What is Transfer of Credit?

• In GST, the term “transfer of credit” refers to the process of transferring unutilized Input Tax Credit (ITC) from one registered business entity to another in the event of a change in business ownership.
• ITC is the tax paid on purchases (inputs) by a business, and can be used to offset GST liability on their sales (output).

Why is it Important?

• Prevents ITC from becoming unusable when businesses change ownership.
• Ensures a smooth transition of GST compliance during restructuring events.
• Avoids double taxation for the buyer of a business.

When Does Transfer of Credit Occur?

• Sale of Business:When a business is sold entirely, unutilized ITC can be transferred to the new owner.
• Merger:Two businesses combine, and any unused ITC of the merging entities can be transferred to the new combined entity.
• Demerger:A single business splits into two or more entities. The unutilized ITC of the original entity is apportioned between the newly created entities.
• Amalgamation:Similar to a merger, several businesses combine, and unused ITC can be transferred to the new entity.
• Lease of Business:If a business is leased in its entirety, ITC transfer might occur.
• Change in Ownership:Transfer of ownership due to reasons other than those listed above.

Process of Transfer of ITC

1. Form GST ITC-02:The business transferring the ITC (transferor) needs to submit the form GST ITC-02 online within 30 days of the event.
2. Chartered Accountant/ Cost Accountant Certification:A certificate from a certified accountant is necessary, confirming that the transfer process includes provisions to transfer liabilities.
3. Transferee Acceptance:The business receiving the ITC (transferee) must accept the credit transfer on the GST portal.

Key Points to Consider

• ITC transfer is mandatory in the events mentioned above.
• Only unutilized ITC can be transferred.
• Transferred ITC is immediately available for use by the transferee.
• ITC transfer rules help maintain seamless GST compliance during business transitions.

Examples

Important Note: Please consult a tax advisor or chartered accountant for specific guidance on your individual business situation, as tax laws are complex and can vary by location.

Examples

• Sale of Business: A small manufacturing company decides to sell its entire operation to a larger corporation. In this case, the seller can transfer any unutilized Input Tax Credit (ITC) in its electronic credit ledger to the buyer, ensuring the ITC doesn’t become a sunk cost.
• Merger: Two mid-sized companies operating in the same sector decide to merge their operations. The ITC from both companies would be consolidated within the new merged entity, allowing the combined company to offset that credit against future GST liabilities.
• Amalgamation: This is similar to a merger, where multiple companies combine to form a larger single entity. The combined ITC balance from the amalgamating companies would transfer to the newly formed company under GST rules.
• Lease of Business: A business owner decides to lease out a portion of their operations (e.g., a manufacturing unit) to another company. The lessor (the owner) may be able to transfer the ITC related to the leased assets to the lessee under specific circumstances.
• Business Transfer: This could involve a change in ownership, perhaps within a family, or the transfer of a specific business unit to a new proprietor. The ITC related to the transfer of the business or unit would be transferred to the new owner to ensure continuity.

Key Points about Transfer of Credit

• The transfer of credit is facilitated through FORM GST ITC-02 submitted on the GST portal in India.
• A certificate from a chartered accountant or cost accountant is usually required to confirm the legitimacy of the transfer.
• Specific rules and regulations in GST law govern the conditions under which ITC transfer is permissible.

Case laws

Here’s a breakdown of important case laws concerning the transfer of credit on sales, merger, amalgamation, lease, or transfer of business under the Goods and Services Tax (GST) laws in India.

Key Provisions

• Section 18(3) of the CGST Act:Provides the basis for transferring unutilized input tax credit (ITC) in situations involving a change in a business’s constitution due to sale, merger, demerger, amalgamation, lease, or transfer.
• Rule 41 of the CGST Rules:Outlines the procedure and required documentation for transferring ITC.

Important Case Laws

These case studies illustrate the application of ITC transfer provisions:

• Vodafone Idea Limited vs. Union Of India & Ors (2022):The Delhi High Court determined that a company could transfer unutilized ITC after amalgamation and that the Scheme of Amalgamation is sufficient evidence for such a transfer.
• Orix Auto Infrastructure Services Limited (OAISL) vs. The Assistant Commissioner (CT) (2019):The Madras High Court ruled that when a business unit is transferred, the transferor can transfer unutilized ITC to the recipient.
• M/S Whirlpool Of India Ltd vs Cce, Delhi Iv (2013):The Madras High Court recognized the right to transfer ITC in cases of business restructuring.

Key Considerations

• Eligibility:ITC transfer is allowed only in specific situations outlined in Section 18(3).
• Transfer Process:It’s crucial to follow the prescribed process under Rule 41, which includes:
  • Submitting FORM GST ITC-02 online.
  • A chartered accountant/cost accountant certificate verifying the transfer of liabilities.
• Time Limit:There’s no stipulated time frame for ITC transfer; however, doing it promptly is recommended.

Seeking Professional Advice

GST laws can be complex, and the rules around ITC transfer involve nuances. If you have a specific scenario related to ITC transfer, it’s strongly recommended to consult a qualified tax professional or chartered accountant. They can offer customized guidance based on your exact business circumstances.

Faq questions

• Q: What does “transfer of credit” mean in the context of GST?
  • A:Transfer of credit means transferring any remaining (unutilized) Input Tax Credit (ITC) from the account of the original business owner or entity (the transferor) to the new owner or entity (the transferee) after a qualifying business event.
• Q: Why is the transfer of credit important under GST?
  • A:The transfer of ITC is crucial because it:
    • Prevents the new business owner from being burdened by taxes already paid by the prior business.
    • Ensures seamless continuation of a business without disrupting the input tax credit chain.
  • Q: What types of business restructuring events allow for credit transfers?
    • A:Qualifying events include:
      • Sale of a business
      • Merger
      • Demerger
      • Amalgamation
      • Lease of a business
      • Transfer of a business for any other reason

Process of Transferring Credit

• Q: How do I initiate a transfer of credit?
  • A:The transferor must electronically submit FORM GST ITC-02 on the common GST portal. This form provides details about the business event and requests a credit transfer.
• Q: What specific documentation is required to transfer credit?
  • A:Along with FORM GST ITC-02, you must submit:
    • Certificate from a chartered accountant or cost accountant confirming the business event and noting liability transfer.
    • In case of a demerger, documentation supporting the apportionment of ITC based on the value of assets in the demerger scheme.
  • Q: Is there a time limit for transferring input tax credit?
    • A:Yes, the relevant form and documentation must be submitted within a specific time frame from the date of the business event. Consult with a GST advisor for the exact timeline.

Additional Considerations

• Q: Are there any restrictions on transferring input tax credit?
  • A:Certain restrictions may apply in specific situations. For instance, credit related to capital goods may have some limitations. Consulting a GST specialist is advised for complex scenarios.
• Q: What happens if I don’t transfer ITC after a qualifying event?
  • A:Failure to transfer ITC in a timely manner could lead to complications for the transferee in utilizing that credit. In a worst-case scenario, it could trigger tax liabilities and potential penalties.
• **Q: Where can I find more information and official resources on ITC transfers? **
  • A:Reliable sources include:
    • The CGST Rules
    • The GST portal
    • Reputable tax websites like Cleartax