Liability in case of amalgamation or merger

Section 87 — LIABILITY IN CASE OF AMALGAMATION OR MERGER OF COMPANIES

BLOCK 1 — VERBATIM TEXT

Marginal note — Liability in case of amalgamation or merger of companies

BLOCK 2 — STATUTORY MAP

BLOCK 3 — COMMENTARY

1. The retrospective amalgamation framework

Section 87 addresses one of the most operationally complex aspects of corporate restructuring under GST — the retrospective amalgamation phenomenon. Standard practice in Indian corporate mergers is to designate an appointed date (typically the start of a financial year, like 1 April) that is several months earlier than the order date (the date NCLT approves the scheme). The order is then effective from the appointed date — creating a backward-looking application of the merger.

For accounting / Companies Act purposes, this retrospective effect is straightforward — the financial statements of transferor and transferee are consolidated from the appointed date. But for GST purposes, the retrospective fiction collides with the reality of operational continuity. During the interim period (appointed date to order date), the merging companies continue to operate as separate legal entities — they hold separate registrations, file separate returns, transact with each other in normal commerce, and bear separate GST obligations. Section 87 resolves the tension by deeming the companies to remain distinct for GST purposes through the interim period.

2. The deemed-distinct-companies framework — sub-s. (2)

Sub-section (2) is the operational core of s. 87. It provides — NOTWITHSTANDING the amalgamation order — for purposes of the CGST Act, the merging companies shall be TREATED AS DISTINCT COMPANIES for the period up to the order date. The cancellation of registrations is with effect from the date of the order — not from the appointed date.

Operational consequences: (a) Each merging company continues separate GST registration through the interim period; (b) Separate GSTR-1, 3B, and 9 / 9C filings for the portion of the financial year up to the order date; (c) Inter-se supplies between merging companies are treated as supplies between distinct persons — invoices, GST charged, tax paid, ITC claimed; (d) On the order date, transferor registrations are cancelled; transferee continues (or fresh registration); (e) GSTR-10 final return for transferor entities filed within 3 months of cancellation; (f) Rule 41 ITC transfer for any unutilised credit.

The framework ensures that the retrospective accounting consolidation does not unwind real-world GST compliance through the interim period. This protects revenue from manipulation through dating gymnastics in merger schemes.

3. Inter-se supplies during the interim period — sub-s. (1)

Sub-section (1) crystallises the substantive obligation. During the interim period, where the merging companies have supplied or received goods or services to or from each other, such transactions shall be included in the turnover of supply or receipt of the respective companies — and the companies shall be liable to pay tax accordingly.

The provision addresses inter-company transactions that, accounting-wise, would be eliminated through retrospective consolidation. Examples:

• Goods transfers between merging companies — Manufacturer A merging with distributor B; during interim period A supplies finished goods to B for distribution. The transfers are GST-taxable supplies; A pays output tax; B takes ITC.

• Service transactions between merging companies — Holding company providing management services to subsidiary; during merger interim period these services are taxable under reverse charge or forward charge as applicable; GST liabilities flow normally.

• Cross-charge for shared resources — Common premises, common employees, common IT infrastructure cross-charged between merging entities. GST applicable on cross-charge invoices through the interim period.

• Inter-company loans / advances — Financial transactions; while some may be exempt under Notification 12/2017-CT(R) financial services, others may attract GST. Interim period GST consequences follow normal rules.

The substantive principle — economic reality of the interim period governs GST treatment, not the retrospective consolidation fiction. This is consistent with the broader GST framework's emphasis on substantive supply over formal labels.

4. Companies Act 2013 sections 230-234 framework

The substantive merger framework under Indian law is in the Companies Act, 2013, sections 230-234:

• Section 230 — Compromise or arrangement — General framework for schemes involving creditors / members. Tribunal approval required.

• Section 231 — Power of Tribunal to enforce compromise — Implementation provisions.

• Section 232 — Merger and amalgamation — Most operatively used. Covers transfer of property, liabilities, employees of transferor companies to transferee. Specific provisions for transfer of tax positions.

