Transfer of Business and GST Implications
                     Transfer of Business and GST Implications
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The advent of GST has led to 
significant changes in the way businesses operate across the 
nation. In the past few years, the need for corporate restructuring 
has increased the scope for transfer of business ownership. It is 
done majorly to increase the value of an enterprise, revive an 
organisation’s downfall, or gain an advantage over the 
competitors in the market. Either way, it is one of the extreme 
events, changes or decisions for a company.
Post COVID-19 economic crisis, organisations are primarily 
focusing on corporate restructuring through the transfer of 
existing business or a part of the business to another entity. 
Companies in India must evaluate the GST implications of 
transferring a business as per the recent tax relaxations. In this 
article, we have discussed the necessary implications and 
impacts of GST that might help business owners take significant 
decisions concerning business ownership changes.
Transfer of Business – Definition
Transfer of business is one of the basic accounting terms that 
define the action of transfer, assignment, conveyance, 
transmission or succession (by operation of law or by agreement) 
of the whole or significant part of a business, establishment or 
undertaking as per the applicability of this arrangement.
How to Transfer 
Business 
Ownership?
The means of 
transferring business 
ownership depends on 
whether a corporate 
entity is entirely up for 
sale, looking for 
partners/significant 
shareholders, or being 
taken over by a new 
member. Below, we 
have elaborated on the 
methods of 
transferring business 
ownership.
Partnership – Adding a New Partner
Adding a new partner is a go-to option for most MSME owners while 
transferring business ownership. Both parties have to follow the 
operating agreement, which describes; how to add a new partner 
to a small business idea. The agreement also states the ownership 
interests amount to be paid by the new partner entering into the 
business. The transaction is usually executed through payment in 
cash. However, other GST payment arrangements are also 
possible.
Sale of Business
Sale of business is initiated to revive the business’ value in the 
market. There are two effective methods to sell a private company.
Cash or Finance
Interested buyer can either pay via a loan or from his resources to 
be a company’s partner. The amount of money on each asset 
distributed is determined by the residual method for ordinary 
income and capital gains.
Owner-Financing Sale
Financing sale is an instalment method of purchasing a company. In 
this payment method, owners offer to train the potential partner 
while paying for their share of ownership over a certain period. It is 
an effective method to avoid the default risk that occurs when a 
company borrows money from the banks. In this method, the 
default risk is forbidden as the buyer might forfeit the business 
back to the owner.
Leasing the Ownership
Lease-purchase enables the lessee to run the small business until the 
lease period expires. It is an ideal purchase method for the buyer as it 
rids the risk of making a wrong purchase decision. Once the lease ends, 
the buyer can either purchase the business for a set price or drop the 
idea. It allows the buyer to lease another company or only walkway by 
giving complete control back to the owner.
Transfer of Business to a Family Member
Most Indian communities follow this method, where they transfer the 
business’ ownership to one of their family members. Businesses run 
under family ties also benefit from the tax deductions. The government 
has a different set of tax rules for these ventures. It helps avoid the 
estate taxes at the death of the current owner. It enables the business 
to tap on the lifetime gift tax exemptions.
Impact of GST 
in Business 
Transfer
The 
new goods and service
s tax (GST) Act
 has altered tax 
procedures across the 
country. The impact of 
GST on the corporate 
transaction has 
primarily affected the 
fulfilment of mergers 
and acquisitions, 
arrangements, Here, we have listed some of the crucial 
amalgamation, and aspects impacted by GST in a business transfer.
takeovers. Thus, the 
corporate sectors must 
analyse the provisions 
of GST laws and rules
 and their impact on 
businesses.
1.   Registration
The GST rule for business transfer under section 22 (3) of CGST 
Act 2017, states that a person buying the company in case of 
business transfer shall obtain a fresh certificate of ownership. The 
person is liable to register as the new owner and get the 
ownership certificate with the transfer date mentioned on it.
However, when a business is transferred due to an official order 
from the High Court or Tribunal, the transferee is liable to obtain 
the ownership certificate dated on the actual date of 
incorporation mention on the company’s registrar. As per section 
22 (4) of CGST Act, 2017, the law states that the transferee shall 
do so under the order of High Court or Tribunal.
