TaxTMI 
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TaxTMI 
ITC reversal calculation in case of merger as a going concern
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....TC reversal calculation in case of merger as a going concern<br> Query (Issue) Started By: - Aditya Singh Dated:- 26-9-2025 Last Reply Date:- 28-9-2025 Goods and Services Tax - GST<br>Got 7 Replies<br>GST<br>Company B got one of its business verticals merged into company A on "going concern" basis with a pre-condition to settle the pending debts (Slim its books of accounts) and assumed only small portion of liabilities. The company B terminated the mutually agreed contract in year 1 and availed ITC accordingly, however, the relevant date for merger falls in year 2. Since transfer as going concern is an exempt service, it will trigger ITC reversal under Section 17 and Rule 42. How reversal will be calculated specifically T2, since T2 is avai....
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....led in year 1 in common basket of ITC and exempt supply materialised in year 2. Q1. As per my understanding, T denotes a tax period not a particular financial year. For calculation of T in year 2, the T2 of year 1 must be added to T of year 2 i.e. T= T(y2) + T2(y1) Q2. Also, this will be a case of reversal of ITC as per section 17 instead of wrong availment of ITC since Trigger for reversal i.e. exempt supply happened in year 2 (Legal jurisprudence: ITC reversal arises when exempt supply materialized, year of ITC availment is not important). Also, since there was no exempt supply in year 1 the taxpayer was perfectly eligible to avail ITC since event of exempt supply hapenned in year 2. The view and comments of experts are req....
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....uired. Please help. Reply By YAGAY andSUN: The Reply: Applicability of ITC Reversal under Section 17 read with Rule 42 on Transfer of Business as a Going Concern. This note examines the requirement to reverse input tax credit (ITC) under Section 17(2) of the CGST Act, 2017, read with Rule 42 of the CGST Rules, where Company B transferred one of its business verticals to Company A on a "going concern" basis in Year 2. The relevant ITC was availed in Year 1, during which no exempt supply existed. It is settled law that the transfer of a business as a going concern qualifies as an exempt supply under Entry No. 2 of Notification No. 12/2017-Central Tax (Rate). Consequently, upon such exempt supply arising in Year 2, proportionate reve....
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....rsal of common ITC is required under Rule 42. The credit availed in Year 1 was validly claimed, as no exempt supplies existed at that time. The obligation to reverse ITC arises only upon the occurrence of an exempt supply, not at the time of credit availment. Therefore, this constitutes a case of ITC reversal under Section 17, not wrongful availment under Sections 73 or 74. For the month in which the exempt supply materialises, the total common credit (T) under Rule 42 must include: (a) common credit (T2) availed in Year 1 that remains part of the credit pool; and (b) any common credit availed in Year 2. The reversal shall be computed as: (Exempt Turnover / Total Turnover) x Common ITC (C2), where C2 includes T2 from prior periods, cons....
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....istent with Rule 42 methodology. As the term "tax period" under the Act refers to a month, there is no restriction on including prior period credits in the reversal calculation. Legal and administrative interpretations also support that reversal is triggered only when exempt supplies occur, irrespective of the year of credit availment. Accordingly, Company B is liable to reverse proportionate common ITC in Year 2, in the month of exempt supply, with reference to the total credit pool available during that period. Reply By Aditya Singh: The Reply: Sir, thank you so much for your expert guidance. Reply By Aditya Singh: The Reply: Sir, please clarify the above discussed facts in following situation, the issue needs immediate atte....
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....ntion as might get time barred on 30.09.2025. 1. If company B terminated the mutually agreed contract in F.Y 2018-19 and availed ITC in GSTR-3B return of F.Y 18-19 accordingly (vendors charged compensation charges for early termination of contracts along with 18% GST, ITC of same was claimed by company B), however, the relevant date for merger falls in F.Y 2019-20. After merger, the Company B transferred the ITC availed in respect of terminated contracts of F.Y 2018-19 & 19-20 in F.Y 2019-20 via ITC-02 mechanism and neither shown any exempt service in GSTR-3B or GSTR-9 returns across states nor any reversal under Rule 42 in GSTR-9 or 3B of F.Y 19-20 across states. 2) Since transfer as a going concern is an exempt service, it will trigger ....
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....ITC reversal under Section 17 and Rule 42. How reversal will be calculated in this situation since major ITC is availed in F.Y 2018-19 in common pool of ITC and exempt supply materialised in F.Y 2019-20. There is one view that since that major chunk of ITC is availed in F.Y 2018-19, the same cannot be demanded by department as reversal in F.Y 19-20 as Rule 42 says - the amount of input tax, out of "T", attributable to inputs and input services intended to be used exclusively for effecting exempt supplies, be denoted as T2; 3. This view is being taken that in the first instance taxpayer should not avail this ITC in F.Y 2018-19 (y1) itself, if even availed and transferred, the calculation of reversal of F.Y 19-20(y2) cant include ITC availed....
