This article is written by Sankeit Taneja, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com.

Introduction

Goods & Service Tax (GST) was first presented during 2007-08 budget session thereafter on 17th December 2014, Cabinet Union Ministry gave its approval for introducing Goods & Service Tax and on 19th December 2014, the bill was presented in Lok Sabha. GST came into force on 1st July 2017 vide 104th Amendment of the Indian Constitution. 

What is Goods & Service Tax (GST)?

Goods & Service Tax (GST) is a tax which is paid on supply of goods & services where the final or actual consumption takes place. It is a consumption based tax & is based on the “Destination Principle”. 

In the Destination Principle, exports which take place are granted with zero taxes as compared to imports which are taxed on par with domestic production. For instance, if X who produces goods in Mumbai, sells goods to Y in Delhi, then tax would be charged and collected and shall accrue upon the goods in the state of Delhi. Revenue in case of the Destination Principle shall belong to the place where goods shall be consumed (in the current instance Delhi).

GST is an indirect tax wherein the tax is conceded till the last stage wherein it is the consumer who has to pay tax for the goods & services.

Our Government has opted for dual GST system which consists of two components which are known to everyone as:

• Central Goods & Service Tax (CGST)
• State Goods & Service Tax (SGST)

GST is levied on Intra State supply & consumption of goods & services, Intra State movement of goods & Import of Goods & Services.

Impact of GST in Business Transfer

GST has envisioned as an effective tax system which is affecting the structure of procedures in India. Corporate transactions in fulfilment of amalgamation, arrangement, mergers, acquisition and takeovers have been affected by GST and hence the Corporate sector must analyse provision of GST and the law relating to GST along with the impact of GST in their business. Following business aspects have been impacted by GST:

• Registration

As per Section 22(3) of the CGST Act, 2017, when a business is conducted by a taxable person who is registered, and such business is transferred, then the transferee shall be liable to register with effect from such transfer and the transferee shall have to obtain a fresh certificate with effect from the date of transfer. 

Section 22(4) of the CGST Act, 2017, states that if the business is transferred due to an order of the High Court or a Tribunal, then the Transferee shall be liable to obtain registration from the date on which the Registrar of Companies would issue the Certificate of Incorporation with respect to the order of the said High Court or Tribunal.

• Input Tax Credit

Section 18 of the CGST Act talks about the availing of input tax credit by a taxable person. Section 18 (3) of CGST Act, 2017 along with Rule 41 of CGST Rules specifies change of constitution of registered taxable person due to sales, merger, demerger, amalgamation, transferring or leasing of business, in such case the registered taxable person would be granted to transfer the input tax credited to the Transferee.

If Demerger takes place, then input tax credit would be allocated as per the ratio of the value of assets of the units mentioned in the demerger scheme.

• Itemised Transactions

An Itemised Transaction can be defined as transfer of assets and liability of a business by assigning a value of each item which is to be transferred. An itemised Transaction includes only the sale of selected assets and liability. In Mergers and Acquisition transactions, each asset and its value is calculated separately.

Transaction of itemised sale along with its supply under the GST act would get covered as per the definition of goods as mentioned in Schedule II of CGST Act, thereby levying GST on itemised Transactions. 

• Crash/Slump Sale

Crash/Slump Sale shall be treated equivalent to normal supply. As per CGST Act, tax shall be paid by the registered taxable person on supply of goods and services. This supply includes activities of goods and services as mentioned in Schedule II of CGST Act, 2017. Vide Notification No. 12/2017 Central Tax dated (Rate) 28.06.2017, services which provide transfer of a going concern either in whole or independently thereof, shall be exempted from GST. Hence, No GST shall be applied on Crash/Slump Sale. 

Thus by virtue of (Re Rajeev Bansal and Sudershan Mittal (GST AAR Uttarakhand) Advance Ruling No 10/2019-20 (date of judgement 09.01.2020 mentioned herewith below) it can be concluded to say that Business Transfer Agreement as a going concern which consists of transfers of under construction project is exempted from Goods & Service Tax.

