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 organisation’s 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.
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.
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.
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.
Cash or Finance
Interested buyer can either pay via a loan or from his resources to be a company’s partner. The amount of money on each asset distributed is determined by the residual method for ordinary income and capital gains.
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.
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.
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.
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 company’s 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.
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.
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.
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.
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.
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 transferor’s 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.
GST Prospects & Implications on Business Transfer
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.
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.
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.
Tax Implication Under GST – Going Concern
When a running business is sold as going-concern, it is considered as a slump sale. Here’s how to analyse the relevant provisions of the GST law under such a scenario.
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.
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 asset’s value is calculated separately.
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.
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 company’s shareholders with a specific price for the purpose.
Tax Implication Under GST – Sale of Securities
It is crucial to analyse the tax implications for this prospect as per the applicable GST provisions. Here’s how to analyse the relevant provisions of the GST law under the sale of securities.
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.
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.