GST on Mergers, Demergers and Business Transfers: What Changes Hands and What Does Not

When a business changes hands, whether by a Tribunal-approved amalgamation, a demerger of one division, a slump sale under a business transfer agreement or a plain sale of assets, GST asks a different question from income tax. Income tax asks who bears the gain; GST asks whether a supply has taken place, what happens to the credit in the transferor's electronic credit ledger, who is registered and from when, and who answers for the old liabilities. This article works through those questions for each structure, notes where the law is contested, and ends with a comparison table and a due-diligence checklist.

Transfer of a going concern: an exempt supply

Section 7 of the CGST Act defines "supply" widely, and Schedule II, paragraph 4 treats the transfer of business assets, and the assets of a person who ceases to be taxable, as supplies unless the business is transferred as a going concern. On the face of the Act, then, the transfer of a business is within the tax. The relief comes from Notification No. 12/2017-Central Tax (Rate) dated 28 June 2017, whose entry 2 exempts "services by way of transfer of a going concern, as a whole or an independent part thereof". The entry treats the transfer as a single service, so that stock, plant, receivables, contracts and goodwill are not taxed at their own rates, and it extends to a division that can operate on its own.

"Going concern" is not defined. The authorities have borrowed the sense it carried under the service tax exemption of 2012: a running business, transferred with the assets and liabilities that make it work, which the transferee can carry on without interruption. In re Rajashri Foods Pvt. Ltd. (Karnataka AAR, 2018) treated the transfer of one manufacturing unit with its assets and liabilities as exempt; the exemption has been refused where only assets passed, without liabilities, employees or contracts, and the department contests it where the agreement reads like an asset sale with a going-concern label.

The contrast is an itemised sale, where each asset is a separate supply: goods at their own rates, with Section 18(6) requiring the transferor to pay on used plant the higher of the credit taken, reduced by five percentage points per quarter, and the tax on the transaction value; goodwill, brands and other intellectual property as services at 18 per cent; land and buildings outside GST under Schedule III. The buyer takes credit on what it is charged, but the cash cost of GST on stock and plant is why most buyers ask for a going-concern structure.

Slump sale under Section 50B, and where GST parts company with income tax

Section 2(42C) of the Income-tax Act, 1961 defines a slump sale as the transfer of an undertaking for a lump sum consideration without values being assigned to individual assets and liabilities, and Section 50B taxes the gain on the difference between the consideration, deemed since 2021 to be no less than fair market value, and the net worth of the undertaking; the Income-tax Act, 2025, in force from 1 April 2026, carries the provision forward with renumbered sections. A demerger is tax-neutral only if it meets Section 2(19AA), which requires all the property and liabilities of the undertaking to pass at book value.

GST uses none of these concepts, and the tests can diverge. An undertaking sold for a lump sum to a buyer who intends to strip the assets is a slump sale but may not be a going-concern transfer. A transfer with itemised values is not a slump sale but can still be exempt if the business passes as a working whole. A demerger that fails Section 2(19AA) because some liabilities stay behind loses income tax neutrality but not, on that account, the GST exemption. The agreement should be drafted to satisfy both tests, with recitals, schedules and a continuation clause that say what is intended.

One point is contested. Because entry 2 makes the transfer an exempt supply, the department has in some assessments sought a proportionate reversal of the transferor's common input tax credit under Section 17(2) and Rules 42 and 43 for the period of the transfer. The Rules exclude certain Schedule III items from "exempt supply" for this purpose but not a going-concern transfer, and the point is being litigated; a transferor should take a considered view before filing the return for that period.

Moving the input tax credit: Section 18(3), Rule 41 and Form GST ITC-02

Credit in the transferor's electronic credit ledger does not pass under the scheme or agreement by itself. Section 18(3) permits a registered person, on a sale, merger, demerger, amalgamation, lease or transfer of the business "with the specific provisions for transfer of liabilities", to transfer the unutilised credit to the resulting business. Under Rule 41 the transferor files Form GST ITC-02 on the common portal with a certificate from a practising chartered accountant or cost accountant that liabilities have been transferred; in a demerger the credit is apportioned in the ratio of the value of assets of the new units as specified in the scheme, "value of assets" meaning the entire assets of the business whether or not credit was availed on them; and the transferee accepts the details on the portal, on which the credit is posted to its ledger.

