Circular No. 133/03/2020-GST [C10-4NP]

Representations have been received from various taxpayers seeking clarification in respect of apportionment and transfer of ITC in the event of merger, demerger, amalgamation or change in the constitution/ownership of business. Certain doubts have been raised regarding the interpretation of sub- section (3) of section 18 of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act) and sub-rule (1) of rule 41of the Central Goods and Services Tax Rules, 2017 (hereinafter referred to as the CGST Rules) in the context of business reorganization.

2. According to sub-section (3) of section 18 of the CGST Act,

“Where there is a change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provisions for transfer of liabilities, the said registered person shall be allowed to transfer the input tax credit which remains unutilized in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in such manner as may be prescribed.”

Further, according to sub-rule (1) of rule 41 of the CGST Rules:

“A registered person shall, in the event of sale, merger, de-merger, amalgamation, lease or transfer or change in the ownership of business for any reason, furnish the details of sale, merger, de- merger, amalgamation, lease or transfer of business, in FORM GST ITC-02, electronically on the

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common portal along with a request for transfer of unutilized input tax credit lying in his electronic credit ledger to the transferee:

Provided that in the case of demerger, the input tax credit shall be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme.

Explanation:- For the purpose of this sub-rule, it is hereby clarified that the “value of assets” means the value of the entire assets of the business, whether or not input tax credit has been availed thereon.

3. The issues raised in various representations have been analyzed in the light of various legal provisions under GST. In order to ensure uniformity in the implementation of the provisions of the law, the Board, in exercise of its powers conferred by sub-section (1) of section 168 of the CGST Act clarifies the issues involved in the Table below.

S. Issue / Question Clarification No.

a. (i) In case of demerger, Proviso to sub-rule (1) of rule 41 of the CGST Rules provides for proviso to rule 41 (1) of apportionment of the input tax credit in the ratio of the value of assets of the CGST Rules provides the new units as specified in the demerger scheme. Further, the that the input tax credit explanation to sub-rule (1) of rule 41 of the CGST Rules states that “value shall be apportioned in the of assets” means the value of the entire assets of the business, whether or ratio of the value of assets not input tax credit has been availed thereon. Under the provisions of the of the new units as CGST Act, a person/ company (having same PAN) is required to obtain specified in the demerger separate registration in different States and each such registration is scheme. However, it is not considered a distinct person for the purpose of the Act. Accordingly, for clear as to whether the the purpose of apportionment of ITC pursuant to a demerger under sub- value of assets of the new rule (1) of rule 41 of the CGST Rules, the value of assets of the new units units is to be considered at is to be taken at the State level (at the level of distinct person) and not at State level or at all-India the all-India level. level. Illustration A company XYZ is registered in two States of M.P. and U.P. Its total value of assets is worth Rs. 100 crore, while its assets in State of M.P. and U.P are Rs 60 crore and Rs 40 crore respectively. It demerges a part of its business to company ABC. As a part of such demerger, assets

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of XYZ amounting to Rs 30 Crore are transferred to company ABC in State of M.P, while assets amounting to Rs 10 crore only are transferred to ABC in State of U.P. (Total assets amounting to Rs 40 crore at all-India level are transferred from XYZ to ABC). The unutilized ITC of XYZ in State of M.P. shall be transferred to ABC on the basis of ratio of value of assets in State of M.P., i.e. 30/60 = 0.5 and not on the basis of all-India ratio of value of assets, i.e. 40/100=0.4. Similarly, unutilized ITC of XYZ in State of U.P. will be transferred to ABC in ratio of value of assets in State of U.P.,i.e. 10/40 = 0.25.

(ii) Is the transferor No. The transferor is required to file FORM GST ITC-02 only in those required to file FORM States where both transferor and transferee are registered. GST ITC – 02 in all States where it is registered?

b. The proviso to rule 41 (1) Yes, the formula for apportionment of ITC, as prescribed under proviso to of the CGST Rules sub-rule (1) of rule 41 of the CGST Rules, shall be applicable for all explicitly mentions forms of business re-organization that results in partial transfer of business ‘demerger’. Other forms assets along with liabilities. of business reorganization where part of business is hived off or business in transferred as a going concern etc. have not been covered in the said rule. Wherever business reorganization results in partial transfer of business assets along with liabilities, whether the proviso to rule 41(1) of the CGST Rules, 2017 shall be applicable to calculate the amount of transferable

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ITC?