• Section 233 — Fast-track merger — Simplified procedure for (a) merger of two or more small companies; or (b) merger of holding and wholly-owned subsidiary. RD (Regional Director) approval; no NCLT order required.

• Section 234 — Cross-border merger — Merger between Indian and foreign companies; complex FEMA / IT / GST cross-implications.

For NCLT mergers under s. 232, the order typically provides for retrospective effect from an appointed date. Section 87 applies to these mergers — interim-period inter-se supplies are taxable. For fast-track mergers under s. 233, RD approval order typically also has an effective date that may differ from the order date; s. 87 applies analogously.

5. IBC resolution plan amalgamations

Under the Insolvency and Bankruptcy Code, 2016, resolution plans may involve mergers or amalgamations of the corporate debtor with other entities. NCLT approval of the resolution plan under s. 31 IBC triggers the merger. Section 87's framework applies to such IBC-driven mergers.

Specific issues in IBC amalgamations: (a) Resolution plan approval may have specific dates that need GST analysis; (b) Pre-approval CIRP period has its own GST framework (often involving s. 79 / s. 82 priority disputes); (c) Post-approval merger triggers s. 87 interim-period analysis if retrospective effect; (d) Coordination between Resolution Professional, NCLT, and GST authorities for compliance during transition.

Where the IBC resolution involves the corporate debtor merging with the successful resolution applicant (or its subsidiary), the s. 87 framework applies. The interim period — typically the CIRP period — has separate GST compliance obligations under the corporate debtor's existing registration (managed by RP).

6. Operational compliance during the interim period

During the interim period (appointed date to order date), each merging company maintains full GST compliance:

• Separate registrations active — All merging companies' GSTINs continue. No early cancellation.

• Separate GSTR-1 filings — Each company files own GSTR-1 monthly / quarterly for its outward supplies.

• Separate GSTR-3B filings — Each company files own GSTR-3B for its tax liability and ITC.

• Separate annual return GSTR-9 / 9C — For the financial year periods that include the interim period — each merging company files own annual return for relevant periods.

• Inter-se invoicing — Standard tax invoices issued by each merging company for supplies to the other. GST charged; ITC available to recipient.

• Inter-se ITC reconciliation — GSTR-1 of transferor and GSTR-2A / 2B of transferee must reconcile for inter-se supplies.

• Compliance for transferor's portion of FY — Up to order date — full compliance; after order date — registration cancelled and final return filed.

7. Post-order transition — cancellation and consolidation

On the order date, the merger becomes operatively effective for GST purposes. Transferor registrations are cancelled with effect from the order date. The transition involves:

• GSTR-10 final return — Transferor companies file final return GSTR-10 within 3 months of cancellation. Reports final ITC balance, output tax, inputs / capital goods. Effectively closes the GST account.

• Rule 41 ITC transfer — Unutilised ITC of transferor companies transferred to transferee through FORM GST ITC-02. Transferee accepts in ITC-02A. Jurisdictional officer's verification.

• Transferee registration amendment — If transferee is existing registered person, amendment under Rule 19 to incorporate transferred business (addition of place of business, brand names, etc.). Otherwise fresh registration.

• Supplier / customer notification — Communication to suppliers (for ITC reflecting transferee's GSTIN going forward) and customers (for billing under transferee's GSTIN). Smooth transition managed through formal communications.

• Final reconciliation and books closure — Inter-se ITC reconciliation finalised; financial books closed; merger accounting effective.

8. Practitioner approach to M&A transactions

For M&A practitioners advising on amalgamations, s. 87 has significant operational implications:

• Tax due diligence — Comprehensive GST due diligence covers (i) interim-period inter-se compliance plans; (ii) GST liabilities of transferor and transferee; (iii) ITC reconciliation; (iv) ongoing audits / investigations; (v) Rule 41 ITC transfer planning.

• Scheme drafting — NCLT scheme to address (a) GST compliance during interim period — typically requires status quo maintenance; (b) Rule 41 ITC transfer authorisation; (c) tax indemnities and warranties from transferor's promoters.