Circular No. 133/03/2020-GST dated 23 March 2020 clarified that the ratio applies to the total credit rather than head by head, that it is computed State by State because ITC-02 moves credit between registrations in the same State, and that the value of assets is taken as on the appointed date. The transferee must be registered in that State before ITC-02 can be filed, and a cancelled transferor cannot file at all: ITC-02 first, cancellation after. A slump sale that transfers only selected liabilities has been questioned under Section 18(3), so the agreement should provide expressly for the liabilities of the business to pass. Credit that is blocked, lapsed or under dispute does not become good by being transferred.

Registration, cancellation and the appointed date: Section 85 and Section 87

Under Section 22(3), where a business is transferred as a going concern, the transferee is liable to be registered from the date of transfer; under Section 22(4), where the transfer is under a scheme of amalgamation or demerger sanctioned by the Tribunal, from the date on which the Registrar of Companies issues the certificate giving effect to the order. A transferee already registered in Maharashtra amends its registration in Form GST REG-14 to add the transferor's places of business; the transferor applies for cancellation in Form GST REG-16 within thirty days under Section 29(1) and files its final return in GSTR-10 under Section 45.

Section 85 applies to any transfer of a business, in whole or in part, by sale, gift, lease, licence or in any other manner: the transferor and the transferee are jointly and severally liable, wholly or to the extent of the transfer, for tax, interest and penalty due from the transferor up to the time of transfer, whether determined before or after it. The agreement cannot alter that as against the department; it can only allocate the cost between the parties by indemnity, escrow or holdback.

Section 87 deals with amalgamations and mergers under an order that takes effect from a date earlier than the order, which is to say every scheme with an appointed date. Section 232(6) of the Companies Act, 2013 allows the scheme to fix that date, and for income tax the amalgamation takes effect from it (Marshall Sons & Co. (India) Ltd. v. ITO, Hon'ble Supreme Court, 1996). GST declines to follow. Section 87(1) provides that supplies between the amalgamating companies from the appointed date to the date of the order are included in the turnover of each and taxed accordingly; Section 87(2) treats the companies as distinct until the date of the order and cancels their registrations from that date. Interim supplies therefore remain taxable and creditable, each company files its own returns for the period, and the gap between the order and the Registrar's certificate should be planned for rather than papered over by backdating.

Section 87 speaks only of companies "amalgamated or merged". Whether it applies to a demerger is contested: the department applies its logic by analogy, but there is no express deeming, and the alternative view is that the demerged company, which continues to exist, is simply a transferor under Section 85 from the effective date. A demerger scheme should say how the interim period will be treated.

The scheme says the business belonged to the transferee from 1 April. The tax says the two companies were strangers until the order. Both are right, and the returns have to reflect the second.

E-invoicing, e-way bills and the documents in between

E-invoicing under Rule 48(4) applies to a registered person whose aggregate turnover in any year from 2017-18 exceeded Rs 5 crore, and the Invoice Registration Portal registers invoices against a GSTIN, so the transferee's invoicing must be live under its own registration from the day it takes over supplies. Whether the transferor's past turnover counts towards the transferee's threshold after an amalgamation is not settled; a transferee near the threshold should treat itself as covered, since a missing invoice reference number invalidates the invoice for the recipient's credit. Credit notes under Section 34 can be issued only by the supplier who issued the invoice, and a cancelled registration cannot issue them, so where the structure permits the transferor's registration is kept alive briefly for the credit notes that can be foreseen.

