CGST Section 85 — Liability in case of transfer of business
CGST Act · Liability in case of transfer of business
Quick Answer
Section 85 of the CGST Act, 2017 governs Liability in case of transfer of business. It provides the core statutory basis, outlining the essential legal principles, rights, and liabilities under Indian indirect tax law. Section 85 GST: Liability in case of transfer of business — eligibility, conditions, case laws and compliance impact under Indian tax law.
Plain-English Explanation
Section 85 of the CGST Act, 2017 deals with situations where a business is transferred, making both the transferor (the seller) and the transferee (the buyer) liable for outstanding GST dues related to the business up to the point of transfer. It also specifies the transferee's responsibility to register for GST or amend their existing registration post-transfer.
This section applies whenever a taxable person, meaning someone registered or liable to be registered under GST, transfers their business, either partially or entirely, to another person. The method of transfer is broad and includes sale, gift, lease, leave and license, hire, or any other means. It essentially aims to protect government revenue by ensuring that outstanding tax liabilities aren't avoided simply by transferring the business.
Here's a breakdown of the key conditions and aspects of Section 85:
- Joint and Several Liability: Both the transferor and the transferee become jointly and severally liable for any outstanding tax, interest, or penalty up to the date of the transfer. This means the GST authorities can pursue either party or both for the full amount owed, up to the extent of the business transferred.
- Extent of Liability: While liability is joint and several, it's also limited to the extent of the business transferred. If a part of the business is transferred, the liability is restricted to the tax dues associated with that specific part of the business. For a whole business transfer, the liability extends to all tax dues related to the entire business.
- Timing of Determination: It doesn't matter whether the tax, interest, or penalty was determined (i.e., an assessment order was passed) before or after the transfer. If the liability relates to the period before the transfer, both the transferor and transferee are responsible.
- Transferee's Ongoing Responsibility: The transferee is liable to pay GST on supplies made after the date of the transfer.
- Registration Requirements: If the transferee is already registered under GST, they must apply for an amendment to their registration certificate to reflect the change in business details. If they are not registered, they may need to register, depending on their aggregate turnover, as specified in the Act.
Let's illustrate with a practical example:
Imagine a restaurant, "Spice Route," owned by Mr. Verma, is sold to Ms. Sharma on July 1st. As of that date, Spice Route has an outstanding GST liability of ₹50,000 from sales made in June, which hasn't been paid or assessed. Under Section 85, both Mr. Verma and Ms. Sharma are jointly and severally liable for this ₹50,000. The GST department can demand the full amount from either of them. Further, if Ms. Sharma continues to operate the restaurant under the same name or a different name (say, "Masala Magic"), she is responsible for paying GST on all sales made from July 1st onwards. If Ms. Sharma is already a registered GST taxpayer for a separate boutique, she must apply to amend her GST registration to include the restaurant business.
Another example:
Suppose Mr. Kumar sells only the catering division of his larger food business to Mr. Gupta. The catering division has unpaid GST of ₹20,000 related to events catered before the sale. In this case, Mr. Kumar and Mr. Gupta are jointly and severally liable for only that ₹20,000, not for any other outstanding GST related to Mr. Kumar's remaining food business.
Key Takeaways for Business Owners:
- Due Diligence is Crucial: As a transferee, always conduct thorough due diligence before acquiring a business. Check for any outstanding GST liabilities to avoid unexpected tax burdens. A GST audit may be necessary.
- Agreement Clarity: The transfer agreement should clearly specify the allocation of responsibility for outstanding tax liabilities. While this agreement might not be binding on the GST authorities, it can define the liabilities between the transferor and the transferee.
- Registration Compliance: Ensure timely application for GST registration amendment or new registration, as applicable.
- Seek Professional Advice: Consult a tax professional to understand the implications of Section 85 and ensure compliance with all relevant GST provisions.
There have been no major amendments to Section 85 since its enforcement on July 1, 2017. The core principle of shared liability upon business transfer remains unchanged.
No case laws found for this section yet.
Browse all case laws →Frequently Asked Questions
What does CGST Section 85 cover regarding the transfer of a business?
CGST Section 85 deals with the joint and several liability of the transferor and transferee of a business for any tax, interest, or penalty due from the transferor up to the date of the transfer, whether determined before or after the transfer. It ensures that the government can recover outstanding dues even after a business has been transferred.
What is the extent of the transferee's liability under CGST Section 85?
The transferee is liable only to the extent of the value of the assets transferred to them. If the value of the transferred assets is less than the outstanding tax, interest, and penalty of the transferor, the transferee is only liable up to the asset's value. If the value is higher, they are liable for the full outstanding amount, subject to that value.
Who is considered the 'transferor' and 'transferee' under CGST Section 85?
The 'transferor' is the registered person who transfers their business, in whole or in part, by sale, gift, lease, leave and license, hire, or in any other manner whatsoever. The 'transferee' is the person to whom the business or part of the business is transferred.
What types of dues are covered under the joint and several liability of CGST Section 85?
The joint and several liability covers any tax, interest, or penalty due from the transferor under the CGST Act, SGST Act, UTGST Act, or IGST Act. It includes dues that are determined before the date of transfer as well as those that are determined *after* the transfer but relate to the period before the transfer.
How can a transferee protect themselves from unforeseen tax liabilities under CGST Section 85?
The transferee should conduct thorough due diligence of the transferor's GST compliance history before the transfer. This includes verifying GST registration, filing of returns, payment of taxes, outstanding demands, and any ongoing assessments or audits. A specific indemnity clause can be included in the transfer agreement to protect the transferee against any undisclosed liabilities.
Is there any relief or exception from liability under CGST Section 85 for the transferee?
The primary relief is that the transferee's liability is limited to the value of the assets transferred. Also, if the transferee can demonstrate that they exercised reasonable care and diligence in assessing the transferor's GST compliance before the transfer (and found no evidence of outstanding dues), this could be a mitigating factor in any subsequent proceedings. However, there is no explicit legal exception beyond the asset value limitation.
What happens if both the transferor and transferee fail to pay the dues under CGST Section 85?
In such a scenario, the GST authorities can initiate recovery proceedings against both the transferor and the transferee, jointly and severally, up to the value of the assets transferred. The authorities will typically pursue the party from whom recovery is easiest or most likely to succeed, but both parties remain liable.
Key Conditions & Requirements
| Condition | Details |
|---|---|
| Transfer of Business | A taxable person, liable to pay tax under this Act, transfers their business in whole or in part. |
| Manner of Transfer | The transfer can be by sale, gift, lease, leave and license, hire or in any other manner whatsoever. |
| Joint and Several Liability | The taxable person (transferor) and the person to whom the business is transferred (transferee) are jointly and severally liable. |
| Extent of Liability | The liability extends wholly or to the extent of such transfer. |
| Nature of Dues | The liability covers tax, interest, or any penalty due from the taxable person. |
| Time Period of Liability | The liability is for dues upto the time of such transfer. |
| Timing of Determination | The tax, interest, or penalty may have been determined before the transfer but remained unpaid, or it may be determined after the transfer. |
| Transferee's Liability for Future Supplies | The transferee is liable to pay tax on the supply of goods or services or both effected by them from the date of transfer. |
| Registration Amendment | If the transferee is a registered person, they must apply for amendment of their certificate of registration within the prescribed time. |
No related notifications found for this section.
Browse all notifications →Amendment History
No numbered amendments recorded for this section.