Guidelines for Transferring Input Tax Credit (ITC) During Demergers

"Effective tax management during a demerger ensures a seamless transition and financial stability for the new entities."

Content:

1. Definition and Concept of Demerger

   A demerger is when a company splits one or more of its business units into new, separate entities. This allows the original company and the new entity (or entities) to operate independently. Here’s what you need to know:

   Key Characteristics of Demergers:

   • Separation of Business Units: Different business units or divisions are separated. This can mean creating a standalone company from a subsidiary or a specific division.
   • Creation of Independent Entities: The new entities operate independently from the parent company with their own management and operations.
   • Shareholder Value: Shares of the new entity are often distributed to the parent company’s shareholders, meaning they own shares in both the original and new entities.
   • Strategic Focus: Both the parent and new entities can focus on their core businesses, improving management and efficiency.

   Types of Demergers:

   • Spin-off: Shares of the new entity are distributed to existing shareholders.
   • Split-off: Shareholders exchange their shares in the parent company for shares in the new entity.
   • Equity Carve-out: The parent company sells a portion of its interest in a subsidiary through an IPO but usually retains a controlling interest.

   Precaution: Before initiating a demerger, ensure legal and financial compliance to avoid regulatory issues.

2. Overview of Circular No. 133/03/2020-GST

   Issued on March 23, 2020, this circular provides guidelines on transferring unutilized ITC during business reorganization, including demergers.

   Key Points:

   • Transfer of ITC: ITC can be transferred in business reorganizations such as mergers, demergers, amalgamations, etc.
   • Provisions: According to Section 18(3) of the CGST Act and Rule 41(1) of the CGST Rules, the unutilized ITC can be transferred to the new entity as prescribed.
   • Apportionment Ratio: The ITC is apportioned based on the value of assets specified in the demerger scheme.

   Precaution: Ensure accurate calculation and proper documentation of asset values and ITC to comply with the circular.

3. Conditions for Availing GST Credit During Demerger

   To avail GST credit during a demerger, specific conditions must be met:

   Eligibility Conditions:

   • Business Transfer: The transferor business must transfer its entire or part of its business as a going concern to the transferee.
   • Scheme of Arrangement: The demerger should be in accordance with a scheme of arrangement sanctioned by a court or tribunal.
   • Proportionate Allocation: The unutilized ITC must be apportioned in a ratio specified in the demerger scheme based on the value of assets.

   Documentation:

   • Certified Copies: Obtain certified copies of the order from the court or tribunal sanctioning the demerger.
   • ITC Apportionment: Maintain detailed records of the ITC allocation as per the asset ratio.
   • Form GST ITC-02: File this form with the GST authorities to transfer the unutilized ITC.

   Precaution: Ensure all conditions and documentation are fulfilled to prevent issues in availing GST credit.

4. Filing GST FORM ITC-02 for ITC Transfer

   GST FORM ITC-02 is used to transfer ITC from the demerged entity to the resulting entities.

   Steps to File Form GST ITC-02:

   1. Log in to the GST Portal:
      • Go to the official GST portal and log in with your credentials.
   2. Navigate to ITC Forms:
      • Click on “Services” > “Returns” > “ITC Forms.”
   3. Prepare Online:
      • Select "Prepare Online" next to Form GST ITC-02.
   4. Provide Details:
      • Enter the GSTIN, trade name, and legal name of both the transferor and transferee.
      • Specify the total unutilized ITC available for transfer.
      • Enter ITC amounts for CGST, SGST, IGST, and Cess.
      • Include details of the certifying Chartered Accountant or Cost Accountant.
   5. Submit the Form:
      • Review all details carefully.
      • Submit the form on the portal.

   Precaution: Double-check all entries for accuracy before submitting to avoid delays or rejections.

Table at a Glance:

Example ITC Distribution:

Location	Unutilized ITC (ABC Ltd)	Asset Ratio (DEF Ltd)	ITC Transferred (DEF Ltd)
Mumbai	₹18,00,000	50%	₹9,00,000
Delhi	₹12,00,000	30%	₹3,60,000
Kolkata	₹10,00,000	20%	₹2,00,000
Bangalore	₹25,00,000	10%	₹2,50,000

Precaution: Ensure the ITC transfer aligns with the asset sharing ratio specified in the demerger scheme.

Conclusion:

Transferring unutilized ITC during a demerger requires careful adherence to GST rules and proper documentation. By following the guidelines in Circular No. 133/03/2020-GST and filing Form GST ITC-02 accurately, businesses can ensure a smooth transition of tax credits.

Precaution: Regularly update and reconcile ITC records to avoid discrepancies during transfers.