The conversion of a sole proprietorship into a company is a change of legal person. For GST purposes, the proprietorship and the company are distinct persons. The GST registration of the proprietorship does not automatically transfer to the company; the company must obtain a fresh GST registration in its own name and PAN. The technical questions are whether the transfer of the business to the company is a taxable supply, and how the unutilised input tax credit in the proprietorship’s electronic credit ledger can be transferred to the company.
The Going-Concern Exemption
A transfer of a business as a going concern is treated as a supply of services under Schedule II of the CGST Act, but it is exempt under Notification No. 12/2017-Central Tax (Rate) where the conditions are satisfied. The exemption applies where the entire business is transferred as a going concern and the business is continued by the transferee. The practical consequence is that the conversion can be structured so that the transfer of the business does not attract GST, provided the going-concern characterisation is substantiated.
The going-concern characterisation requires more than a transfer of individual assets. It requires the transfer of an organised business—assets, liabilities, contracts, employees, licences and goodwill—as a functioning unit. A piecemeal sale of assets does not qualify. The business transfer agreement should reflect the transfer of the business as a whole, and the company should continue the business after the transfer.
Where the conditions are not satisfied—for example, where only selected assets are transferred, or where the business is not continued—the transfer can be taxable, and the GST analysis shifts to the individual supplies.
Fresh GST Registration for the Company
The company is a new legal person with its own PAN. It must apply for a fresh GST registration; the proprietorship’s GSTIN cannot be transferred. The company’s registration application should be aligned with the business transfer timeline so that the company can issue invoices and receive invoices in its own name from the intended date.
The proprietorship’s GST registration should be cancelled or amended in accordance with the transfer timeline. The proprietorship must file its final returns and reconcile its credit ledger before the transfer. The company must obtain its own registration and accept the credit transfer, where applicable.
Transfer of Unutilised ITC Through Form ITC-02
The unutilised input tax credit in the proprietorship’s electronic credit ledger can be transferred to the company by filing Form GST ITC-02 on the GST portal. The transfer is subject to the conditions in Section 18(3) of the CGST Act and the rules, and it requires certification by a chartered accountant or cost accountant. The company must first obtain its own GST registration and accept the transfer.
The ITC-02 route is available where the business is transferred as a going concern. The transfer of credit is not automatic; it requires the filing of the form, the certification and the acceptance by the transferee. The proprietorship and the company should reconcile the credit ledger before the transfer so that the amount declared in ITC-02 matches the records.
Where the business transfer does not qualify as a going-concern transfer, the ITC-02 route may not be available, and the credit position must be analysed under the applicable provisions. The structuring of the transfer therefore affects not only the GST on the transfer but also the transferability of the accumulated credit.
Contracts, Licences and Invoice Transition
The conversion requires migration of contracts, licences, bank accounts and vendor relationships to the company. From a GST perspective, the critical point is that invoices issued by the proprietorship before the transfer and invoices issued by the company after the transfer must be clearly separated. The company should not issue invoices under the proprietorship’s GSTIN after the transfer, and the proprietorship should not issue invoices after its registration is cancelled or amended.
Where a customer contract is novated to the company, the GST treatment of subsequent invoices should follow the company’s registration. Where a vendor continues to invoice the proprietorship after the transfer, the company may not be able to claim credit on those invoices. The vendor master should be updated as part of the conversion.
What the Converting Business Should Control
The conversion’s GST outcome depends on three variables: whether the transfer is structured and documented as a going-concern transfer; whether the company obtains a fresh GST registration in its own name; and whether the unutilised credit is transferred through ITC-02 with the required certification and acceptance. The business that controls these variables avoids an unintended GST cost on the transfer and preserves the accumulated credit.
Call to Action: We advise proprietors and companies on going-concern transfers, fresh GST registration, ITC-02 transfer and contract migration. For a conversion-specific review, contact office@anujdesaiassociates.com, Ph No. 9619456656, Website https://anujdesaiassociates.com, LinkedIn linkedin.com/in/ca-anuj-desai-122547230.