[Opinion] GST Due Diligence in M&A – A Crucial Step

CA Srikanth Kolla – [2024] 168 taxmann.com 337 (Article)

1. Introduction

Mergers and acquisitions (M&A) are prevalent in today’s dynamic business landscape. Conducting thorough due diligence is essential for navigating this complex process effectively, particularly regarding the Goods and Services Tax (GST). This due diligence involves a detailed examination of a company’s financial, operational, and legal aspects to identify potential risks and ensure compliance, which helps mitigate tax liabilities and enhances the overall value of the transaction.

2. Types of M&A Transactions

The major types of M&A transactions include:

• Transfer of a complete business through share/ownership transfer
• Transfer of a segment of the business

2.1. GST Implications on the Transfer of Business by Way of Share Transfer

A common method of corporate acquisition is share acquisition, where ownership is transferred through purchasing shares. According to the Central Goods and Services Tax Act, 2017 (CGST Act), securities, including shares, are specifically excluded from the definition of goods and services, thus exempting such transactions from GST. Consequently, no GST is imposed on the transfer of shares between parties.

2.2. GST Implications in Demerger of Segments

A demerger involves a company splitting into separate entities, which can then operate independently or be sold. In a demerger, net assets are transferred to the new entity, which must register under GST, allowing it to operate independently. Rule 41 of the CGST Rules permits the transfer of unutilised input tax credit (ITC) from the demerged entity to the resulting entity via Form GST ITC-02, accompanied by the demerger agreement.

3. GST Implications in Mergers

Mergers combine companies to form a single legal entity. If assets are transferred as part of a going concern (slump sale), the transfer may be exempt from GST. If specific assets are transferred without going concern status, GST applies, necessitating proper valuation and invoicing. Under Rule 41 of the CGST Rules, Form GST ITC-02 must be filed to transfer unutilized ITC to the merged entity, supported by relevant documentation.

4. Definition of a Going Concern

The GST Act does not explicitly define the term “going concern.” However, in common usage, a “going concern” typically refers to an operational business that continues its activities seamlessly even after ownership is transferred. Transfers of businesses structured as going concerns are considered supplies of services under the GST framework and may be exempt from GST if specific conditions are met, such as the transfer of all essential elements of the business that enable it to function independently post-transfer.

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