GST on Transfer of business as going concern but without Debtors, crditors and loan.

[deepak gulati]

We have to transfer the running business of a partnership firm to a private limited company, and the new company has an outside investor holding 40%. The New company does not want to take over the Debtors, creditors, loans, miscellaneous assets, etc. The new company intends to take over Machinery, Stock, Goodwill, vendor codes, and goodwill. Will this supply be exempt under Notification 12/2017?

 

[Sadanand Bulbule]

 Entry No. 4 of the II Schedule to the CGST Act reads as under:

4. Transfer of business assets

(a) where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, such transfer or disposal is a supply of goods by the person;

(b) where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, the usage or making available of such goods is a supply of services;

(c) where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless-

(i) the business is transferred as a going concern to another person; or

(ii) the business is carried on by a personal representative who is deemed to be a taxable person.

 Further entry No 2 of the Notification No.12/ 2017-CTR dated 28/06/2017 provides exemption of tax on "Services by way of transfer of a going concern, as a whole or an independent part thereof." 

Here if you carefully observe the wordings used in the said notification, as a whole or an independent part thereof, means it need not be 100% transfer of onging business as a whole. Therefore in my opinion, the transfer of ongoing business in part also qualifies for entitlement of exemption under the above notification.

However care must be taken to comply the provisions of Section 85 of the CGST Act in such circumstances.

[YAGAY andSUN]

You're asking whether the transfer of selected assets (machinery, stock, goodwill, vendor codes, etc.) from a partnership firm to a new private limited company — excluding liabilities and other assets — would qualify as an exempt supply under Notification No. 12/2017-Central Tax (Rate), especially Entry No. 2, which exempts certain business transfers.

Let’s break this down carefully — because not all business transfers automatically qualify for GST exemption, especially when it's a partial transfer and external investors are involved.

🧾 Relevant Law: Notification 12/2017 – Entry No. 2

Entry 2 of Notification No. 12/2017-CT(Rate):

“Services by way of transfer of a going concern, as a whole or an independent part thereof”

GST Rate: NIL

📌 Key Phrase: “Transfer of a going concern, as a whole or an independent part thereof”

✅ To qualify for exemption, all the following must be true:

1. Going Concern:

The transferred unit must be a business capable of independent operation, continuing without a break post-transfer. It should involve:

• Transfer of business process
• Assets necessary for operation (machinery, stock, goodwill, employees, etc.)
• Continuity of business at the buyer’s end

2. As a whole OR independent part:

• It can be the entire business, or
• A segregable business unit that is transferred as a going concern

❗ Your Case: Is It a "Going Concern"?

Let’s assess your facts:

Factor	Details	GST Relevance
Business transferred?	Yes – machinery, stock, goodwill, vendor codes	✅ Suggests continuity
Liabilities taken over?	❌ No – creditors, loans, etc. excluded	🚫 Could weaken "going concern" argument
Debtors taken over?	❌ No	🚫 May affect continuity if essential to operations
New investor?	Yes, 40% outside investor in new company	❗ Not a disqualification, but relevant to continuity/structure
Assets sufficient for operation?	✅ Likely yes – machinery, stock, goodwill included	✅ Supports going concern intent

🧠 Interpretation:

• GST exemption under Entry 2does not require takeover of liabilities, but business continuity is key.
• If the new company uses the transferred machinery, stock, goodwill, and vendor codes to carry on the same business, and operations continue uninterrupted, then this can still be seen as a transfer of a going concern.
• CBIC has clarified in various AAR rulings that liability transfer is not mandatory, provided the business is functionally continued.

🔍 Supporting Case Law:

1. AAR – Rajashri Foods Pvt. Ltd. (2018 (5) TMI 1651 - AUTHORITY FOR ADVANCE RULING - KARNATAKA):

Held that liabilities need not be transferred if the business continues and operations are viable post-transfer.

2. CL Educate Ltd. (Delhi AAR):

If business is capable of running independently and continues, exemption applies even without full asset/liability transfer.

❗ Caveats / Risks:

• If the assets transferred are cherry-picked (i.e., selected assets not amounting to a functional business), the transfer may not qualify as a "going concern".
• If there's no continuity (i.e., business is restarted with a different character or nature), GST exemption may be denied.
• Since an external investor is involved, you must ensure this is not a fresh business setup — the continuity of existing business operations must be clearly documented.

