By CA Surekha S Ahuja
Introduction: Why “Compliant” Business Transfers Still Fail
In Indian tax practice, business transfers rarely fail due to ignorance of law.
They fail because the law is applied in fragments.
A transaction may be flawlessly executed under the Income-tax Act, 1961, yet unravel entirely under the Goods and Services Tax law, resulting in substantial demands, interest and penalties. In several recent restructurings, GST exposure has exceeded the income-tax cost that the transaction sought to optimise.
The core issue is structural:
Income-tax and GST do not conceptualise business transfers in the same manner.
This article presents a single, integrated framework to ensure that business transfers are not only tax-efficient, but also GST-neutral, credit-preserving, audit-defensible, and litigation-resistant.
The Structural Disconnect Between Income-tax and GST
At the heart of most disputes lies a fundamental divergence in statutory design.
| Dimension | Income-tax Act | GST Law | Practical Consequence |
|---|---|---|---|
| Nature of transfer | Capital asset | Supply of service | GST may apply even where income-tax is neutral |
| Slump sale | Expressly recognised | No automatic exemption | Going concern must be independently established |
| Appointed date | Retrospective effect allowed | Ignored until order date | Interim GST exposure |
| Asset abstraction | Permitted | Deemed supply risk | 18% GST on open market value |
| ITC vs depreciation | Mutually exclusive | Conditional migration | Dual disallowance risk |
The modern reality is that GST now determines transaction economics, not merely downstream compliance.
Income-tax Treatment: Precision Over Form
Slump Sale – Sections 2(42C) and 50B
A transfer qualifies as a slump sale only where all statutory conditions are met cumulatively:
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Transfer of the entire undertaking as a functional business
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Lump-sum consideration
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No assignment of individual asset values
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Certification in Form 3CEA
Tax outcome
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Capital gains taxable under Section 50B
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Net worth deemed as cost
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No indexation benefit
Any post-transaction allocation of consideration — even for accounting convenience — has repeatedly been held to destroy the character of a slump sale.
Tax-Neutral Reorganisations – Section 47
Income-tax neutrality under Section 47 is strictly conditional.
| Transaction | Section | Core Statutory Conditions |
|---|---|---|
| Amalgamation | 47(vi) | 75% shareholder continuity |
| Demerger | 47(vib) | Proportionate transfer of undertaking |
| Firm → Company | 47(xiii) | Transfer of all assets and liabilities |
| Company → LLP | 47(xiiib) | 100% partner continuity |
Critical principle:
Compliance with Section 47 enables GST planning — it does not eliminate GST obligations.
GST Law: The Controlling Discipline
Going Concern Exemption – The Decisive Test
Under GST, exemption is available only for “transfer of a going concern” under Notification No. 12/2017-CT (Rate).
In practice, tax authorities and auditors examine the transaction through a cumulative, substance-based lens, focusing on the following seven factors:
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Independent operational viability
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Transfer of all operating assets
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Explicit assumption of identifiable liabilities
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Employee continuity
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Novation or continuity of contracts
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Absence of material operational disruption
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Clear documentary intent to transfer a going concern
Failure on any one parameter converts the transaction into a taxable supply of assets.
The Deemed Supply Trap
Where a taxable person ceases business without a going concern transfer, GST law deems all business assets — including stock, capital goods and plant — to be supplied at open market value.
This provision has emerged as the single most expensive error in poorly structured reorganisations, frequently resulting in GST demands that exceed the income-tax cost of the transaction itself.
Aligning Both Laws: An Integrated Framework
| Transaction | Income-tax Position | GST Requirement | Net Result |
|---|---|---|---|
| Slump sale | Section 50B | Going concern compliance | GST exempt |
| Merger | Section 47(vi) | ITC transfer u/s 18(3) | Credit preserved |
| Demerger | Section 47(vib) | Rule 41 apportionment | Proportionate ITC |
| Firm → Company | Section 47(xiii) | Going concern transfer | Tax neutral |
| Business closure | Capital gains | Going concern restructuring | Deemed supply avoided |
In several cases, GST going-concern structuring delivers greater economic value than income-tax optimisation.
ITC vs Depreciation: A One-Time Election
The law draws a clear line:
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Income-tax: Depreciation is disallowed where ITC is availed
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GST: ITC transfer is permitted only where liabilities are transferred
Businesses must therefore make a single, irreversible election at the structuring stage:
| Election | Consequence |
|---|---|
| ITC migration | Full credit available to transferee |
| Capitalisation | Depreciation benefit only |
Post-transaction reversals are rarely defensible in audit or appellate proceedings.
Post-Alstom: ITC Transfer Is Absolute
Following Alstom Transport (Gujarat High Court, January 2026), the legal position has attained clarity:
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100% ITC must migrate on transfer of business
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Partial retention or bifurcation is impermissible
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Dissolved entities have no refund entitlement
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Continuation of GST registration post-merger is procedural, not substantive
This judgment has decisively reshaped GST restructuring jurisprudence.
The Interim Period: The Most Litigated Phase
Between the appointed date and the court or NCLT order date, transferor and transferee remain distinct taxable persons.
Consequences are unavoidable:
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GST on inter-entity supplies
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Separate returns and ledgers
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No cross-utilisation of ITC
Ignoring this period has become the primary source of merger-related GST litigation.
Inter-State Reorganisations: The SGST Constraint
While IGST and CGST credits are transferable, SGST remains State-locked.
In inter-State mergers, SGST credit is permanently lost, directly impacting transaction valuation. This is not a compliance issue — it is a deal economics constraint that must be addressed upfront.
Proceedings Against Non-Existent Entities
Courts have consistently held that:
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proceedings against dissolved entities are void, and
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liabilities survive and attach to the transferee.
Immediate substitution and intimation are essential to preserve limitation and prevent parallel proceedings.
Conclusion: What Defines a Successful Business Transfer
A business transfer can be regarded as successfully structured only when all five outcomes are achieved simultaneously:
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Income-tax neutrality or concessional taxation
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GST exemption as a going concern
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Full preservation of input tax credit
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Zero exposure to penalty
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Immunity from proceedings against non-existent entities
Anything less is not tax planning.
It is deferred litigation.
Closing Reflection
In today’s enforcement environment, business transfers are judged not by intent, but by execution discipline.
The most effective tax structures are those that anticipate audit, withstand scrutiny, and align both statutes from inception.
