Opening Observations
A business restructuring is often planned as a commercial or corporate event. The parties focus on valuation, assets, liabilities, employees, contracts, lenders, shareholders and regulatory approvals. However, under GST law, the same transaction may also become a significant tax event. A transfer of business may carry past GST liabilities into the hands of the transferee. A retrospective merger may not erase taxable transactions between the merging companies during the intervening period. Further, a company that has ceased to exist after amalgamation may no longer be the correct person against whom notices or orders can be issued.
Two provisions of the CGST Act are especially important in this context: Section 85, which addresses liability in the case of a transfer of business, and Section 87, which addresses the amalgamation or merger of companies. Together, these provisions show that GST law looks beyond legal form and focuses on the continuity of business, the preservation of revenue, and the correct identification of the taxable person.
Transfer of Business and Past GST Liability - Section 85(1)
Section 85(1) is based on a simple but commercially powerful principle: tax liabilities connected with a running business should not become unrecoverable merely because the business changes hands. If a taxable person could transfer a business to defeat the recovery of GST dues, business transfers could become a device for avoiding tax obligations. Section 85(1) is designed to prevent such an outcome by preserving the recoverability of GST dues even after transfer of the business.
The provision applies where a taxable person transfers his business, wholly or in part. The transfer may be by sale, gift, lease, leave and licence, hire or any other manner. This language has been deliberately kept wide and extensive. It is not confined to statutory mergers or formal sale agreements. The real test is whether, in substance, a business or an identifiable part of a business has moved from one person to another. Thus, a slump sale, a transfer of undertaking, a demerger, an internal restructuring, or a strategic takeover may all require examination under Section 85(1).
The most important feature of Section 85(1) is joint and several liability. The transferor and transferee may both be liable for tax, interest or penalty due up to the date of transfer. This liability may relate to dues determined before or after the transfer. A transferee may therefore acquire not only assets, employees, customers and contracts, but also historical GST exposure connected with the transferred business.
For instance, Kirti Ltd. transfers its pharmaceutical undertaking to Shreyans Healthcare Ltd. in May 2026. In 2028, a departmental audit finds that input tax credit was wrongly availed in FY 2024-25 in relation to that undertaking. Even though the demand is determined after the transfer, Shreyans Healthcare Ltd. may face liability under Section 85(1) to the extent the demand is attributable to the transferred undertaking.
This is why GST due diligence is no longer optional in business acquisitions. The purchaser must review past returns, notices, ITC claims, vendor compliance, refund positions, e-invoicing compliance, reconciliations and pending litigation. Purchase agreements should contain clear representations, warranties, indemnities, escrow clauses and responsibility-sharing mechanisms for past GST liabilities.
The words “wholly or to the extent of such transfer” are important in partial transfers. If the entire business is transferred, the transferee’s exposure may extend to the entire GST liability connected with that business. If only a part of the business is transferred, liability should ordinarily be confined to the transferred part. In practice, this may be difficult because modern businesses often use shared accounting systems, common input services, centralised procurement, common employees and shared infrastructure.
For instance, if Kirti Ltd. transfers only its pharmaceutical division to Shreyans Healthcare Ltd., and a later dispute arises regarding ITC on common legal services, advertising expenses and IT support used by both the pharmaceutical and consumer products divisions, allocation of liability will require examination of records, cost centres, contracts, invoices, usage patterns and transaction documents. Therefore, where only part of a business is transferred, the agreement should carefully allocate historical GST liabilities, common credits, pending disputes, refunds, credit notes, debit notes and responsibility for future proceedings.
Post-Transfer Supplies and Registration: Section 85(2)
While Section 85(1) deals with tax, interest and penalty due up to the time of transfer, Section 85(2) deals with the period after the business has been transferred. Once the transferee carries on the transferred business, the transferee becomes liable to pay GST on supplies of goods or services or both made from the date of transfer.
This provision is important because a business transfer does not necessarily interrupt commercial operations. The same factory, branch, undertaking, employees, customers, contracts or brand may continue, but the person carrying on the business changes. Section 85(2) therefore identifies the transferee as the person responsible for GST on post-transfer supplies.
The transferee may carry on the business in its own name or in some other name. GST liability does not depend on the trade name or brand under which the business is continued.
For instance, if Shreyans Retail Ltd. acquires the consumer products undertaking of Kirti Ltd. with effect from 1 August 2026, Shreyans Retail Ltd. will be liable for GST on supplies made from that date, even if the products continue to be sold under the old brand name.
Section 85(2) also requires the registered transferee to apply within the prescribed time for the amendment of its registration certificate. This connects Section 85(2) with Section 28 of the CGST Act, 2017, read with Rule 19 of the CGST Rules, 2017. If the transferee acquires a new place of business, additional premises, authorised signatories or other particulars connected with the transferred business, its registration profile must be updated. If the transfer results in a new taxable person or a change of PAN, fresh registration may be required rather than a mere amendment.
GST Treatment of Retrospective Mergers
A special difficulty arises in mergers and amalgamations because corporate law may give the scheme retrospective effect. The order approving the merger may be passed on one date, while the scheme may provide that the merger is effective from an earlier appointed date. During this intervening period, the companies may have continued to function independently. They may have maintained separate GST registrations, issued invoices to each other, filed returns, received payments, claimed input tax credit and dealt with customers and vendors as separate entities.
