
GST Input Tax Credit Transfer in Mergers: HC Seeks Clarity
The Bombay High Court has asked the GST Council and GSTN to consider enabling cross-State input tax credit (ITC) transfers in mergers. This is a major relief-seeking move for businesses undergoing corporate restructuring, especially when the merging entities operate in different States under different GSTINs.
Why Cross-State ITC Transfer Matters
Currently, there is no clear mechanism under the GST law to transfer unutilised ITC across States during mergers or amalgamations. This causes substantial credit loss for companies undergoing all-India mergers, even if both entities fall under the same PAN.
Under GST, each State registration is considered a distinct person (Section 25(4) of the CGST Act), which complicates ITC migration.
What the Bombay HC Said
In the case of Sony India Pvt Ltd v. Union of India & Ors., the Bombay High Court observed:
“The GST Council should examine the matter and provide a solution so that taxpayers undergoing mergers are not unfairly deprived of accumulated ITC.”
The petitioner had unutilised ITC in the transferee State but was unable to transfer the credit from the transferor State’s GSTIN. This led to double taxation and cash flow burden, defeating the seamless credit mechanism of GST.
Legal Background: What GST Law Says
- Section 18(3) of CGST Act: Allows ITC transfer on account of sale, merger, demerger, etc., with proper documentation.
- Rule 41 of CGST Rules: Allows filing of Form ITC-02 for transfer of credit.
- However: These provisions apply only within the same State (i.e., intra-State GSTIN transfer), not inter-State.
This limitation creates a compliance void in pan-India mergers involving multiple State GST registrations.
Expert Tip: Why This Matters for M&A Deals
According to CA Ankit Jain (indirect tax advisor):
“Cross-State mergers without ITC transfer provision can lead to permanent loss of input credit running into crores. Businesses must factor this into due diligence while structuring mergers.”
Suggested Reforms by HC
The Court urged:
- GST Council to frame a mechanism for inter-State ITC transfer.
- GSTN to develop tech solutions to enable credit movement during mergers.
- Time-bound action, so pending cases don’t result in tax loss or litigation.
This aligns with the spirit of Article 279A of the Constitution, which mandates the GST Council to make recommendations in public interest.
Comparison Table: Current vs Suggested ITC Treatment
Scenario | Current GST Rule | Bombay HC Suggestion |
---|---|---|
Intra-State Merger (Same State) | ITC transfer via Form ITC-02 allowed | No change |
Inter-State Merger (Different States) | No mechanism for ITC transfer | GST Council to enable transfer |
Business Impact | Credit loss, cash flow strain | Seamless credit migration possible |
Possible Workaround Until Framework is Notified
Until official amendments or clarifications are made, businesses can:
- Consider business transfer as going concern under Rule 41 for each State separately.
- Apply for advance ruling in case of ambiguity.
- Keep auditor and legal advice documented to support future litigation, if any.
Internal Link
Also read: GST Amnesty Scheme 2025: Last Chance for Defaulting Taxpayers
External Link
Read the Bombay HC Order on bombayhighcourt.nic.in
Summary
The Bombay High Court has urged the GST Council and GSTN to enable cross-State ITC transfer in mergers, addressing a major gap in current GST law. This move could prevent credit loss during pan-India corporate restructuring and streamline the merger process for multi-State businesses.
FAQ: Cross-State ITC Transfer in Mergers
Q1. Can I transfer ITC from one State GSTIN to another during a merger?
Not currently. There is no legal provision under GST to allow cross-State ITC transfers, which is why the Bombay HC has sought GST Council’s intervention.
Q2. Is there a form like ITC-02 for cross-State mergers?
No. Form ITC-02 is available only for intra-State mergers. GSTN does not permit such transfers across different State registrations.
Q3. What’s the risk of not having this mechanism?
Businesses may face permanent ITC loss, leading to increased tax outgo and poor working capital management.
Q4. When is a solution expected?
As of July 2025, the GST Council is yet to issue a framework. Businesses should monitor Council updates and consider legal precautions meanwhile.
Final Word
The Bombay HC’s stand on cross-State input tax credit transfer in mergers may trigger a long-awaited reform in GST. Until then, affected businesses should consult professionals and keep Efiletax in the loop for timely support.
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