GST: Government Clarifies On Utilisation Of Tax Credit For M&A

Entities undergoing business reorganisation via merger, demerger, amalgamation, change in ownership and transfer of assets have now been given clarity on utilisation of input tax credit.

Input tax credit is the tax paid on inputs. Businesses get a credit for this to deduct from the tax on the output so as to avoid double taxation and pay tax only on the value added.

Apportionment of input tax credit must be on the basis of state-wise assets in demerger schemes, the government has clarified.

Section 18 of the Central Goods and Services Tax Act allows transfer or apportionment of accumulated and unutilised input tax credit between entities undergoing business reorganizations. While the Act lays down the method, it is silent on certain practical aspects of such transfer. The circular aims to clarify on such issues.

Demergers: Apportionment of Tax Credit

The CGST Rules say tax credit can be transferred or apportioned to a demerged entity based on the ratio of value of transferred assets. However, the rules do not specify whether the value of the assets must be considered on a state-wise or countrywide basis.

It’s now been clarified that tax credit must be apportioned to the demerged entity on the basis of state-wise value of assets. That’s because GST requires state-wise registration of business entities.

Experts welcomed the clarification. The circular merely clarifies the position which the industry has been following at a practical level, Rajat Bose, partner in Shardul Amarchand Mangaldas & Co., said.

The clarification rightly recognises the distinct person concept under GST and clarifies prevailing doubts, especially for those businesses who have pan-India operations, Deloitte’s senior director Saloni Roy said. “An in-depth state-wise calculation will require extensive planning.”

The circular, however, misses out on certain critical aspects, Bose pointed out.

Some practical aspects still need clarity—for instance, eligibility to claim input credit by the transferor company on services used for business re-organization. A registered business may utilise legal, consulting and accounting services for transfer of business during business reorganizations. The GST department may not treat them as business expenses as it may not consider them to be as sale of “goods”. Any input tax credit availed for such expenses may be disallowed by the department, Bose pointed out.

Similarly, another area that needs clarity is treatment of common input services like lease or rental expenses. Bose explained this by way of an illustration.

Company ‘X’ with a turnover of Rs 1,000 crore hives off one of its units to Y for Rs 200 crore. This Rs 200 crore will be considered an exempt supply and no GST on it will be applicable. Any expense—rentals, electricity—that X may have incurred towards this unit, it would’ve availed tax credit for it. Once the unit is sold, the department could take a position that since Rs 200 crore is an exempt supply, tax credit availed for this unit needs to be reversed as well.

The treatment of such input tax credit in hands of X requires clarification, Bose explained.

Besides demergers, the clarification will be applicable to other forms of business restructurings, Roy pointed out.

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.