CGST Section 87 — Liability in case of amalgamation or merger of companies
CGST Act · Liability in case of amalgamation or merger of companies
Quick Answer
Section 87 of the CGST Act, 2017 governs Liability in case of amalgamation or merger of companies. It provides the core statutory basis, outlining the essential legal principles, rights, and liabilities under Indian indirect tax law. Section 87 GST: Liability in case of amalgamation or merger of companies — eligibility, conditions, case laws and compliance impact under Indian tax law.
Plain-English Explanation
Section 87 of the CGST Act deals with how GST applies when companies merge or amalgamate, particularly when the merger is ordered by a court or tribunal and made retroactive. It clarifies how transactions between the merging companies are treated for GST purposes during the period between the effective date of the merger and the date of the actual order.
This section applies to companies that are merging or amalgamating under a court or tribunal order or through other legal processes. Critically, it applies specifically when the order specifies that the merger is effective from a date earlier than the date the order was issued. This retroactivity is the key trigger for Section 87. Without it, general GST rules for business transfers would apply.
Here's a breakdown of the key conditions and how it works:
- Retroactive Merger: The court or tribunal order must specify an effective date for the merger that predates the actual date of the order. This is the cornerstone of this section.
- Inter-Company Transactions: During the period between the retroactive effective date and the date of the order, the merging companies may have transacted with each other (supplying goods or services). Section 87 addresses how these transactions are treated.
- Turnover Inclusion: Any supplies of goods or services between the merging companies during this retroactive period are included in the taxable turnover of the respective companies. This means each company has to account for these transactions and pay GST accordingly.
- Distinct Entities Until Order Date: Despite the retroactive effect of the merger for other legal purposes, for GST purposes, the merging companies are treated as separate, distinct entities until the date of the court or tribunal order.
- Registration Cancellation: The GST registrations of all the merging companies are cancelled effective from the date of the court or tribunal order. The new, merged entity will then need to obtain a fresh GST registration.
Practical Examples:
Let's say Company A and Company B are ordered by a tribunal to merge, and the order is issued on December 15, 2024. However, the tribunal specifies that the merger is effective from July 1, 2024.
- During the period July 1, 2024 to December 15, 2024, Company A sold goods worth ₹50 lakhs to Company B. Prior to the merger order, both companies would have treated this as a taxable supply and Company A would have paid output tax on these sales.
- Section 87 clarifies that Company A must include this ₹50 lakhs in its taxable turnover for the relevant period (likely July to September and October to December GST returns) and pay the applicable GST. Similarly, Company B would have claimed input tax credit on these purchases from A, and their filings should reflect this.
- From December 15, 2024 onwards, Company A and Company B no longer exist as separate entities for GST purposes. The newly merged entity must cancel the old registrations and apply for a fresh GST registration.
Another Example:
Imagine a scenario where Company X and Company Y are undergoing amalgamation as per the directives of the National Company Law Tribunal (NCLT). The NCLT issues its order on March 10, 2025, stating that the amalgamation will be effective from October 1, 2024. During this retrospective period, Company X provided IT services worth ₹20 lakhs to Company Y. As per Section 87, these services must be accounted for in Company X's GST returns, and applicable taxes must be paid. Company Y, in turn, can claim Input Tax Credit (ITC) on these services, provided they meet all other conditions for claiming ITC. The separate GST registrations of Company X and Company Y will be cancelled from March 10, 2025, and the amalgamated entity will need to obtain a new registration.
Important Note: There have been no significant amendments to Section 87 of the CGST Act since its enactment. The interpretation and application of the section remain consistent with the original intent of addressing GST implications in cases of retroactive mergers and amalgamations. The key takeaway is always to refer to the official pronouncement and seek advise.
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Browse all case laws →Frequently Asked Questions
What happens to the GST liabilities of a company that has been amalgamated or merged with another company under CGST Section 87?
Upon amalgamation or merger, the resulting (new) or the surviving company becomes liable to pay any tax, interest, penalty, or any other sum payable by the amalgamating/merging company under the GST law, as if the resulting/surviving company were the amalgamating/merging company itself. Essentially, all GST-related liabilities transfer to the successor entity.
