India: Business Restructuring From Goods And Services Tax (GST) Perspective

The speed of business dynamics demands business entities not only to revamp their internal business strategies but also expects the corporates to devise inorganic business strategies like mergers, acquisitions, takeovers etc., that results in faster pace of growth and effective utilization of resources. In order to ensure a smooth transition to the new business structure, analyzing the implications from a GST perspective becomes crucial for every practitioner.

Under GST an activity qualifies as supply in order to attract leviability. For this, the activity should be made for a consideration by the person in the course or furtherance of business. Transfer of business or its restructuring is a one-time activity and does not constitute an activity taking place in the course of business. However, since the word 'includes' has been used in the definition of supply, the scope thereof widens. Therefore, transfer of business as a going concern falls within the ambit of 'supply' under GST.

Treatment of sale of business as a going concern or slump sale

The Authority for Advance Ruling, Karnataka in Rajashri Foods (P.) Ltd. has held that transfer of business as a going concern means transfer of business as a whole, including transfer of immovable property, goods, unexecuted orders, employees, goodwill, etc., along with an intention to carry on the existing business in future.

In terms of clause 4(c) of Schedule II to Section 7 of the CGST Act, 2017 transfer of business as a going concern is not regarded as supply of 'goods'. Further, as per Section 2(102) of the CGST Act, service means anything other than goods. Thus, since such business is excluded from the list of supply of goods, it becomes very apparent that transfer of business as a going concern is considered to be a supply of service. Therefore, the transaction of transfer of whole business as a going concern amounts to supply of service.

The Central Government vide Notification No. 12/2017- CT (Rate) dated June 28, 2017, brought "service by way of transfer of a going concern, as a whole or an independent part thereof" in Serial No. 2 thereof to constitute supply of service. Further, activity of transfer of a going concern shall have 'Nil' rate of tax on such supply.

Thus, activity of transfer of a going concern as a supply of service and the same is exempt from the purview of GST. Similarly, Schedule II of the CSGT Act excludes transfer of business as a going concern as supply of goods, the same shall be considered as a supply of service and GST shall be levied.

It shall be inferred that transfer of a going concern as a whole or a part there or transfer of business as a going concern is tax-exempt under GST and transfer of business assets will have GST implications.

The above finds support in advance ruling in the case of Rajashri Foods (P) Ltd. where it has been decided that where the unit is being transferred as a going concern, it will be considered as a supply of service and the same shall be exempt from the payment of GST to the extent leviable under Section of Section (9)(1) of the CGST Act, 2017.

Another point to be noted is that in such cases, the unutilized balance of input tax credit (ITC) lying in the electronic credit ledger of the transferor can be transferred to the transferee under Section 18(3) the CGST Act, 2017. Further a fresh GST registration certificate will be required by the transferee only if there is a change in PAN of the business.

However, there is one area where further clarity is required. Since such transfers have been specifically exempted from tax, ITC reversals under Section 17(3) read with Rule 42 of the CGST Rules, 2017 may be required due to the provision of exempt supplies in total turnover of the transferor. However, both GST law as well as the advance rulings have remained silent on this issue and do not provide clarity.

Transfer of business assets

Instead of transferring business as a whole for a consideration, a registered person may also decide to sell his business assets individually. For instance, the registered person may decide to sell his raw material, furniture and fixtures, building, trademarks etc. to another person for a consideration.

As per clause 4(c) of Schedule II to Section 7 of the CGST Act, 2017 such sale of assets shall be construed as supply of goods and tax will be levied on these goods as per applicable rate under Notification 1/2017- CT (Rate) dated June 28, 2017 as amended for time to time.

Schedule I to Section 7 of the CGST Act, 2017 specifically deals with the activities which shall be treated as supply even if there is no consideration involved. As per clause a) of this Schedule, permanent transfer or disposal of business assets made without consideration will be regarded as supply. Accordingly, the transferor will be required to reverse ITC already availed on business assets which have been transferred without consideration.

Transfers by way of sale and purchase of securities

A company may change its ownership structure by transfer/issuance of equity shares. Such transactions have been kept outside the purview of GST. This is because definition of 'goods' under Section 2(52) of CGST Act, 2017 specifically excludes securities.

Taxability of Intermittent supplies during the amalgamation/merger/demerger process

In case of amalgamation or merger by order of the court or tribunal, the effective date of order may be prior to the date of passing such order.

As per Section 87 of the CGST Act, 2017 supplies effected between these two dates between the transferor and transferee Company shall be taxed in the hands of respective old companies and not the new entities.

Conclusion

In view of the above, it is clear that a person restructuring his business model may be required to analyze its impact keeping in mind various implications under GST in different scenarios, which shall consequently ensure smooth conduct of the business and avoid future enquiries and questioning by tax authorities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.