Section 87 of GST – Liability in case of amalgamation or merger of companies

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Section 87 of GST – Liability in case of amalgamation or merger of companies

(1) When two or more companies are amalgamated or merged in pursuance of an order of court or of Tribunal or otherwise and the order is to take effect from a date earlier to the date of the order and any two or more of such companies have supplied or received any goods or services or both to or from each other during the period commencing on the date from which the order takes effect till the date of the order, then such transactions of supply and receipt shall be included in the turnover of supply or receipt of the respective companies and they shall be liable to tax accordingly.

(2) Notwithstanding anything contained in the said order, for all purposes of this Act, the said two or more companies shall be treated as distinct companies for the period up to the date of the said order and the registration certificates of the said companies shall be cancelled, with effect from the date of the said order.

Analysis of this section

Introduction – This section deals with the tax liability on certain transactions between the effective date and date of order of Tribunal/Court in case of amalgamation or merger of companies.

Analysis

(i) In cases of amalgamation or merger of two or more companies by virtue of an order passed by Tribunal/Court/otherwise, the following two crucial dates are relevant, –

  • — Date from / on which the amalgamation/merger is effective;
  • — Date of the order pursuant to which the amalgamation/merger takes place;

(ii) Normally, by virtue of the said order the transactions of supply of goods and/or services inter-se between the companies merged/amalgamated, between two dates, would get nullified as they would become one entity from the effective date (and not from the date of the order).

(iii) However, for the purposes of GST, by virtue of this provision, such transactions would continue to be treated as supply by one entity and receipt by the other, viz., all the provisions of this law would equally apply as if the amalgamation or merger had not taken place and both the entities continue as two different taxable persons. Till the date of order of amalgamation / merger, those companies shall be treated as distinct companies and should discharge their respective tax liabilities.

(iv) Thus, this provision would eclipse the order and legal effect of the Court/Tribunal for the limited purposes of GST law.

(v) It provides that wherever necessary, the registration certificates of the said companies would stand cancelled with effect from the date of the said order.

Please refer to the facility provided by rule 41 for transfer of unutilized input tax credit lying in electronic credit ledger of the transferor.

Comparative analysis with the erstwhile regime

This is comparable to most of the State level VAT laws, wherein the sale of goods between such entities (between the effective date of merger / amalgamation and the date of the order) will be treated as sale by one entity and purchase by the other. Such transactions will continue to be liable to tax as if the merger or amalgamation had not taken place and both the entities continue as two different entities.

Issues and Concerns

As the treatment under the Companies Act, 2013 read with relevant rules thereto and GST law are different for a period commencing from effective date of order of merger till the date of issue of order, both the merged company and the resultant company will have to keep track of transactions effected between each other during the above said period and maintain relevant reconciliations for the purpose of both the laws, if the same is not done, it would lead to unnecessary complications and avoidable litigations.

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