• Accountability of Companies

Section 87 of CGST Act states that when two or more companies are either in the process of amalgamation and merger or have completed amalgamation and merger in pursuance to Court or Tribunal order, and such order is to come into force from a date prior to the date of Court or Tribunal’s order and two or more companies have either supplied or received goods and services, then in such scenarios the transaction of supply along with receipt would be comprised in the turnover of supply or receipt and would be accountable to pay tax accordingly. 

• Vending of Securities

The most common way of acquiring a company is when the Transferee Company offers to the Shareholders of the Transferor Company, for purchasing Transferor Company’s securities for a particular mentioned price. GST shall however not be applicable on the sale of securities as the definition of goods and services under the GST act does not include securities.

Case Laws

• In Re Rajeev Bansal and Sudershan Mittal (GST AAR Uttarakhand) Advance Ruling No 10/2019-20 (date of judgement 09.01.2020), the question that arose was whether the building which are under construction as a part of business transfer agreements is covered under S No. 12 of Notification 12/2017 Central Tax dated (Rate) 28.06.2017. The application was filed by the Applicant under section 97(1) of the CGST/SGST Act, 2017. The Applicant is a partnership firm engaged in the business of construction and selling of commercial buildings in villages of Manoharpur, Jwalapur and Haridwar. The Applicant approached the competent authority for the approval of the map after which M/s Ronav Infrastructure (buyer) approached the Applicant for the takeover of incomplete projects in the villages mentioned above. The Applicant thereby entered in a business transfer agreement with the buyer. A separate Sale Deed was executed for the transfer of flats as per the state law for Rs 21.80 crores on 24.10.2019. 

The Jurisdictional Officers after reviewing the application filed by the Applicant held that the matter in issue “whether Business Transfer Agreement as a going concern is exempted from GST as per terms in serial No.12 of Notification 12 of 2017 Central Tax (Rate) dated 28.06.2017” pertains to serial no 2 of the said notification and not serial no.12 of the said notification as stated by the Applicant in the said application. By virtue of S No. 2 of Chapter 99 of the said notification, it is found that services by way of going concern as a whole or an independent part thereof is to be treated as supply of goods and services under Chapter 99 of the Service Code (Tariff) and is exempted from GST. 

• M/s Durga Projects and Infrastructure Pvt Ltd 2019 (8) TMI 395 (AAR- Karnataka), the question that arose before the Authority for Advance Ruling was whether the developer would be liable for any GST on the said transaction even though the agreement was executed in the Pre-GST era and the construction of the project was carried out in the GST era. 

In the said case, the Developer entered in a development agreement with the Owner of the Land in the pre-GST era and the said agreement stated that the Owner of the Land would be eligible to construct the area in contrast to the supply of development rights on the said land to the Developer.

The Applicant placed reliance on section 142 (10) & (11) of the CGST Act, 2017 and stated that the said prior to the laws before the introduction of GST, the said service would be taxable to the extent of the remaining work carried out under GST Law. 

The Department opposing the Developer’s Application stated that Section 7 of the CGST Act, 2017, the word “supply” includes “barter” if it is in course of ‘furtherance of business”. With respect to Section 2(31) of CGST Act, 2017 “consideration” with respect to supply shall include money. Thereby the construction of a building by the Developer in exchange of transfer of development rights to the Developer shall fall under the definition of “Supply” thereby attracting tax as per GST Law.

The Authority of Advance Ruling held that the said transaction of “barter” where consideration against service of construction provided to the Owner of the Land falls under the form of Development Rights. The said transaction falls under the definition of “supply” as defined under Section 7 of CGST Act.

In the present case, as the possession was not handed over by the Developer, there shall be no liability under the Service Tax Act.

The Authority of Advance Ruling also held that after adjudging that the barter transaction falls under the definition of “supply”, it has been held that supply of such service took place in the GST era with respect to specific notifications.

Conclusion

Since the introduction of Goods and Service Tax in our country, it has bought clarity of taxability in business transfer and reliability on GST. Transferring of business via mergers, amalgamation, etc does not attract any tax liability under GST Act as they are improbable to be compressed by indirect tax. The GST Law in our country stipulates that transferring or sale of business assets can happen through crash/slump sales or itemised transactions. 

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