ICAI issues Handbook on Liability to Pay in Certain Cases under GST

ICAI issues Handbook on Liability to Pay in Certain Cases under GST

Reetu | Dec 24, 2020 |

ICAI issues Handbook on Liability to Pay in Certain Cases under GST

ICAI issues Handbook on Liability to Pay in Certain Cases under GST

The Institute of Chartered Accountants of India

Liability to Pay in Certain Cases under GST

1. Introduction

India has adopted a dual GST model which means that both Central and State Governments will levy tax under GST. Where any default is made in payment of any of these taxes, interest or penalty shall be imposed accordingly. Therefore, it is imperative to determine who is liable to pay the tax, interest or penalty. Usually, a supplier is liable to pay under forward charge. Generally, liability to pay tax is determined by the provisions of section 9 of Central Goods and Services Tax Act, 2017 (hereinafter referred as ‘CGST Act’) and section 5 of Integrated Goods and Services Tax Act, 2017 (hereinafter referred as ‘IGST Act’). These sections specify two kinds of mechanism to pay taxes i.e. forward charge and reverse charge. Under forward charge, the liability to pay taxes is on the supplier whereas under reverse charge, the liability to pay taxes is on the recipient. Accordingly, the liability to pay interest or penalty arises on the person who is liable to pay taxes.

However, in certain cases, liability to pay taxes is not restricted to supplier or recipient merely; rather it is extended beyond them. Sections 85 to 94 of the CGST Act deal with certain cases where specific persons in certain cases are made liable to pay taxes, interest or penalty. These are discussed in the ensuing paragraphs. :

2. LIABILITY IN CASE OF TRANSFER OF BUSINESS (SECTION 85)

2.1 Bare law

(1) Where a taxable person, liable to pay tax under this Act, transfers his business in whole or in part, by sale, gift, lease, leave and license, hire or in any other manner whatsoever, the taxable person and the person to whom the business is so transferred shall, jointly and severally, be liable wholly or to the extent of such transfer, to pay the tax, interest or any penalty due from the taxable person up to the time of such transfer, whether such tax, interest or penalty has been determined before such transfer, but has remained unpaid or is determined thereafter.

(2) Where the transferee of a business referred to in sub-section (1) carries on such business either in his own name or in some other name, he shall be liable to pay tax on the supply of goods or services or both effected by him with effect from the date of such transfer and shall, if he is a registered person under this Act, apply within the prescribed time for amendment of his certificate of registration.

2.2 Analysis

Section 85 of the CGST Act talks about the liability to pay taxes, interest or penalty in case of transfer of business. Sub-section (1) states that where any taxable person liable to pay tax under the CGST Act , transfers his business, he and the person to whom the business is so transferred shall be jointly and severally liable to pay tax, interest or any penalty due upto the time of transfer. The key requisites of this provision are -:

  • There is a transfer
  • By a taxable person
  • The transfer is of business,
  • The transfer can be in whole or in part
  • The transfer be by way of sale, gift, lease, leave and license, hire or in any other manner whatsoever

In the above cases, the transferor and transferee shall, jointly and severally, be liable, wholly or to the extent of such transfer, to pay the tax, interest or any penalty due from the taxable person upto the time of such transfer, whether such tax, interest or penalty has been determined before such transfer, but has remained unpaid or is determined thereafter.

We shall now examine the different requisites in the following paragraphs.

(a) There is a transfer: A ‘transfer’ includes a sale at full value, a sale at an under value, an exchange and a gift. Therefore, a transferor may be a seller or donor. A transferee may be a purchaser or donee. The transfer can be to a person with no previous interest in the business, e.g. a third-party purchaser. It can be a change of legal entity, e.g. when a sole proprietor converts the entity into a partnership or private limited company. It can also be in the form of a succession, or transfer under will etc. Transfer of ownership is not always transfer of business; for eg., in case a person transfers 100% shares of a private limited company to another person, the same would not amount to transfer of business but transfer of securities or his interest in such business. The disposal of shares, unaccompanied by the transfer of assets, does not allow the transferee to carry on an independent economic activity as the transferor’s successor. Similarly, transfer of property is not equal to transfer of business.For eg., if a doctor had rented a shop to a tenant who starts and run a shoe retail shop in such shop and after some years sells the property to the tenant. This case, is not a transfer of a business but transfer of the premises only. The business of the doctor is rental and not show retail.

