GST: Transfer of Business in the case of Death of Proprietor

[Altamush Zafar]

Transfer of business in GST is considered as supply and is liable to GST. However, if the business is transferred as going concern with all its liabilities and assets then the same is exempt. There can be many forms of transfer of business – Transfers can be done through direct sale of business, amalgamations, mergers, demergers, transfer due to death of proprietor etc. In this article we will be discussing on the Law and procedure in case of transfer of proprietorship business due to the death of the proprietor.

In a proprietorship business the ownership of the business resides with only one person. With the death of the proprietor legally the business also ends with him, however the GST law provides a facility whereby the legal heirs can continue the business if they desire so and has provided with a detailed instructions on how such transfer shall take place. In the event of death of the proprietor its legal heirs have an option of either continuing the business or discontinuing.

Option1: Discontinuance of business – If the option of discontinuation of business is exercised by the legal heirs following will be the consequence and the steps which will have to be taken are enumerated below:

• As per Section 29(1)(a) where the business is being discontinued due to death of proprietor the registration is liable to be canceled.
• Before applying for cancelation certain steps needs to be taken:

1. Section 29 allows legal heirs to file application for cancelation. Therefore, legal heirs will have to get themselves registered as Authorized Signatories.
2. To be added as Authorized Signatories Amendment in Registration will not be done by the legal heirs themselves but will have to approach the jurisdictional officer. (Section 28 read with Rule 19 allows only registered person to apply for amendment registration)
3. Legal Heirs will have to prove that they are the legal heirs of the deceased (Legal Heirs are defined in the personnel laws as enforced on the date)
4. Ensure that all returns have been filed of the deceased. (The same can be checked in the portal)
5. Apply for cancelation within 30 days of date of death. Choose the reason of cancelation as death of proprietor. [The 30 days can be seen liberally in certain cases Circular 69/43/2018-GST]
6. Pay GST of equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock or capital goods or plant and machinery on the day immediately preceding the date of such cancelation or the output tax payable on such goods, whichever is higher. [section 29(5)]
7. File GSTR-10 – Final Return within 3 months from date of cancelation order. Or date of cancelation whichever is later [Section 45]
8. ITC in electronic credit ledger will lapse.

In case any liability of GST arises after the death of proprietor and the legal heirs have opted for closure/discontinuance of business then the legal heirs shall be liable to pay the demand of GST along with interest and penalty out of the estate of the deceased to the extent to which the estate is capable of meeting the charge [ Section 93(1)(b) ]

Option 2: Continuance of Business – If option exercised by the legal heirs is that they will continue the business of the deceased then the following will be applicable:

• As per Section 29 the registration of the deceased is still liable to be canceled.
• Steps to be taken by the Legal Heirs: -

1. Apply for fresh registration citing reason as Death of Proprietor and Date on which liability arises as Date of death of deceased.
2. Section 29 allows legal heirs to file application for cancelation. Therefore, legal heirs will have to get themselves registered as Authorized Signatories in GSTIN of the deceased.
3. To be added as Authorized Signatories Amendment in Registration will not be done by the legal heirs themselves but will have to approach the jurisdictional officer. (Section 28 read with Rule 19 allows only registered person to apply for amendment registration)
4. Legal Heirs will have to prove that they are the legal heirs of the deceased (Legal Heirs are defined in the personnel laws as enforced on the date).
5. Transfer the business
6. Transfer ITC in the credit ledger of the deceased to the new registration by filing ITC-02
7. Apply for cancelation of the registration of deceased within 30 days and file GSTR10
8. No requirement to pay GST on ITC contained in inputs & capital goods.

Here in this case where business is being continued by legal heirs and any liability of GST along with interest and penalty arises for the period when the business was carried on by the deceased then the legal heirs will be liable to pay the whole amount without any limitation of the capability of estate of the deceased. [ Section 93(1)(a) ]

It should be noted that the facility of transferring of business on death where the registration is liable to be canceled is only being provided to proprietorship and it is not extending to partnership firms. Therefore, in the case where a partnership firm had only two partners and one of the partners died then as per Section 42(c) the death of a partner will dissolve the partnership and the business will stand discontinued. The registration will be liable to be canceled and application of cancelation will have to be filed within 30 days. All other provisions will apply accordingly.

The business cannot be continued by the remaining partner since there is no provision in GST for such transfer. The person in question ‘the partnership firm’ doesn’t exist. Even where the partners had agreed that on death their respective legal representatives will become partners with same rights and obligations: Void as it is against the law. The partnership stands dissolved. There remains no partnership in which the legal representatives can become partners - S.P. MISRA & ORS. VERSUS MOHD. LAIQUDDIN KHAN & ANR. - 2019 (11) TMI 1 - SUPREME COURT

The option to continue a business on the death of the proprietor even when the registration is liable to be canceled is an exceptional facility provided by the GST law.

Post Article Note:

Documents that may be required to prove legal heir

• Identity Card having name of both deceased and legal heir. Eg- PAN, Adhaar, Passport
• Id Proof of the deceased
• Death Certificate
• Succession Certificate
• NOC if there are multiple legal heirs in favour of the one being applied for Authorized Signatory.

Discussions to this article

[Rajan Atrawalkar]

With reference to Point No. 8 of Second option : Continuance of Business “ No requirement to pay GST on ITC contained in Inputs and Capital Goods” , will you please discuss this point with respective section, Rule, Notification of the Act. Do you mean that while filing GSTR 10, there is no need to pay any tax on the available stock of inputs and capital goods? Does GSTR 10 to be filed as Nil return? Please elaborate this point.

[Amit Agrawal]

With reference to Point No. 8 of Second option : Continuance of Business “ No requirement to pay GST on ITC contained in Inputs and Capital Goods”, one may refer to discussion took place on this website's discussion-forum having Issue - id - 117961 and subject as 'In case of death of proprietor, whether Reversal of ITC is required?'

[Rajan Atrawalkar]

Instead of referring to Issue id 117961 (issue was initiated by me only), give reference to Act, Rule, Notification according to which GSTR 10 will be filed NIL and no tax will be payable.

[Amit Agrawal]

In my humble view, said discussion comprehensively covers all legal aspects to explain why neither reversal of any ITC nor payment of taxes as output liability - against closing stock - is required upon 'Transfer of business as Going Concern' to legal heir/s on death of the proprietor.

Still, anyone otherwise, I respect those views too.