Question
There are two proprietorship firms and one private limited company. both the proprietor of the firm are also directors in private limited company. both the firms are getting merged with private limited companies and all the capital goods and stock is also transferred to private limited company.

will the transfer of capital goods and stock be considered as taxable transfer ?
please provide your answer with relevant to some section/rules/circular.

Answer

Facts of the Case:
Two proprietorship firms are getting merged with Private Limited Company (Related party because both the proprietors are Director in the Company). Transfer of Capital Assets and stock is taxable transfer or not.

Law Applicable:
SCHEDULE II OF CGST ACT

4. Transfer of business assets

(a) where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person;

(b) where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, the usage or making available of such goods is a supply of services;

(c) where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless'

(i) the business is transferred as a going concern to another person; or

(ii) the business is carried on by a personal representative who is deemed to be a taxable person.

CGST RULE 41

RULE 41. Transfer of credit on sale, merger, amalgamation, lease or transfer of a business

(1) A registered person shall, in the event of sale, merger, de-merger, amalgamation, lease or transfer or change in the ownership of business for any reason, furnish the details of sale, merger, de-merger, amalgamation, lease or transfer of business, in FORM GST ITC-02, electronically on the common portal along with a request for transfer of unutilized input tax credit lying in his electronic credit ledger to the transferee:

Provided that in the case of demerger, the input tax credit shall be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme.

Explanation: - For the purpose of this sub-rule, it is hereby clarified that the 'value of assets' means the value of the entire assets of the business, whether or not input tax credit has been availed thereon.'.

(2) The transferor shall also submit a copy of a certificate issued by a practicing chartered accountant or cost accountant certifying that the sale, merger, de-merger, amalgamation, lease or transfer of business has been done with a specific provision for the transfer of liabilities.

(3) The transferee shall, on the common portal, accept the details so furnished by the transferor and, upon such acceptance, the un-utilized credit specified in FORM GST ITC-02 shall be credited to his electronic credit ledger.

(4) The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account.

Notification No. 12/2017- Central Tax (Rate)

Interpretation:
The Proprietors can transfer closing stock and capital goods of both businesses under their name without paying any GST only if the business is transferred on the concept of going concern.
As the "Service by way of transfer of going concern, as a whole or independent part thereof " is exempt under GST vide Notification No. 12/2017- Central Tax (Rate).
However if only capital assets and stock is transferred not the business as a whole in going concern, then it will be considered as taxable supply and GST would be leviable as sale of capital goods and stock to related party and valuation is done as per Rule 28 of CGST Rules.

Conclusion:
In your case if all the conditions of merger are satisfied and business is transferred as going concern then it is exempt under GST otherwise if only capital goods and stock are transferred then it is taxable supply under GST as discussed above.
 

(Reply dt.25/06/2019)