Business restructuring — whether through merger, demerger, amalgamation, or transfer of business — has significant GST implications, particularly regarding the treatment of Input Tax Credit (ITC). This article provides a comprehensive guide to ITC transfer during business restructuring, including the legal framework, procedures, and recent judicial developments.
The Legal Framework
Section 18(3) of the CGST Act
Section 18(3) of the CGST Act, 2017 allows the transfer of unutilised ITC when there is a change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease, or transfer of business with a specific provision for transfer of liability.
Rule 41 of the CGST Rules
Rule 41 prescribes the procedure for ITC transfer. Form GST ITC-02 must be filed electronically on the common portal along with a request for transfer of unutilized ITC lying in the electronic credit ledger to the transferee.
When Is ITC Transfer Allowed?
ITC transfer is allowed in the following situations:
- Sale of business — Transfer of the entire business
- Merger — Two or more companies merge into one
- Demerger — One company splits into two or more
- Amalgamation — One company amalgamates with another
- Lease of business — Business is leased
- Transfer of business — Any other transfer of business with transfer of liabilities
The Procedure for ITC Transfer
Step 1: Determine Eligibility
Ensure that the business restructuring qualifies for ITC transfer under Section 18(3).
Step 2: Calculate Unutilised ITC
Determine the amount of unutilised ITC in the Electronic Credit Ledger of the transferor.
Step 3: File Form GST ITC-02
File Form GST ITC-02 electronically on the common portal, providing details of:
- Transferor and transferee
- Amount of ITC to be transferred
- Details of the business transfer
Step 4: Get ITC Transferred
Upon acceptance, the ITC is transferred to the transferee's Electronic Credit Ledger.
The Inter-State ITC Transfer Issue
The Problem
A significant issue arose regarding the transfer of ITC across states. The GST portal restricted ITC-02 filings to cases where both the transferor and transferee were in the same State.
Circular No. 133/03/2020-GST mandated that Form GST ITC-02 can only be filed where both entities are registered in the same State. This caused significant hardship for businesses with multi-state operations.
The Bombay High Court Ruling (July 2025)
The Bombay High Court in Umicore Autocat India Pvt. Ltd. case delivered a landmark ruling.
Facts:
- Transferor was in Goa, Transferee was in Maharashtra
- Petitioner faced rejection while filing ITC-02 due to system error: "Transferee and Transferor should be of the same State/UT"
Petitioner's Arguments:
- Neither Section 18(3) nor Rule 41 imposes any restriction on inter-State ITC transfer
- Rejection of ITC-02 by the GST portal is based on portal logic, not law
- Scheme of amalgamation was approved by NCLT and includes transfer of all liabilities and assets
Court's Decision: The Bombay High Court ruled that the transfer of unutilised ITC between amalgamating companies registered in different states is permissible under Section 18(3). The court directed the GST Council and GST Network to develop a mechanism for cross-state ITC transfer in mergers and amalgamations.
ITC-02: Key Compliance Points
Who Files: The transferor (the entity transferring the business)
When to File: Within the prescribed time from the date of business transfer
What to Include:
- Details of transferor and transferee
- GSTIN of both parties
- Amount of unutilised ITC
- Details of the business transfer
- Supporting documents
Consequences of Non-Compliance:
- ITC may not be transferred
- The transferee may lose the benefit of unutilised ITC
- Potential interest and penalty
Due Diligence for Business Restructuring
Pre-Transaction Due Diligence:
- Review ITC balances of the transferor
- Verify that ITC is eligible for transfer
- Identify any pending ITC disputes
- Check for any blocking of credit ledger
Transaction Documentation:
- NCLT approval (if applicable)
- Scheme of amalgamation/merger
- Board resolutions
- Transfer agreement
Post-Transaction Compliance:
- File ITC-02 within prescribed time
- Update registration details
- Reconcile ITC balances
Practical Considerations
Multiple Registrations: If the transferor has multiple registrations (different states), ITC transfer must be done for each registration separately.
Partial Transfer: ITC can be transferred partially if only part of the business is transferred.
ITC on Capital Goods: Special rules apply for ITC on capital goods transferred as part of business restructuring.
Exempt Supplies: If the transferee makes exempt supplies, proportionate ITC may need to be reversed.
ITC treatment during merger, demerger, and business transfer is a complex area with significant tax implications. The Bombay High Court ruling has provided much-needed clarity on inter-State ITC transfers. With proper planning, due diligence, and compliance, businesses can ensure seamless ITC transfer during restructuring.
Planning a business restructuring? Our team provides comprehensive GST advisory and due diligence services to ensure seamless ITC transfer.
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