Rectification of errors apparent on the face of record

Rectification of errors apparent on the face of record

Section 161

Section 161 of the CGST Act, 2017 states the rectification of mistakes or errors that are recognized from the records. 

It mentions that the authority responsible for issuing decisions, orders, summons, notices, or certificates may rectify any mistake that is found in the records in such documents.

These rectifications are done by the below-mentioned relevant authority:

• Suo moto by such authority.

• Upon notice by the affected person

• Upon notices of such authority by GST officials (both at the Central and State levels).

The term “mistake evident from records” remains undefined under the GST Act, indicating an unmistakable error. In this context, Section 154 of the Income Tax Act of 1961, furnishes detailed provisions regarding the concept. The term “mistake,” from a legal perspective, includes the following scenarios:

• Misreading a clear provision is an error.

• Applying an inapplicable provision.

• Ignoring a mandatory provision.

• Application of an incorrect provision of the Act.

• Disregard of decisions by the jurisdictional High Court.

The word ‘record’ can be meant as a comprising of the whole situation, including entire proceedings such as documents and materials provided by the concerned parties and officially taken on record by the authorities. When the order was issued which is the subject matter of the rectification process, these records were available.

Both taxable individuals and officers designated in accordance with the GST law have the authority to ask for the commencement of rectification proceedings. A taxable individual must apply for rectification within three months from the date when the respective order, decision, notice, or certificate was issued.

A rectification order is required to be passed within the period of six months from the date of issuance of the respective order, decision, notice, certificate, or any other documents, in accordance with the Section itself. However, in the case where the rectification effect pertains only to rectifying clerical or arithmetic mistakes caused by unintentional slips or omissions, this six-month time limit is not applicable. In such cases, the authority may act by issuing a notice and rectifying the error on their own initiative or based on a report from any officer appointed under the act, within a span of two years from the issuance of the original document.

Useful GST Rule 142(7)

In cases, where rectification of the directive has been issued under Section 161 or in cases, where an order uploaded on the portal has been taken back, then the proper officer must upload the abstract of the rectification order or the withdrawal order electronically in Form GST DRC-08.

As per the regulations, the Proper Officer must upload an abstract of the rectification order issued under Section 151 electronically in Form GST DRC-08. This same form can also be utilized for the withdrawal of the directive. This form includes information on the original order and rectification order and a summary of the original claim and demand post-rectification.

Taxability of corporate guarantee by group companies

Taxability Of Personal and Corporate Guarantee Under GST

A corporate guarantee is a contract between a corporate entity or individual and a debtor. In this contract, the guarantor agrees to take responsibility for the debtor's obligations, such as repaying a debt.

Recent clarification issued by Central Board of Indirect Tax & Customs (CBIC) with respect to taxability of personal and corporate guarantee provided to a Company under Goods and Services Tax (GST) law. In a recent circular, following clarifications have been provided: 204/16/2023-GST on 27th October, 2023.

Taxability of personal guarantee by directors:

Directors / promoters / employees and the Company are 'related persons' as per the explanation to Section 15 of the Central Goods and Services Tax Act, 2017 (CGST Act).

The circular clarifies that personal guarantees offered by promoters, directors, managerial staff, etc. of borrowing company would be treated as taxable supplies, even if made without consideration, and is in the course or furtherance of business.

In case personal guarantee is provided without any consideration, the value of taxable supply would be determined under  . Circular No. RBI/2021-22/121 dated 9 November 2021 issued by The Reserve Bank of India, prohibits earning of income from such guarantees. 

Therefore, the circular clarifies that the taxable value for such provision of personal guarantee provided by under Rule 28 of the CGST Rules would also be zero. Hence, no GST would be payable on such supplies.

In cases where specific consideration / remuneration is provided for such guarantee, GST would apply on such consideration.

Taxability of corporate guarantee by group companies

Any transaction between related / group / holding and subsidiary companies is treated as provision of taxable supply in accordance with Section 7 read with Schedule I of CGST Act, even if it is made without any consideration and is made in the course or furtherance of business.

It is clarified that where the corporate guarantee is provided by a related / group / holding company for a borrowing company to the bank / financial institutions for securing credit facilities for its group / subsidiary company, it is regarded as taxable supply under GST even when made without any consideration.

