred to company XYZ in State of Gujarat while assets amounting to Rs.10 crore only are transferred to XYZ  in State of Maharashtra (Total assets amounting to Rs 40 crore at all-India level are transferred from ABC to XYZ). The unutilized ITC of ABC in State of Gujarat shall be transferred to XYZ on the basis of ratio of value of assets in State of GUJARAT, i.e. 30/60 = 0.5 and not on the basis of all-India ratio of value of assets, i.e. 40/100=0.4. Similarly, unutilized ITC of ABC in State of Maharashtra will be transferred to XYZ in ratio of value of assets in State of Maharashtra i.e. 10/40 = 0.25.

  • As per rule 41(2), the transferor shall also submit the copy of certificate issued by practicing chartered or cost accountant certifying that such transfer has been done with the specific provision of transfer of liabilities.
  • As per rule 41(3), the transferee shall on the common portal, accept the details submitted by transferor and upon such acceptance, the utilized ITC as specified in ITC-02 shall be credited to his electronic credit ledger.
  • As per rule 41(4),the inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of accounts.

Procedures to be followed in case of death of sole proprietor:

Application for cancellation of registration shall be made in form GST REG-16 by legal heir/successor of the deceased. But before that the transferee/successor shall apply for registration under GST Act in REG-01 only thereafter legal heir can file application for cancellation of registration.

Now if legal heir continue the business it will be considered as transfer of business and credit shall be allowed to be transferred as per section 18(3) of CGST Act, read with rule 41 of CGST Rules.GST ITC-02 should be filed before filing application for cancellation of registration. On acceptance by transferee/Successor, Unutilized ITC as specified in ITC-02 shall be credited to the electronic credit ledger of transferee.

Procedure for filing ITC-02

By Transferor after log in to GSTN portal:-

Services>Returns>ITC Forms> Online preparation of ITC-02> Transferor has to entered the GSTIN of transferee and amount of matched ITC to be transferred> Enter the particulars of certifying chartered /cost accountant > Attach the certificate > Upload the form using DSC or EVC.

By transferee after log in to GST portal:-

Services> ITC02- pending for actions> Click on ARN link> Accept/Reject> File it with DSC or EVC for the acceptance of ITC.  On such Acceptance transferred inputs and capital goods should be properly accounted in the books of accounts.

On Acceptance by the acquiring merged entity (transferee), The ITC will be transferred to the transferee and Electronic credit ledger of (transferee) Acquiring Entity will get updated.

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