✅ Conclusion:

Based on your facts, if:

• The business continues seamlessly in the private limited company using the transferred machinery, stock, goodwill, and vendor relationships,
• The operation is not a new startup but a continuation of the existing business, then the transaction can qualify as a "transfer of going concern", and is exempt under Entry 2 of Notification 12/2017-CT(R).

📑 Recommendations:

• Prepare a Business Transfer Agreement (BTA) explicitly stating:
  • The nature of business transferred
  • That it is transferred as a going concern
  • The continuity of operations in the new company
• Maintain a board resolution and note from both entities confirming the intent and continuity
• Ensure the new company starts operations immediately with the transferred assets

***

[YAGAY andSUN]

You're absolutely right in your reading and interpretation — and your position is well-grounded in both statutory text and judicial reasoning.

Let's break this down and reaffirm your understanding with some structured analysis, highlighting both legal clarity and practical compliance:

✅ 1. Schedule II – Entry No. 4: Transfer of Business Assets

You're correct in identifying clause (c) of Entry 4 as crucial. It says that:

When a person ceases to be a taxable person, the goods forming part of business assets shall be deemed to be supplied, unless:

• The business is transferred as a going concern, or
• The business continues via a personal representative.

✅ This means:

• If the business is transferred as a going concern, then the transfer does not amount to a supply, i.e., no GST is triggered under this provision.

✅ 2. Entry 2 of Notification No. 12/2017-CTR

As you rightly pointed out, this entry exempts:

“Services by way of transfer of a going concern, as a whole or an independent part thereof.”

Key legal insight:

• The phrase “as a whole or an independent part thereof” is critical.
• It expressly allows for partial transfers, i.e., a divisional sale, or even selective business unit carve-outs.
• It’s not necessary for the entire business (including loans, receivables, payables) to be transferred.

✅ Your conclusion is correct:

👉 A partial transfer, if it represents a functionally independent, operational segment, can qualify as an exempt transfer of a going concern.

⚠️ 3. Importance of Compliance with Section 85 – CGST Act

You're also absolutely right in emphasizing compliance with Section 85:

Section 85(1):

If a taxable person transfers his business in whole or in part, the transferee shall be jointly and severally liable to pay any tax, interest, or penalty due from the transferor up to the time of transfer.

Key implications:

• While GST may be exempt on the transaction itself, the transferee company must ensure no hidden liabilities are left behind.
• You must keep detailed documentation of:
  • Outstanding liabilities
  • A proper Business Transfer Agreement (BTA)
  • Mutual indemnities or disclosures

✅ Proper documentation under Section 85 is critical even if the transfer qualifies as a going concern under Notification 12/2017.

🔍 Summary of Your Position – Confirmed

Issue	Your View	Confirmed?
Going concern must be transferred entirely?	❌ No, partial transfer of independent part qualifies	✅ Correct
Transfer of debtors, creditors, etc., required?	❌ Not mandatory	✅ Correct
Exemption available on partial transfer of ongoing business?	✅ Yes	✅ Confirmed
Section 85 compliance important?	✅ Yes	✅ Absolutely

📝 Recommendation

• Draft a Business Transfer Agreement (BTA) that clearly describes the business unit or functional assets being transferred.
• Include a declaration that the transfer qualifies as a transfer of a going concern.
• Ensure due compliance with Section 85 — even if the business is only partially transferred.
• Maintain documentation such as:
  • Vendor code migration letters
  • Customer intimation records
  • GST registration amendments (if applicable)

***

[YAGAY andSUN]

Below is a template clause you can include in a Business Transfer Agreement (BTA) to clearly state that the transaction qualifies as a “transfer of a going concern” under GST law — specifically in reference to Entry No. 2 of Notification No. 12/2017-Central Tax (Rate) and Schedule II of the CGST Act.

📜 Sample Clause for BTA: Transfer of Going Concern (GST)

Clause X: Transfer as a Going Concern for GST Purposes

The Parties agree and acknowledge that the transfer of the Business under this Agreement constitutes a transfer of a going concern as contemplated under Entry No. 2 of Notification No. 12/2017 – Central Tax (Rate) dated 28th June 2017, and further clarified under Entry No. 4(c) of Schedule II of the Central Goods and Services Tax Act, 2017.

