Liability in Case of Amalgamation or Merger of Companies – Section 87 of GST

In the dynamic world of business, mergers and amalgamations are common strategies adopted by companies to consolidate their operations, expand market presence, or achieve financial synergies. While such corporate restructuring has its own benefits, it also comes with certain compliance requirements under the GST.

Section 87 of the CGST Act, 2017, deals specifically with the liability in case of amalgamation or merger of companies. This provision ensures clarity and compliance in the taxation of inter-company transactions during the transitional period of such restructuring.

In this blog, we break down the implications, compliance requirements, and legal nuances of Section 87 in an easy-to-understand format for business owners, accountants, and tax professionals.

Understanding Section 87 of the CGST Act

Key Provision:

Section 87 addresses the GST liability when two or more companies undergo amalgamation or merger, particularly in cases where the effective date of the order is backdated—that is, earlier than the date on which the court or tribunal actually passes the order.

Legal Text Summary:

Section 87 comprises two key sub-sections:

Sub-section (1):

• If two or more companies are amalgamated or merged by an order of a court or tribunal or otherwise;

• And the effective date of the merger is earlier than the date of the order;

• And these companies have supplied or received goods or services to or from each other during the interim period (i.e., from the effective date to the date of the order);

• Then, such transactions are deemed valid, and must be included in the turnover of the respective companies.

• Each company will be individually liable to pay GST on such supplies or receipts.

Sub-section (2):

• Regardless of what the amalgamation or merger order states, for the purposes of GST, the companies shall be treated as distinct entities up to the date of the order.

• Their respective GST registrations will be cancelled only from the date of the order, not from the earlier effective date.

Why This Provision Matters

In many cases, amalgamation or merger orders are made effective from a retrospective date. For example, a tribunal may issue a merger order in December 2024 but make it effective from April 2024. During this period, the merging companies may continue transacting with each other as independent entities.

Section 87 ensures that:

• These transactions are not ignored or voided for tax purposes.

• The tax liability remains intact even if the entities cease to exist post-merger.

• There is no tax loss to the government due to backdating of orders.

Practical Implications for Businesses

1. Taxation of Inter-Company Transactions

Companies must ensure that all transactions conducted during the interim period (from effective date to order date) are properly invoiced and reported in their GST returns. These supplies cannot be nullified simply because the companies have now merged.

2. Accounting and Documentation

Businesses need to maintain detailed records of such transactions and ensure that taxes are paid as per law. Failing to include such supplies in returns may lead to penalties and interest.

3. Cancellation of GSTIN

GST registrations of the merging entities shall not be cancelled from the backdated effective date of the order. They will be cancelled only from the actual date of the order, ensuring tax administration has a consistent cut-off.

Common Scenarios Where Section 87 Applies

• Company A and Company B decide to merge, with the effective date being April 1, 2024, and the tribunal passes the order on December 1, 2024.

• Between April and December, both companies engage in regular business transactions with each other.

• Under Section 87, such transactions are valid and taxable, and both companies must report and pay GST on these supplies.

• Post-December 1, 2024, they will be considered a single entity, and GST registration of the erstwhile companies will be cancelled accordingly.

Judicial Interpretations and Clarifications

While Section 87 is clear in its application, courts have upheld its importance in various rulings, especially highlighting the need to respect the tax treatment of entities as they existed during the interim period. Ignoring such transactions could lead to revenue leakage and misreporting under GST.

Key Compliance Tips for Businesses Undergoing Mergers or Amalgamations

1. Track All Inter-Company Transactions from the effective date to the order date.

2. File Accurate GST Returns for both companies separately during the interim period.

3. Communicate with GST Authorities to ensure proper transition and cancellation of registrations.

4. Consult Tax Advisors to handle complexities related to ITC (Input Tax Credit), reporting, and documentation.

5. Update Books and ERP Systems to reflect transaction-level details and align them with GST returns.

Conclusion

Section 87 of the CGST Act plays a crucial role in ensuring that tax compliance is maintained even during the complex phases of corporate restructuring like mergers and amalgamations. By treating the merging companies as distinct entities until the date of the merger order, and requiring them to account for all inter-company transactions, the law ensures that GST liability is accurately discharged.

For businesses, it is essential to be proactive, maintain meticulous records, and seek professional guidance to remain compliant with GST regulations during such transitional periods.

Need help managing your GST compliance during mergers and acquisitions? Reach out to our expert team for tailored advisory and end-to-end support at +91 9769647582.