Amount of Gratuity is Chargeable under GST or Not after Merger of companies.

[Khushi Kansal]

There are two companies, Company A and Company B. Company A and Company B are the parent entities of their respective subsidiaries, namely A1 and B1. Subsequently, Company A acquires Company B, and as a result, B1 also becomes a subsidiary of Company A.

Prior to the acquisition, certain gratuity obligations relating to employees of Company B were pending. After the acquisition, Company A received funds from Company B (or its subsidiary B1) and discharged the gratuity liability of the said employees.

The query is:
Whether the transfer of funds from Company B (or B1) to Company A, for the purpose of settlement of gratuity dues of employees of Company B, would qualify as a “supply” under Section 7 of the CGST Act, 2017 and thereby attract GST liability, or whether such transfer will be treated as a mere movement/settlement of funds not amounting to consideration for supply of goods or services?

AI Summary

Payment by target to acquirer to discharge pre-acquisition gratuity liabilities not a 'supply' under Section 7 CGST Act After an acquisition, the transferral of funds from the target (or its subsidiary) to the acquirer to discharge pre-acquisition gratuity liabilities was held not to be a 'supply' under Section 7 of the CGST Act. Commentators agree there is no provision of goods or services in return, no consideration, and the payment is a settlement of statutory employee liabilities or a contingent/internal funds movement; accordingly it falls outside taxable supply (including Schedule III/excluded services) and does not attract GST.