CBIC Clarifies on Utilisation of ITC in Case of Mergers & Acquisitions

Entities undergoing company reorganisation by merger, demerger, amalgamation, ownership change and asset transfer have now been clarified the use of input tax credit under GST.

The input tax credit is the tax paid on inputs and input services. Businesses get credit for this to deduct from the output tax to prevent double taxation and thereby pay tax only on the value-added. The input tax credit allocation must be based on state-wise properties in demerger schemes, the government has explained.

Section 18 of the Central Goods and Services Tax Act provides for the transfer or allocation of accrued and unused input tax credit to entities undergoing business reorganisations. Although the Act sets out the process, it is silent about certain practical aspects of such transfer. The circular is intended to guide on these issues.

The CGST Rules state that tax credit can be transferred or assigned to a demerged entity based on the value ratio of the assets transferred. Moreover, the rules do not specify whether state-wise or country-wide consideration of the value of the assets is necessary. It has now been explained that, based on the state-wise valuation of the properties, the tax credit must be assigned to the demerged entity. That’s because GST allows business entities to be registered in a state-wise manner.

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The clarification rightly recognises the distinct individual definition under GST and clarifies prevailing doubts, particularly for those enterprises that have pan-India operations. A comprehensive, state-wise calculation would require careful preparation.

Some functional aspects still need clarity; for example, the transferor company’s ability to claim input credit on services used to restructure the business. During business reorganisations, a registered company can use legal, consulting and accounting services to transfer assets. The GST department may not view them as business expenses because it does not find them to be “goods” sales. The department may disallow any input tax credit used for these expenses.

Besides demergers, the clarification will apply to other forms of business restructurings. Electronic filing for transfer of such input tax credit must be done only in states where the transferor and transferee companies are registered, the notification has clarified.

For any clarifications/feedback on the topic, please contact the writer at dvsr.anjaneyulu@cleartax.in