Company Act, 2013 or LLP Act, 2008 allows companies or LLP or Partnership Firms to change their constitution or convert them i.e. from Private limited to LLP or any other combination. In such a situation, it’s very important to understand the impacts of the GST. We observed that their merger, demerger or amalgamation or conversion of Pvt Ltd to LLP or any other combination or transfer of business, are continuously taking place. Considering the above, the GST Act also allowed for merger, Demerger, amalgamation or transfer of business.
Let’s discuss a case of conversion of Private Limited to LLP and GST related provisions
Whether the transfer of business or Conversion of Pvt Ltd to LLP is a Supply?
As per Section 7(1) of CGST Act, 2017,
“For the purposes of this Act, the expression “supply” includes (d) the activities to be treated as a supply of goods or supply of services as referred to in Schedule II.”
Section 7(1) has given an inclusive definition and that is for consideration in the course of business or furtherance of business, where special transactions are also covered under Schedule I and Schedule II which will be treated as Supply;
As per Entry 4 Transfer of business assets of Schedule II:
“(c) where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless -
(i) the business is transferred as a going concern to another person; or ………….”
Point (4)(c)(i) of Schedule II explains that, if the business is transferred as a going concern to another person; will not be treated as a supply of goods.
Hence, it can be construed that the transfer of a business as going concern would not be differentiated as Supply of assets and supply of liabilities. Further, the whole transfer of business could be treated as “Supply of Services”;
We believe that the said transfer would be treated as Supply of Services under the CGST Act, 2017.
What does GST Rate need to be applied for this supply?
The Government has specifically mentioned an entry under Chapter 99 of the Schedule of Services under “NIL rated”:
Services by way of transfer of a going concern, as a whole or an independent part thereof.
Hence, the transfer would be chargeable to tax at NIL Rates.
Value to be considered for charging GST.
Basis the above explanation, it can be construed that the GST @ 0% has to be charged on transfer of a business as going concern. Hence, the said supply would be required to be presented in the returns of the transferor;
The value of supply which needs to be mentioned in returns can be ascertained as per Section 15 of the CGST Act, 2017,
"The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply."
In the current scenario of conversion of a business constitution, generally, it is without consideration and hence, there is no price paid or payable. Hence, for determining the value, we need to refer to the CGST Rules, 2017;
As per Rule 27 of CGST Rules, 2017,
“Value of supply of goods or services where the consideration is not wholly in money.-Where the supply of goods or services is for a consideration not wholly in money, the value of the supply shall,-
(a) be the open market value of such supply;
(b) if the open market value is not available under clause (a), be the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money, if such amount is known at the time of supply;
(c) if the value of supply is not determinable under clause (a) or clause (b), be the value of supply of goods or services or both of like kind and quality;
(d) if the value is not determinable under clause (a) or clause (b) or clause (c), be the sum total of consideration in money and such further amount in money that is equivalent to consideration not in money as determined by the application of rule 30 or rule 31 in that order.”
Further, if the value is not determinable under the above-said rule, then Rule 30 of CGST Rules, 2017 may be referred.
As per Rule 30 of CGST Rules, 2017,
“Value of supply of goods or services or both based on cost.-Where the value of a supply of goods or services or both is not determinable by any of the preceding rules of this Chapter, the value shall be one hundred and tenpercent of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services.”
Hence, the value can be a determined basis of the above rules as applicable to the respective case.
Whether Transferor has to charge tax on business transfer to the transferee and pay it to Government?
As per the expansion given above the transaction would be treated as a supply and would be chargeable at NIL rate. Hence, no tax would be actually payable.
Whether balance in Ledgers (Credit or Cash) of Transferor will lapse?
As per Section 18(3) 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 unutilised in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in such manner as may be prescribed.
Section 18(3) for Inputs in special circumstances are also allowed to carry forward to the transferee’s account subject to the safeguards of government revenue, this section benefit is available only in case of all business liabilities are transferred to the transferee;
Hence balance in ledgers will be carried forward to the transferee.
How to transfer these account balances to transferee?
As per the Rule 41 of CGST Rules, 2017, Form GST ITC 02 has to be filed electronically and the same has to be accepted by the transferee
Let’s see the rule
(1) A registered person shall, in the event of sale, merger, demerger, amalgamation, lease or transfer or change in the ownership of business for any reason, furnish the details of sale, merger, demerger, 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 the 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.
(2) The transferor shall also submit a copy of a certificate issued by a practicing chartered accountant or cost accountant certifying that the sale, merger, demerger, amalgamation, lease or transfer of business has been done with a specific provision for the transfer of liabilities.
(3) The transferee shall, on the common portal, accept the details so furnished by the transferor and, upon such acceptance, the unutilized credit specified in FORM GST ITC-02 shall be credited to his electronic credit ledger.
(4) The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account.
How to transfer obtain registration for the new entity?
As the private limited company would be converted into an LLP, a new PAN has to be applied for. Further, due to the new PAN, a fresh registration for the LLP needs to be obtained;
Further, the registration of the old entity needs to be cancelled.
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