Mergers & Acquisitions under GST: What are the Implications?
Mergers or Acquisitions are modes of transfer of a business. It is prudent to understand the taxability, ITC, Registration, share-holding, or other legal provisions that can ensure a smooth transfer of a business entity. Mergers & Acquisitions have several implications under GST. In pursuance of Amalgamation, Arrangement, Mergers, De-mergers, Share Acquisition, Sale of Assets, and Transfer of Undertaking, several GST provisions are required to understand their impact on the transfer of business. Let us understand the modes of business transfer first before understanding the legal provisions under GST.
MergerÂ
In a merger, the acquiring company retains all its rights whereas the acquired company is dissolved and ceases to exist. It is done to expand the company’s reach and provide stability.
De-Merger
A business entity is transferred to a transferee entity whereas the transferor entity remains in existence post-demerger, unlike a merger where the transferee entity loses its identity.
Amalgamation
Two or more companies come together to consolidate a single entity while all the combining companies lose their separate existence.
Sale of Assets
Itemized sale of assets not amount to a business/undertaking is a sale of asset. Assets are sold or transferred rather than shares or stocks. These assets can be tangible like machinery, or inventory, and intangible like intellectual property.
Transfer of Undertaking
Transfer of assets with liabilities constituting a business activity capable of being run independently.
Share Acquisition
The acquirer purchases the equity shares of the target company and it is a transaction in security. The acquirer gains control if buys more than 50% of the equity share of a target company.
Input Tax Credit in Case of Mergers & Acquisitions
A taxable person can avail of the input tax credit as per the provisions enshrined under section 18 of the CGST Act. Section 18 (3) of the CGST Act and rule 41 stipulate that in case of a change of constitution, the registered taxable person is allowed to transfer the unutilized input tax credit to the transferee on account of sale, merger, amalgamation, acquisition, lease or transfer of the business. All the details on the sale, merger, amalgamation, acquisition or lease, or transfer of the business have to be furnished in the form GST ITC-02 electronically on the common portal. The form requests the authorities to transfer the unutilized ITC available in the electronic cash ledger of the transferor to the transferee.
 ITC in Case of De-Merger
If any business is de-merged, as per the provisions mentioned in rule 41, ITC is to be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme. Also, the registered person who is also the transferor has to submit a copy of a certificate issued by a chartered accountant or cost accountant certifying the transfer of business.
Business Registration Requirements After Mergers/Acquisition
As per the provisions mentioned in section 22(3) of the CGST Act, in case of transfer of business through mergers, acquisitions, sales, leases, or de-mergers, the business is to be registered immediately on the date which the registrar of companies issues a certificate of incorporation giving effect to such order of the high court or tribunal. The transferee of the business has to obtain a separate registration soon after the succession.
Sale of Securities, A Mode of Business Transfer
When a business is transferred as a mode of sale of securities, no GST is applicable on such transactions. Therefore, no GST would be charged on the sale of securities if a business is acquired by a transferee company from the shareholders of the transferor at a price stated for sale.
Slump Sale
Slump sale refers to the transfer of business when a business is transferred not based on the exact calculation but rather on a lump sum amount. The transfer of business amounts to the transfer of a part of the assets and not the whole business.
In slump sales, tax applies to the registered person on the supply of goods or services or both if it is transferred as a going concern. However, if the business is not transferred as a going concern, it is not considered a supply, and no tax is applicable.
In the case of itemized sales of assets or liabilities, GST is applicable. Itemized sale refers to a transfer of business when not the whole business is transferred but assets or liabilities in units. The value of each asset is calculated separately and merger, amalgamation, and acquisition takes place accordingly.
Get Started with TaxDunia
If you are looking forward to expanding your business, reach out to TaxDunia. We offer personalized solutions for mergers, acquisitions, amalgamations, lease or sale. In case you want to pursue your plans by going solo, we curate plans for de-mergers as well. Our team will design a specialized roadmap for the consistent growth of your business. Let us connect today.
