Assets Outside GST Scope Included in Demerger ITC Apportionment

The ruling clarified that the value of assets outside the purview of GST must be included for apportioning input tax credit (ITC) in case of demerger per Section 18(3) of the CGST Act, 2017 and Rule 41(1) of the CGST Rules, 2017. It was determined that assets created to comply with Accounting Standards and assets not transferred as part of the demerger should also be considered in the value of assets for ITC apportionment. Additionally, all assets must be attributed to a specific GSTIN for computing the asset ratio, with assets transferred to new units relative to total assets in the state for accurate ITC apportionment.

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Issues Involved:
1. Inclusion of value of assets outside the purview of GST in the value of assets for apportionment of input tax credit (ITC) in case of demerger.
2. Consideration of assets created to comply with Accounting Standards and assets not transferred as part of demerger for determining value of assets for ITC apportionment.
3. Attribution of assets not attributable to any particular GSTIN for computation of asset ratio.

Detailed Analysis:

Issue 1: Inclusion of Value of Assets Outside the Purview of GST

The applicant sought clarification on whether the value of assets outside the purview of GST should be included in the value of assets for the purpose of apportioning ITC in a demerger. The relevant legal provisions include Section 18(3) of the CGST Act, 2017, and Rule 41(1) of the CGST Rules, 2017. The explanation to Rule 41(1) defines "value of assets" as the value of the entire assets of the business, irrespective of whether ITC has been availed.

The ruling clarified that the term "entire assets" includes all assets of the business, whether or not they fall under the purview of GST. Therefore, the value of assets outside the purview of GST must be included for apportioning ITC.

Issue 2: Consideration of Assets Created to Comply with Accounting Standards and Assets Not Transferred as Part of Demerger

The applicant questioned whether assets created to comply with Accounting Standards and assets not transferred as part of the demerger should be included in the value of assets for ITC apportionment.

The ruling stated that since the definition of "value of assets" includes the entire assets of the business, it also encompasses assets created to comply with Accounting Standards and assets not transferred as part of the demerger. The proviso to Rule 41(1) requires that the ITC be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme. Hence, all assets, including those created for compliance with Accounting Standards and those not transferred, must be considered.

Issue 3: Attribution of Assets Not Attributable to Any Particular GSTIN

The applicant inquired about the treatment of assets not attributable to any particular GSTIN for the purpose of computing the asset ratio.

The ruling emphasized that all assets must be part of either one or another GSTIN. For the purpose of computing the asset ratio, the assets transferred to the new units must be considered relative to the total assets maintained by the company in the particular state. This is consistent with the clarification provided in Circular No. 133/03/2020-GST dated 23.03.2020, which states that the value of assets should be taken at the state level (distinct person) and not at the all-India level.

Ruling:

1. The value of assets outside the purview of GST is required to be included in the value of assets for apportionment towards the transfer of ITC in case of demerger as per Section 18(3) of the CGST Act, 2017 read with Rule 41(1) of the CGST Rules, 2017.
2. The value of assets includes assets created to comply with Accounting Standards and assets not transferred as part of the demerger.
3. There is no question of assets not being attributed to any particular GSTIN. For the computation of the asset ratio, the assets transferred to the new units must be considered relative to the total assets maintained by the company in the particular state, and ITC apportionment should be calculated accordingly.

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