Business restructuring through merger, demerger, amalgamation, or sale of business is a common strategic move in the corporate world. However, one of the most critical tax considerations in such transactions is the treatment of unutilized Input Tax Credit (ITC) . Under GST law, the transfer of ITC in such events is governed by Section 18(3) of the CGST Act and Rule 41 of the CGST Rules, which prescribe the use of FORM GST ITC-02.
This comprehensive guide explains the complete procedure, legal framework, and recent judicial developments concerning transfer of ITC on merger, demerger, amalgamation, and business transfer.
Legal Framework for ITC Transfer
Section 18(3) of the CGST Act, 2017
Section 18(3) of the CGST Act provides the statutory basis for transfer of unutilized ITC in cases of:
- Sale of business
- Merger of business
- Demerger of business
- Amalgamation of business
- Lease of business
- Transfer of business
- Change in ownership of business for any reason
Rule 41 of the CGST Rules, 2017
Rule 41 prescribes the procedural framework:
"A registered person shall, in the event of sale, merger, de-merger, amalgamation, lease or transfer or change in the ownership of business for any reason, furnish the details of sale, merger, de-merger, amalgamation, lease or transfer of business in FORM GST ITC-02, electronically on the Common Portal along with a request for transfer of unutilized input tax credit lying in his electronic credit ledger to the transferee".
When Is FORM GST ITC-02 Required?
Business Restructuring Events
FORM GST ITC-02 is required in the following scenarios:
- Merger: Two or more entities combine into one entity
- Demerger: One entity splits into two or more entities
- Amalgamation: One or more entities merge into an existing entity
- Sale of Business: Entire business is sold to another entity
- Lease of Business: Business is leased to another entity
- Transfer of Business: Business is transferred for any reason
Key Requirement: Transfer of Liabilities
The transferor can pass unutilized ITC to the transferee via FORM GST ITC-02, provided liabilities are also transferred. During mergers or demergers, merging entities remain distinct taxable persons until the NCLT order date.
Step-by-Step Procedure for Filing GST ITC-02
Step 1: Ensure Eligibility
- The transfer must be on account of sale, merger, demerger, amalgamation, lease, or transfer of business
- Both transferor and transferee must be registered under GST
- All liabilities of the transferor must be transferred to the transferee
Step 2: Log in to GST Portal
- Access the www.gst.gov.in URL
- Navigate to Services > Returns > ITC Forms > TRANSFER ITC
Step 3: Fill FORM GST ITC-02
- Enter GSTIN of transferor
- Enter legal name of transferor
- Enter GSTIN of transferee
- Provide details of the business transfer
- Specify the amount of ITC to be transferred
Step 4: Submit and Verify
- Submit the form electronically on the Common Portal
- Verify using Digital Signature Certificate (DSC) or Electronic Verification Code (EVC)
Recent Judicial Developments
Bombay High Court: Inter-State ITC Transfer Allowed
In a landmark judgment delivered on 10 July 2025, the Bombay High Court (Justice Bharati Dangre and Justice Nivedita P. Mehta) addressed a critical issue concerning inter-State ITC transfer.
Facts of the Case:
- Transferor company was situated in Goa
- Transferee company (petitioner) was registered in Satara, Maharashtra
- The petitioner faced rejection while filing FORM GST ITC-02 on the GST Portal due to system error: “Transferee and Transferor should be of the same State/UT”
Respondent's Arguments:
- Section 25(4) treats each State registration as a distinct person — so inter-State credit transfer is not allowed
- Circular 133/03/2020-GST restricts ITC-02 filings to same-State transferor and transferee
- Permitting cross-State SGST transfer would lead to loss of revenue to the originating State
Petitioner's Arguments:
- Neither section 18(3) of CGST Act nor rule 41 of CGST Rules impose 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, including ITC
Held: The Bombay High Court ruled in favour of the petitioner, allowing inter-State transfer of ITC on amalgamation.
Gujarat High Court: ITC Transfer on Amalgamation Allowed
Similarly, the Gujarat High Court has held that ITC transfer on amalgamation is allowed despite different State registrations.
Key Takeaway
The courts have consistently held that:
- Neither Section 18(3) nor Rule 41 imposes any restriction on inter-State ITC transfer
- Portal restrictions based on system logic cannot override statutory provisions
- NCLT-approved schemes of amalgamation must be given effect
Important Compliance Points
ITC-02A: A Related Form
FORM GST ITC-02A is relevant where:
- A person has multiple places of business in a State
- Separate registration has been granted for each place of business
- The transferor entity files FORM GST ITC-02A on the GST Portal
Transfer of Credit on Sale, Merger, etc.
The registered person shall, in the event of sale, merger, de-merger, amalgamation, lease or transfer of a business, furnish the details in FORM GST ITC-02 electronically on the Common Portal along with a request for transfer of unutilized ITC.
Common Mistakes to Avoid
1. Assuming Same-State Restriction
Many businesses assume that ITC transfer is only allowed within the same State. Recent court judgments have clarified that this restriction is not supported by law.
2. Not Transferring Liabilities
ITC transfer is conditional upon transfer of all liabilities. Failure to transfer liabilities can result in denial of ITC transfer.
3. Delaying ITC-02 Filing
ITC-02 must be filed before cancellation of the transferor's registration.
4. Incorrect ITC Amount
Ensure the ITC amount being transferred is correctly computed and matches the electronic credit ledger.
Practical Example
Scenario: ABC Ltd. (registered in Maharashtra) merges with XYZ Ltd. (registered in Gujarat) through an NCLT-approved scheme of amalgamation. ABC Ltd. has unutilized ITC of ₹50 lakhs in its electronic credit ledger.
Step 1: ABC Ltd. files FORM GST ITC-02 on the GST Portal, requesting transfer of ₹50 lakhs ITC to XYZ Ltd.
Step 2: Despite the system showing an error (“Transferee and Transferor should be of the same State”), ABC Ltd. relies on the Bombay High Court judgment and pursues the matter with the tax authorities.
Step 3: Upon acceptance, the ITC of ₹50 lakhs is transferred to XYZ Ltd.'s electronic credit ledger.
Result: The ITC is preserved and the amalgamation proceeds smoothly.
Planning a merger, demerger, or business transfer? Our expert team provides comprehensive GST advisory on ITC transfer and business restructuring.
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