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.... in year F.Y 18-19 even though the same is carry forwarded in 19-20 as opening balance and transferred in 19-20. The demand for the same is time barred and C1 for F.Y 19-20 = T(19-20) - (T1(19-20)+T2(19-20)+T3(19-20)) and will not include T2 availed in F.Y 18-19. 4. Also, it is being considered that ITC reversal calculation in Project Completion issue provided in Rule 42 is special case and its reversal formula will not be applicable in case of merger as a going concern, wherein reversal is calculated on Trigger of Completion certificate/ first occupancy, the C3 includes Common ITC of Year 1, 2, 3 till date of completion of project. I request all the experts, Please throw some light and provide relevant case laws or specific rule/section,....
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.... The issue needs immediate attention as might get time barred on 30.09.2025. Reply By Shilpi Jain: The Reply: What are the common credits that exist for this transaction? You could have some specific credits that may relate only to this sale of business transaction. In that case you would have to reverse it completely in the year in which incurred. Common credits - as you mentioned to be revesed in the year in which availed basis the taxable and exempt turnover. A Flaw in the law in case the exempt turnover actually materialises in the subsequent year. Reply By Aditya Singh: The Reply: 1. Since the Company B was running 4 business verticals and planned to close down only one by way of transfer as going concern and even this vertical....
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.... was functioning in F.Y 2018-19, there were many common credits - rental, consultancy, infrastructure related services. However, the specific credits are those which were availed on compensation charges raised by vendors for early termination of their agreement specifically to execute merger, as per pre-conditions of company A. 2. Since you mentioned "you would have to reverse it completely in the year in which incurred". I would like to submit that Rule 42 mentions tax period (month/quarter) not financial year since reversals for exempt turnover has to be done on monthly / quarterly basis in GSTR-3B (defined in Section 2(106)). Also, we get reference that tax period is a month/quarter since Rule 42 (g) mentions - T 1, T 2,T 3 and T 4 shal....
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....l be determined and declared by the registered person 2[****] 3[at summary level in FORM GSTR-3B]; Also, T2 is defined as - the amount of input tax, out of "T", attributable to inputs and input services intended to be used exclusively for effecting exempt supplies, be denoted as T2; So, if we assume a hypothetical situation where merger happened in 2020-21, the taxpayer did not avail this specific credit (T2) in F.Y 2018-19 itself as C1=T-(T1+T2+T3), considering that this ITC will be intended for exempt supplies taking place in F.Y 2020-21. If by any chance, the deal b/w Company B & A did not materialize and this expected exempt supply did not take place, the company B will lose all the credits already reversed and wont be able to reclaim....
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.... since F.Y 2018-19 credit has become time barred in 2020-21. I hope you got my point. Also, by way of your logical reasoning, a construction project started in July 2017 and got completion certificate in 2025-26 will have to reverse ITC availed in 2025-26 itself and govt will lose revenue on ITC reversal. The Rule 42 contradictorily, specifies the common credit to be considered for reversal shall be from July 2017 till completion of project. I request the experts that this is a critical issue, please consider these aspects before providing your valuable suggestions. Reply By YAGAY andSUN: The Reply: What You Should Do Immediately * The provision that transfer of business as a going concern is an exempt supply triggers potential need t....
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....o reverse ITC under Section 17 / Rule 42 for common credit (to the extent attributable to the exempt supply) in the period of transfer. * But whether reversal can reach back to credit availed in past (2018-19) depends on whether that credit is still "available / unutilised" and whether the department can validly demand it (i.e. not time-barred) - this is the battleground of your argument. * You have a defensible position that only credit availed in the year (2019-20) should be subject to reversal, and earlier credits should not be reopened. * The "project completion style" backward pooling is not directly applicable to merger, and arguing that difference is valid. * Immediately, you should: (a) do your reversal / adjustment ....
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....computation (b) see whether you can file a rectification / amendment before time bar (c) prepare your legal / factual defenses (d) check limitation dates and audit / assessment statuses for 2018-19 and 2019-20. Reply By Aditya Singh: The Reply: Sir, i am asking this question from departmental side.. if SCN has to be issued to the taxpaconcernyer, how its calculation will be done in case of this merger as a going concern - 1) The credits availed by Company B in F.Y 18-19 have been carry forwarded in F.Y 2019-20 and ultimately after merger have been passed on to Company A via ITC -02 mechanism in F.Y 19-20 itself. This exempt supply has neither been shown in returns nor any reversal under Rule 42 has been made by company B during....
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.... F.Y 19-20. How will I calculate reversal in this scenario ? Whether i can reach back to credits availed in F.Y 18-19 while calculating reversal for F.Y 19-20, if yes, please provide any legal backing or such interpretation provided in any case law. Few other officers are of opinion that since ITC was availed in F.Y 18-19, the same cant be added in reversal in F.Y 19-20 since 18-19 is time barred. Also, as per them law does not provide any clarity in this regard. This is the actual bone of contention. Please guide with any relevant case law on this issue. Thanks for timely reply. <br> Discussion Forum - Knowledge Sharing ....