E-way bills are required for the movement of goods worth more than Rs 50,000 under Rule 138, whether or not the movement is a supply, with a higher intra-State threshold of Rs 1 lakh in Maharashtra for most goods. Where stock stays where it is, there is no movement and no e-way bill; the transferee simply adds the premises to its registration. Where stock or plant is physically moved, an e-way bill is required, supported by a delivery challan under Rule 55 rather than a tax invoice.

Customs: authorisations, bonded goods and the IEC

Customs obligations do not pass automatically. Under the Export Promotion Capital Goods scheme in Chapter 5 of the Foreign Trade Policy 2023, capital goods imported at nil duty carry an export obligation, ordinarily six times the duty saved, to be met within six years; under the advance authorisation scheme in Chapter 4, duty-free inputs carry an actual-user condition. Both are issued against the holder's Importer-Exporter Code and survive a transfer only if the Regional Authority of the Directorate General of Foreign Trade amends them, which the Handbook of Procedures allows on a merger, demerger or transfer of the unit once the transferee undertakes the unfulfilled obligation and furnishes any fresh bond and bank guarantee. A transfer without permission can be treated as a breach that triggers the duty saved with interest, and on an amalgamation the transferor's PAN-based IEC is surrendered, so every authorisation and bond must be moved to the transferee's IEC before the effective date.

Goods in a bonded warehouse under Section 58 of the Customs Act, 1962, or in a unit licensed under the Manufacture and Other Operations in Warehouse Regulations, 2019, are held under the importer's bond. Section 59 allows them to be transferred to another person with the proper officer's permission, on the transferee executing a fresh bond and furnishing security, and a warehouse licence is specific to the licensee and premises, so the transferee needs its own licence or an amendment. Each approval takes weeks, and a timetable that closes first leaves the transferee holding goods it has no right to use.

Related parties: valuation, and what is left of anti-profiteering

A restructuring usually leaves the business inside a group, and many of its supplies are then between related persons. Section 15 accepts the transaction value only where the parties are not related and price is the sole consideration; holding and subsidiary companies and companies under common control are related, and Rule 28 then applies the open market value or, failing that, the cost-based or residual methods. The second proviso to Rule 28(1) is the practical safe harbour: where the recipient is eligible for full input tax credit, the invoice value is deemed to be the open market value. Rule 28(2) values a corporate guarantee given by a related person at one per cent of the guaranteed amount per year or the actual consideration, whichever is higher, subject to the same proviso. Schedule I, paragraph 2 treats supplies between related persons without consideration as supplies, so shared services and use of the group's brand after the restructuring need to be identified and invoiced.

Anti-profiteering under Section 171, the requirement to pass on the benefit of a rate reduction or of input tax credit by a commensurate reduction in price, has largely run its course: no new applications have been accepted since 1 April 2025, and pending matters sit with the Principal Bench of the GST Appellate Tribunal. Its relevance to a merger is as a legacy liability that passes to the transferee under Section 85 or Section 87, and the due diligence should ask for it.

Four structures compared

The table sets out the ordinary position; the contested points noted above apply to each column.

Due-diligence checklist

Before signing, the buyer or the resulting company should have seen:

• The status of every GSTIN of the target, State by State, with returns filed and GSTR-2B reconciled to the credit claimed.
• The balance in each electronic credit ledger, with a note of credit under dispute, blocked under Rule 86A or claimed beyond the time limit in Section 16(4).
• Notices and orders under Section 73, Section 74 and Section 74A, audits under Section 65, and appeals, with the pre-deposits made.
• Related-party transactions and the basis of their valuation; corporate guarantees given and received; pending refund claims and export incentives.
• Customs: EPCG and advance authorisations with outstanding export obligation, bonds and bank guarantees, warehouse licences, bonded stock and SEZ approvals.
• E-invoicing applicability, the credit-note position on pre-transfer supplies, and any legacy anti-profiteering proceeding.
• The transfer document itself: going-concern recitals, the transfer of liabilities in terms, the apportionment ratio in a demerger, the interim-period mechanics, and the tax indemnity, escrow and holdback.

The firm's GST and customs practice advises on the structuring and documentation of these transfers and acts in the assessments and appeals that follow. You can contact us to discuss a particular transaction.

