GST implications on Business Restructuring: Emerging Jurisprudence and Practical Challenges

Business restructurings such as mergers, demergers, amalgamations, and shifting of business units are typically designed to be tax-neutral. However, under the Goods and Services Tax (GST) regime, the operationalization of such neutrality has encountered multiple legal and procedural complexities. Recent judicial pronouncements have further added interpretational divergence, necessitating a closer examination of the statutory framework and its practical application.

This article analyses key contentious issues relating to Input Tax Credit (ITC) in the context of business restructuring, supported by recent jurisprudence and a critical evaluation of the legal position.

Statutory Framework Governing ITC Transfer

Under GST law, Section 18(3) of the CGST Act, 2017 permits transfer of ITC in cases involving a 'change in constitution of a registered person' due to sale, merger, demerger, amalgamation, lease, or transfer of business, provided liabilities are also transferred.

Rule 41 of the CGST Rules, 2017 prescribes the procedural mechanism through Form ITC-02 for such transfer.

Additionally section 29 read with Rule 20 mandates cancellation of GST registration within 30 days of occurrence of an event such as merger. Section 87(2) deems the registration of the transferor as cancelled from the date of approval of the scheme (e.g., NCLT order).

While the statutory provisions appear straightforward, practical scenarios often fall into grey areas, leading to disputes.

Issue 1: Transfer of ITC on Shifting of Business Operations to Another State

Issue Analysis- A common restructuring model involves shifting operations from one State to another. However, Section 18(3) does not explicitly cover such scenarios.

Judicial Position

• Advance Ruling Authorities have consistently denied ITC transfer in such cases due to absence of express provision.
• Contrarily, in M/s. Shilpa Medicare Limited Versus Union Of India, Represented By Its Secretary Ministry Of Finance (Department Of Revenue), The Goods And Services Tax Council, New Delhi, The State Of Andhra Pradesh, The Appellate Authority For Advance Ruling, For The State Of Andhra Pradesh (Goods And Service Tax), Andhra Pradesh, The Authority For Advance Ruling, Andhra Pradesh, (Goods And Service Tax), Andhra Pradesh, The Deputy Commissioner Of Central Tax, Vizainagaram - 2026 (2) TMI 169 - ANDHRA PRADESH HIGH COURT, the Andhra Pradesh High Court allowed ITC transfer, interpreting such shifting as falling within the scope of business transfer.

Critical Evaluation- A strict reading of Section 18(3) indicates that it applies only to change in constitution of a legal entity. Mere geographical relocation across States does not satisfy this condition.

Further, the legislative intent becomes evident when compared with Rule 10 of the erstwhile CENVAT Credit Rules, 2004, which explicitly allowed credit transfer upon shifting of factory-an expression notably absent in GST law.

Practical Approach- Despite the restrictive interpretation, businesses can achieve tax neutrality through treating inter-State transfer between distinct registrations as supply under Entry 2 of Schedule I, Charging GST on such transfer and availing ITC in the recipient State. This mechanism ensures economic continuity of credit, albeit through a tax-paid route.

Issue 2: Transfer of ITC in Case of Cross-State Merger or Amalgamation

Issue Analysis- In mergers or amalgamations, it is possible that the transferor and transferee are located in different States. While the law does not prohibit such transfer, the GST portal imposes a technical restriction requiring both entities to be in the same State.

Judicial Position- High Courts across jurisdictions have allowed transfer of ITC across States permitted manual filing of ITC transfer forms and directed authorities to develop appropriate technological solutions

The matter is currently pending adjudication before the Supreme Court, indicating its significance.

Critical Evaluation- The restriction imposed by the GST portal lacks statutory backing. The law itself does not prescribe any such limitation.

However, a nuanced distinction arises IGST and CGST credits as legally transferable and SGST credit not transferable across States due to its State-specific nature

Thus, while cross-State ITC transfer is permissible, it must be confined to eligible components.

Issue 3: Continuation of GST Registration of Transferor Post-Restructuring

Issue Analysis- Post approval of a merger or amalgamation by the National Company Law Tribunal (NCLT), the transferor entity ceases to exist. However, in practice, GST registrations often continue due to transitional and compliance-related constraints.

Judicial Position - In M/s. Alstom Transport India Limited Through Its Authorised Signatory Shah Diptej Harshadkumar Versus Additional Commissioner, CGST And Central Excise (Appeals) & Ors. - 2026 (1) TMI 1337 - GUJARAT HIGH COURT, the Gujarat High Court held that GST registration of the transferor cannot continue post NCLT order. Further No compliance actions (such as refund claims) can be undertaken thereafter.

Critical Evaluation -Section 87(2) clearly deems cancellation of registration from the date of the NCLT order. However, a rigid application creates practical challenges such as ongoing contracts, pending returns and Transitional reconciliations

Harmonious Interpretation - A pragmatic approach would involve reading Section 87(2), Section 29, and Rule 20 together. I would also allow a 30-day window from the date of NCLT order for closure of activities. This interpretation aligns legal finality with operational feasibility.

Key Takeaways and Strategic Recommendations

1- Legislative Gaps Persist
GST law does not comprehensively address all restructuring scenarios, particularly shifting of business units across States.

2- Judicial Divergence Continues
Conflicting rulings (e.g., Shilpa Medicare) create uncertainty and increase litigation exposure.

3- Technology vs Law Conflict
GST portal restrictions cannot override statutory provisions yet they significantly impact compliance.

4- Need for GST Council Intervention
A uniform mechanism especially for cross-State ITC transfer is urgently required.

Risk Mitigation Strategy for Taxpayers

• Evaluate restructuring models from a GST lens before implementation.
• Use taxable supply route for ITC transfer where ambiguity exists.
• Maintain robust documentation linking transfer of assets and liabilities
• Ensure timely compliance with registration cancellation provisions

Conclusion

While GST aspires to maintain tax neutrality in business reorganizations, the absence of explicit provisions for certain scenarios, coupled with technological and interpretational constraints, has led to increased litigation. The evolving jurisprudence reflects judicial attempts to balance legal interpretation with business realities, but a definitive resolution can only emerge through legislative or policy-level clarity.

Until then, taxpayers must adopt a cautious, well-documented, and strategically structured approach to restructuring transactions under GST.