As per Notification No. 52/2023-CT dated 26 October 2023, the value of services provided by a supplier to a related person, involving the provision of a corporate guarantee to a banking company or financial institution on his behalf, is deemed to be 1% (one percent) of the guaranteed amount offered, or the actual consideration, whichever is higher.

Comment

The deemed value of a corporate guarantee offered to any banking company or financial institution on behalf of a 'related person' is established at a rate of 1%. However, no specific valuation criteria have been outlined for cases where such a corporate guarantee is extended to government entities or individuals.

Valuation of corporate guarantees for transfer pricing purposes under Income Tax laws has been a contentious issue. The Bombay High Court, in the cases of Everest Kento Cylinders Ltd and Manugraph India Ltd has ruled that a Corporate Guarantee fee of 0.50% can be considered to be at arm's length. Conversely, the Madras High Court in the case of Redington (India) Ltd, has determined that a Corporate Guarantee fee of 0.85% to be at arm's length. However, Rule 10TD of the Indian Income-tax Rules, 1962, sets the safe harbour rate for this fee at 1% of the guaranteed amount.

The circular does not make any reference to Rule 10TD of the Income-tax Rules, 1962. As a result, the valuation of Corporate Guarantees extended to government entities or private individuals may be subject to the discretion of the involved parties. Furthermore, the taxability of such Corporate Guarantees prior to 26 October 2023, remains uncertain in the absence of a defined valuation mechanism. Notably, there have been recent instances where various field formations have issued notices demanding GST on corporate and personal guarantees.

In addition, the circular also does not throw any light on the manner of valuation from GST perspective in case of continuing guarantee or where the guaranteed amount is not fixed.

Time of Supply of Goods

TIME OF SUPPLY OF GOODS

The time of supply for goods can be classified into three broad categories.

o Time of Supply for Goods – Forward Charge

o Time of Supply for Goods – Reverse Charge

o Time of Supply for Goods – Miscellaneous Provisions

(i) Default Rule:

The time of supply of goods section 12 of the CGST act 2017, shall be the earlier of the following dates:

(a) The date of issuing of invoice (or) the last day by which invoice should have been issued, OR

(b) The date of receipt of payment.

Note-1: The date of receipt of payment shall be earlier of- (a) The date on which payment is entered in the books of accounts; OR (b) The date on which the payment is credited to bank account.

Note-2: Last date by which invoice should have been issued is the “date of removal of goods”.

(ii) Time of supply of goods when the supplier is under composition scheme:

• In such cases, time of supply of goods is the date of invoice. Time of supply of goods will be the same in case the turnover is up to 1.5 Crore even though the supplier did not opt for composition scheme.

• In other cases, where supply involves movement of goods, time of supply is the date of invoice issued at the time of removal of goods.

• In all other cases, time of supply is the date of delivery of goods.

(iii) Time of supply of goods in respect of the excess amount (up-to Rs.1000) received over the amount mentioned in invoice:

Time of supply in respect of such excess amount received will be the “date of issue of invoice” or the “date of receipt of payment”, as preferred by the supplier.

(iv) Time of supply in case of continuous supply of goods:

In case of continuous supply of goods, time of supply is the “time when each statement is issued”, or the “time when each payment is received”, whichever is earlier.

(v) Time of supply of goods sent on approval basis:

Under the current GST regime, goods sent on approval basis is treated as deemed supply and accordingly it is taxable if the recipient fails to return the goods within a stipulated time period say six months. So, to fix the tax liability, it has become important to know the time of supply of goods in such cases.

Time of supply of goods sent on approval basis is the “time when it becomes known that supply is taken place”, or the “Six month from the date of removal of goods”, whichever is earlier.

(vi) Time of supply of goods under RCM:

Time of supply of goods taxable under reverse charge basis is the earlier of the following three dates:

(a) Date of receipt of goods, OR

(b) Date of receipt of payment, OR

(c) Date Immediately following 30 days from the date of issue of invoice.

Note: If time of supply cannot be determined with the help of above provisions, then the time of supply shall be the date on which entry in the books of the recipient of goods is made.

