Merger allows tax-free transfer of input credit under CGST Act

The Authority ruled in favor of the applicant, stating that the merger of a proprietorship firm with a private limited company did not attract tax liability under the CGST/SGST Act. The transfer of input tax credit from the proprietorship firm to the private limited company post-merger was permissible under Section 18(3) of the CGST Act and Rule 41 of CGST Rules. The Authority emphasized that the transfer of unutilized input tax credit was allowed in case of a merger, supported by relevant legal provisions and notifications. Therefore, the applicant was not required to pay tax on assets and could transfer input tax credit to the private limited company.

---

---

Issues:
1. Liability to pay tax on merger of a proprietorship firm with a private limited company.
2. Transfer of input tax credit from the proprietorship firm to the private limited company upon merger.

Analysis:
1. The applicant sought a ruling on the liability to pay tax under the CGST/SGST Act on the merger of their proprietorship firm with a private limited company. The applicant contended that the merger would not attract tax as per Rule 41 of CGST/HGST Rules and Section 29 of the CGST/HGST Act. The Officer's comments did not provide any specific observations on the case's facts. The applicant argued that the transfer of business as a going concern to a private limited company did not fall within the ordinary course of business or furtherance of business, hence exempt from tax under Section 7 of the CGST Act 2017. Reference was made to Schedule II of the Act, which excludes the transfer of business as a going concern from the definition of supply of goods or services.

2. The applicant also sought a ruling on the transfer of input tax credit from the proprietorship firm to the private limited company post-merger. The applicant relied on Section 18(3) of the CGST Act 2017 and Rule 41 of CGST Rules, which allow for the transfer of unutilized input tax credit to the transferee in case of a change in the constitution of a registered person due to merger. The Authority noted that these provisions applied specifically to the transfer of unutilized input tax credit and not to the balance in the electronic cash ledger. The applicant's reliance on a ruling from the Authority for Advance Rulings, Karnataka, further supported their claim for the transfer of input tax credit upon merger.

3. The Authority, after detailed discussions, found that the provisions of Section 18(3) of the CGST Act 2017 and Rule 41 of CGST Rules 2017 allowed for the transfer of unutilized input tax credit in case of a merger. The Authority also referenced Notification no. 12/2017-Central Tax, which exempted the intra-state supply of services of transfer of a going concern from central tax, supporting the applicant's position. Therefore, the ruling pronounced that the applicant was not liable to pay tax on fixed assets and current assets upon merger and that the input tax credit could be transferred to the private limited company as per the relevant provisions.

This judgment clarifies the tax implications and input tax credit transfer process in the context of a merger between a proprietorship firm and a private limited company under the CGST/SGST Act, providing guidance on compliance with the legal provisions governing such transactions.

---