Merger of firm as going-concern will not attract GST, rules AAR

An Advanced Authority Ruling (AAR) has upheld that merger of a proprietorship firm as a going-concern with a company is not a supply and hence it does not involve payment of Goods and Services Tax (GST) on the fixed or current assets.

Also, un-utilised ITC (Input Tax Credit) balance of the firm can be transferred to the company which is taking over, the ruling said.

The applicant is BM Industries, a proprietorship firm based in Yamunanagar, Haryana, engaged in manufacture and sales of aluminium profiles. It proposed to merge as a going-concern with Bimal Aluminium Pvt Ltd, based in the same city. Consequent to the merger, the proprietorship firm will cease to exist and all its assets and liabilities, rights, claims, and business will be taken over by the latter.

The applicant approached the Haryana AAR with two specific queries — whether the applicant is liable to pay tax under CGST/SGST Act, on the merger as a going-concern and whether the ITC available in the credit ledger account or cash ledger account of the proprietorship firm can be transferred to the respective credit ledger and cash ledger account of the private limited company, post-merger.

Assets, liabilities

The petitioner argued that the merger will be for consideration based on the valuation of assets and liabilities on the date of merger. All the assets and liabilities of applicant to be taken over by the company and business of the firm will continue to be run by the company. Accordingly, it was mentioned that such transaction should not be construed as ‘supply’ as defined under Section 7 of the CGST Act, 2017.

The term ‘supply’ includes sale, transfer, barter, exchange made for a consideration in the course of or for furtherance of business. It was also said that the transfer of the applicant’s business as a going-concern to a private limited company is not in the ordinary course of business or for the furtherance of business. The selling of business is an extraordinary activity and not the business of the applicant and hence the activity cannot be termed as supply as per Section 7.

After considering the legal position and facts in the matter, the AAR found merit in the arguments of the applicant and held that there are specific provisions under the GST laws which deal with the taxability of the transaction where the business is transferred as a going-concern.

Considering this provision, such a transaction is not treated as supply and thus the same stands excluded from the scope of supply of goods. It means that the applicant will not have to pay GST on the fixed assets and currents assets, including stocks of raw material, semi-finished and finished goods. Also, it was held that the ITC available in the credit ledger account of proprietorship firm will be transferred to the respective credit ledger account of the private limited company, consequent upon merger in accordance with the relevant provisions of GST laws.

Commenting on the ruling, Harpreet Singh, Partner at KPMG, said the advance ruling has rightly held that where the entire business (which includes all assets and liabilities) is getting transferred as a going-concern, the same cannot be construed as supply under the GST laws and hence such transactions remain outside the purview of GST.

“This ruling signifies that where facts about entire business getting transferred are clear, there is not much to be deliberated upon taxability or credit transfer, as the law on both these aspects is crystal clear,” he said.

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