• Working capital planning — Interim-period GST cash flow — output tax paid by transferor on inter-se supplies, ITC available to transferee, net working capital impact. For groups with high-volume inter-se supplies, this is significant.

• Schedule I deeming considerations — For inter-related party transactions, Schedule I deeming may apply alongside s. 87. Combined analysis required for cross-charges, cost-sharing arrangements, brand royalties, etc.

• Post-order operational integration — Customer / supplier transitions; invoice format changes; GSTIN updates; supplier ITC compliance for transferred suppliers.

9. Departmental View from CBIC Handbook of GST Law and Procedures (DGGST, 2024)

The CBIC Handbook (Chapter X on Liability) treats s. 87 as the operational framework for retrospective amalgamation scenarios. The Handbook emphasises that the deemed-distinct-companies framework under sub-s. (2) is operationally critical — preventing manipulation through retrospective consolidation.

On interim-period compliance, the Handbook directs that taxpayers must continue separate GST compliance through the interim period — separate GSTRs, separate tax payments, separate ITC claims. The retrospective effect for accounting purposes does NOT extend to GST compliance; merger only operationally takes effect on order date.

On Rule 41 ITC transfer, the Handbook directs verification by jurisdictional officer before approval. Conditions include (a) genuineness of merger scheme; (b) compliance through interim period; (c) Final return GSTR-10 filing by transferor; (d) Specific provision in NCLT order for transfer of liabilities. The ITC transfer is the key operational benefit of merger; verification ensures it is not misused.

On post-order transitions, the Handbook acknowledges the complexity of supplier / customer transitions and directs proportionate Departmental support. Late-filing relief for transition-period returns, brief amnesty for inter-se reconciliation issues, and similar accommodations are typically considered for bona fide cases.

On IBC-driven mergers, the Handbook directs coordination with Resolution Professionals — supporting transition compliance while preserving Government revenue priority. Rainbow Papers framework applies to GST claims in IBC waterfall.

CIRCULARS, INSTRUCTIONS & NOTIFICATIONS

• Sections 230-234 of the Companies Act, 2013 dated Statutory — Compromise, arrangement, merger and amalgamation framework. The substantive merger framework: (i) s. 230 — compromise or arrangement; (ii) s. 231 — implementation; (iii) s. 232 — merger / amalgamation; (iv) s. 233 — fast-track merger for small companies / wholly-owned subsidiaries; (v) s. 234 — cross-border merger. NCLT (or Regional Director for s. 233) approval triggers s. 87 framework. The provisions address property transfer, liabilities transfer, employee transfer, and specific tax positions.

• Section 31 of the Insolvency and Bankruptcy Code, 2016 dated Statutory — Approval of resolution plan — IBC mergers. Where IBC resolution plan involves merger / amalgamation, NCLT approval under s. 31 IBC triggers the merger. Section 87 applies analogously — interim-period inter-se supplies between corporate debtor and successful applicant (or its subsidiary) are GST-taxable. Coordination with Resolution Professional for transition compliance.

• Rule 41 dated Statutory (CGST Rules, 2017) — Transfer of credit on sale, merger, amalgamation, lease or transfer of business. Rule 41 operationalises ITC transfer in merger scenarios. Operative content: (i) Transferor's unutilised ITC transferable to transferee through FORM GST ITC-02; (ii) Conditions — merger / amalgamation with specific provision for transfer of liabilities; (iii) Transferee's acceptance in ITC-02A; (iv) Jurisdictional officer's verification and approval; (v) ITC reflected in transferee's electronic credit ledger after approval.

• Rule 19 dated Statutory (CGST Rules, 2017) — Amendment of registration — for transferee on merger. Rule 19 governs amendment of registration. Post-merger, transferee files application in FORM GST REG-14 within 15 days from order date to incorporate transferred business — addition of places of business, brand names, principal officer changes, etc. For fresh registration scenarios, FORM GST REG-01 within 30 days of becoming liable.

