Transfer of Business and GST Implications - Imprezz

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Transfer of Business and GST Implications

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• The advent of GST has led to significant changes
  in the way businesses operate across the nation.
  In the past few years, the need for corporate
  restructuring has increased the scope for
  transfer of business ownership. It is done
  majorly to increase the value of an enterprise,
  revive an organisations downfall, or gain an
  advantage over the competitors in the market.
  Either way, it is one of the extreme events,
  changes or decisions for a company.
• Post COVID-19 economic crisis, organisations are
  primarily focusing on corporate restructuring
  through the transfer of existing business or a
  part of the business to another entity. Companies
  in India must evaluate the GST implications of
  transferring a business as per the recent tax
  relaxations. In this article, we have discussed
  the necessary implications and impacts of
  GST that might help business owners take
  significant decisions concerning business
  ownership changes.

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Transfer of Business Definition

• Transfer of business is one of the basic
  accounting terms that define the action of
  transfer, assignment, conveyance, transmission or
  succession (by operation of law or by agreement)
  of the whole or significant part of a business,
  establishment or undertaking as per the
  applicability of this arrangement.

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How to Transfer Business Ownership?

• The means of transferring business ownership
  depends on whether a corporate entity is entirely
  up for sale, looking for partners/significant
  shareholders, or being taken over by a new
  member. Below, we have elaborated on the methods
  of transferring business ownership.

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• Partnership Adding a New Partner
• Adding a new partner is a go-to option for most
  MSME owners while transferring business
  ownership. Both parties have to follow the
  operating agreement, which describes how to add
  a new partner to a small business idea. The
  agreement also states the ownership interests
  amount to be paid by the new partner entering
  into the business. The transaction is usually
  executed through payment in cash. However,
  other GST payment arrangements are also possible.
• Sale of Business
• Sale of business is initiated to revive the
  business value in the market. There are two
  effective methods to sell a private company.

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• Cash or Finance
• Interested buyer can either pay via a loan or
  from his resources to be a companys partner. The
  amount of money on each asset distributed is
  determined by the residual method for ordinary
  income and capital gains.
• Owner-Financing Sale
• Financing sale is an instalment method of
  purchasing a company. In this payment method,
  owners offer to train the potential partner while
  paying for their share of ownership over a
  certain period. It is an effective method to
  avoid the default risk that occurs when a company
  borrows money from the banks. In this method, the
  default risk is forbidden as the buyer might
  forfeit the business back to the owner.

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• Leasing the Ownership
• Lease-purchase enables the lessee to run
  the small business until the lease period
  expires. It is an ideal purchase method for the
  buyer as it rids the risk of making a wrong
  purchase decision. Once the lease ends, the buyer
  can either purchase the business for a set price
  or drop the idea. It allows the buyer to lease
  another company or only walkway by giving
  complete control back to the owner.
• Transfer of Business to a Family Member
• Most Indian communities follow this method, where
  they transfer the business ownership to one of
  their family members. Businesses run under family
  ties also benefit from the tax deductions. The
  government has a different set of tax rules for
  these ventures. It helps avoid the estate taxes
  at the death of the current owner. It enables the
  business to tap on the lifetime gift tax
  exemptions.

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Impact of GST in Business Transfer

• The new goods and services tax (GST) Act has
  altered tax procedures across the country. The
  impact of GST on the corporate transaction has
  primarily affected the fulfilment of mergers and
  acquisitions, arrangements, amalgamation, and
  takeovers. Thus, the corporate sectors must
  analyse the provisions of GST laws and rules and
  their impact on businesses.

Here, we have listed some of the crucial aspects
impacted by GST in a business transfer.
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1.   Registration

• The GST rule for business transfer under section
  22 (3) of CGST Act 2017, states that a person
  buying the company in case of business transfer
  shall obtain a fresh certificate of ownership.
  The person is liable to register as the new owner
  and get the ownership certificate with the
  transfer date mentioned on it.
• However, when a business is transferred due to an
  official order from the High Court or Tribunal,
  the transferee is liable to obtain the ownership
  certificate dated on the actual date of
  incorporation mention on the companys registrar.
  As per section 22 (4) of CGST Act, 2017, the law
  states that the transferee shall do so under the
  order of High Court or Tribunal.