2.   Input Tax Credit
Input Tax Credit is one of the most discussed topics among 
individual planning to take over an existing company? What 
happens to ITC when the business ownership is transferred? 
Under section 18 of the CGST Act, the GST rule specifies that the 
taxable person can avail of ITC.
Further, section (3) of CGST Act, 2017 under GST rule 41 specifies 
that, in case of a change in the constitution of a registered 
taxable person due to a merger, sales, demerger, amalgamation, 
leasing or transferring of business, the registered person is 
granted transfer ITC to the transferee. In case of a demerger, the 
ITC will be allocated as per the asset value ratio of each unit 
mentioned in the demerger scheme.
3.   Itemized Transactions
What is an itemised transaction? It is defined as transferring 
assets and liabilities with assigned value on each item being 
transferred while transferring a business. Itemized transactions 
mainly concern the sale of particular items. Wherein, during a 
merger or acquisition, each item value is calculated separately. 
The transferee is liable to levy GST on itemised transactions; the 
sale covers the definition of goods as mentioned in Schedule II of 
the CGST Act.
4.   Crash or Slump Sale
What happens when you purchase a company on a crash or slump sale? 
Generally, crash/slump sale is no different from regular sales; they are 
treated equally. The CGST Act states that the registered taxpayer is 
liable to pay the applicable taxes. In case of transfer of company 
ownership, the supplies including activities mentioned in Schedule II of 
the CGST Act 2017, (Notification No. 12/2017 Central Tax dated (Rate) 
28.06.2017) are exempt from GST under transfer of going-concern either 
whole or independently.
No GST is applicable on crash/slump sale. Thus, as per the virtue of Re 
Rajeev Bansal and Sudershan Mittal (GST AAR Uttarakhand) Advance 
Ruling No 10/2019-20 (date of judgement 09.01.2020 mentioned 
herewith below), it can be concluded that the agreement of business 
transfer as a going concern consisting an under-construction project is 
exempted from GST.
5.   Accountability of Businesses
At times, two or more small businesses in India merged or under 
the amalgamation/merger processes tend to involve exchanging 
goods or services before the date of enforcement ordered by the 
court or Tribunal for the transfer of business. Under such a 
scenario, the section 87 of CGST Act states that the companies 
are liable to pay tax on any such transaction of supply. The 
receipts shall either be included while calculating the turnover of 
supply or shall pay tax accordingly.
6.   Trading Securities 
Trading securities is one of the most common ways of acquiring a 
company. Buyer offers the shareholders to buy the securities of 
the transferor’s company at a specifically mentioned price. 
Trading securities is not considered as a transaction under GST. 
Thus, GST does not apply to the sale of securities.
GST Prospects & 
Implications on 
Business Transfer
The COVID-19 pandemic has caused chaos around the world. The 
disruption has caused a significant change in the economy, and 
the way businesses operate across the globe. However, on the 
other hand, it has also created tons of opportunities increasing 
the importance and flexibility of supreme businesses.
“Right time, right place and right opportunities”. It is the market 
condition that reflects the right time to leverage opportunities 
and exploit the ones at the bottom in any given situation. In the 
present-day scenario, businesses are determined, focused and 
consistently networking to assess various business niches and 
their performance. It helps them prepare themselves to sky-
rocket their business both organically and inorganically through 
restructuring.
While the emerging prospects are floating across the tax system, 
MSME owners need to hunt for the opportunities and analyse the 
implication of GST on the transfer of business. Post COVID-19 
pandemic, small businesses in India plan to retrieve their market 
value with a prospect to reinforce and grow amid. It is crucial to 
raise above the distress caused due to the adverse effects of the 
pandemic.
The information below is structured to provide detailed insights 
on the prospects of transferring business ownership and its tax 
implications.
Prospect 1: Transfer of Business as 
Going Concern
A running business capable of being owned and operated by the 
new owner/purchaser as an independent business, the transfer of 
ownership is listed under going-concern. As per this prospect, 
assets are sold as a part of the company when the purchaser 
intends to utilise the same resources to keep the business 
running and unchanged.
