GST Implication on death of Sole Proprietor

In certain cases, death of a key member of the business leads to automatic closure of business such as death of sole proprietor, death of one of two partners, death of a partner when partnership deed provides for dissolution on death etc. On the contrary, in certain cases death does not affect the continuity of business such as Death of a partner when partnership deed provides for continuation of business, Death of director/shareholder of Company, LLP etc.

Where the legal entity of the business remains the same, remaining persons may continue the business after making certain compliance such as updating information about partners/directors on GST portal, formation of revised partnership deed etc. 

However, in case of dissolution of business, legal identity of the business comes to an end and business is either taken over by the legal heir of the deceased proprietor or remaining partners or it comes to an end. 

In this article, an attempt has been made to discuss GST on dissolution of business due to death of sole proprietor.

In case of the death of the Sole proprietor, the business is taken over by his legal heir of the deceased proprietor and they may decide to either continue the business in their name or close the business. 

However, with death of sole proprietor, GST compliances do not come to an end, rather, provisions specified by GST law is required to be complied by the legal heir/successor of the deceased proprietor.

Therefore, In case of death of sole proprietor, GST implication shall vary in following cases:

  1. Business is taken over and continued by Legal Heir; or
  2. Business is not continued by Legal Heir

1. Business is taken over and continued by Legal Heir

In case where business is taken over and continued by legal heir, various provisions are given under Central Goods and Service Tax Act, 2017 (“CGST Act”) and different issues are also clarified by CBIC vide Circular No. 96/15/2019-GST dated 28th March, 2019.

1.1 GST Registration by Successor/Legal Heir

As per Section 22(3) of CGST Act, 2017, where a business is transferred due to succession to any other person on going concern basis then the successor is liable to obtain GST registration from the date of succession.

Therefore, the legal heir of the deceased person is required to obtain separate GST registration with his PAN number and from such date onwards he shall be liable for all GST Compliances.

At the time of filing application for GST registration in Form GST REG-01, “Death of the Proprietor” should be selected as reason for obtaining GST registration.

In cases where the legal successor is already registered under GST then he may continue with his existing GST registration.

1.2 Adding Legal heir/Successor as Authorised Signatory

After death of the proprietor, all returns and documents on GST portal shall be filed by the legal heir on behalf of the proprietor.

For this purpose, legal heirs shall be first required to file a copy of the death certificate of the proprietor and succession certificate to the jurisdictional officer as documentary evidence.

Upon verification of all documents, the proper officer shall add such legal heir/successor as “Authorised Signatory” on GSTIN of deceased proprietor.

A temporary username and password shall be created by the proper officer for successor and he can login to the GSTIN of the deceased proprietor by using such login credentials.

Thereafter, all remaining returns and forms shall be filed and Cancellation proceedings of GSTIN shall be carried out by successor by using such login credential only.

1.3 Transfer of Input Tax Credit to Successor/Legal Heir

As per Section 18(3) of CGST Act, 2017, in case of transfer of business where liabilities of the business is also transferred, transferor is allowed to transfer the unutilised balance lying in electronic credit ledger to the transferee.

In case of death of the proprietor, both assets and liabilities are transferred to the successor. Therefore, balance lying in the electronic credit ledger of the proprietor can be transferred to the successor/legal heir.

Following is the procedure to be followed for transfer of ITC as per Rule 41 of CGST Rules, 2017:

  • ITC balance can be transferred through filing of Form GST ITC-02.
  • Form GST ITC-02 should be filed post login at the GST portal with GSTIN of deceased proprietor by using new login credentials provided to the successor.
  • While filing form GST ITC-02, a copy of Certificate issued by practising Chartered Accountant or Cost Accountant, certifying that transfer of business has been done in accordance with provisions of GST Law transferor, is also required to upload.
  • Upon filing of GST ITC-02 by transferor, the legal heir/successor shall accept such ITC transferred by login his GSTIN at GST portal and upon acceptance of transferred ITC, such ITC shall get credited to Electronic credit ledger of the legal heir.

1.4 Transfer of GST Liability to Successor/Legal Heir

As per Section 93 of CGST Act, 2017, if business of a deceased person is continued by his legal representative or any other person then such legal representative shall be liable to pay tax, interest or penalty due from such deceased person.

