GST Liability for Transfer of Business U/S 85
According to Section 85 of the tax law, if a person who is liable to pay tax under this Act transfers their business, either wholly or partly, through sale, gift, lease, hire, or any other means, both the person transferring the business and the recipient of the business will be jointly and severally responsible for paying the outstanding tax, interest, or penalties up to the time of the transfer. This applies even if the tax liabilities were determined before the transfer but remained unpaid or were determined after the transfer.
If the recipient of the business continues to operate it under their own name or any other name, they will be liable to pay tax on the supply of goods or services from the date of the transfer. If the recipient is registered under this Act, they must apply for the necessary amendments to their registration certificate within the prescribed timeframe.
Relevant GST Liability for Businenes Transferring to Another Person
The applicable GST tax liability in situations where business is transferred to another person without completing the tax liabilities-
In summary, when a person transfers their business without settling their tax obligations, both the transferor and the transferee are jointly responsible for clearing the tax, interest, or penalty dues incurred by the transferor until the transfer took place, regardless of whether these dues were determined before or after the transfer.
The accountability of the transferee shall be automatic regardless of :
- Review
- Transfer in complete or part
- Procedure and manner of transfer
- Resolve or not of liability
This tax accountability should pertain to the period prior to such transfer and should be unpaid, and this is the only requirement. It will not be necessary to consider if it is determined before the transfer or after such transfer.
It is obligatory at its utmost that the transferee or lessee must pay tax, interest, or penalty jointly that is due from payable by such taxable person (transferor).
Irrespective of whether the tax, interest, or penalty has been determined and remains unpaid at the time of transfer, or is determined after the transfer, the significance of such factors will be immaterial.
Responsibilities of the Transferee or Lessee Upon Transfer
Upon transfer, the transferee has the option to conduct business under their own name or an alternative name. They are required to:
- Apply for appropriate amendment of the registration certificate within the stipulated timeframe.
- Start paying Goods and Services Tax (GST) from the date of transfer for taxable supplies of goods and/or services provided by them.
Types of Business Transfers Covered
The business transfers falling under Section 85 include – Sale, Gift, Lease, Leave and license, Hire, and Any other manner (such as exchange, rental, disposal, etc.)
These transfers can involve the entire business or only a share of it.
The phrase “in any other manner” mentioned in the provision has a broad scope and involves various types of transactions, extending beyond the specific cases mentioned in the provision. Consequently, transactions like barter, exchange, and disposal in any form can also be considered as transfers.
Although the Act does not explicitly define what constitutes a transfer, it specifies that the aforementioned types of transactions fall within its purview. Such transfers cover both goods and services. The Sale of Goods Act of 1930, defines a contract of sale and agreement to sell under Section 4.
Accordingly, a contract of sale involves the transfer or agreement to transfer the property in goods from the seller to the buyer for a cost. It is possible to have a contract of sale between one part owner and another. A contract of sale can be absolute or conditional. An agreement to sell becomes a sale when the specified time ends or the conditions for transferring the property in the goods are fulfilled. Therefore, that contract will be considered as an agreement to be sold.
An agreement to sell will be considered a sale if the time duration ends or the requirements. Accordingly, the property in the goods is to be transferred.
According to Section 5 of the Transfer of Property Act, of 1882, the term “transfer of property” refers to an act performed by a living person to convey property, either immediately or in the future, to one or more living persons, including themselves. The act of transferring property is referred to as “transfer property.”
| Business Transferor | All Models of Transfer | Business Transferee |
|---|---|---|
| Sale, Transfer, Barter, Exchange, Lease, License, Disposal, Hire, Rental, Other Manner |
Types of Business Transfers Included
Below we have discussed the different types of transfers including sales and supply, barter, exchange, lease etc.
Sales Under the Goods Act of 1930
The definition of ‘sale’ is not explicitly provided in the GST Act. However, it is considered one of the components of ‘supply’ as defined in Section 7 of the GST Act. For a transaction to qualify as a sale under the Sales of Goods Act of 1930, the following elements must be met:
- Goods Delivery
- Sale agreement
- Promise or payment of price
- Property Transfer from the seller to the buyer
In state VAT laws and the Central Sales Tax Act, ‘sale’ is defined as the transfer of property in goods from one person to another for cash, deferred payment, or other valuable consideration.
Sale and Supply for Property Transfering
In a sale transaction, the transfer of property in goods holds significant importance. On the other hand, the term “supply” encompasses a broader scope, with sales being just one aspect of it. For instance, the removal of goods constitutes a supply under the GST, whereas the issuance of an invoice is the determining factor for a sale.
Barter for the Goods Exchange
‘Barter’ refers to the exchange of goods for goods. In a barter contract, goods are exchanged without involving money, whereas in a sale contract, goods are exchanged for money. Barter transactions can include:
- Services traded for services
- Goods exchanged for goods
- Goods services traded
- Goods and services are traded partially for goods and partly for services.
Exchange Money for Transfer of Goods and Services
‘Exchange’ involves giving up one thing for another. If goods are exchanged for money, it is considered a sale transaction. If goods are exchanged for other goods or services, it becomes a barter transaction. In commercial transactions, ‘exchange’ and ‘barter’ are often used interchangeably to refer to the transfer of goods and/or services for other goods and/or services.
Give Permission By Persons
‘License’ refers to the permission granted by one person to another to perform an act that would otherwise be unlawful. In the commercial world, licensing plays a crucial role in the fraudulent utilization of intellectual property rights. For example, a software developer allows the end user the right to use the software and issue a license.
Lease for Hiring Goods and Property
‘Rental’ is the consideration paid for hiring goods or property for a specified period. In the context of immovable property, rent refers to the amount agreed upon in a lease or tenancy agreement to be paid by the tenant to the landlord. The term ‘rental’ can also be used for charges related to movable property. It covers activities where payment is made as rent, such as hiring a cab or renting a pandal or shamiana.
Rental Property
‘Lease’ is a contract wherein one party agrees to grant the right to use an estate or property to another party for consideration. A lease contract can involve both immovable and movable property, such as machines or cars. In a lease, ownership remains with the lessor while possession and the right to use are transferred to the lessee.
Getting Off Goods Ownership
‘Disposal’ refers to the act of removing someone from the ownership of goods. It signifies the process of getting rid of something. The concept of disposal is also included within the scope of ‘supply’ under GST law.
Transactions attract tax liability under the GST law that fulfils the conditions outlined in Sections 7 and 8. To ensure that such transfers are liable for taxation, the following criteria should be met:
- There should be a transfer of business involved in the transaction.
- The transfer should involve two parties, namely the transferor (seller) and the transferee (buyer).
- The transfer should pertain to the transfer of a business entity.
- The transfer should be made in the furtherance or as part of the regular course of the business.
- The transfer should be made for consideration, unless it falls under the exception provided for permanent transfer or disposal of business assets as per Clause I of Schedule I of the CGST Act, 2017.
In cases where the transfer does not cover the entire business but only a part of it, the transferee would be liable to pay tax only for the portion of the liability attributable to the transferred business.