The internationally accepted guidelines of revenue and custom 
(referred by advance ruling authorities in India) also state that an 
enterprise should operate separately when only a part of the 
business is being sold. Further, the guidelines also forbid a series 
of immediate and consecutive transfers.
Tax Implication Under 
GST – Going Concern
When a running business is sold as going-concern, it is 
considered as a slump sale. Here’s how to analyse the 
relevant provisions of the GST law under such a scenario.
Provision No. 1
Schedule II of the CGST Act, 2017, states that the GST can be levied on 
the permanent transfer of business assets when a taxable person carries 
out the transaction; it is deemed to be performed by him in the course or 
before he transfers the ownership of another person. However, it is only 
applicable if the business is transferred as a going concern or a 
representative who is deemed the taxable person.
Provision No. 2
Serial No. 2 of Notification 12/2017 – Central Tax (Rate) dated 10-06-
2017 states that the business as a going concern transferred either 
wholly or as an independent part is considered as the supply of service 
and its entire value is exempt from the levy of GST.
Explanation (Prospect 1)
The provisions mentioned above prove that the transfer of a business as 
a going concern includes the supply of services exempt from the levying 
GST on its transaction value. Concerning this, the GST Advance Ruling 
Authority (GST ARA) in India also runs the business transfer agreement 
analysis.
Prospect 2 – Transfer of Business as 
Itemized Sale of Assets
When a business is not transferred as a going concern, the assets and 
liabilities are transferred by allotting specific value to each item and is 
known as an itemised sale. As per this prospect, the slump sale, merger 
and amalgamation of business transfer are carried out item-wise where 
each asset’s value is calculated separately.
Tax Implication Under 
GST – Itemized Sale of 
Assets
As per the provisions mentioned above, under GST, the transfer of business assets is 
considered a supply. Goods that are a part of the business’ assets carried on by the taxable 
person is deemed to be supplied by him/her before the person ceases to be taxable. In 
simpler words, GST can be levied on itemised sales as per the GST rates applicable to the 
respective goods.
Prospect 3 – Transfer of Business as 
Sale of Securities 
Sale of securities is one of the most common methods of 
transferring business ownership. As per this prospect, the share 
of the company on sale is transferred to the purchasing company. 
It is done by making an offer to the existing company’s 
shareholders with a specific price for the purpose.
Tax Implication Under 
GST – Sale of Securities
It is crucial to analyse the tax implications for this prospect as 
per the applicable GST provisions. Here’s how to analyse the 
relevant provisions of the GST law under the sale of securities.
Provision No. 1
Section 2 (52) of CGST Act, 2017 defines goods as a movable property 
excluding money and securities. However, it includes actionable claim, 
agriculture, or goods forming a part of the land either served or agreed 
to be served before supply or under a supply contract.
Provision No. 2
Section 2 (105) of CGST Act, 2017 defines services as activities that 
concern the use of money, or its conversion through cash or any other 
transaction mode from one form to another form of currency or 
denomination; they are charged separately. In simpler words, services 
are anything other than goods, securities and money.
Explanation (Prospect 3)
GST has been explicitly excluded for the transfer of securities. As per the 
Goods and Services (GST) law, the securities Contract/Regulations Act, 
1956, securities transfer include scripts, derivative instruments, shares, 
bonds, etc. Thus, the transfer of business ownership through the sale of 
securities, including the shares is not subject to GST.
Conclusion
The introduction of the GST regime in India has wholly modified 
traditional tax methods. The unified tax system of 
accounts and records under GST has increased the clarity in a business 
transfer; enterprise owners can now rely on GST. Transfer of business 
via amalgamation merges, and other means do not attract tax liabilities 
under the GST law.
With the advent of GST, it has become crucial for businesses to consider 
the prospects of restructuring their enterprise. It is essential to 
thoroughly understand the availability of relevant credits of Input and 
Input services to check from the GST prospective. Transfer of business 
requires an in-depth study of cost benefits, GST implications and 
appropriate due diligence as per the business combination.
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