(b) By a taxable person: It is important to note that the liability in case of transfer of business in not limited to a registered person (person who is registered under GST laws). However, if the transferor is a taxable person, the present section would apply. A taxable person has been defined in Section 2(107) of the CGST Act, 2017 to mean a person who is registered or liable to be registered under section 22 or section 24.

(c) Transfer is of business: The Term business has been defined under Section 2(17) of the CGST Act, 2017 as under-

(17) “business” includes––

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;

(d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;

(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;

(f) admission, for a consideration, of persons to any premises;

(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;

(h) activities of a race club including by way of totalisator or a license to book maker or activities of a licensed book maker in such club; and

(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;

The consideration for transfer of business should be a lump sum consideration. This consideration should be arrived at without assigning values to individual assets and liabilities. In the case of CIT v. Artex Manufacturing Co., [(1997) 227 ITR 260 (SC)], it was held that if in a business sale transaction, there is a possibility of attribution of price to individual items (plant, machinery and dead stock), such transaction may not qualify as transfer of business. Transfer of business is a supply of services. Goods has been defined in Section 2(102) of CGST Act, 2017 to mean every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply. The term ‘Services’ has been defined in Section 2(102) of CGST Act, 2017 to mean anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

Moreover, in the case of Paradise Food v. State of Telangana (2017) 81 taxmann.com 331; 63 GST 86 (AP) it was held that the transfer of business as a whole could not be considered as sale of goods.

Is transfer of business a ‘supply’?

Section 7 of CGST Act, 2017 provides as under-

(1) For the purposes of this Act, the expression “supply” includes ––

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

Thus, any transfer which is done for a consideration in the course or furtherance of business shall fall within the ambit of ‘supply’. Thus, we can say that the activity of transfer of a business is a supply.

(d) Transfer can be whole in or in part: The transfer of business may be in whole or part. Thus, the transferor can transfer the business whol ly or he can also transfer a part of his business to another person. A part of business does not mean few assets; a part of business means an independent part of business which itself is capable of being continued as a going concern. For eg., a logistics company transfers its warehousing segment to another company.

(e) Transfer can be by way of sale, gift, lease, leave and license, hire or in any other manner.

The transfer can happen by many ways including but not limited to sale, gift, lease, leave, license, succession etc. We shall discuss some common ways of business transfer in the following paragraphs:

Transfer of business by gift

Such transfers generally happen in case of family businesses where a person intends to discontinue the business on his own and transfers his business to another family member by giving it as a gift as a whole or may choose to transfer business partly.

Further, Schedule I of the CGST Act, 2017 provides certain activities to be considered as a supply even if made without consideration. The relevant entry is reproduced below-

1. “Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.”

This means where business assets are transferred permanently or disposed of permanently on which input tax credit was claimed, such permanent transfer or disposal shall be considered as a supply even though no consideration is received for such transfer or disposal.

We can conclude that in case of transfer by way of gift, the element of consideration is absent and thus in such a scenario when business assets are transferred by way of gift where no consideration is received, such activity shall be a supply.

Transfer of business by sale

Now, there can be transfer of business by sale in two ways i.e. asset transfer or business transfer. When there is a sale of business assets, one intends to purchase only the business assets without the liabilities of the business. The transferor, still, has the legal ownership over his business but not over the assets, whether tangible or intangible. Transfer of business assets can be an example where a business is not transferred wholly but partly which further means it is not a slump sale.

Further, Schedule II of CGST Act deals with the activities or transactions to be treated as supply of goods or services. We shall discuss the clauses under para 4 of this Schedule which deals with transfer of business assets, provided as under-

4. “Transfer of business assets

(a) where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, such transfer or disposal is a supply of goods by the person; ”

This clause provides that when goods that form part of the business assets are transferred or disposed of as per the instructions of the person who carries such business, such transfer or disposal of goods shall be a supply of goods made by such person.

(b) where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, the usage or making available of such goods is a supply of services;

This clause provides that where a person carrying on a business gives direction to put goods for a personal use which were earlier held for carrying the business or to make them available to any other person for personal use excluding the business purpose, such usage or making the goods available to another person shall be a supply of services.

c) where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless-

(i) the business is transferred as a going concern to another person; or

(ii) the business is carried on by a personal representative who is deemed to be a taxable person.