If the retrospective effect of the merger were applied mechanically for GST purposes, serious uncertainty would arise. Transactions between the merging companies during the intervening period could be treated as internal transactions, even though tax invoices had been issued, GST had been paid, and input tax credit had been claimed. Section 87 addresses this difficulty by creating a specific GST framework for retrospective mergers and amalgamations.
Taxability of Supplies During the Intervening Period: Section 87(1)
Section 87(1) deals with the tax treatment of supplies made between companies that are amalgamated or merged pursuant to an order of a Court, Tribunal or other competent authority, where the order is made effective from a date earlier than the date of the order. It ensures that supplies or receipts between such companies during the period from the effective date of the merger to the date of the order are not ignored merely because the merger is later given retrospective effect.
The company making the supply must report the transaction as an outward supply and pay GST. The company receiving the supply may claim input tax credit, subject to the normal conditions of the Act. In substance, Section 87(1) treats such transactions in the same manner as taxable transactions between separate taxable persons.
For instance, Anish Ltd. and Harpreet Ltd. received an amalgamation order dated 20 August 2025, but the scheme provides that the amalgamation shall take effect from 1 April 2025. From 1 April 2025 to 20 August 2025, Anish Ltd. supplies raw materials to Harpreet Ltd. and charges GST. Section 87(1) ensures that this supply remains taxable. Anish Ltd. must discharge GST, and Harpreet Ltd. may claim input tax credit in accordance with law. The transaction cannot be disregarded on the ground that both companies are later treated as part of one enterprise from 1 April 2025.
This rule is practical because, during the intervening period, the companies generally act as independent commercial entities. They continue to issue invoices, receive supplies, maintain books, file returns and conduct business in their own names. Section 87(1) recognises this reality and prevents retrospective corporate law treatment from unsettling GST compliance already undertaken.
Distinct Company Fiction and Registration Consequences -Section 87(2)
Section 87(2) provides the legal foundation for Section 87(1). It states that, notwithstanding anything contained in the merger or amalgamation order, the companies shall be treated as distinct companies for GST purposes up to the date of the order.
This is a limited statutory fiction. It does not deny the corporate law effect of the merger. It merely preserves the separate GST identities of the companies until the order date, so that tax paid, invoices issued, input tax credit claimed, and returns filed during the intervening period remain valid and applicable.
Section 87(2) also deals with registration consequences. It provides that the registration certificates of the merging companies shall be cancelled with effect from the date of the order. Since the companies are treated as distinct up to the order date, their registrations remain valid until then. Cancellation is therefore linked to the order date and not to the earlier appointed date mentioned in the merger scheme.
If registrations were cancelled retrospectively from the appointed date, invoices, tax payments, ITC claims and returns filed during the intervening period could all become doubtful. Section 87(2) avoids this difficulty by maintaining continuity of registration up to the order date.
Proceedings Against Non-Existent Entities
While Section 87 treats amalgamating companies as distinct up to the order date, that fiction cannot be extended beyond its purpose. A separate question arises after the merger is complete: can the department issue a show-cause notice, an adjudication order, or a recovery communication in the name of a company that has ceased to exist after amalgamation?
The Delhi High Court addressed this issue in HCL Infosystems Ltd. v. Commissioner of State Tax & Another, 2024-VIL-1283-DEL. The Court recognised that Section 87 preserves the GST consequences of transactions during the intervening period. However, it clarified that Section 87 does not authorise the department to issue notices or pass assessment orders against an entity that no longer exists after amalgamation. The statutory fiction is limited to preserving taxability and compliance during the relevant period. It cannot be used to resurrect the legal existence of a dissolved or amalgamated company.
The same principle was reinforced by the Bombay High Court in Vodafone Idea Ltd. v. Union of India & Ors., 2026-VIL-447-BOM, decided on 29.04.2026. In that case, proceedings were issued in the name of Vodafone Mobile Services Ltd., which had already ceased to exist after the merger. The Bombay High Court quashed the proceedings and held that a show-cause notice or adjudication order issued against a non-existent entity is without jurisdiction and void.
These decisions draw an important distinction. Section 87 preserves the taxability of transactions during the intervening period and treats the companies as distinct up to the order date. However, once an amalgamating company ceases to exist, the department must proceed against the correct surviving or successor entity. Tax liability may survive the merger, but proceedings must be initiated or continued in the name of the legally existing person.
Transaction Planning and Closing Observations
The combined effect of Sections 85 and 87 is that GST planning must be built into the transaction itself. In a business transfer, the transferee must examine historical liabilities. In a merger, the parties must identify the appointed date, order date, ROC date, registration consequences and treatment of inter-company supplies during the intervening period.
Transaction documents should clearly allocate pre-closing and post-closing GST liabilities. They should also contain provisions for cooperation in audits, handling of notices, filing of returns, correction of invoices, transfer of records and indemnity for past disputes. Where a company has amalgamated, prompt communication should be sent to the department so that future notices are issued in the correct name.
GST law does not prevent business restructuring. It permits mergers, transfers and takeovers to proceed. But it insists that tax liabilities, compliance obligations and statutory identities be handled with precision. A business may change hands, but the tax history attached to it does not vanish. A merger may operate retrospectively under corporate law, but GST law preserves the reality of supplies made during the intervening period.
Thus, the practical message is clear. In every merger, amalgamation, or takeover deal, GST should be examined before the deal closes,not after a notice is received. Careful due diligence, proper registration, proper invoicing, timely departmental communication and well-drafted indemnities can convert a potential tax dispute into a manageable transaction risk.
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