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2.   Input Tax Credit

• Input Tax Credit is one of the most discussed
  topics among individual planning to take over an
  existing company? What happens to ITC when the
  business ownership is transferred? Under section
  18 of the CGST Act, the GST rule specifies that
  the taxable person can avail of ITC.
• Further, section (3) of CGST Act, 2017 under GST
  rule 41 specifies that, in case of a change in
  the constitution of a registered taxable person
  due to a merger, sales, demerger, amalgamation,
  leasing or transferring of business, the
  registered person is granted transfer ITC to the
  transferee. In case of a demerger, the ITC will
  be allocated as per the asset value ratio of each
  unit mentioned in the demerger scheme.

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3.   Itemized Transactions

• What is an itemised transaction? It is defined as
  transferring assets and liabilities with assigned
  value on each item being transferred while
  transferring a business. Itemized transactions
  mainly concern the sale of particular items.
  Wherein, during a merger or acquisition, each
  item value is calculated separately. The
  transferee is liable to levy GST on itemised
  transactions the sale covers the definition of
  goods as mentioned in Schedule II of the CGST Act.

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4.   Crash or Slump Sale

• What happens when you purchase a company on a
  crash or slump sale? Generally, crash/slump sale
  is no different from regular sales they are
  treated equally. The CGST Act states that
  the registered taxpayer is liable to pay the
  applicable taxes. In case of transfer of company
  ownership, the supplies including activities
  mentioned in Schedule II of the CGST Act 2017,
  (Notification No. 12/2017 Central Tax dated
  (Rate) 28.06.2017) are exempt from GST under
  transfer of going-concern either whole or
  independently.
• No GST is applicable on crash/slump sale. Thus,
  as per the virtue of Re Rajeev Bansal and
  Sudershan Mittal (GST AAR Uttarakhand) Advance
  Ruling No 10/2019-20 (date of judgement
  09.01.2020 mentioned herewith below), it can be
  concluded that the agreement of business transfer
  as a going concern consisting an
  under-construction project is exempted from GST.

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5.   Accountability of Businesses

• At times, two or more small businesses in
  India merged or under the amalgamation/merger
  processes tend to involve exchanging goods or
  services before the date of enforcement ordered
  by the court or Tribunal for the transfer of
  business. Under such a scenario, the section 87
  of CGST Act states that the companies are liable
  to pay tax on any such transaction of supply. The
  receipts shall either be included while
  calculating the turnover of supply or shall pay
  tax accordingly.

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6.   Trading Securities 

• Trading securities is one of the most common ways
  of acquiring a company. Buyer offers the
  shareholders to buy the securities of the
  transferors company at a specifically mentioned
  price. Trading securities is not considered as a
  transaction under GST. Thus, GST does not apply
  to the sale of securities.

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GST Prospects Implications on Business Transfer
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• The COVID-19 pandemic has caused chaos around the
  world. The disruption has caused a significant
  change in the economy, and the way businesses
  operate across the globe. However, on the other
  hand, it has also created tons of opportunities
  increasing the importance and flexibility of
  supreme businesses.
• Right time, right place and right
  opportunities. It is the market condition that
  reflects the right time to leverage opportunities
  and exploit the ones at the bottom in any given
  situation. In the present-day scenario,
  businesses are determined, focused and
  consistently networking to assess various
  business niches and their performance. It helps
  them prepare themselves to sky-rocket their
  business both organically and inorganically
  through restructuring.

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• While the emerging prospects are floating across
  the tax system, MSME owners need to hunt for the
  opportunities and analyse the implication of GST
  on the transfer of business. Post COVID-19
  pandemic, small businesses in India plan to
  retrieve their market value with a prospect to
  reinforce and grow amid. It is crucial to raise
  above the distress caused due to the adverse
  effects of the pandemic.
• The information below is structured to provide
  detailed insights on the prospects of
  transferring business ownership and its tax
  implications.

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Prospect 1 Transfer of Business as Going Concern

• A running business capable of being owned and
  operated by the new owner/purchaser as an
  independent business, the transfer of ownership
  is listed under going-concern. As per this
  prospect, assets are sold as a part of the
  company when the purchaser intends to utilise the
  same resources to keep the business running and
  unchanged.
• The internationally accepted guidelines of
  revenue and custom (referred by advance ruling
  authorities in India) also state that an
  enterprise should operate separately when only a
  part of the business is being sold. Further, the
  guidelines also forbid a series of immediate and
  consecutive transfers.

