It is believed, as a matter of course, that in terms of notf no. 12/2017-CT(Rate) dated 28.6.2017 transfer of business as a going concern is invariably exempt from GST. [Several Advance Ruling Authorities have also so held (eg. Rajashri Foods Pvt Ltd KAR ADRG 06/2018 - 2018-TIOL-36-AAR-GST.] This belief stems from a taken-for-granted presumption that transfer of business as a going concern is supply of service(s). For some, this presumption seems to flow from para 4(c) of Schedule II of the CGST Act, 2017 and for some others from the said notification or from both. The said para and the relevant portion of the said notification are reproduced below:
Para 4. Transfer of business assets:
(c) where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless-
(i) the business is transferred as a going concern to another person; or
(ii) the business is carried on by a personal representative who is deemed to be a taxable person.
Not. No. 12/2017-CT(Rate) date 28.6.2017 inter alia exempts supply of :
Chapter 99 : Services by way of transfer of a going concern, as a whole or an independent part thereof.
[Here a harmless presumption is to be made that what the notification inter alia exempts are services by way of transfer of business as a going concern and not 'services by way of transfer of a going concern'. Such drafting errors are galore in the GST legislation and should be charitably seen as occasions to smile rather than frown.]
2. As may be observed, the said para 4(c) is applicable only when a person ceases to be a taxable person. So let us first consider a case where a person who has transferred his business vertical as a going concern but still remains a taxable person. In that case, no resort can be made to the said para 4(c). Indeed, there is nothing in Schedule II or anywhere else in the CGST law which declares or stipulates that transfer of business as a going concern is to be necessarily treated as supply of service.
3. Even in a case where the person ceases to be a taxable person, para 4(c) in effect only states that in case the business is transferred as a going concern to another person, then any goods forming part of assets of business shall not be deemed to be supplied (as different from 'shall be deemed to be not supplied'). In other words, the nature of such supply will have to determined as per the provisions of law. Thus even here, para 4(c) does not declare that the transfer of business as a going concern is to be necessarily treated as supply of service(s). (Actually the deeming provision is to essentially take care of situations like where a person closes his business and becomes a non-taxable person but does not sell/supply his goods which formed part of the business assets to any one and just keeps them idle in store. The deeming provision ensures that the GST is collected on such goods. But any disagreement on this need not detain us as it is not really central/relevant for the purpose of this article).
4. Thus, in either case (i.e. a person transferring business as a going concern ceasing to become taxable person or not), the said para 4(c) is of no avail to determine whether the transfer of business as a going concern is to be treated as supply of service(s). But for the sake of those having trouble comprehending what is stated in the preceding para, we may as well proceed with the presumption that after transfer of a business vertical as a going concern, the person does not cease to be a taxable person.
5. Education Guide issued under the erstwhile Service Tax regime explained the term 'transfer of a going concern' (in para 7.11.15 thereof) as under:
Transfer of a going concern means transfer of a running business which is capable of being carried on by the purchaser as an independent business, but shall not cover mere or predominant transfer of an activity comprising a service. Such sale of business as a whole will comprise comprehensive sale of immovable property, goods and transfer of unexecuted orders, employees, goodwill etc. Since the transfer in title is not merely a transfer in title of either the immovable property or goods or even both it may amount to service and has thus been exempted.
There is no intention to treat the above explanation in the Education Guide as a statutory authority. It is mentioned here only for the limited purpose to drive home the point that transfer of business as a going concern will involve supplies (transfer) of a mix of goods and/or services. (By the way even the Education Guide merely says that transfer of a going concern MAY amount to service.) In this article we are proceeding with the presumption that the transaction is indisputably transfer of business as a going concern (i.e. it is not in dispute that the transaction is 'transfer of business as a going concern').
6. In the above background, it is evident that whenever there is transfer of business as a going concern, it shall involve transfer of goods and/or services. Whether such a transfer over all is to be treated as supply of goods or supply of service has to be and can be determined in terms of the definitions of composite supply and mixed supply read with s. 8 of the CGST Act 2017. These are reproduced below.
s.2(30) "composite supply" means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply; Illustration.- Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;
2. (74) "mixed supply" means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.
s.8. The tax liability on a composite or a mixed supply shall be determined in the following manner, namely:- (a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply; and (b) a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.
7. Supply is defined in s. 7 of the CGST Act, 2017 as under:
s. 7. (1) For the purposes of this Act, the expression "supply" includes-- (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
The word 'transfer' in the definition may be taken note of (because it means that transfer of goods or services made for a consideration by a person in the course or further of business is covered under supply).
8. If the transfer of business as a going concern involves a supply (transfer) which can be called principal supply and that supply is of goods, then the transfer of business as a going concern will have be treated as supply of goods by virtue of s.8 ibid and, therefore, the exemption under notf no. 12/2017-CT(Rate) will not be applicable as that is applicable to services of transfer of business as a going concern.
Yes, if such transfer involves a principal supply of service, then it will be taken to be supply of service and thereby become entitled to the said exemption.
9. The analysis is similar even if there is no principal supply involved in the transfer of business as a going concern. In that case, the supply satisfies all the integers of the definition of mixed supply in which case, if the rate of tax is the highest on the supply of any of the goods, the transfer of business as a going concern will have to be treated as supply of goods as per section 8 ibid and hence will not be eligible for the said exemption but if the rate of tax is the highest on the supply of any one of the services, then the transfer of the going concern will be treated as supply of service and will be covered by the said exemption.
10. It is pertinent to mention here that some professionals have tried to argue that the said notification itself makes it clear that transfer of business as a going concern is to be invariably treated as supply of service. This is totally specious and demonstrates lack of understanding. An exemption notification is never meant to be nor is it an assistance or a tool to determine the classification. To decide whether an exemption notification is applicable or not inter alia requires pre-determination as to whether the supply is covered under the classification and description given in the notification. Thus, the said notification will apply to the transfer of business as a going concern only and only when such transfer can be treated as a supply of service and will not apply when such transfer is tantamount to supply of goods.
11. Thus it stands proved that the transfer of business as a going concern is not exempt under the said notification as a matter of course; it is exempt only when such transfer tantamounts to supply of service and is not exempt when such transfer tantamounts to supply of goods.