c. (i) Whether the ratio of No, the ratio of value of assets, as prescribed under proviso to sub-rule (1) value of assets, as of rule 41 of the CGST Rules, shall be applied to the total amount of prescribed under proviso unutilized input tax credit (ITC) of the transferor i.e. sum of CGST, to rule 41 (1) of the CGST SGST/UTGST and IGST credit. The said formula need not be applied Rules, shall be applied in separately in respect of each heads of ITC (CGST/SGST/IGST). Further, respect of each of the the said formula shall also be applicable for apportionment of Cess heads of input tax credit between the transferor and transferee. viz. CGST/ SGST/ IGST/ Illustration A: The ITC balances of transferor X in the State of Cess? Maharashtra under CGST, SGST and IGST heads are 5 lakh, 5 lakh and

10 lakh respectively. Pursuant to a scheme of demerger, X transfers 60% of its assets to transferee B. Accordingly, the amount of ITC to be transferred from A to B shall be 60% of 20 lakh (total sum of CGST, SGST and IGST credit) i.e. 12 lakh.

(ii) How to determine the The total amount of ITC to be transferred to the transferee (i.e. sum of amount of ITC that is to be CGST, SGST/UTGST and IGST credit) should not exceed the amount of transferred to the ITC to be transferred, as determined under sub-rule (1) of rule 41 of the transferee under each tax CGST Rules [refer 3 (c) (i) above]. However, the transferor shall be at head (IGST/CGST/SGST) liberty to determine the amount to be transferred under each tax head while filing of FORM (IGST, CGST, SGST/UTGST) within this total amount, subject to the ITC GST ITC–02 by the balance available with the transferor under the concerned tax head. This is transferor? shown in the illustration below:

(1) (2) (3) (4) (5) (6)

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State Asset Tax ITC balance Total ITC balance Ratio of Heads of Transferor amount of of Transferor Transfe (pre- ITC (post- ree apportionmen transferred apportionme t) as on the to the nt) after date of filing Transferee filing of FORM GST under FORM GST ITC–02) FORM ITC–02) GST ITC- [Col (4) – 02 Col (5)]

CGST 10,00,000 10,00,000 0

Delhi 70% SGST 10,00,000 10,00,000 0

IGST 30,00,000 15,00,000 15,00,000

Total 50,00,000 35,00,000 15,00,000

CGST 25,00,000 3,00,000 22,00,000

Haryan 40% SGST 25,00,000 5,00,000 20,00,000 a IGST 20,00,000 20,00,000 0

Total 70,00,000 28,00,000 42,00,000

d. (i) In order to calculate the According to sub-section (3) of section 18 of the CGST Act, “Where there amount of transferable is a change in the constitution of a registered person on account of sale, ITC, the apportionment merger, demerger, amalgamation, lease or transfer of the business with formula under proviso to the specific provisions for transfer of liabilities, the said registered person rule 41(1) of the CGST shall be allowed to transfer the input tax credit which remains unutilized Rules has to be applied to in his electronic credit ledger to such sold, merged, demerged, the unutilized ITC balance amalgamated, leased or transferred business in such manner as may be of the transferor. prescribed.” Further, sub-rule (1) of rule 41 of the CGST Rules prescribes However, it is not clear as that the registered person shall file the details in FORM GST ITC-02 for to which date shall be transfer of unutilized input tax credit lying in his electronic credit ledger relevant to calculate the

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amount of unutilized ITC to the transferee. balance of transferor. A conjoint reading of sub-section (3) of section 18 of the CGST Act along with sub-rule (1) of rule 41 of the CGST Rules would imply that the apportionment formula shall be applied on the ITC balance of the transferor as available in electronic credit ledger on the date of filing of FORM GST ITC – 02 by the transferor.

(ii) Which date shall be According to section 232 (6) of the Companies Act, 2013, relevant to calculate the “The scheme under this section shall clearly indicate an appointed date ratio of value of assets, as from which it shall be effective and the scheme shall be deemed to be prescribed in the proviso effective from such date and not at a date subsequent to the appointed to rule 41 (1) of the CGST date”. The said legal provision appears to indicate that the “appointed Rules, 2017? date of demerger” is the date from which the scheme for demerger comes into force and it is specified in the respective scheme of demerger. Therefore, for the purpose of apportionment of ITC under rule sub-rule (1) of rule 41 of the CGST Rules, the ratio of the value of assets should be taken as on the “appointed date of demerger”.

In other words, for the purpose of apportionment of ITC under sub-rule (1) of rule 41 of the CGST Rules, while the ratio of the value of assets should be taken as on the “appointed date of demerger”, the said ratio is to be applied on the ITC balance of the transferor on the date of filing FORM GST ITC - 02 to calculate the amount to transferable ITC.

4. Difficulty, if any, in implementation of the Circular may be brought to the notice of the Board. Hindi version would follow.