Transferring Credit on Sale, Merger or Demerger: ITC-02

An electronic credit ledger belongs to a GSTIN, not to a business. When a business is sold, merged, demerged or amalgamated, the credit stays in the old registration unless it is moved. FORM GST ITC-02 is the means, and three things can go wrong. The law lets the credit move only with the liabilities. The transferee has to accept it on the portal. And the portal, the circulars and two High Courts do not agree on whether credit can cross a State border.

This guide sets out what the law allows, how the amount is worked out, the portal steps on both sides, and the related FORM GST ITC-02A for a business that splits its own registration within a State. The registration side of a transfer, including the transferee’s new registration and the transferor’s cancellation, is in Cancelling a Registration on Application.

What section 18(3) allows

Section 18(3) of the CGST Act applies “where there is a change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provisions for transfer of liabilities”. The registered person “shall be allowed to transfer the input tax credit which remains unutilised in his electronic credit ledger” to the business that takes over.

The condition is in the words “with the specific provisions for transfer of liabilities”. A sale of assets alone does not qualify. Liabilities follow the business in any case: under section 85(1), the transferor and the transferee are “jointly and severally” liable for tax, interest and penalty due up to the transfer.

Rule 41 of the CGST Rules sets out the procedure. Circular No. 96/15/2019-GST of 28 March 2019 confirms that a transfer on the death of a sole proprietor is a transfer for this purpose, where the business is continued by a successor.

Two forms for two different situations

ITC-02 (rule 41) is for a change in constitution: a sale, merger, demerger, amalgamation, lease or other transfer of the business, including on the death of a proprietor. The transferor and transferee are different persons.

ITC-02A (rule 41A) is narrower than it is often described. It applies only to a registered person “who has obtained separate registration for multiple places of business in accordance with the provisions of rule 11”. That means additional registrations within the same State or Union territory, under the proviso to section 25(2). The form’s instructions describe the transferee as “the place of business for which a separate registration has been obtained under rule 11”. A new registration in another State on the same PAN is a distinct person, and no form moves credit to it.

How much can move

A whole business. All the unused credit may move. In Alstom Transport India Ltd v. Additional Commissioner, CGST (Gujarat High Court, 23 January 2026), a company amalgamated into its group company, effective 22 September 2023. On 20 October 2023 it filed ITC-02 for about Rs 192.88 crore of its Rs 242.02 crore balance, and kept back Rs 49.14 crore. It then claimed that balance as a refund on its earlier exports, and the transferee later pursued the refunds. The court dismissed the writ petitions. Section 18(3) and rule 41 provide for transfer of the credit “which remains unutilised”, and the transferor “was never restricted in transferring the entire unutilized ITC”. The court also observed that, although rule 41 fixes no time for ITC-02, the formalities of an amalgamation must be completed promptly.

Part of a business. The proviso to rule 41(1) apportions credit on a demerger “in the ratio of the value of assets of the new units as specified in the demerger scheme”. The Explanation defines value of assets as “the value of the entire assets of the business, whether or not input tax credit has been availed thereon”. Circular No. 133/03/2020-GST of 23 March 2020 adds four points:

• The ratio applies to every reorganisation that transfers part of a business with its liabilities, not only to a demerger.
• Assets are compared State by State, at the level of each registration, not across India.
• The ratio is applied to the total of central, State or Union territory, and integrated tax, and separately to cess. The transferor may decide how much to move under each head, within that total and the balance under each head.
• The ratio is fixed on the “appointed date” in the scheme, and it is applied to the ledger balance on the date ITC-02 is filed.

Suppose a company’s Maharashtra registration holds assets of Rs 80 crore on the appointed date, and the scheme demerges Rs 20 crore of them. The ratio is 25 per cent. If the ledger on the filing date shows Rs 4 lakh central tax, Rs 4 lakh State tax and Rs 12 lakh integrated tax, the total is Rs 20 lakh. Up to Rs 5 lakh can move, split across heads as the transferor chooses.

