In a strategic move towards future growth and market positioning, businesses often undergo transformations, and transitioning from a partnership firm to a Private Limited Company is a significant journey. As this transition unfolds, many companies seek clarity on the Goods and Services Tax (GST) implications associated with the transfer of closing stock and the transfer of unutilized Input Tax Credit (ITC). In response to these queries, our analysis aims to provide a thorough understanding of the GST considerations involved in this transition.
GST Implications on the Transfer of Closing Stock
Under Section 7 of the CGST/TNGST Act, 2017, the scope of supply encompasses various transactions, including sale, transfer, barter, or exchange for consideration in the course of or for the furtherance of business. Schedule II of the CGST/TNGST Act, 2017, outlines activities to be treated as the supply of goods or services.
The critical aspect here is the transfer of business assets, as detailed in Schedule II, paragraph 4. Clause (c) of paragraph 4 stipulates that when a person ceases to be a taxable person, any goods forming part of the assets of the business shall be deemed supplied unless certain conditions are met.
In the context of merging a business entity, wherein the transfer is treated as a going concern, the transfer of closing stock to the new entity is not considered a supply. This exemption aligns with Notification No. 12/2017-Central Tax (rate), dated 28-06-2017, which exempts intra-state supplies of services associated with the transfer of a going concern from central tax. The term "transfer of a going concern" refers to the transfer of a running business capable of being independently carried on by the purchaser.
Therefore, if the transfer is structured as a going concern, GST shall not be payable on the transfer of closing stock.
Transfer of Unutilized Input Tax Credit (ITC)
In the case of a merger, Section 18(3) of the CGST/TNGST Act, 2017, allows the transfer of unutilized Input Tax Credit from the transferor to the transferee. Rule 41 of the CGST/TNGST Rules, 2017, provides the procedural aspects of this transfer.
- A registered person, in the event of a merger, can furnish details of the transfer in FORM GST ITC-02 on the common portal, requesting the transfer of unutilized ITC.
- The transferor must provide a certificate issued by a practicing chartered accountant or cost accountant certifying the specifics of the transfer.
- Upon acceptance of the details by the transferee on the common portal, the unutilized credit specified in FORM GST ITC-02 is credited to the transferee's electronic credit ledger.
It's crucial to note that these provisions pertain specifically to the transfer of unutilized Input Tax Credit and not to unutilized balances in the electronic cash ledger.
The transition from one business structure to another involves intricate GST considerations, and careful adherence to the prescribed procedures is essential for a seamless process. Businesses can navigate this transformation confidently, leveraging the provisions of the law to ensure compliance and maximize the benefits of the transition. As businesses chart their course into a new corporate structure, understanding and implementing these GST considerations will contribute to a successful and compliant transition