Does Section 87 of the CGST Act cover only tax liabilities, or does it extend to other obligations like returns and refunds?
Section 87 is broadly worded and covers 'any tax, interest, penalty or any other sum payable'. This includes not only outstanding tax liabilities but also any other sum payable by the amalgamating/merging company under the GST law. While the section primarily addresses liabilities, the new entity also inherits the obligations related to filing pending returns, claiming eligible refunds, and addressing any ongoing assessments or audits pertaining to the pre-merger/amalgamation period. It's essentially inheriting the entire GST compliance history of the merged entity.
What is the procedure for transferring the GST registration of the amalgamating/merging company to the resulting/surviving company?
The amalgamating/merging company's GST registration will be cancelled. The resulting or surviving company needs to apply for a fresh GST registration. They should indicate in the application that they are the successor to the amalgamating/merging company. The cancellation of the merging entity's registration and the issuance of the new entity's registration need to be properly coordinated to avoid any disruption in business operations and compliance.
How does the amalgamation or merger affect the Input Tax Credit (ITC) of the amalgamating/merging company under CGST Section 87?
The unutilized Input Tax Credit (ITC) of the amalgamating/merging company, lying in its electronic credit ledger, can be transferred to the electronic credit ledger of the resulting/surviving company. The procedure for this transfer would typically involve updating the GST portal with the relevant details of the merger/amalgamation, including any required documentation to demonstrate the legal transfer of assets and liabilities. Specific rules and formats for ITC transfer may be prescribed by the GST authorities from time to time and should be followed meticulously.
What documentation is required to prove the amalgamation or merger for the purposes of CGST Section 87, especially for transferring ITC and handling liabilities?
Key documents required typically include the scheme of amalgamation/merger as approved by the High Court or relevant authority, certificate of incorporation of the resulting/surviving company (if it is a new entity), orders of the High Court sanctioning the scheme, and any other documents evidencing the transfer of assets and liabilities. These documents serve as legal proof of the transfer and are essential for all GST-related transactions pertaining to the merged entities. Retaining these documents and presenting them when requested by GST officers is critical.
If the amalgamating/merging company was under audit or investigation by GST authorities at the time of the merger, what happens to that audit/investigation?
The audit or investigation continues, with the resulting/surviving company now becoming responsible for cooperating with the authorities and providing the necessary information and documents. The resulting/surviving company steps into the shoes of the amalgamating/merging company in relation to the ongoing audit or investigation. Failing to cooperate can result in penalties and further scrutiny.
Is there a time limit within which the resulting/surviving company must inform the GST authorities about the amalgamation or merger and take steps to transfer GST liabilities and ITC?
While the CGST Act does not prescribe a specific time limit for informing the GST authorities about the amalgamation/merger, it is advisable to do so as soon as practically possible after the merger becomes effective. This is because delays can lead to complications in GST compliance, especially concerning ITC transfers and handling of pending liabilities. It is best to proactively engage with the authorities and follow any relevant guidance issued by them to ensure a smooth transition.
Key Conditions & Requirements
| Condition | Details |
|---|---|
| Amalgamation or Merger | Two or more companies are amalgamated or merged. |
| Order of Court/Tribunal/Otherwise | The amalgamation/merger is in pursuance of an order of a court, Tribunal, or otherwise. |
| Retrospective Effect | The order is to take effect from a date earlier than the date of the order itself. |
| Inter-Company Transactions | Two or more of the companies involved have supplied or received goods/services/both to/from each other during the period between the effective date of the order and the order date. |
| Turnover Inclusion | Such inter-company supply/receipt transactions must be included in the turnover of supply/receipt of the respective companies. |
| Tax Liability | The companies are liable to pay tax accordingly on the inter-company transactions. |
| Distinct Companies Treatment | Notwithstanding the order, the companies are treated as distinct companies for the purposes of the CGST Act until the date of the order. |
| Registration Cancellation | The registration certificates of the companies involved shall be cancelled with effect from the date of the order. |
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No numbered amendments recorded for this section.