CBIC clarifies apportionment and transfer of ITC in case of business reorganization

This Tax Alert summarizes a recent circular  issued by the Central Board of Indirect Taxes and Customs (CBIC) clarifying apportionment and transfer of input tax credit (ITC) in case of business reorganization. 

As per proviso to rule 41(1) of the Central Goods and Services Tax Rules, 2017 (CGST Rules), in case of demerger, ITC shall be apportioned in the ratio of value of assets of the new units as specified in the demerger scheme. 

The circular clarifies the following: 

·         While apportioning ITC as per the proviso, value of assets of new units shall be taken at the state level (i.e., at the level of each distinct person) and not at the entity level.

·         Proviso not only covers demerger but applies to all forms of business reorganizations resulting in partial transfer of business assets along with liabilities.

·         Ratio for apportionment of ITC need not be applied separately in respect of each tax head, viz. central tax (CGST), state tax (SGST) and integrated tax (IGST).

·         Transferor is at liberty to determine the amount to be transferred under each tax head, subject to availability of ITC balance under such head.

·         Apportionment formula shall be applied on ITC balance available in the electronic credit ledger on the date of filing of Form GST ITC–02 by the transferor.

·         Further, the ratio of the value of assets shall be taken as on the appointed date of demerger. 

Clarifications issued by CBIC addresses most of the ITC related open issues faced by industry while implementing various business transfer arrangements. 

Flexibility in determining amount of ITC to be transferred from each tax head could prove beneficial to taxpayer. 

There are few more GST related issues pertaining to business restructuring which may require clarity. Industry should engage with the government to clear the ambiguity in order to avoid any unwarranted litigation.