ITC-02A. Under rule 41A(1), the transferor may move credit “either wholly or partly”, in the ratio of the value of assets held by the new registrations “at the time of registration”.

What to have ready

• The transfer document: the court or tribunal order and scheme, or the business transfer agreement or lease, with the clause transferring liabilities. This is the transferor’s.
• The transferee’s GSTIN. Under section 22(3), a transferee of a going concern is liable to register from the date of transfer. Under section 22(4), on a sanctioned amalgamation or demerger, liability runs from the date of the Registrar of Companies’ certificate. The transferee registers first.
• Asset values by registration as on the appointed date, for any partial transfer. These come from the books.
• The credit ledger balance on the planned filing date, from the portal.
• A certificate from “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” (rule 41(2)). ITC-02A has no equivalent requirement.
• The portal’s prerequisites. The portal’s manual says the transferor “must have validly filed all the returns for the past periods”. It also requires that pending transactions be accepted, rejected or modified, and that liabilities arising from filed returns be paid.

The forms

FORM GST ITC-02 carries both parties’ GSTINs and names (items 1 to 6). Table 7 lists each tax head with “Amount of matched ITC available” and “Amount of matched ITC to be transferred”. Item 8 holds the certifying accountant’s particulars and the certificate, and item 9 the verification.

FORM GST ITC-02A, inserted from 1 February 2019 by Notification No. 03/2019-Central Tax, has the same table but no certificate.

Filing ITC-02: the transferor

The portal’s user manual describes these steps.

1. After login, the transferor goes to Services, then Returns, then ITC Forms, and chooses Prepare Online on the GST ITC-02 tile.
2. The available credit is auto-filled from the credit ledger.
3. The manual states that ITC-02 can be filed “only if the reason for cancellation of registration in REG-16” is a transfer by amalgamation, merger or demerger, sale or lease, or the death of the sole proprietor. The transferee’s GSTIN is then filled in from REG-16. On a death, it is entered by hand.
4. The transferor enters the amount to be transferred under each head, which cannot exceed the ledger balance.
5. The transferor enters the certifying firm, accountant, membership number and certificate date, and attaches the certificate in JPEG or PDF, “not exceed 500 KB”.
6. The transferor saves, ticks the declaration, selects the authorised signatory, and files with a DSC or EVC. The portal issues an ARN.

The manual’s tie to REG-16 assumes that the transferor’s registration is being cancelled. It does not describe a demerger in which the transferor carries on and keeps its registration. Circular No. 96/15/2019-GST, for a death, says ITC-02 “is required to be filed by the transferee/successor before filing the application for cancellation”. The sequence the portal enforces in each case is the one in force at the time of filing.

Accepting it: the transferee

Under rule 41(3), the transferee “shall, on the common portal, accept the details so furnished”, and only then is the credit added to its ledger. The manual describes the steps.

1. The transferee goes to Services, then User Services, then ITC02 – Pending for actions, and opens the ARN.
2. It chooses ACCEPT or REJECT.
3. It ticks the declaration and files the response with a DSC or EVC.

The manual warns that clicking ACCEPT or REJECT “without completing the filing steps does not make any changes” to either ledger. On rejection, the credit goes back to the transferor. Rule 41(4) requires the transferee to account for the inputs and capital goods in its books.

Filing ITC-02A

The manual for ITC-02A describes the same pattern through the TRANSFER ITC and TAKE ACTION buttons on the GST ITC-02A tile. The transferor’s ledger is debited when the form is filed. The new registration accepts or rejects but “cannot modify the amount”. If it rejects, the amount is re-credited to the transferor.

The ITC-02A manual repeats the passage tying filing to a cancellation reason in REG-16. That condition does not appear in rule 41A, and it does not fit a business that keeps its existing registration.

Time limits

Rule 41 sets no period for ITC-02. Rule 41A sets thirty days “from obtaining such separate registrations” for ITC-02A.