• Section 29 of the CGST Act, 2017 dated Statutory — Cancellation of registration — transferor companies post-merger. Section 29(1)(b) provides for cancellation of registration where the business has been transferred fully. For amalgamation scenarios, transferor's registration is cancelled effective from the NCLT order date per s. 87(2). Final return GSTR-10 within 3 months of cancellation per Rule 81.

PROCEDURE — STEP-BY-STEP

Step 1: Pre-merger GST due diligence

Comprehensive review of transferor and transferee GST positions: (i) GSTR filings for relevant FYs; (ii) ongoing demands / investigations; (iii) ITC balance and reconciliation; (iv) any anti-evasion engagement; (v) inter-se transactions identification.

Step 2: Scheme drafting — tax-specific provisions

NCLT scheme should address — (i) interim-period compliance maintenance; (ii) Rule 41 ITC transfer authorisation; (iii) cancellation of transferor registrations on order date; (iv) tax indemnities and warranties; (v) employee tax positions; (vi) ongoing tax dispute treatment.

Step 3: Interim-period compliance through merger pendency

From appointed date to order date — each merging company maintains: (a) separate GSTR-1 / 3B / 9 / 9C filings; (b) separate tax payments; (c) inter-se invoicing with full GST compliance; (d) ITC reconciliation; (e) compliance documentation.

Step 4: Inter-se transaction documentation

Standard GST documentation for inter-company transactions: (a) tax invoices in own name; (b) GST charged at applicable rates; (c) entries in GSTR-1; (d) recipient's ITC claim in GSTR-3B; (e) GSTR-2A / 2B reconciliation. Treated as supplies between distinct persons.

Step 5: NCLT order communication and verification

On NCLT order receipt — verify (i) effective date (appointed date); (ii) order date; (iii) specific provisions for transfer of liabilities; (iv) cancellation provisions for transferor; (v) any specific GST-related directions in order.

Step 6: Section 29(1)(b) cancellation application

Transferor companies file cancellation application under s. 29(1)(b) effective from NCLT order date. Application in FORM GST REG-16; supporting documents include NCLT order copy and merger scheme.

Step 7: Rule 41 ITC transfer application

Transferor files FORM GST ITC-02 specifying ITC balance to be transferred. Transferee accepts in ITC-02A. Application submitted through GSTN portal with supporting NCLT order.

Step 8: Jurisdictional officer's verification

Officer verifies (a) genuineness of merger; (b) interim-period compliance; (c) consistency with NCLT order; (d) Final return filings. Approval typically within 30-60 days; ITC credited to transferee's electronic credit ledger.

Step 9: GSTR-10 final return for transferor

Transferor files final return GSTR-10 within 3 months of cancellation date. Reports: (a) ITC balance reversed (if any); (b) final tax liability; (c) inputs / capital goods on which ITC was taken; (d) closing balances. Effectively closes the transferor's GST account.

Step 10: Transferee registration amendment / fresh registration

If transferee is existing registered person — Rule 19 amendment under FORM GST REG-14 to add transferred business elements. If fresh entity (e.g., NEWCO from merger), fresh registration under s. 22 with FORM GST REG-01.

Step 11: Supplier / customer transition notifications

Communication to (i) suppliers — for ITC under transferee's GSTIN going forward; (ii) customers — for invoicing under transferee's GSTIN. Periodic notifications during transition; effective dates clarified.

Step 12: Annual return GSTR-9 / 9C for transition year

For the financial year in which merger occurs: (a) transferor's GSTR-9 for periods up to order date; (b) transferee's GSTR-9 covering its full year plus the transferred business from order date. Reconciliation between merging entities' returns.

Step 13: Post-order tax compliance integration

Transferee's tax compliance now covers the consolidated business — single GSTR filings, consolidated ITC, integrated tax payment. Operational systems updated; account heads merged; books reconciled.

Step 14: Handling of ongoing demands / investigations

Pre-merger demands / investigations against transferor continue but with transferee inheriting liability under s. 85 (general transfer-of-business provision). Notices may be served on transferee. Substantive defence preserved.