(vii). Time of Supply in case of Vouchers

Situation Time of Supply

If the supply is identifiable at the point at which voucher is

identified Date of issuance of the voucher

In all other cases i.e the supply is not identifiable at the point

at which voucher is identified Date of redemption of voucher

(viii). Residuary Provision

In case it is not possible to determine the time of supply under aforesaid provisions, the time of supply is:

Due date of filing of return, in case where periodical return has to be filed Date of payment of tax in all other cases.

(ix). Time of supply in relation to an addition in the value of supply by way of interest, late fees, or penalty

Time of supply related to an addition in the value of supply by way of interest, late fee, or penalty for delayed payment of any consideration shall be the date on which supplier receives such addition in value.

For example, a supplier receives consideration in the month of September instead of due date of July and for such delay he is eligible to receive an interest amount of Rs. 1000/- and the said amount is received on 15.12.22. The time of supply of such amount (Rs. 1000/-) will be 15.12.22 i.e. the date on which it is received by the supplier and tax liability on this is to be discharged by 20.01.23.

Time of supply of services

Time of supply of services

13(1) CGST Act 2017

The liability to pay tax on services shall arise at the time of supply, as determined in accordance with the provisions of this section. 

13(2)

The time of supply of services shall be the earliest of the following dates, namely: —

(a) the date of issue of invoice by the supplier, if the invoice is issued within the period prescribed under [sub-section (2) of] 1 section 31 or the date of receipt of payment, whichever is earlier; or

(b) the date of provision of service, if the invoice is not issued within the period prescribed under [sub-section (2) of] 2 section 31 or the date of receipt of payment, whichever is earlier: or

(c) the date on which the recipient shows the receipt of services in his books of account, in a case where the provisions of clause (a) or clause (b) do not apply:

Provided that where the supplier of taxable service receives an amount upto one thousand rupees in excess of the amount indicated in the tax invoice, the time of supply to the extent of such excess amount shall, at the option of the said supplier, be the date of issue of invoice relating to such excess amount. 

Explanation. ––For the purposes of clauses (a) and (b)–– 

(i) the supply shall be deemed to have been made to the extent it is covered by the invoice or, as the case may be, the payment.

(ii) “the date of receipt of payment” shall be the date on which the payment is entered in the books of account of the supplier or the date on which the payment is credited to his bank account, whichever is earlier. 

1 Omitted vide "The Central Goods and Services Tax (Amendment) Act , 2018" dt. 30.08.2018

2 Omitted vide "The Central Goods and Services Tax (Amendment) Act , 2018" dt. 30.08.2018

13(3)

In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earlier of the following dates, namely: ––

(a) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or

(b) the date immediately following sixty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier:

Provided that where it is not possible to determine the time of supply under clause (a) or clause (b), the time of supply shall be the date of entry in the books of account of the recipient of supply:

Provided further that in case of supply by  , where the supplier of service is located outside India, the time of supply shall be the date of entry in the books of account of the recipient of supply or the date of payment, whichever is earlier. 

13(4)

In case of supply of vouchers by a supplier, the time of supply shall be––

(a) the date of issue of voucher if the supply is identifiable at that point; or

(b) the date of redemption of voucher, in all other cases. 

13(5)

Where it is not possible to determine the time of supply under the provisions of sub-section (2) or sub-section (3) or sub-section (4), the time of supply shall––

(a) in a case where a periodical return has to be filed, be the date on which such return is to be filed; or

(b) in any other case, be the date on which the tax is paid. 

13(6)

The time of supply to the extent it relates to an addition in the value of supply by way of interest, late fee, or penalty for delayed payment of any consideration shall be the date on which the supplier receives such addition in value. 

GST - Valuation

 GST - Valuation

Under GST law as per sec 15 CGST Act taxable value is the transaction value i.e. price actually paid or payable, provided the supplier and the recipient are not related and price is the sole consideration

Compulsory Inclusions 

Any taxes, fees, charges levied under any law other than GST law, ex¬penses incurred by the recipient on behalf of the supplier, incidental ex¬penses like commission & packing incurred by the supplier, interest or late fees or penalty for delayed payment and direct subsidies (except government subsidies) are also to be added to the price (if not already added) to arrive at the taxable value.

Exclusions

Discounts like trade discount, quantity discount etc. are part of the nor-mal trade and commerce, therefore pre-supply discounts i.e. discounts recorded in the invoice have been allowed to be excluded while deter-mining the taxable value. 

