Corporate Restructuring through amalgamation, arrangement, mergers, acquisition and takeover has become vital to corporate strategy today. To attain accelerated growth, corporate in India nowadays resort more towards restructuring strategies. The Goods and Services Tax (GST) has been envisaged as an efficient tax system and it affects the structuring of the various operations in India. Corporate transaction in pursuance of amalgamation, arrangement, mergers, acquisition and takeover are also affected by GST. Thus, the industries are required to analyse the provisions of the GST Law and its impact on their business.
Registration of any business entity under the GST Law implies obtaining a unique number from the concerned tax authorities for the purpose of collecting tax on behalf of the government and to avail Input tax credit for the taxes on his inward supplies. By virtue of section 22(3) of the CGST Act, where a business carried on by a taxable person registered is transferred, the transferee or the successor would be liable to be registered with effect from such transfer or succession and he will have to obtain a fresh registration with effect from the date of such transfer or succession.
Section 22(4) states that if the business is transferred as an order of a High Court, Tribunal or otherwise pursuant to –
- Sanction of scheme
- Arrangement for amalgamation
- De-merger of two or more companies,
The transferee would be liable to obtain registration from the date on which the Registrar of Companies issues a certificate of incorporation giving effect to such order of the High Court or Tribunal.
Input Tax Credit
Section 18 enshrines the provisions regarding availment of input tax credit by taxable person. Section 18(3) of the CGST Act as well as rule 41 of the CGST Rules stipulates that in case of change of constitution of a registered taxable person on account of sale, merger, demerger, amalgamation, lease or transfer of business, the registered person would be allowed to transfer the unutilized input tax credit to transferor. In this context, the registered person is required to 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 to transfer the unutilized input tax credit lying in his electronic credit ledger to the transferee. The transferee would accept the details so furnished by the transferor on the Common Portal and, upon such acceptance, the unutilized credit would be credited to his electronic credit ledger.
In the case of demerger, the input tax credit would be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme.
Where assets and liabilities of a business are transferred by way of assigning a value to each item then it is called as itemized sale. Such sale involves the disposal of key or selected business assets. Under the merger and amalgamation, value of each asset is calculated separately i.e. the whole business is transferred but item wise.
Transaction of itemized sale is supposed as supply under the ambit of GST and individual asset would be covered under the definition of goods as per schedule II of the CGST Act. Thus, GST would levy on itemized sale.
Slump sale will have the same treatment as normal supply. Under the GST regime tax is payable by the registered taxable person on the supply of goods and/or services. The term ‘Supply’ is wide in its import cover all forms of supply of goods or services or both that includes sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. Further, supply covers the activities to be treated as supply of goods or supply of services as referred to in Schedule II. Accordingly, transfer of business assets is supposed as supply.
The transfer of business is amounted to transfer of a part of the assets and not the whole business. Moreover, para 4© of the schedule II specifies that in case business is transferred as a going concern then it would not constitute as supply. However, in pursuance of Notification No. 12/2017 Central tax (rate) dt 28.06.2017 services, which are provided by way of transfer of a going concern as a whole or an independent part thereof, are exempted from GST. Thus, no GST would applicable on slump sale transaction as transfer of business on a going concern basis.
Liability of companies w.r.t. order of court or Tribunal
According to section 87 of the CGST Act, when two or more companies are amalgamated or merged in pursuance of an order of court or of Tribunal or otherwise and the order is to take effect from a date earlier to the date of the order and any two or more of such companies have supplied or received any goods or services or both to or from each other during the period commencing on the date from which the order takes effect till the date of the order, then such transactions of supply and receipt would be included in the turnover of supply or receipt of the respective companies and they would be liable to pay tax accordingly.
Such two or more companies would be treated as distinct companies up to the date of order and the registration certificates of companies would be cancelled with effect from the date of the order.
Sale of Securities
In most case, the usual mode is the acquiring of company by making an offer by the transferee company to the shareholders of the transferor company to purchase their securities, in the transferor company, at a price stated for the purpose. The definition of goods, as well as services under the GST regime, do not cover the securities, therefore GST would not be levied on the sale of securities.
Goods and Services Tax have impact on each and every industry and business in India. Transfer of business under mergers, amalgamation and acquisitions do not attract any tax liability under GST regime, they are unlikely to impacted by indirect taxation. For calculating the Capital gains, the holding period is calculated from the date of original purchase of shares. The companies who opt for merger and acquisition, the liability to register arises on the date of transfer for transferee of a business as going concern. Further, GST Law stipulates transfer or sale of business assets can take place either as a slump sale or itemized sale. In case of change of constitution of a registered person on account of sale, merger, demerger etc, the unutilized ITC would be allowed to be transferred to transferee. Thus, GST Law brought the immense clarity on the taxability of business transfer and related aspect thereof.