Step 15: Closure documentation and institutional record

Comprehensive merger documentation maintained for compliance docket — NCLT order, scheme of merger, ITC transfer documents, cancellation orders, final returns, amendment applications, transition communications. Reference for future audits / inquiries.

PRACTITIONER CHECKLIST

WORKED EXAMPLES

PRACTITIONER PLANNING

• M&A tax due diligence comprehensive — pre-merger GST positions of all merging entities.

• NCLT scheme drafting — tax-specific provisions for interim compliance, ITC transfer, indemnities, employee positions.

• Interim-period compliance plan — separate registrations, separate GSTR filings, inter-se invoicing protocol.

• Inter-se transaction reconciliation — month-end discipline through interim period.

• Working capital planning — interim-period inter-se GST cash flow.

• Rule 41 ITC transfer planning — preserve full ITC value through merger.

• Cancellation and final return timing — coordination with NCLT order communication.

• Transferee amendment / fresh registration — pre-emptive arrangements before order date.

• Supplier / customer transition communications — clear effective dates and GSTIN updates.

• Annual return GSTR-9 / 9C for transition year — both entities; reconciliation discipline.

LITIGATION DEFENCE — KEY ATTACK POINTS

• Effective-date vs order-date — verify Departmental treatment matches s. 87 framework.

• Interim-period inter-se supplies — substantive GST defence on specific transactions.

• Schedule I deeming for related-party transactions — careful analysis to avoid double GST.

• Rule 41 ITC transfer denial — appeal under s. 107 for procedural denials.

• Section 85 inheritance overlap — coordinated defence with s. 87 framework.

• Final return GSTR-10 errors — rectification through GSTR amendment.

• Time-bar protection — s. 73(10) / 74(10) for any subsequent SCNs.

• Procedural irregularities — SCN service, hearing requirements per Whirlpool / Mafatlal lines.

• Cross-jurisdictional bar — s. 6(2)(b) for parallel Central / State proceedings.

• Tax indemnity invocation — under merger scheme provisions.

• Stay through merger pendency — limited; merger does not stay ongoing investigations.

• Cross-border merger specifics — FEMA, IT Act, GST coordination.

CROSS-REFERENCES

• Section 22 — Persons liable for registration — for transferee post-merger.

• Section 24 — Compulsory registration — for specific scenarios.

• Section 29(1)(b) — Cancellation of registration — transferor on merger.

• Section 39 — GSTR-3B framework.

• Section 44 — Annual return — for transition-year GSTR-9.

• Section 50 — Interest on delayed payment.

• Section 73 — Determination (non-fraud).

• Section 74 — Determination (fraud).

• Section 75 — General provisions; mandatory hearing.

• Section 85 — Liability in case of transfer of business — companion in Chapter XVI; applies to merger as transfer.

• Section 89 — Liability of directors of private company.

• Section 168A — Power to extend time-limits.

• Sections 230-234 of Companies Act, 2013 — Substantive merger framework.

• Section 31 of IBC, 2016 — Approval of resolution plan.

• Schedule I to CGST Act — Para 2 (related party deemed supply); Para 3 (principal-agent).

• Rule 41 — Transfer of credit on sale, merger, amalgamation, lease.

• Rule 19 — Amendment of registration.

• Rule 81 — Final return GSTR-10.

• FORM GST ITC-02 / ITC-02A — ITC transfer documents.

• FORM GST REG-14 — Amendment of registration.

• FORM GST REG-16 — Cancellation application.

• FORM GST REG-19 — Cancellation order.

• FORM GST GSTR-10 — Final return.

• Notification 9/2017-CT dated 28.06.2017 — Date of enforcement of s. 87.

• Whirlpool Corporation v Registrar of Trade Marks (1998) 8 SCC 1 — reasoned-order.

• Mafatlal Industries v Union of India (1997) 5 SCC 536 — reasoned-order in tax matters.

• State Tax Officer v Rainbow Papers Ltd (2022 SC) — secured-creditor status in IBC.

• CBIC Handbook of GST Law and Procedures (DGGST, 2024) — Chapter X on Liability.