Discounts provided after the supply can also be excluded while deter-mining the taxable value provided two conditions are met namely: 

(a) discount is established in terms of a pre-supply agreement between the supplier and the recipient, and such discount is linked to relevant invoices and 

(b) input tax credit attributable to the discounts is reversed by the recipient. 

Two Circulars namely Circular No. 92/11/2019-GST dated 07.03.2019 and Circular No. 105/24/2019-GST dated 28.06.2019 have been issued to clarify various aspects of exclusions or otherwise of discount from the value to arrive at the taxable value.

Taxable value when consideration is not solely in money (Rule 27 of CGST Rules) 

In some cases, where consideration for a transaction is not solely in mon¬ey, taxable value has to be determined as per prescribed Valuation Rule. In such cases following values have to be taken sequentially to deter¬mine the taxable value: 

i. Open Market Value of such supply. 

ii. Total money value of the supply i.e., monetary consideration plus money value of the non-monetary consideration. 

iii. Value of supply of like kind and quality. 

iv. Value of supply based on cost i.e., cost of supply plus 10% mark-up.

v. Value of supply determined by using reasonable means consistent with principles & general provisions of GST law. (Best Judgement method) 

Open Market Value means the full value of money excluding taxes under GST laws, payable by a person to obtain such supply at the time when supply being valued is made, provided such supply is between unrelated persons and price is the sole consideration for such supply. 

Supply of like kind & quality means any other supply made under similar circumstances, is same or closely resembles in respect of characteristics, quality, quantity, functionality, reputation to the supply being valued. 

Illustration: 

(1) Where a new phone is supplied for Rs.20000/- along with the ex¬change of an old phone and if the price of the new phone without exchange is Rs.24000/-, the open market value of the new phone is Rs. 24000/-. 

(2) Where a laptop is supplied for Rs.40000/- along with a barter of printer that is manufactured by the recipient and the value of the printer known at the time of supply is Rs.4000/- but the open mar-ket value of the laptop is not known, the value of the supply of lap¬top is Rs.44000/-. 

Value of supply between distinct or related persons (excluding Agents) (Rule 28 of CGST Rules). 

A person who is under influence of another person is called a related per¬son like members of the same family or subsidiaries of a group company etc. The term “person” also includes legal persons. 

Under GST law, following persons have been deemed as related persons. 

(i) such persons are officers or directors of one another’s businesses. 

(ii) such persons are legally recognised partners in business. 

(iii) such persons are employer and employee. 

(iv) any person directly or indirectly owns, controls, or holds 25% or more 

of the outstanding voting stock or shares of both of them. 

(v) one of them directly or indirectly controls the other.

(vi) both of them are directly or indirectly controlled by a third person; 

(vii) together they directly or indirectly control a third person; or 

(viii) they are members of the same family. 

Further, persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, how¬soever described, of the other, are also deemed to be related. 

Above categories of related persons have been specified and as relation may influence the price between two related persons therefore a Special Valuation Rule has been framed to arrive at the taxable value of transac¬tions between distinct or related persons. In such cases following values have to be taken sequentially to determine the taxable value: 

i. Open Market Value. 

ii. Value of supply of like kind and quality. 

iii. Value of supply based on cost i.e., cost of supply plus 10% mark-up. 

iv. Value of supply determined by using reasonable means consistent. 

with principles & general provisions of GST law. (Best Judgement method)

 

However, where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a relat¬ed person. Further, if the recipient is eligible for full input tax credit, the invoice value is deemed as open market value and is accepted as taxable value.

Questions?

Value of Supply in case of lottery

Value of Supply in case of betting, gambling, and horse racing

Determination of value in respect of seven specific supplies

(a) Purchase or sale of foreign currency including money changing. 

(b) Booking of tickets for air travel by an air travel agent. 

(c) Life insurance business. 

(d) Value of supply of Second-hand goods. 

(e) Value of redeemable vouchers/Stamps/Coupons/tokens. 

(f) Value in case of notified supplier of services. 

(g) Value of supplies where Kerala Flood Cess is applicable

Head office and Branch office

Head office and Branch office

The 50th GST Council meeting had recommended to clarify through a circular that Input Services Distributor (ISD) mechanism is not mandatory for distribution of input tax credit of common input services procured from third parties to the distinct persons as per the present provisions of GST law, and also to clarify issues regarding taxability of internally generated services provided by one distinct person to another distinct person [such as branch offices of same entity]. 