In case of death, legal heirs shall be liable for filing of pending returns of the deceased person and upon filing of pending returns and completing other compliance such as filing of GST ITC-02, they may proceed to apply for cancellation of GST registration of deceased person.

Any sales made by the deceased person till the date of his death should be disclosed while filing GSTR-1 and GSTR-3B by the legal heir of the deceased proprietor on his behalf.k

However, any tax, interest or penalty due from such deceased person shall be paid by his legal heir only.

1.5 Cancellation of GST registration of successor

As per Section 29(1) of CGST Act, 2017, in case of death of any person, GST registration of deceased person shall be cancelled on an application made by legal heir. Application for cancellation of GSTIN shall be filed in Form GST REG-16 by stating the reason “”Death of the Proprietor”.

2. Business is taken over but not continued by Legal Heir

There can be cases where business is taken over by the legal heir for completing closure proceeds but legal heirs don’t continue the business of the deceased proprietor. 

Following are the provisions need to be complied in such case:

2.1 Appointment of Authorised Representative

Legal Heir shall appoint himself as authorised representative for the deceased proprietor by making an application to the jurisdictional officer for the purpose of filing of remaining returns and completing GST cancellation proceedings.

2.2 Transfer of GST Liability

As per Section 29(5) of CGST Act, 2017, every registered person whose registration is cancelled shall pay higher of the following amounts:

  • Amount equivalent to ITC availed in respect of input held in stock and input contained in semi-finished goods or finished goods or capital goods or plant and machinery or
  • Output tax payable on such stock or capital goods

Such tax shall be paid for stock or capital assets held on date immediately preceding the date of cancellation of GST registration.

Such tax payment can be made using balance lying in Electronic Credit Ledger or cash ledger.

Therefore, stock held on date of cancellation of GST registration of deceased proprietor, ITC availed with respect to such stock or output tax payable on such stock should be paid.

As per Section 93(1)(b) of CGST Act, 2017, where business of a deceased person is discontinued then his legal representative shall be liable for payment of taxes, interest or penalty due from the deceased person. Such liability may be determined before his death or after his death.

Legal heirs shall make the payment of liability out of the estate of the deceased to the extent such estate is capable of meeting the liability.

Therefore, the legal heir of the deceased proprietor shall be liable for payment of GST on stock or capital goods held on the date of cancellation of GST registration.

2.3 Transfer of Input Tax Credit

As per Section 18(3) of CGST Act, 2017, in case of transfer of business with transfer of liabilities, transferor can transfer balance lying in Electronic Credit Ledger to the transferee.

In the given case, as no business is transferred to the legal heir/successor, therefore, balance lying in Electronic Credit Ledger can’t be transferred the legal heir.

2.4 New GST registration by Legal Heir/Successor not required

As per Section 22(3) of CGST Act, 2017, where a business is transferred due to succession to any other person on going concern basis then the successor is liable to obtain GST registration from the date of succession.

However, where business is not continued by the legal heir, therefore, the legal heir of the deceased person is not required to obtain separate GST registration.

2.5 Cancellation of GST registration of successor

As per Section 29(1) of CGST Act, 2017, in case of death of any person, GST registration of deceased person shall be cancelled on an application made by legal heir. Application for cancellation of GSTIN shall be filed in Form GST REG-16 by stating the reason “”Death of the Proprietor”.

3. Frequently Asked Questions

3.1 In case of death of proprietor, can his legal heir/successor continue the business using his GSTIN?

Ans: GSTIN is a 15 digit number which is based on PAN of the assessee. As PAN of the successor is different from that of the deceased person, therefore, successor is required to apply for fresh GST registration or he can merge the business with his existing GST number, if he is already registered.

3.2 In case of change of partners or directors or shareholders, whether new GSTIN is required?

Ans: If there is no change in legal status of the person, i.e., PAN number of the person doesn’t change then there is no requirement to apply for a new GSTIN. E.g., in case of admission of partner, retirement of partner, change of directors, change of shareholders etc. there is no requirement to apply for new GSTIN.

4. Conclusion

Mere cancellation of GST registration on death of sole proprietor is not enough. Legal Heirs are required to discharge GST on stock and capital assets held on the date of cancellation of GST registration of deceased proprietors. Alternatively, legal heir may take over the business of the deceased proprietor and transfer GST liability of deceased proprietor and ITC lying in his electronic credit ledger to their own GSTIN.

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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