There may be various reasons for which businesses opt to cancel their GST registration. It may be because of the closure of business, turnover dropping below the threshold limit, or change in the constitution of the business. It can also be initiated by the tax authorities for non-compliance under GST. On the date of cancellation, the taxpayer may have stocks and capital goods. Some of the stocks might have been purchased before and some after the introduction of GST. ITC might not have been utilized, as he might have registered under the composition scheme. So, the question arises about the treatment of tax as per GST laws on such stock at the time of cancellation of GST registration. Let us discuss in detail the process of clearance of stock and assets in GSTR-10 at the time of cancellation of registration under GST.
ITC on Inputs and capital goods in GSTR-10
As per GST laws, every taxpayer whose registration is cancelled should pay back to the government the amount of input tax credit in respect of inputs held in stocks, semi-finished and finished goods, capital goods, plant, and machinery on the day immediately preceding the date of such cancellation or the output tax payable on such goods, whichever is higher, calculated as prescribed.
The ITC on capital goods remaining in stock is to be calculated on a pro-rata basis of its residual life. The residual life is assumed to be five years. The value of the capital goods is to be reduced by 5% per quarter or part thereof from the date of invoice or other document specifying the receipt of such capital goods by the recipient.
Treatment of stock and assets in GSTR-10
For inputs held in stock, semi-finished and finished goods held in stock, capital, and plant and machinery held in stock, the value is calculated as per the prevailing market rate. The amount of input tax credit must be reported on Form GSTR-10 while filing the final return. This amount must be reversed or paid back to the government on account of the cancellation of registration before filing GSTR-10.
The pre-GST goods are not considered inputs or capital goods in GST, so no amount needs to be paid on them at the time of cancellation. While the goods acquired during the GST period are considered inputs and capital goods, the amount payable for both must be ascertained and paid. The implications of GST on such inputs are as follows:
The amount payable on the stocks at the time of cancellation of registration is as follows:
- For inputs, it is limited only to the stocks on which ITC has been availed.
- In the case of capital goods, it is ITC availed less pro-rata for the period of use (assuming useful life as 5 years).
GST applicable for discontinuation of business
There may be a change in the structure of a business due to various reasons, like death of proprietor or partner, intentional closure of firm or company, transfer or amalgamation of the business, etc.
The following are the outcomes of cessation of business in any concern:
- Closure of business operations without the transfer of stocks and assets
- Transfer of business to legal heirs without any consideration
- Sale or transfer of a business for consideration This type of transfer can be of two types.
- Sale of business for lumpsum consideration and
- Itemized sale, that is charging separate consideration for various assets.
Transfer of business to legal heirs without consideration
In such situations, as the stock and assets are sold within the regular course of business, GST at applicable rates must be charged at the time of sale.
When there is transfer of business to the legal heir on the death of the proprietor, the legal heir has the option to either continue the business of the deceased proprietor or transfer the firm’s assets and liabilities. If he opts to continue the business, the legal heir then must obtain a new GSTIN and transfer the ITC available in the electronic ledgers of the deceased proprietor. He is also liable to pay the GST liability of the previous proprietor. So the legal heir is liable to pay the liabilities on the stock of assets and capital goods remaining on the date of cancellation of GST registration for the previous firm.
Sale or transfer of a business for lump sum consideration
- The sale or transfer of the assets and capital goods of the business for consideration is called a slump sale.
- Slump sale is treated as normal supply. The registered taxpayer is liable to pay tax on the supply of goods and services. As per para 4(c) of Schedule II, if a business is transferred as a going concern, then it is not considered a supply.
- In pursuance of notification no. 12/2017 Central Tax dt June 28, 2017, services provided as transfer of an ongoing concern in full or an independent part thereof are exempt from GST. Therefore, no GST is applicable on slump sale transactions for transfer of business of an ongoing concern.
According to notification no. 12/2017-Central Tax, the transfer of business for an ongoing concern is exempt from GST liability without any conditions. As per Section 18(3) of the CGST Act, read with Rule 41 of CGST Rules, the balance in the electronic credit ledger of the transferor shall be transferred to the transferee by filing form GST-ITC-02 on the GST portal, subject to fulfilment of the above conditions.
Partial transfer of business-computation of ITC
When there is a full transfer of business, the complete balance of unutilized ITC lying in the electronic ledger of the transferor must be transferred to the transferee. But in the case of partial transfer of business, the transferor is required to transfer only proportional ITC. The formula for calculating ITC in such cases is as follows:
ITC eligible to be transferred=Remaining ITC *value of assets being transferred / total value of assets
Suppose a business partially transfers its assets worth 6 crore rupees out of a total asset of 15 crore rupees, and the ITC available in the credit ledger is 2 crore rupees, then the ITC transferred will be:
2*6/15 = 0.8 crores
Itemized sale of the business
In a business where the assets and liabilities are transferred separately for different prices, the sale is called an item wise sale. The following conditions apply:
- The value of each asset is calculated separately and transferred for that value under the merger and amalgamation. The business is sold in full, but the assets are sold item-wise.
- The transaction of itemized sales is considered a supply under GST and therefore liable for tax at applicable rate.
- There is no provision for the transfer of unutilized balances in the electronic credit ledger in this case.
Reversal of input tax credit
Input tax credit would be reversed in the following two situations:
- When a taxpayer registered under the composition scheme utilizes input tax credit on goods and services or both, which are wholly or partially exempt from tax, then an equivalent amount of ITC on inputs held in stock, semi-finished goods, finished goods, and capital goods held in stock must be debited in the electronic cash or credit ledger. The amount of ITC is calculated based on the invoices available in the business.
Suppose Ace Enterprises sells handmade jute items to Ram for Rs. 1,00,000, and the ITC utilized on the inputs was 10,000 rupees. Ace Enterprises opts for the composition scheme under GST. But handmade jute products are exempt from GST. Thus, the amount of Rs. 10,000 must be debited from the electronic credit or cash ledger of Ace Enterprises and paid to the government.
- When the registration is cancelled by the GST authorities, the amount of ITC related to the goods held in stock, capital goods, semi-finished goods, and finished goods must be debited from the electronic credit or cash ledger on the day preceding the day of cancellation of registration.
A cancellation of GST registration is not an end to the liabilities of the taxpayer. Non-compliance can result in notices from the authorities. Therefore, it is essential for taxpayers to be aware of the rules and regulations with regard to the clearance of stock and assets during the cancellation of GST registration and compliance under GSTR-10.
Frequently asked questions
Is a certificate from the CA required for the sale, merger, amalgamation, or transfer of business?
Answer: Yes, as per Rule 41(3) of the CGST Rules, a copy of a certificate issued by a practicing CA that the sale, merger, amalgamation, or transfer of the business has been done within the provisions of the law about the transfer of liabilities.
Can a taxpayer with pending assessment proceedings under the GST Act for not filing GSTR-10 and GSTR-3B file the returns?
Answer: Yes, the CBIC issued a notification on March 31, 2023, stating that the assessment proceedings initiated by the tax authorities would be deemed to be withdrawn if the taxpayer filed the pending GSTR-10 and GSTR-3B.