Sale of a business as a going concern is different from sale of individual assets. Under GST, the transfer of a going concern is generally exempt as a service, but the boundaries of the exemption are strict and often misunderstood.
What Is a Going Concern?
A going concern means a business that is capable of functioning as an independent unit without significant additional inputs from the transferor. It includes the assets, liabilities, contracts, employees, goodwill and operational ability that allow the business to continue.
A transfer of a going concern may take the form of:
- Sale of an entire business division.
- Slump sale under Section 2(42C) of the Income-tax Act.
- Demerger or merger.
- Transfer of a standalone business undertaking.
GST Exemption
Under Notification No. 12/2017-Central Tax (Rate), as amended, services by way of transfer of a going concern, as a whole or an independent part thereof, are exempt from GST.
The exemption applies to the service element of the transfer. If the transaction is structured as a transfer of a going concern as a whole, GST is not leviable on the transfer.
Schedule II Exception
Schedule II, paragraph 4(c) of the CGST Act provides that when a person ceases to be a taxable person, closing stock is deemed supplied, but not where the business is transferred as a going concern. This ensures that a genuine going concern transfer does not trigger deemed supply of goods.
Sale of Individual Assets vs Going Concern
If the business is sold as a collection of individual assets rather than as a going concern, GST may be payable on each asset:
- Sale of goods is taxable as supply of goods.
- Sale of immovable property after completion certificate may be outside GST, subject to Schedule III.
- Sale of machinery is supply of goods and taxable.
- Transfer of intangibles, contracts and goodwill may be services and taxable unless the going concern exemption applies.
A slump sale that transfers the whole undertaking as a going concern is exempt. A itemised asset sale may not qualify.
Input Tax Credit
When a going concern is transferred as an exempt supply, the transferor may need to reverse input tax credit under Section 17(2) on inputs and capital goods used for the exempt transfer, unless the ITC is transferred.
Under Section 18(3) and Rule 41, where a business is transferred as a going concern and the liability of the business is also transferred, the transferor can file Form GST ITC-02 to transfer unutilised ITC to the transferee. The transferee can then use the credit.
Practical Steps
- Define the scope of the transfer clearly: going concern or individual assets.
- If going concern, document that the business is capable of independent operation.
- Ensure the transfer includes employees, contracts, goodwill, licences and stock as a whole.
- Apply the exemption for the service element and rely on Schedule II exception for goods.
- File ITC-02 for credit transfer where applicable.
- Obtain legal advice on transaction structure before execution.
Common Mistakes
- Assuming every asset sale is a going concern transfer.
- Not transferring employees and contracts but claiming going concern exemption.
- Selling assets without GST and then facing demands.
- Not transferring ITC or not reversing it appropriately.
- Confusing share sale with asset sale. Share sale is not supply of goods or services under GST, but business asset sale may be.
How Anuj Desai & Associates Can Help
We help buyers and sellers structure business transfers, determine whether the going concern exemption applies, manage ITC transfer and avoid costly GST demands on asset sales.
Contact Anuj Desai & Associates
Email: office@anujdesaiassociates.com
Phone: 9619456656
Website: https://anujdesaiassociates.com
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