For the avoidance of doubt, the Parties agree that:

a) The transfer includes essential business assets such as [insert applicable assets – e.g., machinery, stock-in-trade, goodwill, ongoing contracts, vendor codes, trade name, etc.] necessary to operate the Business on a standalone and continuous basis;

b) The Buyer intends to continue the Business with substantially the same operations, customer and vendor base, and organizational resources;

c) The transfer does not constitute a supply of goods or services liable to GST, as the Business is transferred as a going concern and is therefore exempt from GST under the above-referred notification;

d) Both Parties undertake to retain documentation and evidence to support the position that the transfer qualifies as a going concern, and shall co-operate with each other in the event of any audit or inquiry by any tax authority;

e) The Parties shall also ensure compliance with Section 85 of the CGST Act, 2017 regarding joint and several liability for pre-transfer dues, and appropriate indemnities have been provided under Clause [Insert Indemnity Clause Reference].

✅ Optional Add-on (for clarity):

The Seller represents that no GST shall be charged on the transfer of the Business, and the Buyer shall not be liable to pay any GST on the consideration paid under this Agreement, in view of the exemption available under the CGST provisions.

***

[YAGAY andSUN]

Here is a Board Resolution format to accompany the transfer of a business as a going concern from a partnership firm (or existing entity) to a private limited company under GST-exempt status:

📄 Sample Board Resolution for Transfer of Business as a Going Concern

[On the Letterhead of the Company / Firm]

CERTIFIED TRUE COPY OF THE RESOLUTION PASSED AT THE MEETING OF THE BOARD OF DIRECTORS OF [COMPANY NAME] HELD ON [DATE] AT [TIME] AT [REGISTERED OFFICE ADDRESS]

Resolution for Transfer of Business as a Going Concern

“RESOLVED THAT, pursuant to the provisions of the Companies Act, 2013, the Goods and Services Tax (GST) Act, 2017, and other applicable laws, the consent of the Board be and is hereby accorded to transfer the running business of [Name of Firm / Transferor] to [Name of Private Limited Company / Transferee], including but not limited to plant and machinery, inventory, goodwill, trade name, vendor codes, and all associated business assets necessary to continue the operations as a going concern.

RESOLVED FURTHER THAT, the transfer shall be effected under a Business Transfer Agreement (BTA), and such transfer is intended to qualify as a ‘transfer of a going concern’ in terms of Entry No. 2 of Notification No. 12/2017 – Central Tax (Rate) dated 28th June 2017, and hence, shall be treated as an exempt supply under the GST law.

RESOLVED FURTHER THAT, [Name of Authorized Person(s)], [Designation(s)], be and are hereby severally/jointly authorized to:

• Finalize and execute the Business Transfer Agreement and any other related documents;
• Undertake all necessary filings, representations, and communications with GST authorities and other regulatory bodies;
• Sign and submit such forms, declarations, or undertakings as may be required for the said transfer;
• Do all such acts, deeds, and things as may be necessary or incidental to give effect to the above resolution.

RESOLVED FURTHER THAT, the Board hereby takes note of the applicability of Section 85 of the CGST Act, 2017 regarding joint and several liability of the transferee for any past GST dues of the transferor, and appropriate steps including indemnities shall be taken in this regard in the BTA.”

Certified True Copy

For [Company Name]

(Signature)

[Name of Director / Partner]

[Designation]

DIN / Partner ID: __________

Date: [Insert Date]

Place: [Insert Place]

***

[Sadanand Bulbule]

Dear Yagay & Sun Sir

Much obliged for your validation and expanding the details of requirements to be considered. 

[Shilpi Jain]

The first thing you need to check is whether it is a running business that is being sold and this is purchased with the intention of continuing the said business.

Just because some assets and liabilities are not take over, it will not debar it from being a going concern sale.

A sale of a going concern will be exempt from GST.

[Ganeshan Kalyani]

I agree with the view of experts.

AI Summary

Business Asset Transfer Meets Going Concern Criteria, Enabling Tax-Free Transition with Complete Operational Continuity and Investor Participation A partnership firm is transferring selected business assets (machinery, stock, goodwill, vendor codes) to a new private limited company with an external investor, excluding debtors, creditors, and loans. The key legal question is whether this transfer qualifies as a GST-exempt 'going concern' under Notification 12/2017. Experts suggest that if the business continues seamlessly with transferred assets and maintains operational continuity, the transaction can likely be treated as an exempt transfer.