Liability in Case of Transfer of Business – Section 85 of GST

In the dynamic world of business, ownership transitions are common. Businesses may be transferred through sale, lease, gift, or other means. However, such transitions carry significant tax implications under the GST regime. Section 85 of the CGST Act, 2017 specifically addresses the liability to pay tax in case of transfer of business. It imposes a joint and several liabilities on both the transferor and the transferee. Understanding this provision is crucial for both outgoing and incoming business owners to ensure compliance and avoid legal complications.

Applicability of Section 85 of the CGST Act

Section 85 applies when a taxable person transfers their business, either wholly or partially. The transfer can occur through various modes, including:

• Sale of business

• Lease or licensing arrangements

• Gift or inheritance

• Hire agreements

• Any other method of transfer

The provision ensures that any dues under GST law — including tax, interest, or penalty — are not evaded or lost during such transitions.

Key Provisions of Section 85

1. Joint and Several Liability of Transferor and Transferee (Sub-section 1)

As per Section 85(1), when a taxable person transfers their business (in full or in part), both the transferor and the transferee are jointly and severally liable to pay any tax, interest, or penalty due up to the date of transfer. This includes:

• Dues that have already been assessed but remain unpaid

• Dues that may be determined at a later stage (even after the date of transfer)

Implication:
This means that even if the transferor fails to pay outstanding GST liabilities before the transfer, the transferee may be held liable. This provision is designed to protect government revenue and ensure that liabilities do not vanish due to business restructuring or ownership changes.

2. Liability of the Transferee After the Transfer (Sub-section 2)

According to Section 85(2), once the transferee takes over and starts operating the business:

• He shall be liable to pay GST on all supplies made from the date of transfer.

• If already registered under GST, the transferee must apply for an amendment of the registration certificate within the prescribed time.

Implication:
The business continues under the new owner, and so does the GST compliance. The transferee must ensure they are registered correctly and start discharging tax obligations from day one of taking over the business.

Practical Scenarios Covered Under Section 85

Scenario 1: Sale of Business

If Mr. A sells his business to Mr. B, and there are outstanding GST dues, both Mr. A and Mr. B can be held liable for these dues, up to the date of transfer.

Scenario 2: Gift of Business

In case of a business being gifted to a relative, even though no monetary consideration is involved, Section 85 still applies. The recipient of the business is liable jointly and severally with the previous owner.

Scenario 3: Business Transfer by Lease

When a business is transferred temporarily through a lease agreement, the lessee who operates the business also assumes GST liability for prior dues along with the original business owner.

Compliance Requirements for the Transferee

1. Review Tax Records:
   Before accepting a business transfer, the transferee must review the tax compliance history of the transferor.

2. Due Diligence:
   Conduct a detailed due diligence process to understand existing liabilities, pending assessments, or disputes with the GST department.

3. Registration Amendment:
   If the transferee is already registered under GST, they must apply for amendment of their GST registration to reflect the new business details.

4. Obtain No-Due Certificate (Optional):
   Though not mandatory under the GST law, a no-due certificate from the transferor can be a good practice to mitigate future risks.

Why Is Section 85 Important?

Section 85 plays a crucial role in safeguarding government revenue during business transitions. It prevents tax evasion and ensures that GST dues are not ignored when businesses change hands. It also places an onus on the incoming business owner to ensure that the business they are acquiring is compliant.

Consequences of Non-Compliance

Failure to comply with the provisions of Section 85 can lead to:

• Recovery proceedings against both parties

• Interest and penalties

• Legal disputes

• Damage to business reputation

Conclusion

Section 85 of the CGST Act ensures that tax liabilities are not overlooked when a business changes ownership. Whether the business is sold, leased, gifted, or transferred through any other means, both the old and the new owner may be held accountable for past dues. Therefore, it is essential for both transferors and transferees to understand their responsibilities under this section and ensure full compliance to avoid any future liabilities.

FAQs

Q1. Does Section 85 apply in case of merger or amalgamation of companies?
Yes, in such cases, the merged or amalgamated entity inherits the tax liabilities of the original entities.

Q2. Is the transferee liable if the business is only partially transferred?
Yes, liability under Section 85 applies even if only a part of the business is transferred.

Q3. Can the transferee be held liable for penalties incurred before the transfer?
Yes, Section 85 covers tax, interest, and penalties, even if determined after the date of transfer.

Q4. Is it necessary to inform the GST department about the transfer?
Yes, the transferee must update the GST registration to reflect the change in ownership or business structure.