Library / Goods and Services Tax: The Professional's Master Guide

34. Business Restructuring, Transfers and Insolvency

When a business is sold, merged, split or closed, GST asks three questions: is the transfer itself taxable, what happens to the unused credit, and who carries the old liabilities.

34.1 Transfer of a going concern and slump sale

Services by way of transfer of a going concern, as a whole or an independent part of it, are exempt. A going concern transfer moves the business with its assets, liabilities, employees and contracts so that the buyer can carry it on without a break. A slump sale for a lump sum usually qualifies. An itemised sale, where assets are sold one by one at separate prices, is a series of taxable supplies of goods. Under section 18(3) and rule 41, unused ITC moves to the transferee on a sale, merger, demerger, amalgamation, lease or transfer of business with a specific provision for transfer of liabilities; the transferor files ITC-02 and the transferee accepts it on the portal.

Illustration 173: Slump sale or itemised sale

Joshi Engineering sells its fabrication division to Kumar Industries. The division has stock of Rs. 50,00,000 and machinery with a sale value of Rs. 80,00,000 (all 18% goods). Unused ITC relating to the division is Rs. 6,00,000.

Option A (itemised sale): tax on stock Rs. 9,00,000 + tax on machinery Rs. 14,40,000 = Rs. 23,40,000, subject to section 18(6) on machinery. Kumar Industries takes ITC of Rs. 23,40,000. Joshi's unused credit stays with Joshi.

Option B (going concern): no GST on the transfer. The ITC of Rs. 6,00,000 moves to Kumar Industries through ITC-02.

Result: option A blocks Rs. 23,40,000 of the buyer's cash until it is used; option B has no cash cost but requires the agreement to transfer the division as a running business, with employees, contracts and liabilities.

In an amalgamation the transferor's registration continues until the court or NCLT order, and supplies between the amalgamating companies in the period between the appointed date and the order are taxable (section 87). In a demerger, credit is apportioned in the ratio of the value of assets of the new units. A sale of shares is outside GST, and the target keeps its credits and liabilities.

34.2 Sale of capital goods and closure

When capital goods on which ITC was taken are sold, section 18(6) and rule 40(2) require payment of the higher of (a) ITC taken reduced by 5 percentage points for every quarter or part of it from the invoice date, and (b) tax on the transaction value. When a registration is cancelled, section 29(5) requires payment of ITC on stock of inputs, semi-finished and finished goods and on capital goods (for capital goods, the credit for the remaining part of a five-year life under rule 44), or the output tax on them, whichever is higher, declared in ITC-03 and reported in GSTR-10.

Illustration 174: Sale of a used machine

Anand Plastics bought a moulding machine on 1 June 2023 for Rs. 20,00,000 and took ITC of Rs. 3,60,000. It sells the machine on 10 August 2025 for Rs. 12,00,000.

Step 1: Quarters or part quarters from 1 June 2023 to 10 August 2025 = 9. Reduction = 9 x 5 = 45 percentage points.

Step 2: ITC less reduction = Rs. 3,60,000 x 55% = Rs. 1,98,000.

Step 3: Tax on transaction value = Rs. 12,00,000 x 18% = Rs. 2,16,000.

Step 4: Pay the higher, Rs. 2,16,000 (CGST Rs. 1,08,000 + SGST Rs. 1,08,000), on a tax invoice. If the price had been Rs. 8,00,000, tax on value would be Rs. 1,44,000 and Rs. 1,98,000 would be payable.

34.3 Insolvency

When a corporate debtor enters the corporate insolvency resolution process, the IRP or RP takes over management. Notification 11/2020-Central Tax treats the IRP or RP as a distinct person from the corporate debtor, requiring a fresh registration within 30 days of appointment. Circular 134/04/2020-GST clarified that dues for the period before the insolvency commencement date are claims under the Insolvency and Bankruptcy Code, 2016 and cannot be recovered outside it; returns for the earlier period are still to be filed, and the new registration pays tax on supplies after the commencement date.

Judicial view: Dues extinguished by a resolution plan

Ghanashyam Mishra and Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. (Supreme Court, 2021): once a resolution plan is approved under section 31 of the Code, all claims not part of the plan, including dues of the Central Government, State Governments and local authorities, stand extinguished. No proceedings can be continued for the period before approval. GST officers therefore cannot raise or recover pre-resolution demands against the company after the plan is approved; the department must file its claim with the resolution professional in time.

Illustration 175: GST dues in a resolution plan

Varun Steels Ltd. entered insolvency on 1 July 2025. GST dues for FY 2023-24 of Rs. 2,40,00,000 are admitted by the RP. The approved plan pays operational creditors 10%.

Step 1: The department receives 10% = Rs. 24,00,000.

Step 2: The balance Rs. 2,16,00,000 is extinguished on approval. A show cause notice issued later for FY 2023-24 would be invalid.

Step 3: From 1 July 2025 the RP's new registration pays tax on current supplies in the normal way.

34.4 GST due diligence checklist

Before an acquisition, the buyer should review the target's GST position. The table lists the usual checks.

Area	What to check
Registrations	All GSTINs under the PAN, status, additional places of business
Returns	GSTR-1, 3B and 9 filed; three-year bar on late filing
Reconciliation	GSTR-1 v. 3B, 3B v. 2B, books v. returns, e-invoice and e-way bill data
ITC risk	Suppliers with cancelled GSTINs, rule 37 and 37A reversals, blocked credits
Classification	Rates after GST 2.0, pending advance rulings
Litigation	Notices under sections 73, 74 and 74A, appeals, pre-deposits paid
Related party	Cross charge, corporate guarantees, secondment
Refunds	Pending claims, LUT, export realisation

Findings go into indemnities in the transfer agreement, with an escrow for large exposures.

Chapter summary

• Transfer of a going concern is exempt; an itemised sale is taxable asset by asset.

• Unused ITC moves to the transferee under section 18(3) through ITC-02.

• Sale of capital goods: pay the higher of reduced ITC and tax on transaction value (section 18(6)).

• On cancellation, section 29(5) requires payment on stock and capital goods through GSTR-10.

• The IRP or RP takes a new registration; pre-CIRP dues are claims under the Code and are extinguished by an approved plan (Ghanashyam Mishra).

PART H: ASSESSMENT, INVESTIGATION AND DISPUTES

Assessment, demands, search, advance rulings, appeals, penalties and anti-profiteering

This Part follows a tax position from the return to the courtroom. It covers how the department checks returns, raises and recovers demands and conducts searches, and how the taxpayer responds through advance rulings, appeals and settlement. The focus is on time limits, forms and the practical choices a professional makes at each stage.