ITC admissibility in case of Merger / Demerger, Goods and Services Tax - GST

[HIMANSHU BHUSHAN]

In case of Merger, the goods dispatched with invoice by the supplier are in the name of old entity but are received to new entity (which is at different place) after a cut-off date. Can the new entity be entitled to ITC for the goods received to it, as the invoice is in the name of old entity?

Posts / Replies

[YAGAY andSUN]

In the scenario where goods are dispatched with an invoice in the name of the old entity but received by the new entity (post-merger) at a different location, the eligibility of the new entity to claim Input Tax Credit (ITC) under GST laws depends on several key factors. Let's break this down step by step:

1. Understanding the Merger Scenario under GST

• When a merger occurs, the old entity ceases to exist, and the new entity assumes all the assets, liabilities, rights, and obligations of the old entity, as per the terms of the merger.
• A merger typically involves a transfer of the business, including goods and services, from the old entity to the new entity, but ITC eligibility may be affected by the fact that the old entity was registered under GST and the new entity needs to take over the ITC claims properly.

2. Key Points to Consider for ITC Eligibility:

a. GST Invoices in the Name of Old Entity

• The invoice is issued in the name of the old entity, which means the old GSTIN is mentioned on the invoice.
• GST law specifies that for claiming ITC, the recipient must be the person to whom the goods are supplied, and the invoice must reflect the correct GSTIN of the recipient.

b. Transfer of Goods Post-Merger

• In case of a merger, the goods physically received by the new entity will be considered to have been transferred to the new entity.
• However, the key issue here is whether the ITC can be claimed by the new entity when the invoice is still in the name of the old entity.

c. GST Transfer Post-Merger (ITC Transfer Mechanism)

• As per Section 18(3) of the CGST Act, 2017, the new entity (or the successor company post-merger) can claim ITC on the goods transferred to it by the old entity, provided:
  • The old entity has paid the GST on the goods and has not utilized the ITC.
  • The old entity properly transferred the goods to the new entity before the cut-off date of the merger.
• The new entity would need to apply for the transfer of the ITC from the old entity to the new entity through the relevant GST portal (by filing the GST ITC-02 form).

Section 18. Availability of credit in special circumstances.-

(1) Subject to such conditions and restrictions as may be prescribed-

(a) a person who has applied for registration under this Act within thirty days from the date on which he becomes liable to registration and has been granted such registration shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of this Act;

(b) a person who takes registration under sub-section (3) of section 25 shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of grant of registration;

(c) where any registered person ceases to pay tax under section 10, he shall be entitled to take credit of input tax in respect of inputs held in stock, inputs contained in semi-finished or finished goods held in stock and on capital goods on the day immediately preceding the date from which he becomes liable to pay tax under section 9:

Provided that the credit on capital goods shall be reduced by such percentage points as may be prescribed;

(d) where an exempt supply of goods or services or both by a registered person becomes a taxable supply, such person shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock relatable to such exempt supply and on capital goods exclusively used for such exempt supply on the day immediately preceding the date from which such supply becomes taxable:

Provided that the credit on capital goods shall be reduced by such percentage points as may be prescribed.

(2) A registered person shall not be entitled to take input tax credit under sub-section (1) in respect of any supply of goods or services or both to him after the expiry of one year from the date of issue of tax invoice relating to such supply.

(3) 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 unutilised in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in such manner as may be prescribed.

(4) Where any registered person who has availed of input tax credit opts to pay tax under section 10 or, where the goods or services or both supplied by him become wholly exempt, he shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, 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 and on capital goods, reduced by such percentage points as may be prescribed, on the day immediately preceding the date of exercising of such option or, as the case may be, the date of such exemption:

Provided that after payment of such amount, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse.

(5) The amount of credit under sub-section (1) and the amount payable under sub-section (4) shall be calculated in such manner as may be prescribed.

(6) In case of supply of capital goods or plant and machinery, on which input tax credit has been taken, the registered person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher:

Provided that where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, the taxable person may pay tax on the transaction value of such goods determined under section 15.

d. GST Filing Procedure After Merger

• The new entity can claim the ITC by:
  • Filing an application for transfer of ITC from the old entity under Form ITC-02.
  • If the old entity has already claimed the ITC and filed returns, the new entity will need to reconcile and ensure that it is entitled to the same credit.

e. Documentation and Compliance

• The new entity will need to prove that the goods were received by it and were intended to be used for taxable business activities.
• While the invoice may be in the name of the old entity, the goods received by the new entity should be documented, and a valid business reason for the transfer must be established, including details of the merger.
• The cut-off date of the merger is critical, and any goods received after this date should be linked to the merger process. Invoices related to the merger process may also need to reflect the new entity's GSTIN if re-issued post-merger.

3. Practical Implications:

• If the old entity and new entity have properly followed the merger process under the Companies Act and the GST laws (with proper filings), the new entity can claim ITC for the goods it receives, provided it meets all the relevant compliance requirements under the GST Act.
• The new entity will need to demonstrate that the goods were transferred post-merger, and proper documentation should support that the goods were for the purpose of business and not personal consumption.

4. Conclusion:

Yes, the new entity can claim ITC under the GST laws for the goods received, even if the invoice is in the name of the old entity, provided:

• The old entity has paid the applicable GST.
• The goods are received after the cut-off date of the merger.
• The new entity follows the necessary compliance steps, including filing the GST ITC-02 form to transfer the ITC from the old entity to the new entity.

Therefore, ITC eligibility can be claimed by the new entity, but the process must be managed carefully, ensuring that all required procedures are followed for GST filing and ITC transfer post-merger.

[YAGAY andSUN]

Short reply for better & quick understanding: 

Under GST law, the new entity can claim ITC for goods received from the old entity after a merger, even if the invoice is in the name of the old entity, subject to the following:

1. Section 18(3) of the CGST Act, 2017: The new entity can claim ITC on goods received post-merger if they were transferred from the old entity before the cut-off date.

2. ITC Transfer: The new entity must file Form ITC-02 to transfer the ITC from the old entity.

3. Documentation: The new entity must maintain proof that the goods are for business purposes and properly document the merger.

In essence, the new entity can claim ITC by following the proper transfer process under Section 18(3) and filing the necessary forms.