APPORTIONMENT OF INPUT TAX CREDIT IN CASES OF BUSINESS REORGANIZATION

[Mr. M. GOVINDARAJAN]

Business reorganization

Change is inevitable and the business is not an exception to this.  The changes may bring fruitful results or it may make the business down and panic.  Therefore such companies may think for overhauling the situation and tries to reorganize their business in some way such as mergers, amalgamation, lease etc.  When a business reorganizes, it generally changes its business tax structure.

Effect of reorganization in GST

When reorganization is carried out the business entity is to pay all the outstanding tax dues in respect of dues.  The company may input tax credit in their balance that may not be utilized against payment of tax. 

Section 18(3) of the Central Goods and Services Tax, 2017 allows the transfer of input tax credit to the transferee company.  The said section provides that 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 unutilized in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in such manner as may be prescribed.

Procedure for transfer of input tax credit

Rule 41 provides the procedure for transfer of input tax credit from the transferor company to Transferee Company.  A registered person shall, in the event of sale, merger, de-merger, amalgamation, lease or transfer or change in the ownership of business for any reason, furnish the details of sale, merger, de-merger, 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.

In the case of demerger, the input tax credit shall be apportioned in the ratio of the value of assets (the value of the entire assets of the business, whether or not input tax credit has been availed thereon) of the new units as specified in the demerger scheme.  

The transferor shall also submit a copy of a certificate issued by a practicing chartered accountant or cost accountant certifying that the sale, merger, de-merger, amalgamation, lease or transfer of business has been done with a specific provision for the transfer of liabilities.   The transferee shall, on the common portal, accept the details so furnished by the transferor and, upon such acceptance, the un-utilized credit specified in FORM GST ITC- 02 shall be credited to his electronic credit ledger.   The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account.

Issues

Various issues have been raised in the field.  The same has been analyzed by the Department in the light of various legal provisions under GST laws.  In order to ensure uniformity in implementation of the provisions of the law, the Board, clarifies the following issues involved vide Circular No. 133/03/2020-GST, dated 23.03.2020-

• 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 - it is not clear as to whether the value of assets of the new units is to be considered at State level or at all-India level.

It is clarified that under the provisions of the CGST Act, a person/ company (having same PAN) is required to obtain separate registration in different States and each such registration is considered a distinct person for the purpose of the Act. Accordingly, for the purpose of apportionment of input tax credit pursuant to a demerger under Rule 41(1), the value of assets of the new units is to be taken at the State level (at the level of distinct person) and not at the all-India level.

• Filing of Form GST ITC – 02 by the transferor in all States is required?

It is clarified that the transferor is required to file Form GST ITC-02 only in those States where both transferor and transferee are registered.

• Where part of business is hived off or business is transferred as a going concern etc. have not been covered Rule 41(1). Wherever business reorganization results in partial transfer of business assets along with liabilities, whether the proviso to rule 41(1)  shall be applicable to calculate the amount of transferable input tax credidt?

It is clarified that the formula for apportionment of input tax credit, as prescribed under proviso to Rule 41(1), shall be applicable for all forms of business re-organization that results in partial transfer of business assets along with liabilities.

• Whether the ratio of value of assets shall be applied in respect of each of the heads of input tax credit viz. CGST/ SGST/ IGST/ Cess?

It is clarified that the ratio of value of assets shall be applied to the total amount of unutilized input tax credit of the transferor i.e. sum of CGST, SGST/UTGST and IGST credit. The said formula need not be applied separately in respect of each heads of input tax credit (CGST/SGST/IGST). Further, the said formula shall also be applicable for apportionment of Cess between the transferor and transferee.

• How to determine the amount of input tax credit that is to be transferred to the transferee under each tax head?

It is clarified that the total amount of input tax credit  to be transferred to the transferee (i.e. sum of CGST, SGST/UTGST and IGST credit) should not exceed the amount of input tax credit to be transferred, as determined.  However, the transferor shall be at liberty to determine the amount to be transferred under each tax head (IGST, CGST, SGST/UTGST) within this total amount, subject to the input tax credit balance available with the transferor under the concerned tax head.

• Name of the State;
• Asset Ratio of transferee;
• Tax heads;
• Input tax credit balance of transferor as on the date of filing of Form GST ITC-02;
• Total amount of input tax credit transferred to the transferee under Form GST ITC-02;
• Input Tax Credit balance of transferor (post apportionment) after filing of Form GST ITC-02.

• In order to calculate the amount of transferable input tax credit, the apportionment formula has to be applied to the unutilized input tax credit balance of the transferor. However, it is not clear as to which date shall be relevant to calculate the amount of unutilized input tax credit balance of transferor.

It is clarified that a conjoint reading of Section 18(3)  of the CGST Act along with Rule 41(1)  would imply that the apportionment formula shall be applied on the input tax credit  balance of the transferor as available in electronic credit ledger on the date of filing of Form GST ITC-02 by the transferor.

• Which date shall be relevant to calculate the ratio of value of assets?

According to section 232 (6) of the Companies Act, 2013, the scheme under this section shall clearly indicate an appointed date from which it shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to the appointed date. The said legal provision appears to indicate that the appointed date of demerger is the date from which the scheme for demerger comes into force and it is specified in the respective scheme of demerger. Therefore, for the purpose of apportionment of input tax credit under Rule 41(1), the ratio of the value of assets should be taken as on the appointed date of demerger.