Liability on Transfer of Business (Section 85 CGST)

Understand Liability on Transfer of Business (Section 85)

Key rules to remember

Core rule

Liability = tax + interest + penalty due from transferor up to the time of transfer

Applies to transfer in whole or in part, by sale, gift, lease, leave and licence, hire or any other manner.

Nature of liability

Taxable person (transferor) and transferee are jointly and severally liable

The department may recover the full amount from either person. Contribution between them is a private matter.

Part transfer

Where transfer is in part, the transferee's liability relates to the part of the business transferred

The transferor remains liable. Do not load the transferee with dues of the portion that stays with the transferor.

Cut-off

Dues relating to periods up to the time of transfer, whether determined before or after the transfer

Only dues for the post-transfer period are the transferee's own tax liability.

Trigger

Taxable person liable to pay tax, interest or penalty under the CGST Act transfers business in whole or part

Dues relating to periods up to the transfer are covered even if an order determines them after the transfer.

How to solve Liability on Transfer of Business (Section 85) questions

1. 1Confirm there is a transfer of a business, in whole or in part. Check the mode: sale, gift, lease, leave and licence, hire or other manner.
2. 2Identify the transferor and transferee, and note the date of transfer.
3. 3List the dues of the transferor: tax, interest and penalty, split between periods up to and after the transfer date.
4. 4If only part of the business moved, pick out the dues relating to that part. Exclude the rest from the transferee's liability.
5. 5Apply the rule: the transferor and transferee are jointly and severally liable for the relevant pre-transfer dues.
6. 6Treat post-transfer tax on supplies made by the transferee as the transferee's own liability, not under Section 85.
7. 7Compute amounts clearly, then state the conclusion in provision, facts, conclusion form.

Quickest way: Three-line Section 85 check

Common mistakes in Liability on Transfer of Business (Section 85)

• Saying the transferor is released once he transfers the business.

  Students think liability moves with the business.

  Fix: Remember the words 'jointly and severally'. The transferor remains liable along with the transferee.

• Making the transferee liable for all the transferor's dues in a part transfer.

  Students stop reading after 'transferee is liable'.

  Fix: Tie the transferee's liability to the extent relating to the part of the business transferred, as the section provides, and say the transferor stays liable.

• Including post-transfer tax in the Section 85 amount.

  Students add all dues shown in the case without checking dates.

  Fix: Draw a date line. Dues relating to periods up to the time of transfer go in, even if an order determines them later. Dues for the post-transfer period belong to the transferee on his own account.

• Excluding pre-transfer dues because the demand order was passed after the transfer.

  Students look at the date of the order instead of the period the dues relate to.

  Fix: Section 85 covers dues up to the time of transfer whether determined before or after the transfer. Check the period of the dues, not the date of the order.

• Limiting the section to sale of business.

  Sale is the most common example.

  Fix: List all modes: sale, gift, lease, leave and licence, hire or any other manner.

• Ignoring penalty and interest and counting only tax.

  Students focus on tax figures.

  Fix: Add tax, interest and penalty due up to transfer, if the facts give them.

• Mixing Section 85 with amalgamation or liquidation provisions.

  All fall under liability in special cases.

  Fix: Section 85 covers a transfer of business. Mergers and liquidation have their own sections. Pick by the facts.

Worked examples