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Tax Implication Under GST Going Concern

• When a running business is sold as going-concern,
  it is considered as a slump sale. Heres how to
  analyse the relevant provisions of the GST law
  under such a scenario.

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• Provision No. 1
• Schedule II of the CGST Act, 2017, states that
  the GST can be levied on the permanent transfer
  of business assets when a taxable person carries
  out the transaction it is deemed to be performed
  by him in the course or before he transfers the
  ownership of another person. However, it is only
  applicable if the business is transferred as a
  going concern or a representative who is deemed
  the taxable person.
• Provision No. 2
• Serial No. 2 of Notification 12/2017 Central
  Tax (Rate) dated 10-06-2017 states that the
  business as a going concern transferred either
  wholly or as an independent part is considered as
  the supply of service and its entire value is
  exempt from the levy of GST.
• Explanation (Prospect 1)
• The provisions mentioned above prove that the
  transfer of a business as a going concern
  includes the supply of services exempt from the
  levying GST on its transaction value. Concerning
  this, the GST Advance Ruling Authority (GST ARA)
  in India also runs the business transfer
  agreement analysis.

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Prospect 2 Transfer of Business as Itemized
Sale of Assets

• When a business is not transferred as a going
  concern, the assets and liabilities are
  transferred by allotting specific value to each
  item and is known as an itemised sale. As per
  this prospect, the slump sale, merger and
  amalgamation of business transfer are carried out
  item-wise where each assets value is calculated
  separately.

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Tax Implication Under GST Itemized Sale of
Assets

• As per the provisions mentioned above, under GST,
  the transfer of business assets is considered a
  supply. Goods that are a part of the business
  assets carried on by the taxable person is deemed
  to be supplied by him/her before the person
  ceases to be taxable. In simpler words, GST can
  be levied on itemised sales as per the GST rates
  applicable to the respective goods.

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Prospect 3 Transfer of Business as Sale of
Securities 

• Sale of securities is one of the most common
  methods of transferring business ownership. As
  per this prospect, the share of the company on
  sale is transferred to the purchasing company. It
  is done by making an offer to the existing
  companys shareholders with a specific price for
  the purpose.

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Tax Implication Under GST Sale of Securities

• It is crucial to analyse the tax implications for
  this prospect as per the applicable GST
  provisions. Heres how to analyse the relevant
  provisions of the GST law under the sale of
  securities.

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• Provision No. 1
• Section 2 (52) of CGST Act, 2017 defines goods as
  a movable property excluding money and
  securities. However, it includes actionable
  claim, agriculture, or goods forming a part of
  the land either served or agreed to be served
  before supply or under a supply contract.
• Provision No. 2
• Section 2 (105) of CGST Act, 2017 defines
  services as activities that concern the use of
  money, or its conversion through cash or any
  other transaction mode from one form to another
  form of currency or denomination they are
  charged separately. In simpler words, services
  are anything other than goods, securities and
  money.
• Explanation (Prospect 3)
• GST has been explicitly excluded for the transfer
  of securities. As per the Goods and Services
  (GST) law, the securities Contract/Regulations
  Act, 1956, securities transfer include scripts,
  derivative instruments, shares, bonds, etc. Thus,
  the transfer of business ownership through the
  sale of securities, including the shares is not
  subject to GST.

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Conclusion

• The introduction of the GST regime in India has
  wholly modified traditional tax methods. The
  unified tax system of accounts and records under
  GST has increased the clarity in a business
  transfer enterprise owners can now rely on GST.
  Transfer of business via amalgamation merges, and
  other means do not attract tax liabilities under
  the GST law.
• With the advent of GST, it has become crucial for
  businesses to consider the prospects of
  restructuring their enterprise. It is essential
  to thoroughly understand the availability of
  relevant credits of Input and Input services to
  check from the GST prospective. Transfer of
  business requires an in-depth study of cost
  benefits, GST implications and appropriate due
  diligence as per the business combination.
• Implement Imprezz GST accounting software and
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