LLP act, 2008 of the companies act, 2013, enables LLP or companies or partnership firms to change their constitution or convert them from private limited to LLP or any other combination. In such scenarios, it is crucial to comprehend the impact of GST.
We observed that their demerger, merger, or amalgamation, or conversion of private limited to LLP or any other combination or transfer of business are persistently taking place. Considering the above, the GST act also enabled for merger, demerger, amalgamation, or transfer of the business with LLP registration online.
Now, let’s get into the conversion of private limited companies to LLP and GST concerning provisions.
Whether the transfer of business or conversion of private limited company to LLP is a supply?
According to section 7(1) of CGST act, 2017, ‘to serve the objective of this act, the expression ‘supply’ includes (d) the activities to be treated as a supply of goods or supply of services as mentioned in the schedule II.’
Section 7(1) has provided an inclusive definition, which is for consideration in business or furthering the business, where notable transactions are also covered under the schedule I and II that will be treated as supply.
According to entry 4, transfer of business assets of schedule II.
‘(c) where any individual ceases to be a taxable person, any goods making part of assets of any business conducted by him/her should be deemed to be supplied by him/her in the course of furthering the business instantaneously before he/she ceases to be a taxable person, unless-
The business is being transferred to another individual.
Point 4 (c)(i) of schedule II describes that if the business is being transferred as a going concern to another individual, it will not be treated as a supply of goods.
Thus, it can be interpreted that the transfer of a business as a going concern would not be distinguished as a supply of assets and supply of liabilities. Also, the whole transfer of business will be treated as a ‘supply of services.
We reckon that the said transfer will be treated as a supply of services under the CGST act, 2017.
What does the GST rate require to be applied for such supply?
The government has categorically stated an entry under chapter 99 of the services’ schedule under ‘NIL rated.’
Services by way of transfer of a going concern, as a full or an independent part thereof.
Thus, the transfer will be chargeable to tax at NIL rates.
The value that will be taken for charging GST
Based on the above explanation, it can be interpreted that the GST @ 0% will have to be charged on the transfer of a business as a going concern. Thus, the said supply will be needed to be furnished in the returns of the transferor.
The value of supply that requires to be stated in returns can be discovered according to section 15 of the CGST Act, 2017.
‘the value of supply of goods or services or both will be the transactional value, that is the actual price paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not concerned, and the price is the only consideration for the supply.’
In such a case, the business constitution’s conversion usually, is without consideration, and thus, there is no price paid or payable. Therefore, for choosing the value, we require to refer to the CGST rules, 2017;
According to rule 27 of CGST rules, 2017;
‘value of supply of goods or services where the consideration is not entirely in money. Where all the goods or services is for a consideration not fully in money, the value of supply will be;
- The open market supply’s value.
- If the open market value is not available under clause (a), then be the sum total of consideration in money. Any such additional amount in money is equivalent to the consideration not in money if such amount is known at the time of supply.
- If the value is not ascertainable under clause (a) or clause (b), then be the value of supply of goods or services or both of like kind and quality.
- If the value is not ascertainable under clause (a) and (b) or clause (c), then be sum total of consideration in money and such further amount in money that is equivalent to consideration not in money as decided by the application of rule 30 or 31 in that order.
If the value is not ascertainable under the said rule, rule 30 of CGST rules 2017 might be referred to.
According to rule 30 of CGST rules, 2017;
‘value of supply of goods or services or both based on cost and where the value of supply of goods or services or both is not ascertainable by any of the preceding rules of this chapter, the value will be 100 and 10% of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services.’
Thus, the value can be ascertained based on the above-stated rules as applicable to the respective case.
Will the transferor have to charge tax on the business transfer to the transferee and pay it to the government?
According to the expansion given above, the transaction will be treated as a supply and chargeable at NIL rate. Thus, no tax will actually be payable.
Whether the balance in ledgers (cash or credit) of the transferor would lapse?
According to section 18(3), where there is a change in the constitution of a registered individual on account of the sale, demerger, merger, amalgamation, lease, or transfer of the business with particular provisions for transfer of liabilities, the said registered person would be permitted to transfer input tax credit that stays unutilized in his/her electronic credit ledger to such sold, demerged, merged, amalgamated, leased or transferred business in such manner as might be stated.
Section 18(3) for inputs in exceptional circumstances will also be permitted to carry forward to the transferee’s account subject to government revenue safeguards.
According to rule 41 of CGST rules, 2017, form GST ITC 02 must be submitted electronically, and the transferee should accept the same.
For converting a private limited company into the LLP, a new PAN has to be applied for. Also, a new registration for the LLP has to be obtained because of the new PAN.