It provides that where a person has ceased to be a taxable person, it shall be deemed that the assets of the business carried on by him have been supplied by him in the course or furtherance of his business before he ceased to be a taxable person. It should be noted that transfer of assets is considered as a supply of goods whereby only assets are transferred and not the whole business. However, an exception has been provided which states that when such taxable person transfers the business as a going concern to another person before he ceases to be a taxable person, then such transfer of assets shall not be considered to be supplied by him. Another exception provides that where the business of such taxable person is carried on by a personal representative who is considered as a taxable person then such transfer of assets shall not be considered as a supply.

Further, Notification 12/2017-central tax (rate) dated 28.06.2017 provides as under-

S. NoChapter, Section, Heading, Group or Service Code (Tariff)Description of ServicesRate (percent.)Condition
(1)(2)(3)(4)(5)
2Chapter 99Services by way of transfer of a going concern, as a whole or an independent part thereof.NilNil

Thus, there are two conditions to avail this notification namely-

1. Transfer of a going concern

2. Such transfer shall be as a whole or an independent part

This means that transfer of a business as a going concern shall be such that the business activity is capable of being run as an independent unit.

Now, on the other hand, in a business sale, a business is transferred in its entirety including the capital, workers, assets, liabilities, goodwill, licences, products and services and other benefits associated with the business and thus, it will get covered under slump sale.

Transfer of assets v transfer of business: The difference was highlighted by Supreme Court in the case of Karnataka and Another v. Shreyas Papers (P) Ltd. (2006) 1 SCC 615. The Supreme Court did not accept the contention that “business” could not be separated from the assets of the business. It was held that ‘business’ is an activity, directed with a certain purpose, more often towards producing income or profit and ownership of assets is merely an incident rather than a characteristic of business. Hence, the mere transfer of one or more species of assets does not necessarily bring about the transfer of the “ownership of the business”. “Ownership of a business” is much wider than mere ownership of discrete or individual assets. In fact, “ownership of business” is wider than the sum total of the ownership of a business’ constituent assets. Above all, transfer of “ownership of business” requires that the business be sold as a going concern.

Transfer of business in case of death of sole proprietor

In this context, Circular No. 96/15/2019-GST dated 28.03.2019 clarifies as under –

2. Clause (a) of sub-section (1) of section 29 of the CGST Act provides that reason of transfer of business includes “death of the proprietor”. Similarly, for uniformity and for the purpose of sub-section (3) of section 18, sub-section (3) of section 22, sub-section (1) of section 85 of the CGST Act and sub-rule (1) of rule 41 of the CGST Rules, it is clarified that transfer or change in the ownership of business will include transfer or change in the ownership of business due to death of the sole proprietor.”

Thus, it was clarified that transfer or change in the ownership of business will include transfer or change in the ownership of business due to death of the sole proprietor.

Sub-section (2) states that where the transferee carries on such transferred business in his own name or in some other name he will be liable to pay the taxes on supply of goods or services or both effected by him with effect from the date of such transfer, which means that the liability to pay tax on supply after the transfer took place is solely on the transferee. Further if the transferee is a registered person, he has to apply for amendment of his registration certificate within the prescribed time.

Where the business is transferred by the reason of death of sole proprietor, Circular No. 96/15/2019 dated 28.3.2019 has clarified the provisions in respect of transfer of unutilised input tax credit lying in electronic credit ledger to the transferee, the liability to pay any tax, interest and/or penalty due from the transferor. The process mentioned in the circular is as follows:

  • Registration liability of transferee / successor: As per the provisions of section 22(3) of the CGST Act the transferee / successor is liable to be registered with effect from the date of such transfer or succession by filing application in FORM GST REG-01. While filing the application, the applicant is required to mention the reason to obtain registration as “death of the proprietor”.
  • Cancellation of registration on account of death of the proprietor: As per clause (a) of section 29(1) of the CGST Act the legal heirs have to file the application for cancellation of registration in FORM GST REG-16 electronically on common portal on account of transfer of business for any reason including death of the proprietor. In FORM GST REG-16, reason for cancellation is required to be mentioned as “death of sole proprietor”. The GSTIN of transferee to whom the business has been transferred is also required to be mentioned to link the GSTIN of the transferor with the GSTIN of transferee.
  • Transfer of input tax credit and liability: Section 18(3) of the CGST Act, allows the transfer of the unutilized input tax credit lying in electronic credit ledger of transferor to the transferee in the manner prescribed in rule 41 of the CGST Rules, where there is specific provision for transfer of liabilities. It is also clarified that the transferee / successor shall be liable to pay any tax, interest and/ or any penalty due from the transferor in cases of transfer of business due to death of sole proprietor.
  • Manner of transfer of credit (Rule 41(1) of the CGST Rules):
    • A registered person shall file FORM GST ITC-02 electronically on the common portal with a request for transfer of unutilized input tax credit lying in his electronic credit ledger to the transferee. In case of transfer of business on account of death of sole proprietor, the transferee / successor shall file FORM GST ITC-02 in respect of the registration which is required to be cancelled on account of death of the sole proprietor. FORM GST ITC-02 is required to be filed by the transferee/successor before filing the application for cancellation of such registration in FORM GST REG- 16.
    • The transferee /successor shall accept the details so furnished on the common portal. On acceptance, the un-utilized input tax credit specified in FORM GST ITC-02 shall be credited to the electronic credit ledger of the transferee / successor.
    • The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account.

2.3 Certain cases of transfer of business and liabilities therein

Example 1 Assume A transfers his business to B with effect from 01/07/2019 and the tax, interest or penalty due from A totals Rs.500,000/- before 01/07/2019 and remains unpaid till transfer. In this situation, A and B are jointly and severally liable to pay Rs. 500,000/-.

If another Rs. 5,000/- is determined after the transfer took place then also both A and B will be jointly and severally liable.

Example 2. X registered under GST carrying on business dies on 01/03/2019. The business gets automatically transferred to his legal heir Y. The taxes due on 01/03/2019 are Rs. 300,000/-.

In this case, Y being transferee is liable to pay Rs. 300,000/-.

3. LIABILITY OF AGENT AND PRINCIPAL (SECTION 86)

3.1 Bare law

Where an agent supplies or receives any taxable goods on behalf of his principal, such agent and his principal shall, jointly and severally, be liable to pay the tax payable on such goods under this Act.

Section 86 of the CGST Act deals with the liability to pay tax on supplies made by the agent on behalf of his principal. The goods basically belong to the principal and are supplied or received by the agent and in such cases, the first liability lies with agent (if registered under his own GSTIN and not that of the Principal). However, the provision creates a joint and several liabilities on Principal as well in case of default by such agent. We shall now discus the same in detail hereunder.

3.2. Analysis

• Who is an agent?

Section 2(5) of the CGST Act, 2017 provides the meaning of ‘agent’ as under-

“agent” means a person, including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another;

Thus, an agent is a person who undertakes to engage in the business of supply or receipt of goods or services or both on behalf of another person. An agent includes the following persons-

▪ Factor

▪ Broker

▪ Commission agent

▪ Arhatia

▪ Del credere agent

▪ Auctioneer

▪ Any other mercantile agent

It is pertinent to mention that the term ‘agent’ has also been included in the definition of intermediary under the Integrated Goods & Services Tax Act, 2017 which is reads thus:

(13) “intermediary” means a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account;

Thus, an agent is also included in the definition of an intermediary as a person who arranges the supply of goods or services or both excluding such supply of goods or services or both is not on his own account.

In both the above terms, it is pertinent to mention that agent undertakes supply on behalf of another person. He does not make a supply on his own account. The basic difference is that an agent is in a position to effect a supply on behalf of another person. For instance X received 100 bags of cement from Y to be sold in local market. Whatever sales he makes, he will get 5% of such sale value as his commission. In this case, whenever the sale is made, the sale value accrues to Y and only the commission accrues to X. The important features of being an agent are as follows:

─ The agent receives the custody of goods or services to be supplied but not their ownership.

─ The risk and reward of such goods or services (including unsold inventory) remains with the principal.

─ The principal has direct privity with the customer as the agent does not sell in his own capacity but as an agent of the principal and on behalf of principal.

 

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