In Pacific Industries Ltd v. Union of India (Rajasthan High Court, 15 March 2022), a company’s new unit was registered with effect from 16 April 2019, but ITC-02A was not available on the portal during the thirty days. The company raised a helpdesk ticket and gave a manual copy of the form to the officer on 14 May 2019, within time. The department did not dispute that the form was unavailable. The court held the refusal to transfer the credit “grossly illegal, arbitrary and unjust”. It allowed the company to take credit of Rs 2,58,03,590 through its next GSTR-3B.

Moving credit across a State border

Circular No. 133/03/2020-GST states that ITC-02 is to be filed “only in those States where both transferor and transferee are registered”. In both cases below, the portal rejected a transfer across a State border with the message “Transferee and Transferor should be of the same State/UT”.

In Umicore Autocat India Pvt Ltd v. Union of India (Bombay High Court at Goa, 10 July 2025), a Goa company that had stopped operating was amalgamated into a Maharashtra company. It held Rs 3,52,84,105 of central tax, Rs 3,69,586 of integrated tax and Rs 1,39,285 of State tax. The court held that neither section 18(3) nor rule 41 restricts transfer to the same State, and that the portal’s limitation “can be no ground to deny the benefit”. The petitioner gave up the Goa State tax. The court permitted the central and integrated tax to be transferred “by physical mode for the time being”, and asked the GST Council and GSTN to build a mechanism.

In Emerson Process Management (India) Pvt Ltd v. Union of India (Gujarat High Court, Special Civil Application No. 7006 of 2024, 5 March 2026), the court followed Umicore. It held that the department “cannot incorporate something in a statutory form ITC-02 on GST Portal which is absent in the statutory provisions”. It directed that ITC-02 be accepted and processed manually until the portal is changed. The claim there was confined to central tax.

The Union of India has challenged Umicore in the Supreme Court (SLP (Civil) Diary No. 67126 of 2025). Notice was issued on 6 January 2026. The latest order traced, of 15 April 2026, gave the respondents time to file a counter affidavit. No decision had been traced as of 12 October 2026. Until the Supreme Court decides, the circular and the portal confine ITC-02 to the same State, and two High Courts have held that the law does not.

Who signs

On each side, the authorised signatory of that registration verifies the form. Under rule 26(1), a company registered under the Companies Act, 2013 must use a DSC. On a death, Circular 96 has the successor file ITC-02 for the deceased’s registration.

What happens if it is not done, or done wrongly

Credit left in the transferor’s ledger stays there. When that registration is cancelled, the stock reversal under section 29(5) and the final return, GSTR-10, follow, as described in Filing the Final Return, GSTR-10. Alstom shows that the transferee cannot later reach the stranded credit by another route.

Credit moved beyond the rule 41 ratio, or without a real transfer of liabilities, is credit wrongly availed by the transferee. It is recoverable under section 73, 74 or 74A, with interest under section 50(3) at 18 per cent if it was used. Credit received through ITC-02 and ITC-02A is reported in table 6M of GSTR-9 (see Filing the Annual Return, GSTR-9). Correcting Mistakes in Returns and Late Returns cover how a wrong figure is put right afterwards.

The procedure in summary

1. Confirm that the transfer carries a specific provision for the transfer of liabilities.
2. Register the transferee, from the date fixed by section 22(3) or 22(4).
3. For a partial transfer, compute the State-level ratio of asset values on the appointed date.
4. Obtain the practising accountant’s certificate under rule 41(2).
5. File all pending returns, act on pending items and pay outstanding liabilities.
6. File ITC-02 from the transferor’s registration, apply the ratio to the ledger balance on that day, and sign with a DSC or EVC.
7. Have the transferee accept and file its response, then account for the goods in its books.
8. For a separate registration in the same State under rule 11, file ITC-02A within thirty days instead.
9. Report the credit in table 6M of the transferee’s GSTR-9.

The next guide in this set covers the reverse movement, paying back credit in FORM GST ITC-03 on opting for composition or when supplies become exempt.