Closing a business triggers several GST obligations that many taxpayers ignore until a notice arrives. The law deems the closing stock to be supplied immediately before cessation, requires input tax credit reversal and mandates cancellation of registration and a final return.
Deemed Supply of Closing Stock
Schedule II, paragraph 4(c) of the CGST Act provides that where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person.
This means:
- On closure, stock of raw materials, work-in-progress, finished goods and other business goods are deemed supplied.
- GST is payable on the deemed value of such closing stock.
- The tax is payable even if the goods are not actually sold.
Exceptions
The deemed supply on cessation does not apply where:
- The business is transferred as a going concern to another person.
- The business is carried on by a personal representative who is deemed to be a taxable person.
Valuation of Deemed Supply
Valuation is done under Section 15 and the GST Valuation Rules:
- Open market value of the closing stock.
- If not available, value of like kind and quality goods.
- If both unavailable, 110% of cost of production or acquisition.
For stock that is damaged or obsolete, open market value may be lower. Proper documentation of valuation is essential.
Input Tax Credit Reversal on Cancellation
When registration is cancelled, Section 29(5) requires the taxpayer to pay an amount equal to the input tax credit involved in:
- Inputs held in stock.
- Inputs contained in semi-finished goods.
- Inputs contained in finished goods held in stock.
- Capital goods, reduced as per prescribed manner.
Alternatively, under Section 18(6), the taxpayer may pay tax on the deemed supply of goods and claim the corresponding reduction in the amount payable on cancellation. This allows the taxpayer to choose the more beneficial mechanism, but both cannot be applied simultaneously for the same goods.
Final Returns
Before cancellation, the taxpayer must file all pending returns. The final return GSTR-10 must be filed within three months of the date of cancellation or the date of cessation of business, whichever is later.
GSTR-10 requires disclosure of closing stock, ITC reversal and payment of tax on deemed supply.
Cancellation of Registration
Application for cancellation is made in Form GST REG-16. The proper officer may cancel registration after ensuring all dues are paid. If the business ceases operations but does not apply for cancellation, the department may cancel on its own under Section 29(2).
Practical Compliance Steps
- Quantify closing stock, work-in-progress and capital goods.
- Determine whether closure qualifies for going concern exception.
- Compute GST on deemed supply or ITC reversal amount.
- File all pending GSTR-1 and GSTR-3B returns.
- File GSTR-10 and apply for cancellation.
- Pay interest and late fees if any.
- Preserve records for the statutory period.
Common Mistakes
- Not reporting closing stock as deemed supply.
- Applying for cancellation without filing returns or GSTR-10.
- Ignoring capital goods ITC reversal.
- Treating closure as exempt from GST.
- Not evaluating going concern transfer exemption.
How Anuj Desai & Associates Can Help
We help businesses manage closure-related GST, compute deemed supply and ITC reversal, file final returns, apply for cancellation and handle departmental queries.
Contact Anuj Desai & Associates
Email: office@anujdesaiassociates.com
Phone: 9619456656
Website: https://anujdesaiassociates.com
LinkedIn: linkedin.com/in/ca-anuj-desai-122547230