Introduction
Transfer of business is a very common commercial transaction carried out by many businesses for the furtherance of their businesses. But very few tend to know the GST implications in the case of such transfers. This article lays down GST implications when any kind of business is transferred.
Business includes any kind of trade, commerce, manufacture, profession, vocation, adventure, wager, or any other similar activity. Hence, any kind of business can be transferred. But such transfer can be of “going concern” or as “not a going concern” and depending on the same GST implication would vary.
What is business transferred as “going concern”?
The term “going concern” is not defined in the CCGST Act, 2017 hence, it must be understood in common parlance as used in trade. The running business when sold in its entirety or as a branch of the business, it is considered as going concern[1]. In simpler terms, the transfer of a running business which is capable of being carried out by the new purchaser as an independent business and such transfer comprises sale of immovable property, goods and transfer of unexecuted orders, employees, goodwill, etc[2] can be termed as “business transferred as going concern.” Moreover, the Supreme Court in the case of Allahabad Bank v. ARC Holding[3] held that if a company is sold off as a “going concern” then along with the assets of the company, if there are any liabilities relevant to the business or undertaking, the liabilities too are to be transferred. Hence, a business transferred with all the assets and liabilities constitutes a business activity capable of being run independently and such transfer of business is said to be of going concern. When on perusal of the facts of a case, AAR noticed that the applicant in the said case was transferring its business but excluding its employees and liabilities it was held that such transfer is not of going concern[4].
Is GST Applicable on the transfer of a business as ‘a going concern’?
The transfer of business is considered as a supply of services.[5] As per the entry 2 of the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 services by way of transfer of a going concern as a whole or an independent part thereof will be taxed as NIL[6]
In M/s Innovative Textile Ltd., when the applicant in the case was selling his entire business and the purchaser agreed to take over the assets and liabilities of the business it was held by the Advance Ruling Authority of Uttarakhand that such transfer constitutes a supply of services of going concern and would be taxed as NIL[7].
In M/s Rajshree Foods Pvt. Ltd. where the applicant was transferring one of his units along with its fixed assets namely land, building, plant and machinery etc. current assets, namely stock and trade receivables etc. and the liabilities namely bank terms loans, creditors for supplies etc. for a lump sum consideration, the Authority of Advance Ruling Karnataka, held the same as the supply of services of going concern and taxable as NIL[8]
In Cosmic Ferro Alloys Ltd., the Authority for Advance Ruling West Bengal held that for a business to be considered as a “going concern” it must not have the intention or necessity of liquidation or curtailing materially the scale of operation. When the applicant failed to furnish any documentary evidence with respect to the entity’s ability to continue in operation for the foreseeable future the Authority ruled that such transfer would be considered as a“going concern” only when this condition is fulfilled.
Business transferred as Not a Going Concern
In the case of M/s SCV Sky Vision[9], when the applicant was transferring his business but in the Business Transfer Agreement excluded the liabilities arising out of past business relations and also retained the employees, the Authority for Advance Ruling ruled that non-passing off the past liabilities and employees will not make the transfer of going concern and such transfer will be considered as transfer of business assets and will be taxed accordingly.
Conclusion
It can be clearly demarcated from above that for obtaining the tax benefit under entry 2 of the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 the transfer should be-
- A Going Concern
- All the assets, liabilities and employees must be transferred
- There must be sufficient proof regarding the entity’s (going concern) ability to continue in operation for the foreseeable future
It must be noted that as per the provision of the CGST Act, 2017 in case of transfer of business both the transferor and transferee are jointly and severally liable for payment of tax hence, making it important for all the parties involved in such transaction to understand the tax implication in said transactions.
[1] M/s SCV Sky Vision, AAR No.04/AP/GST/2021 dated: 12.01.2021.
[2] Cosmic Ferro Alloys Ltd. AAR No. 02/WBAAR/2022-23 dated 22.04.2022.
[3] Allahabad Bank v. ARC Holding AIR 2000 SC 3098
[4] M/s SCV Sky Vision, AAR No.04/AP/GST/2021 dated: 12.01.2021.
[5]Deputy Commissioner(CT) v. Behanan Thomas 1977 (39) STC 325 (Madras)
[6] Government of India, Minestry of Finance, Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, available at: Notification12-CGST.pdf (cbic.gov.in)
[7] M/s Innovative Textile Ltd, Ruling No. 20/2018-19
[8] M/s Rajshree Foods Pvt. Ltd., Advance Ruling No. KAR ADRG/06/2018
[9] M/s SCV Sky Vision, AAR No.04/AP/GST/2021 dated: 12.01.2021
