Transfer of Business to the Successor on Death of Proprietor: A Comprehensive Guide on GST

Introduction

The Goods and Services Tax (GST) is a comprehensive, multi-stage, destination-based tax that is levied on every value addition. In the event of the death of a sole proprietor, the GST law provides a facility whereby the successors can continue the business if they desire so by claiming the stock in hands deceased without payment of GST and by transferring Input Tax Credit available in the Electronic Credit Ledger of the deceased to Electronic Credit Ledger of the Successor. This article will discuss the law and procedure in case of transfer of proprietorship business due to the death of the proprietor.

Extracts of Section 22 of the CGST Act, 2017-

“22 (3) Where a business carried on by a Taxable person registered under this Act is transferred, whether on account of succession or otherwise, to another person as a going concern, the transferee or the successor, as the case may be, shall be liable to be registered with effect from the date of such transfer or succession.”

Upon demise of the proprietor if the business is carried ahead or taken up by the successors it is mandatory for them to obtain a GST registration if the deceased was registered under the GST on the date of demise irrespective of the Turnover threshold.

Vide Circular No. 96/15/2019-GST dt. 28.03.2019 it was clarified that transfer or change in the ownership of business will include transfer or change in the ownership of business due to death of the sole proprietor.

Cancellation of Registration upon demise of proprietor-

As perClause (a) of sub-section (1) of Section 29 of the Central Goods and Services Tax (CGST) Act, the GST registration will is to be cancelled upon the death of a sole proprietor. CGST Act, allows the successors in case of death of sole proprietor of a business, to file application for cancellation of registration in FORM GST REG-16 electronically on Common portal on account of transfer of business for any reason including death of the proprietor. In FORM GST REG-16, reason for cancellation is required to be mentioned as “death of sole proprietor”. The GSTIN of transferee to whom the business has been transferred is also required to be mentioned to link the GSTIN of the transferor with the GSTIN of transferee.

Transfer of Input tax credit and liability:-

In case of death of sole proprietor, if the business is continued by any person being transferee or successor of business, it shall be construed as transfer of business. Sub-section (3) of section 18 of the CGST Act, allows the Registered person to transfer the unutilized input tax credit lying in his Electronic credit ledger to the transferee in the manner prescribed in rule 41 of the CGST Rules. Extracts of the aforementioned Section and Rules are reproduced as under-

Section 18(3)-

“(3) Where there is a change in the constitution of a Registered person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provisions for transfer of liabilities, the said Registered person shall be allowed to transfer the Input tax credit which remains unutilised in his Electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in such manner as may be prescribed.”

Rule 41-

“Rule 41. Transfer of credit on sale, merger, amalgamation, lease or transfer of a business.-

(1) 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:

….

(2) The transferor shall also submit a copy of a certificate issued by a practicing Chartered accountant or Cost accountant certifying that the sale, merger, de-merger, amalgamation, lease or transfer of business has been done with a specific provision for the transfer of liabilities.

(3) The transferee shall, on the Common portal, accept the details so furnished by the transferor and, upon such acceptance, the un-utilized credit specified in FORM GST ITC-02 shall be credited to his Electronic credit ledger.

(4) The inputs and Capital goods so transferred shall be duly accounted for by the transferee in his books of account.”

As per sub-rule (1) of rule 41 of the CGST Rules, a Registered person shall file FORM GST ITC-02 electronically on the Common portal with a request for transfer of unutilized input tax credit lying in his Electronic credit ledger to the transferee, in the event of sale, merger, de-merger, amalgamation, lease or transfer or change in the ownership of business for any reason.

In case of transfer of business on account of death of sole proprietor, the transferee / successor shall file FORM GST ITC-02 in respect of the registration which is required to be cancelled on account of death of the sole proprietor. FORM GST ITC-02 is required to be filed by the transferee/successor before filing the application for cancellation of such registration.

Upon acceptance by the transferee / successor, the un-utilized Input tax credit specified in FORM GST ITC-02 shall be credited to his Electronic credit ledger.

Liability of the Successor-

As per sub-section (1) of section 85 of the CGST Act, the transferor and the transferee / successor shall jointly and severally be liable to pay any tax, interest or any penalty due from the transferor in cases of transfer of business “in whole or in part, by sale, gift, lease, leave and license, hire or in any other manner whatsoever”

Section 85(1)-

“(1) Where a Taxable person, liable to pay tax under this Act, transfers his business in whole or in part, by sale, gift, lease, leave and license, hire or in any other manner whatsoever, the Taxable person and the person to whom the business is so transferred shall, jointly and severally, be liable wholly or to the extent of such transfer, to pay the tax, interest or any penalty due from the Taxable person upto the time of such transfer, whether such tax, interest or penalty has been determined before such transfer, but has remained unpaid or is determined thereafter.”

Since the transferor is no more the entire liability shall be borne by the successor. This is endent from Section 93(1) which is reproduced as under-

“(1) Where a Taxable person, liable to pay tax under this Act, transfers his business in whole or in part, by sale, gift, lease, leave and license, hire or in any other manner whatsoever, the Taxable person and the person to whom the business is so transferred shall, jointly and severally, be liable wholly or to the extent of such transfer, to pay the tax, interest or any penalty due from the Taxable person upto the time of such transfer, whether such tax, interest or penalty has been determined before such transfer, but has remained unpaid or is determined thereafter.”

GST Applicability when the business/Assets is taken over by the Successor-

Serial No. 2 of the Notification No. 12/2017 Central Tax (Rate), dt. 28.06.2017 exempts the undermentioned from levy of GST-

“Services by way of transfer of a going concern, as a whole or an independent part thereof.”

Since vide Circular No. 96/15/2019-GST dt. 28.03.2019 it has already been clarified that transfer or change in the ownership of business will include transfer or change in the ownership of business due to death of the sole proprietor, the aforementioned entry would operate to exempt the take over of assets of the business of the deceased proprietor by the successor.

Conclusion

In conclusion, the GST law provides a detailed procedure for the transfer of business to the successor on the death of the proprietor. It is important for the successors to understand these procedures to ensure compliance with the GST law.