Introduction:
Commerce and trade are reaching new peaks in this century. We all hear about the sale of business, mergers, acquisition taking place every other day. The business agreements and transfers are becoming more complex with the passing time. The reconstruction of business organisations requires a number of steps and procedures that needs to be followed. Therefore, in the 21st century where there is an unprecedented growth of the economy, a taxation system is required which is equally advanced to regulate it. Goods and service tax was introduced to bring the uniformity in the indirect taxation in India. It provides a comprehensive framework that helps in the smooth functioning of the business sector. This article deals with how goods and service tax applies to business transfer agreements.
Business Transfer Agreements
Business transfer agreements include the sale or transfer of the whole business or the part of it from one entity to another. A business transfer agreement is an agreement made to sell or transfer assets and liabilities from one entity to another. It is similar to an ownership or purchase agreement containing the details of the business and its assets. It includes various details such as the type of agreement. Type of transfer, details of the transferable assets and liabilities etc. It lists down in detail the inventory, liabilities, assets, employees, patents etc. Of the part of the business being transferred. These agreements frequently take place when companies go through mergers, acquisitions, amalgamation etc. The two major types of business transfer agreements are
- Slump sale
- Itemized sale
Transfer of Business- Supply Goods or Services?
GST is a tax on the supply of goods and services. According to the Section 7 of the (Central Goods and Services Tax Act 2017 (CGST Act, 2017); “supply” includes––all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease Or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. As this definition includes transfer, the transfer of business is covered under this definition of supply.
As the GST clearly implies from its title it is a tax applicable to goods and services. Therefore, to know whether GST applies to business transfer agreements it is important to know whether it classifies as the supply of goods or services.
According to the Sec. 2(52) of CGST Act, 2017, the definition of goods states “goods means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply”.
According to the sec. 2(102), services mean anything other than goods. Therefore due to its wide definition the transfer of business is considered as a transfer of service under this Act. As business is not a movable property, it is not considered as goods under this Act. In the case of Paradise Food Court v. State of Telangana 2017 VIL 238 AP the Andhra Pradesh High Court held that business is not movable property and is therefore not a good.
Applicability of GST on Business Transfer Agreements
As discussed above, business transfer agreements are of 2 types, slump sale and itemized sale.
Slump sale is defined under section 4 (42c) of the Income tax Act 1961 as the “slump sale” means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.” Therefore slump sale includes the transfer of all the assets and liabilities of one or more undertaking without assigning individual value to assets or liabilities and selling them for lump sum consideration.
Itemized sale of assets is when assets are sold by an entity by assigning values to them.
In other words, transferring some of the assets and liabilities of the business. It can also be said as a partial transfer of business. This is usually done when mergers and acquisitions take place, where each item is valued separately.
In both these cases, if the business is transferred as going concern, it is to be treated as supply of service as per Entry No. 4(C) of Schedule II of the CGST Act, 2017. Entry No. 2 of Notification No. 12/2017–Central Tax (Rate) dated 28th June 2017 states that the services by the way of transfer of going concern as a whole or as a part, are to be treated as supply of services and is exempted from GST. It is treated as an exempted supply. However, if the business is not transferred as a going concern in an itemized sale, then according to, entry no. 4(c) of Schedule II of CGST Act, 2017, it will be treated as the sale of goods. It will be taxable as per provisions of the GST Act
Treatment of Input Tax credit in Case of Transfer of Business Agreement
Input tax credit according to section 2 (63) of CGST Act, is the credit for input tax. When the transfer of business is done as a going concern, and the transferor has some exempted supplies, the input tax credit has to be reversed proportionately of such exempted supplies according to the section Sec 17, 7 read with rule 42 of CGST Rules, 2017. Therefore, the transferor has to reverse unutilized input tax credit accordingly. IN case of the transferee, the unutilized input tax credit of the transferor in his electronic credit ledger shall be transferred to the new entity as per the section Sec. 18(3) of the CGST Act, 2017. In case of a partial transfer of business, the credit availed by the transferee shall be credited proportionally.
Conclusion
As business reconstruction and selling and transferring of business assets and liabilities from one entity to another is a common practice by the businesses, the Goods and Service tax plays an important role. While making the decisions the owners do not only need to evaluate business risks and effects but also the impact of GST on their transactions. For the transfer of business agreements, the central goods and service tax Act lays down the conditions under which the tax may be levied and the conditions when it will be exempted. GST has a direct impact on the financial industry therefore the implications of not abiding by the same should be kept in mind by the business.
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