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FORM GST ITC - 02 : A Detailed Analysis

The main purpose behind implementation of GST was to put an end to cascading of taxes. In the old indirect tax regime, the taxes were multilayered as the Central Government levied excise duty,service tax, Central Sales Tax etc. Whereas the State Government levied taxes such as VAT , Entry Tax, Sales Tax, state excise and octroi etc. 

To eradicate this problem, the Government moved towards opting a new Indirect Tax Regime i.e. GST to reduce the extra tax burden on the ultimate consumers , to simplify the whole process of levying taxes and to lessen the duplicacy of taxes at every stage.

Input tax Credit plays an important role in the whole GST Process. Input Tax Credit implies that taxes paid by a person on any purchase of goods in the course or furtherance of business can be further utilised by such a taxable person in the form of Input while discharging its tax liability.

From the conditions to be satisfied for availment of ITC, block credit u/s 17(5) of the CGST Act, taking of ITC in case of job worker , Manner of distribution of credit by ISD to Manner of recovery of credit distributed in excess, all the circumstances are elucidated in the Chapter V of the CGST Act.

A lot of changes take place in a business from time to time, which includes transfer of business by way of merger or demerger, sale of business, etc. 

  • The question that arises in such a scenario is the treatment of Credit lying unutilized and available in the Electronic Credit Ledger of transferred business?

The answer to the above question lies in the provisions of the GST Act and GST Rules.A registered taxpayer can transfer the input tax credit unutilized and lying in its electronic credit ledger into another business by filing a Declaration in the FORM GST ITC - 02.

FORM GST ITC - 02 is a form prescribed by the Government to transfer ITC lying in the electronic credit ledger of a GSTIN to another GSTIN due to mergers and acquisitions.

  • Who is liable to file FORM GST ITC - 02?

The transferor must file FORM GST ITC - 02 and the requisite action is to be taken by the transferee.

  • When does the obligation to file FORM GST ITC - 02 arises?

When the amalgamation, mergers , demergers or acquisition of a business takes place, the registered taxpayer might have unutilized ITC lying in its Electronic Credit Ledger. Such unutilized ITC can be transferred by the transferor to the Electronic Credit Ledger of such transferee.Thereby implying that such ITC can be utilised by the transferee.

  • What are the contents of FORM GST ITC - 02?

Rule 41 of the CGST Rules has prescribed the procedure to be followed in order to transfer credit on sale, merger, amalgamation, lease or transfer of business. 

The Contents of the FORM GST ITC - 02 in accordance with Rule 41(1) of CGST Rules. Attached below is format of FORM GST ITC - 02:

  • What are the prerequisites of filing FORM GST ITC - 02?

The following conditions must be met for being eligible to file the FORM GST ITC-02:

  1. In case any registered entity undergoes sale, merger, de-merger, amalgamation, lease or transfer, the acquired entity must file ITC declaration for transfer of ITC in the FORM GST ITC-02.
  2. The acquired or transferor entity must have matched Input Tax Credit available in the Electronic Credit Ledger, as on effective date of merger/ acquisition/ amalgamation / lease/ transfer.
  3. The acquiring entity (transferee) and the acquired entity (transferor), both should be registered under the GST regime.
  4. The acquired entity (transferor) must have validly filed all the returns for the past periods.
  5. All transactions categorised as “Pending for action” of the merging entity should be either accepted, rejected or modified and any liabilities arising out of the returns filed by the transferor must be paid.
  6. The transfer of business should be with specific provision of transfer of liabilities. It should be accompanied by a certificate issued by Chartered Accountant or Cost Accountant to that effect. Liabilities here would include stayed demands – of tax or in respect of litigation or recovery cases.
  • Which ITC can be transferred by filing FORM GST ITC - 02?

The following ITC can be transferred by filing the FORM GST ITC-02:

1) Matched ITC balance available in the transferor’s Electronic Credit Ledger;

2) Such ITC appearing under the major heads – Central tax, State / UT tax, Integrated tax, and CESS can be transferred by filing FORM GST ITC-02.

3) The amount of ITC that is provisional or unmatched, cannot be transferred by the Acquired Entity (transferor) using this process.

  • Can the transferee change its decision to accept / reject the transfer of the ITC by the transferor?

The process of transferring unutilised ITC is divided into two parts:

  • The transferor files GST ITC-02 stating the unutilised ITC.
  • The transferee accepts/rejects the same on the GST portal.

Upon filing of FORM GST ITC - 02 by the transferor, an intimation regarding the same would be provided to the transferee. On acceptance of the same, ITC lying unutilized in the credit ledger of the transferor will be transferred to the transferee. However, if the request is rejected by the transferee, the ITC will be credited back to the electronic credit ledger of the transferor.

Transferee has an option to accept or reject the ITC transfer multiple times until the same is finally submitted by the transferor on the GST Portal.