CBIC clarifies Apportionment of ITC in cases of Business Reorganization [Read Circular]

The Central Board of Indirect Taxes and Customs ( CBIC ) has issued Clarification in respect of apportionment of ITC in cases of business reorganization (events of the merger, demerger, amalgamation or change in constitution/ownership of a business) u/s 18 (3) of CGST Act r/w Rule 18(3) of CGST Act and Rule 41(1) has been issued vide Circular No. 133 03/2020-GST dated 23.03.2020.

The clarifications to questions raised are answered as below:

1. While Proviso to Rule 41(1) prescribes that the ITC shall be apportioned in the ratio of the value of assets of the new units as specified in demerger scheme, the same does not make clear as to whether such value is to be considered at State level or all India level.

It has been clarified that the value is to be considered at the State level (along-with an illustration).

Also, FORM GST ITC-02 is to be filed only in the States where both transferor and transferee are registered.

It has been stated that “Under the provisions of the CGST Act, a person/ company (having the same PAN) is required to obtain separate registration in different States and each such registration is considered a distinct person for the purpose of the Act. Accordingly, for the purpose of apportionment of ITC pursuant to a demerger under sub-rule (1) of rule 41  of the CGST Rules, the value of assets of the new units is to be taken at the State level (at the level of distinct person) and not at the all-India level.”

1. The proviso to Rule 41(1) mentions the method of apportionment of ITC in case of ‘demerger’ only. Whether the aforementioned method shall be applicable to other forms of business reorganization resulting in the partial transfer of business assets along-with liabilities.

The scope of the proviso has been expanded by way of the present Circular to apply the said method of apportionment to all forms of business reorganization resulting in the partial transfer of business assets along-with liabilities.

1. The proviso to Rule 41(1) providing for the ratio of the value of assets, whether shall be applied in respect of each of the heads of ITC viz. CGST/SGST/IGST/Cess

The ratio has been clarified to apply to the total amount of unutilized ITC of the transferor (i.e. the sum of CGST/SGST/UTGST and IGST) and not individually. It is further stated that the said formula shall also be applicable for apportionment of Cess between the transferor and transferee.

The method of determination of the amount to be transferred under each tax head has been stated by way of an illustration.

1. The proviso to Rule 41(1) prescribing the apportionment formula does not make clear the date on which such amount of (i) unutilized ITC and (ii) ratio of the value of assets shall be calculated.
2. A conjoint reading of sub-section (3) of section 18 of the CGST Act along with sub-rule (1) of rule 41 of the CGST Rules would imply that the apportionment formula shall be applied on the ITC balance of the transferor as available in electronic credit ledger on the date of filing of FORM GST ITC – 02 by the transferor.

For the purpose of apportionment of ITC under sub-rule (1) of rule 41 of the CGST Rules, while the ratio of the value of assets should be taken as on the “appointed date of demerger”, the said ratio is to be applied on the ITC balance of the transferor on the date of filing FORM GST ITC – 02 to calculate the amount to transferable ITC.