Transfer of ITC in case of Death of Sole Proprietor

Provisions for Transfer of Input tax credit to new business in case of transfer of business has been given under Section 18, Section 29 and Rule 41(1) of CGST Act 2017.

Provision under these sections and rules provide transfer of ITC on account of sale, merger, demerger, amalgamation, lease or transfer of the business. However these provision does not clearly specify transfer of ITC in case of death of sole proprietor.

Several doubt has been raised in case of transfer of ownership on account of death of sole proprietor and consequently transfer of ITC to new business.

To clarify this issue and bring uniformity in implementation of GST Law provisions, Central Board of Indirect Taxes and Customs (“CBIC” or “Department”) has issued circular No. 96/15/2019-GST dated 28th March, 2019.

To answer how to transfer ITC in case of death of sole proprietor where business is continued by any person, provision contain in following section has been taken in consideration.

  • Section 18: Availability of Credit in Special Circumstances
  • Section 29: Cancellation of Registration
  • Rule 41(1): Transfer of credit on sale, merger, amalgamation, lease or transfer of a business

Section 18: Availability of Credit in Special Circumstances

(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.

Accordingly, Section 18(3) (deals with availability of credit in special circumstances) of Central Goods and Service Tax Act, 2017 (“CGST Act”) provides that where there is a change in constitution of business due to sale, merger, demerger, amalgamation, lease or transfer of business then transferor is allowed to transfer ITC remaining unutilised in electronic credit ledger to transferee.

1. Is it allowed to transfer ITC in case of Death of Sole Proprietor?

Section 29(1)(a) of CGST Act reiterated above expressly specifies that reason for transfer of business includes “Death of sole proprietor”. Accordingly, for uniformity purpose, department has clarified that for the purpose of section 18(3) of CGST Act also, transfer of business shall include death of sole proprietor.

Section 29: Cancellation of Registration

(1) The proper officer may, either on his own motion or on an application filed by the registered person or by his legal heirs, in case of death of such person, cancel the registration, in such manner and within such period as may be prescribed, having regard to the circumstances where,––

(a) the business has been discontinued, transferred fully for any reason including death of the proprietor, amalgamated with other legal entity, demerged or otherwise disposed of; or

(b) there is any change in the constitution of the business; or

(c) the taxable person, other than the person registered under sub-section (3) of section 25, is no longer liable to be registered under section 22 or section 24.

Therefore, in case of death of sole proprietor, if business of deceased person is carried on by any successor or transferee then it is allowed to transfer unutilised ITC of deceased person to transferee/successor.

2. Procedure of Transfer of ITC (in general)

Rule 41(1): 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:

Provided that in the case of demerger, the input tax credit shall be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme.

[Explanation:- For the purpose of this sub-rule, it is hereby clarified that the “value of assets” means the value of the entire assets of the business, whether or not input tax credit has been availed thereon.] 34

Accordingly, as per Rule 41(1) of Central Goods and Service Tax Rules, 2017 (“CGST Rules”) transferor is required to file Form GST ITC-02 electronically on common portal to transfer unutilised ITC lying in his electronic credit ledger to transferee.

Similar to general procedure, in case of death of sole proprietor, transferee/successor shall file form GST ITC-02 for transfer of ITC of deceased person. However, application for transfer of ITC in form GST ITC-02 should be filed before filing application for cancellation of deceased person’s GST registration.

Unutilised ITC, for which form GST ITC-02 has been filed, shall start reflecting in electronic credit of ledger of transferee or successor upon acceptance.

3. Condition for Transfer of ITC

As clarified above, it is allowed to transfer ITC in case of “Death of Sole Proprietor” if business of deceased is taken-over by any person. However, transfer of ITC is allowed subject to following conditions:

  • As per Rule 41 of CGST Rules, in case of transfer of business it is allowed to transfer ITC subject to transfer of liabilities also.
  • Transferor and transferee are jointly and severally liable to pay any tax, interest or penalty which is due from transferor. Accordingly, in case of death of sole proprietor, transferee/successor of deceased are liable to pay any GST, interest or penalty which is due from deceased person.

4. Cancellation of GST registration of deceased person

As per section 29(1)(a) of CGST Act, legal heir will file application for cancellation of GST registration for deceased person.

Application will be filed electronically through form GST REG-16 on common portal mentioning therein reason for cancellation of registration as “Death of Sole Proprietor”. Further, in case of continuation of business, GSTIN of transferee or successor should be mentioned to link GSTIN of transferor with transferee.

5.Liability of GST Registration of transferee

As per section 22(3) of CGST Act, in case of transfer of business whether due to succession or otherwise, transferee is also required to obtain registration under GST with effect from date of transfer. Accordingly, in case of death of sole proprietor also, successor or transferor is required to be registered under GST.

Section 22: Person Liable for Registration

(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.

While filing application for GST registration, transferee will mention “Death of Sole Proprietor” as reason of obtaining registration.

Availability of ITC based on reconciliation GSTR 2A and GSTR 3B is unfounded

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DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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