ITC in Business Transfers & Mergers: How to Move Unutilized Credit

Input Tax Credit (ITC) is essentially cash restricted to your GST ledger. But what happens to that cash if the underlying business ceases to exist in its current form?

If you sell your business, merge with another company, or change your constitution from a proprietorship to a private limited company, your original GSTIN usually becomes invalid. You cannot simply leave your unutilized ITC sitting in the old portal account, nor can you withdraw it into your bank account.

The Goods and Services Tax (GST) law provides a specific mechanism to seamlessly transfer this accumulated ITC from the old entity (Transferor) to the new entity (Transferee). This process is executed via Form GST ITC-02.

This guide explains the legal conditions for transferring ITC during a business restructuring and the step-by-step process for filing ITC-02 in the 2026 Assessment Year.

When Can You Transfer ITC?

You are legally permitted to transfer your unutilized ITC balance only under specific circumstances of business restructuring:

1. Sale or Transfer of Business: You sell your entire business "as a going concern" to another person.
2. Merger or Amalgamation: Two companies combine to form a new entity, or one company absorbs another.
3. De-merger: A single company splits into two or more independent companies.
4. Change in Constitution:
   • A Sole Proprietorship converts into a Partnership or a Private Limited Company.
   • A Partnership Firm converts into an LLP.
   • (Crucial: The new constitution must obtain a new GSTIN because the PAN changes).

The Primary Legal Requirement

To legally transfer the ITC, there must be a specific provision for the transfer of liabilities.

You cannot just sell your assets (like machinery and stock) to a new buyer and transfer your ITC, while leaving your old debts behind in the dead entity. The transfer agreement must explicitly state that the transferee is assuming the business liabilities along with the assets.

Legal Reference

Relevant Law: Section 18(3) of the CGST Act allows the transfer of unutilized ITC in case of a change in the constitution of a registered person. Rule 41 of the CGST Rules, 2017 prescribes the procedure for filing Form GST ITC-02.

The Role of the Chartered Accountant

Filing ITC-02 is not a simple self-declaration like a monthly GSTR-3B return. Because massive amounts of unverified credit are often moved during mergers, the government mandates an independent audit.

To successfully file Form ITC-02, you must obtain a Certificate from a practicing Chartered Accountant (CA) or Cost Accountant. This certificate officially verifies that the sale, merger, or change in constitution has actually taken place and that the legal requirement regarding the transfer of liabilities has been met.

The details of this certificate (Name of Certifier, Membership Number, Date of Issue) must be uploaded along with a scanned copy of the certificate when filing the form on the GST Portal.

The Transfer Process (Step-by-Step)

The transfer requires synchronized actions from both the old entity (Transferor) and the new entity (Transferee).

Step 1: Transferor Files ITC-02

1. The Transferor creates a draft balance sheet on the date of transfer.
2. The Transferor logs into the GST portal using their old GSTIN.
3. Navigate to Services > Returns > ITC Forms > Form GST ITC-02.
4. The screen will automatically display the unutilized balance in the Electronic Credit Ledger.
5. Enter the GSTIN of the Transferee.
6. Enter the amount to be transferred. (In a full transfer, this is 100% of the balance. In a demerger, it is a proportional amount based on the value of assets).
7. Upload the CA Certificate and submit the form using a Digital Signature Certificate (DSC).

Step 2: Transferee Accepts the Credit

1. The Transferee logs into the GST portal using their new GSTIN.
2. Navigate to Services > User Services > ITC-02 Pending for Action.
3. The pending transfer request from the Transferor will be visible.
4. The Transferee reviews the details and clicks Accept.
5. Upon acceptance, the ITC is instantly credited to the Transferee's Electronic Credit Ledger and can be used immediately to offset their output tax liabilities.

Special Rule for Demergers

In a full merger, 100% of the old entity's ITC moves to the new entity. However, in a demerger (where a ₹100 Crore company splits off a division worth ₹30 Crores), you cannot arbitrarily decide how much ITC goes to the new company.

Section 18(3) dictates that the ITC must be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme. If the demerged division takes 30% of the total asset value of the old company, it is strictly entitled to exactly 30% of the unutilized ITC balance—regardless of whether that division was the one that generated the credit in the first place.

Common Mistakes Beginners Make

1. Attempting to Transfer Cash Ledger Balances: Form ITC-02 only transfers the Electronic Credit Ledger (the ITC). It does not transfer the money sitting in your Electronic Cash Ledger. Before closing the old GSTIN, you must apply for a refund of the cash balance using Form GST RFD-01.
2. Transferring ITC After Cancelling Registration: Business owners often immediately cancel their old GST registration the day a merger is signed. If the old GSTIN is cancelled or suspended, you cannot log in to file ITC-02. You must execute the ITC transfer before initiating the final cancellation process.
3. Leaving Capital Goods ITC Behind: Believing that the 5-year useful life rule means you must reverse the ITC on machinery because the business was "sold". Section 18(3) explicitly overrides the reversal rule if the business is transferred as a going concern with liabilities.

Conclusion

A change in legal constitution should not result in a loss of accumulated tax capital. Form ITC-02 provides a clean digital bridge for Input Tax Credit. By engaging a CA early to certify the transfer of liabilities and ensuring the form is accepted by the transferee before the old portal account is permanently closed, businesses can seamlessly protect their working capital during major transitional events.