TaxTMI 
TaxTMI 
TaxTMI 
Max Baucus, a famous US Senator, once said 'Tax complexity itself is a kind of tax'. GST laws are not alien to this adage. The present legislative framework is riddled with complicated provisions which require periodic fine tuning and patchwork. Having said that, Central Government has proactively through its various circulars have attempted to bring in clarity on the interpretations of the legal provisions and procedures. In certain cases, in addition to providing clarity, these circulars have opened up certain new questions which were not thought of hitherto. Through this Article, the authors will attempt to critically analyze the contours of one such Circular[1] which has been issued recently in respect of transfer of unutilized input tax credit on account of transfer of business.
Before going into the intricacies of the clarifications provided by the circular, it becomes necessary to outline the relevant legal provisions concerning the issues addressed therein.
Relevant legal provision
Section 18(3) of the CGST Act, 2017 provides that where there is a change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provisions for transfer of liabilities, then the assessee shall be allowed to transfer the unutilized input tax credit to such sold, merged, demerged, amalgamated, leased or transferred business [hereinafter be collectively referred to as transferred business and the registered person who transfers the said business will be referred to as transferor and the registered person to whom such business is transferred will be referred to as the transferee] in a prescribed manner.
The methodology for transfer of credit has been prescribed in Rule 41 of the CGST Rules, 2017. In terms of Rule 41(1), the transferor shall, in the event of change in its constitution, furnish the details of such change in Form GST ITC-02, electronically on the common portal along with a request for transfer of unutilized input tax credit to the transferee.
Further, in terms of proviso to Rule 41(1), in cases where a business is transferred by way of demerger, it has been provided that the input tax credit shall be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme.
The said provision was specifically drafted for business reorganization by way of demerger for the reason that in case of demerger, only a part of business of an assessee is transferred and therefore it becomes imperative for the legislature to provide for a mechanism for apportionment of credit pertaining to such transferred business.
Issues
At the time of effecting business transfers, among other things, the taxpayers have been facing the following issues in the context of transfer of unutilized input tax credit:
Lack of prescription of the manner of apportionment of unutilized credit for any kinds of business reorganizations, except demerger. For example, in case of slump sale through a business transfer agreement, like demerger, only a specific division/vertical/unit of the business of the assessee may be transferred; hence in such a scenario, it becomes necessary to apportion the credit pertaining to the transferred business by an appropriate mechanism;
Further, even in the case of demergers, while applying the said formula there is no clarity on the following aspects:
Whether the ratio of value of assets transferred should be determined at the individual registration level or on a whole at the entity level?
What meaning is to be given to the term value of assets viz., would it mean the value as per books of accounts or the market value or any other value?
Considering the manner in which the businesses function, not all credits relating to the transferred business would be duly accounted by the transferor as on the date of business transfer. Some credits will be accounted only after such transfer; for e.g., credit relating to imported/indigenous goods which are in transit during such transfer, credit relating to debit notes received post business transfer, genuine credits not availed due to inadvertence prior to such transfer, credits availed belatedly after transfer due to delay in receipt of invoice from the supplier etc.
Consequently, the issue that has been bothering the taxpayers is the cutoff date for arriving at the quantum of unutilized input tax credit to be transferred. The reason being if the cutoff date is the date of transfer, then only the unutilized input tax credit accumulated as on such date shall be eligible for transfer to the transferee and all the credits relating to the transferred business availed thereafter cannot be transferred.
Clarification provided by the circular and its impact
The clarifications provided by the circular (tabulated below) on various aspects in connection with transfer of input tax credit does indeed throw some light on the aforesaid issues; however, the clarifications provided have their own share of grey areas as well.
Aspects | Clarification | Impact/Issues |
Whether the asset based formula for transferring the credits apply only to de-merger or can it be applied to all forms of business reorganization? | The said formula shall be applicable for all forms of business reorganizations including demerger. | Impact
|
For apportionment of credit, whether the proportion of value of assets transferred should be determined at the registration level or entity level? | The proportion of value of assets transferred has to be determined at the registration level and not at the entity level and consequently, the transfer of credit from each registration shall be effected at the proportion determined for such registration. | Impact
Open issues
|
Is the Form GST ITC 02 required to be filed in all states where the transferor is registered? | No. The Form GST ITC 02 is required to be filed only in those states where both transferor and transferee are registered. | Open issues
|
Whether the proportion of value of assets transferred should be applied for each head of input tax credit or for the consolidated input tax credit lying unutilized? Further, if the proportion should be applied for the consolidated input tax credit, then how shall the input tax credit that is to be transferred from each head be determined? | The proportion should be applied for the total amount of unutilized input tax credit. Further, out of the total input tax credit to be transferred as determined above, the transferor is at liberty to determine the quantum of credit to be transferred from each head [including cess]. However, the quantum of credit determined for each head should not exceed the total credit available under the said head. | Impact
|
What is the relevant date for determining the amount of input tax credit to be transferred to the transferor? | The transferor shall apply the apportionment formula to the unutilized ITC available with them in their electronic credit ledger as on the date of filing ITC 02. | Impact
Open Issue
|
What is the relevant date for determining the ratio of value of assets? | In case of de-merger, the it shall be the appointed date as fixed under the Companies Act. | Open Issue
|
Conclusion
Having given appropriate clarifications for some of the unsettled issues, the law in this field is still unclear on certain other aspects as enumerated above. Hence, in such cases it is advisable for the taxpayers to file representations with the Board seeking clarity on the above issues as well. Unlike the erstwhile central excise and service tax law wherein offline credit availment was permissible, GST being a system driven taxation regime requiring availment of credit through matching in GST portal, it is imperative for the Government to provide clarifications and suggest appropriate course of action to ensure that the valuable right of input tax credit is not lost due to system rigidity.
The views expressed in this article are strictly personal
[2]Section 25(4) of the CGST Act, 2017
[3]125/44/2019-GST dated 18.11.2019
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B. Venkatramanan (Senior Associate) & Rohan Muralidharan (Principal Associate)