Key takeaways

• The transfer of a business, or an independent part of it, as a going concern is exempt under entry 2 of Notification No. 12/2017-Central Tax (Rate); an itemised sale is taxed asset by asset, with Section 18(6) on used plant.
• A slump sale under Section 50B and a going-concern transfer usually coincide but are tested differently; draft the agreement to satisfy both, and take a view on the contested common-credit reversal.
• Credit moves only through Form GST ITC-02 under Section 18(3) and Rule 41, within the same State, on a demerger in the ratio of the value of assets under the scheme, and only while the transferor's registration is live.
• GST ignores the appointed date: under Section 87 the amalgamating companies are distinct persons until the Tribunal's order, and their supplies in between are taxed; the transferee is registered from the Registrar's certificate under Section 22(4).
• Section 85 makes the transferee jointly and severally liable for the transferor's pre-transfer dues, so the indemnity, escrow and holdback matter; customs authorisations, bonded goods and the IEC need their own approvals before closing.

Frequently asked questions

Is GST payable when a company is amalgamated under a scheme approved by the Hon'ble NCLT?

Not on the transfer itself. The transfer of the amalgamating company's business is a transfer of a going concern, exempt under entry 2 of Notification No. 12/2017-Central Tax (Rate), and on one view is not a supply at all because it takes place by operation of the Tribunal's order. What remains taxable is the interim period: under Section 87 the companies are treated as distinct until the date of the order, so supplies between them from the appointed date to the order date are taxed and returned as usual. The transferee is liable to be registered from the date of the Registrar's certificate under Section 22(4), and the transferor's unutilised credit moves only through Form GST ITC-02.

Can the buyer in a slump sale take over the seller's unutilised input tax credit?

Yes, if the business transfer agreement contains specific provisions for the transfer of liabilities, which Section 18(3) requires. The seller files Form GST ITC-02 on the portal, uploads a certificate from a practising chartered accountant or cost accountant confirming that liabilities have been transferred, and the buyer accepts the transfer, on which the credit is posted to its electronic credit ledger. The buyer must hold a registration in the same State, and the seller must file before its own registration is cancelled; a cancelled GSTIN cannot file ITC-02.

Our scheme has an appointed date of 1 April. Do we stop charging GST on supplies between the two companies from that date?

No. Income tax gives effect to the appointed date, but Section 87 of the CGST Act does not: the companies are treated as distinct persons until the date of the Tribunal's order, supplies between them in that period are included in each company's turnover and taxed, and each files its own returns. Invoices continue to be raised and credit continues to be taken until the order date, and the transferor's registration is cancelled with effect from that date under Section 87(2). Backdating invoices or netting off the interim supplies after sanction is not an option.

Does the going-concern exemption apply if we leave some liabilities behind?

It is contested. The exemption asks whether a running business, capable of being carried on by the transferee, has been transferred; retaining a disputed liability or a loan that the buyer will not assume does not by itself defeat that, but a transfer of assets with none of the liabilities, employees or contracts has been refused the exemption by the advance ruling authorities. Separately, Section 18(3) allows the credit to move only where there are specific provisions for the transfer of liabilities. The agreement should say in terms which liabilities pass and confirm that the business is transferred as a going concern, and an advance ruling under Section 97 is worth considering where the amounts are large.

Who pays if the department raises a demand for a period before the transfer?

Both, as far as the department is concerned. Section 85 makes the transferor and the transferee jointly and severally liable, wholly or to the extent of the transfer, for tax, interest and penalty due from the transferor up to the time of transfer, whether determined before or after it; in an amalgamation the transferee succeeds to the transferor's liabilities in any event. The agreement cannot alter that as against the department, but it can allocate the cost between the parties, and a buyer should take a tax indemnity backed by an escrow or holdback sized to the open periods and any pending notices.

This article is general information on Indian law, not legal advice. How the law applies depends on your facts; please consult an advocate before acting on it.

DAA LegalAdvocates, Mumbai