Going concern transfer

Going concern transfer

Sale of business as a ‘going concern’ [commonly called, lock-stock-barrel basis] is not taxable as per paragraph 4(c), schedule II of the CGST Act read with entry no. 2 to exemption Notification no. 12/2017- Central Tax (Rate) dated 28th June, 2017.

Schedule II of the CGST Act: It talks about activities that are treated as a supply of goods or services. Here clause 4 says that transfer of business assets is considered as supply of goods.

However, as per clause 4(c) transfer of a business as a whole and as a going concern is not considered as a supply of goods.

Notification No.12/2017- Central Tax (Rate): As per this notification, services by way of transfer of going concern as a whole or part thereof is exempt from GST.

By way of this notification, the Revenue has clarified that transfer of a business as a going concern is exempt from GST. But the term going concern is not defined anywhere under GST.

The notification says that the activity of business transfer as a going concern is considered as supply of service and the same is exempt from GST. Similarly, Schedule II of the CSGT Act excludes the transfer of a business as a going concern as the supply of goods but includes the transfer of business assets as the supply of goods.

From above, we can interpret that.

• Transfer of business assets- Considered as the supply of goods.

• Transfer of business- Considered as the supply of service.

• Transfer of business as a going concern- Considered as the supply of service and exempt from GST as per above notification.

Delhi High court ln re Indo Rama Textile Limited (2013) 4 Comp LJ 141 (Del). Para 27 of the said judgement reads as follows:

“Statement on Standard Auditing Practices (SAP) 16, “Going Concern”, issued by the Council of the Institute of Chartered Accountants of India, provides that” When a question arises regarding the appropriateness of the Going Concern assumption, the auditor should gather sufficient appropriate audit evidence to attempt to resolve, to the auditor’s satisfaction, the question regarding the entity’s ability to continue in operation for the foreseeable future.

It therefore appears that to qualify as a ‘going concern’, the business must not have ‘intention or necessity of liquidation or of curtailing materially the scale of the operations.

One may refer to rule 41 that permits the transferor to upload GST ITC 02 on the common portal for effecting a smooth transfer of all unutilised credits pursuant to a transfer as a ‘going concern’, without any condition of correlation with underlying inputs and / or capital goods.

This provision is not new and is an added measure of responsibility that transferee of business needs to be mindful of to ensure that unpaid liabilities (determined or not, subject to limitation under section 73, 74 or 76) cannot be forfeited on account of sale of business. 

However, where ‘sale of business’ is effected by ‘sale of assets’, transferee carries no liability under GST law as all dues will remain with the ‘Taxable Person A’. All recovery provisions against Taxable Person A will not travel to transferee as the business is left behind with Taxable Person A and only assets (on payment of applicable GST) have been transferred to Taxable Person B.

In case of transfer of business by whatever method i.e., sale, lease, gift, license etc., the law does not indicate as to what should be the life of capital goods that is to be reckoned in the hands of transferee, for the purpose of GST laws, would it be five years, as reduced by number of years for which such asset was put to use by the transferor or would it be an additional five years from the date of transfer or would it be as per the actual remaining life of the asset on the basis of actuarial valuation as on the date of such transfer. The GST law is silent on this issue. 

But the very nature of ‘going concern’ is the recognition of continuity of use of capital goods. Rules 43 and 44 would need to be complied without restarting the period of use applicable in these cases.

The person taking over the business of another person should, in the normal course as a matter of due diligence, make sure that all the tax liabilities due under GST (CGST & SGST / IGST) laws in relation to transactions made before the date of transfer is fully discharged with applicable interest due, if any. Further, such transferee shall also ensure that there is no pending proceeding(s) against him under the said Act, to ensure that the transition process is smooth. It must be noted that the GST law casts the burden of paying tax, interest, penalty or any other amount on the transferee jointly with the transferor of business, though such amounts could relate to a period, prior to the date of transfer.

Q1. In case of transfer of business, who is liable to pay tax in respect of business transactions prior to such transfer?

Ans. Both the transferor and transferee of business (either wholly or partly) are jointly and severally liable to pay tax.

Q2. Whether such liability as mentioned above is applicable only for tax?

Ans. Such liability is applicable to interest and penalty also in addition to tax.

Quick concerns

1. Transfer of employees?

2. Takeover of current net assets?

3. Conduct of business to ensure continuity?

4. Non-compete clause by seller?

5. Transfer of permission of licences?