The Council also recommended that amendment may be made in GST law to make ISD mechanism mandatory prospectively [for future] for distribution of input tax credit of such common input services procured from third parties.

It would do well to recollect at this juncture that in Schedule I to GST law, it sets out at entry 2 that the supplies between distinct persons would be deemed to be supplies, even when done without consideration.

Examples of distinct persons are branch offices in different states or being different GSTINs in same PAN. As per this entry, even when the offices of same legal entity bearing different GST registrations, make supplies of goods/services to each other, these are liable to GST on the supplies made between them. While there is a physical trail for the movement of goods between branches, tracking the services supplied has been challenging.

On the other hand, when the employees situated in one branch office were discharging functions to another branch of same entity, should it be taxed at entry 2 Schedule I at all as deemed supply between distinct persons or not? This confusion is due to Schedule III of GST has entry 1 services by employee to employer in course of employment are excluded from tax net, as neither a supply of goods nor of services. Where cross charge was done for supplies of services between branch offices, then there has been the confusion on the valuation of supplies, whether to add salary costs or not?

The advance ruling of Karnataka authorities in the case of Columbia Asia Hospitals Private Limited 2018 (15) G.S.T.L. 722 (A.A.R. - GST) approved in (2019 (20) G.S.T.L. 763 (App. A.A.R. - GST) would be important for reference here. In this case, it has been held that the services of employees working at corporate office to provide accounting, administration, and IT systems to other branches of the same company would be supplied liable for GST.

The ruling seemed to have erred as treating employee of the company as employee of particular branch or location.

Coming to ISD concept, "Input Service Distributor [ISD]"is an office of the supplier which receives tax invoices issued towards the receipt of input services and issues a document for the purposes of distributing the credit of tax paid on the said services to another branch office of same entity.

The credit on vendor invoices pertaining to specific recipient branches such as advertisement expense, is distributed to such branch. Common credit is distributed to the recipient branches, is distributed based on turnover basis.

There are many taxpayers who have not complied with ISD mechanism on the common expenditures incurred. Whether the credits were required to be distributed only under ISD mechanism or alternately could the vendor expenses at HO be cross charged, whether there could be excess/short distribution of credits were questions arising to assessee. Adding to this, taking the ISD registration and its compliance challenges have also been there.

In this backdrop, the latest circular 199/11/2023 was issued regarding ISD mechanism, tax on the input services procured by HO for branches as well as clarifying on services supplied between branch offices of entity in different states.

Whether head office [HO] can avail the ITC of common input services procured from a third party but attributable to Branch offices [BOs], and raise tax invoice to BOs for such input services, and the BOs can then avail the ITC for the same?

Yes. HO can opt to issue tax invoices to the concerned BOs in respect of common input services procured from third-party vendor by HO but attributable to the said BOs and the BOs can then avail ITC on the same [to extent used to make taxable supplies/zero rated supplies].

Is it mandatory for the HO to go under ISD mechanism to distribute ITC on common input services procured by them from a third party attributable to both HO and BOs or exclusively to one or more BOs?

Under present provisions of GST, it is not mandatory for the HO to distribute ITC by ISD route.

Such distribution of the ITC in respect common input services procured from a third-party vendor can be made by the HO to a BO through ISD only if the said input services are attributable to the said BO or actually been provided to the said BO.

Whether the HO is mandatorily required to issue tax invoice to BOs for internally generated services? Whether the cost of all components including salary cost of HO employees involved in providing the said services has to be included in the computation of value of services provided by HO to BOs when full input tax credit is available to the concerned BOs?

Vide the second proviso to Rule 28 of GST rules, in cases where full input tax credit is available to a BO, the value declared on the invoice by HO to the said BO in respect of a supply of services shall be deemed to be the open market value of such services. This is irrespective of the fact whether cost of any particular component of such services, like employee cost etc., has been included or not in the value of the services in the invoice.

If HO has not issued a tax invoice to the BO in respect of any particular services being rendered by HO to the said BO, where full ITC is available to the recipient, the value of such services may be deemed to be declared as Nil by HO to BO and may be deemed as open market value in terms of second proviso to rule 28 of GST Rules.

