treatment of liability in case of transfer of business

[Rajat Gupta]

A taxpayer has filed an appeal against the demand order which is pending for hearing. He has sufficient balance in the credit ledger to meet any tax demand that may arise in appellate proceedings. However, due to some reasons, he has to transfer his business to another person as going concern and wants to file ITC-02 for transfer of ITC. My query is if the liability arises in future, which GSTN will furnish the same? can the ITC of transferee GSTN be utilized for discharging the tax liability?

 

[Ganeshan Kalyani]

In my view, the transferee GSTIN will be discharging the tax liability. 

[Shilpi Jain]

There is one provision in GST law which takes about liability in case of transfer of business. In this provision both the translator and the transferee would be jointly and severally liable. 

When the business transfer agreement is made a specific clause can be included to mention that this liability also has to be borne by the transferee

[Shilpi Jain]

Read translator as transferor in the above post

[Rajat Gupta]

Hi, thanks for the reply. My concern is if the transferor GSTN is held liable, then the tax will have to be discharged using cash. But of transferee can pay, it can use the credit ledger balance for tax payment. this will also spare interest liability (subject to available balance).

[KASTURI SETHI]

If any liability arises for the period prior to the date of transfer of business as going concern, transferor is responsible for discharging tax liability. The transferor cannot use unutilized ITC which stands transferred to the transferee. In other words, the transferor will have to discharge tax liability in cash.    

[KASTURI SETHI]

An agreement cannot be executed in violation of GST Acts. 

[Shilpi Jain]

Sale of business is a business transaction

Also what I understand is that the liability is not certain on date. 

It will depend on the outcome of the appeal. 

In such a scenario is the transferor is no longer going to exist then the transferee can be given the responsibility to pay.

Hence the business transfer agreement can mention that any future tax liability will have to be borne by the transferee.

[KASTURI SETHI]

Dear Querist,

There is no restriction to incorporate such clause in the agreement as per Contract Act but it will not be litigation-free. It will not be digested by the department. The liability arising for the period prior to the date of transfer of business is yours.

In case you want to add such clause in the agreement, you must take shelter of any case law which has been accepted by the department otherwise you will invite SCN.

All facts should be brought to the notice of the department.

AI Summary

Taxpayer Seeks Guidance on GST Liabilities During Business Transfer; Joint Liabilities Raise Concerns Under GST Law A taxpayer is transferring their business and seeks advice on handling GST liabilities during an ongoing appeal. The concern is whether the transferee's GSTIN can utilize its ITC to discharge any future tax liabilities. Responses suggest that both the transferor and transferee are jointly liable under GST law. However, liabilities arising before the business transfer must be settled by the transferor, typically in cash, as the transferred ITC cannot be used. Some advise including a clause in the business transfer agreement assigning future liabilities to the transferee, but caution against potential legal challenges from tax authorities.