With the completion of more than a year since the Goods and Services Tax (GST) came into effect, the last three to four months have witnessed a fairly large number of advance rulings being issued by the Authority for advance Rulings (AAR) constituted for each State under the GST regime. Where advance rulings are sought by the tax payers for gaining clarity towards issues which have not been specifically mentioned in the law, the rulings sometimes lead to questions which require further clarifications. One such issue is the requirement of reversal of input tax credit (‘ITC’) on account of slump sale made by businesses. The said issue cropped up from a recent advance ruling by Karnataka AAR in case of M/s Rajshri Foods Pvt. Ltd (‘the applicant’).
Under the facts of the said ruling, the applicant intended to transfer one of its business units along with fixed assets and liabilities for a lump sum consideration, on a going concern basis. Such transaction is commonly referred to as a slump sale / transfer of a going concern. The applicant approached the AAR, Karnataka with the following questions;

a)  Whether slump sale qualifies as a supply of goods or supply of services or a supply of goods and
services; and
b)  Whether slump sale would be covered under serial no. 2 (“Services by way of transfer of a going
concern, as a whole or an independent part thereof”) of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 and thereby would attract NIL rate of GST.

The AAR on a perusal of the relevant provisions with respect to the first query raised by the applicant, held that a slump sale/ transfer of a going concern constitutes as a ‘supply of service’. Further, with respect to the second question raised by the applicant, the AAR held that the slump sale/ transfer of a going concern is an exempt supply and is subject to ‘nil’ rate of tax.

This ruling brought reasonable clarity regarding tax implications on conventional slump sale transactions. However, a pivotal question which arose was the requirement of reversal of ITC availed on account of the fact that a slump sale qualifies as an ‘exempt supply’.
As per Section 17(2) of the Central Goods and Services Act, 2017 (“CGST Act”) where goods or services or both are used by registered persons partly for effecting taxable supplies and partly for effecting exempt supplies, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies. For ease of reference, the said section has been mentioned below;
“Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.”
“Exempt supply” has been defined under the CGST Act to mean ‘supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply’.

Since, services by way of transfer of going concern/ slump sale has been specifically exempted vide
Notification No.12/2017-Central Tax. On a strict interpretation of law, there is requirement of reversal
of ITC attributable to such exempt supply. The impact of the same appears to be very harsh on businesses.

Let’s take a simple example of a person running an established business comprising of various divisions/
units only engaged in the provision of taxable supplies and accordingly availing 100% ITC on procurement of inputs and input services. If for any reason, the person chooses to sell any one or more of its business units for a consideration, this activity may tantamount to a slump sale/ transfer of a business as a going concern. Now, in accordance to the provisions of GST laws, the person would be required to reverse ITC attributable to such slump sale. Even if it is established that no inputs/ input services are directly attributable to the slump sale, the ITC on common input/ input services (viz. office rent, accounting expenses, office administration expenses) would need to be apportioned in accordance with GST provisions. The financial impact of such reversal may be enormous as it is obvious and imaginable that the consideration for which a unit is being sold could be very high in comparison to the annual turnover. The reversal of ITC in this manner would be unfair.

The GST law (via Explanation to Rule 42 and 43 of the CGST Rules) contemplates certain supplies
which are excluded from the purview of exempt supplies for the purpose of ITC apportionment. Such
supplies include services by way of accepting deposits, extending loans or advances in so far as the
consideration is represented by way of interest or discount; services by way of transportation of goods
by a vessel from the customs station of clearance in India to a place outside India. However, no such
exclusion has been made for slump sale/ transfer of business as a going concern.

Furthermore, one of the changes recommended during the recent 28th GST Council meeting was the
inclusion of certain transactions (for instance high seas sales) under Schedule III of the CGST Act which
covers activities that neither qualify as a supply of goods nor as a supply of services and accordingly
are not subject to GST. It has been further provided that ITC would be eligible against most of the
activities or transactions specified in Schedule III of the CGST Act. Since sale of business as a going
concern is not included in Schedule III of the CGST Act, the recommendations do not address the issue
of reversal of ITC.

Thus, till date, no clarification or amendment has been made for eligibility of ITC on account of slump
sale/ transfer of business as a going concern. Although this is a legacy (as under the service tax regime
the sale of business as a going concern was exempted), the GST Council should appreciate that the
provisions of ITC is for the benefit of taxpayer and should take appropriate steps to plug this issue. A
suitable amendment on non-applicability of reversal provisions in case of a slump sale would certainly
be appreciated by businesses as the reversal of substantial ITC, will adversely affect the financial health of businesses.