In respect of internally generated services provided by the HO to BOs, in cases where full input tax credit is not available to the concerned BOs, whether the salary cost of employees of the HO involved in providing said services is mandatorily required to be included while computing the value of the services provided by HO to Bos?

The cost of salary of employees of the HO, involved in providing is not mandatorily required to be included while computing the taxable value of the supply of such services, even in cases where full input tax credit is not available to the concerned BO.

Sum-up

What are internally generated services?

However rightly clarified circular that ISD is optional not mandatory. This was the correct view all along vide section 20(1) r/w 20(2) GST law, confirmed now in the latest circular.

Where assessee HO has cross charged for centrally procured services used to make supplies of services to branch offices, such as accounting/recruitment, this circular has removed doubts on denial of credit availed centrally on such expenses at HO.

Cross charge can be done by HO to branch office at any value when recipient branch can avail ITC. Valuation for such cross-charge u/r 28 of GST rules, is on open market value of same/similar services or cost plus 10%; Where recipient can avail full ITC, then invoice value [even nominal amount] is deemed to be the market value. Recipient Branch can avail full ITC when such inwards supplies from HO is attributed to its outward taxable supplies/exports/supplies to SEZ unit or developer.

For assessee who omitted to do cross charge during past 6 years, could certainly rely on this clarification citing that even when invoice not raised for supplies of service made, nil could be deemed as value of supplies made by supplier branch [no GST impact], when recipient branch was in position to avail credit.

Due to lack of clarity on including staff costs, and adverse ruling in Columbia Asia supra, employees’ costs formed a huge chunk of value of cross charge done to branch offices, leading to accumulated credit at recipient locations. The circular has clarified need not include employee costs in valuation, even when recipient provides exempt supplies and not in position to avail ITC.

This circular is a big relief in instances where dept during audit u/s 65, has been making inflated tax demands on supplies between branch offices, by including salaries/various expenses incurred at HO, even in cases where supplier DTA unit is making zero rated supplies of services, to recipient distinct person being SEZ unit of same legal entity and not required to charge GST at all!!

Note: It would do well to remember that circulars are binding on the department officers. Similarly held in Dhiren Chemicals Industries [2002 (143) ELT 19 (SC)].

How to address the following?

Whether the head office of XYZ Co Ltd, Bangalore which has procured common expenses such as audit fees, in 2022-23, benefitting all the 10 branches across India was compulsorily required to distribute credit through ISD?

No, it was not mandatorily required to distribute credit by taking ISD registration. It could have raised tax invoice, discharge tax as per the valuation mechanism set out in 28 of GST rules.

Based on market value of same/similar services or cost plus 10% or when recipient branch can avail ITC, any value declared in invoice would be deemed market value.

Whether the head office of XYZ Co Ltd, Bangalore which has procured software license from vendor, in 2022-23, benefitting 5 out of 10 branches across India was compulsorily required to distribute credit through ISD?

NO. They can raise cross charge invoice for the same.

When the head office of XYZ Co Ltd, Bangalore supplied accounting support services to its branches such as at Chennai and Gurgaon in 2021-22, whether it was required to cross-charge for such services, including salary costs of finance team employee?

It could take view that not liable to include salary costs, as such services by employees, was in course of employment, Schedule III entry 1.

When head office of Bangalore has supplied accounting support services to its branches at Chennai and Gurgaon in 2021-22, and raised tax invoices for cross charge in March 2023, when recipient branches provide taxable supplies, can such branches avail ITC?

 If invoice was not raised in 2021-22, and HO raised tax invoice in March 2023, for services supplied and completed in 2021-22, voluntarily paid GST. Interest liability could arise for delayed payment of taxes. Recipient can avail ITC of tax charged by the HO Bangalore.

Cross Charge-Centralized Billing for the following expenses, 

• Core/centralized accounting expenses 

• Top management expenses 

• Advertisement expenses Sales and marketing expenses 

• Finance charges, 

• Treasury administration expenses 

• Cash management expenses 

• Legal expenses and Audit fee (Statutory Audit, Internal Audit etc.)

• Tax/Management consultant fee 

• Royalty fee and License Fee

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?