Transfer of assets and liabilities in case of corporatization of business.

Corporatization of business:

The conversion of a traditional form of business into neo corporate form is commonly known as corporatization. The concept of the corporate form of business can be explained as below:

Point	Traditional business	Cooperate form of business
Form of business	·         Proprietorship ·         Partnership ·         Firm ·         Hindu undivided family ·         Artificial judicial person	– Company – LLP – Society – Trust –  Association and /or body of individuals
Manner of doing business	The person investing the fund is also doing the business. Thus, income is taxable directly on investors qua taxing the business.	Income is taxed directly on the business as business is done by a group where investors may be a part or may not.

 

Transfer of assets and/or liabilities in case of corporatization:

1. Manner of transfer of business (i.e. Business Transfer Agreement): A sale or transfer, as the case may be, the agreement may be entered into. You may transfer only those assets and liabilities. This may be done at book value as per the balance sheet prepared on the date of transfer. Stamp duty for this purpose differs from state to state and ranging between Rs.200/- to Rs.500/- for Business Transfer Agreement (BTA)
2. Transfer of OD and/or loan a/c: The loan can be shifted from proprietor/Partnership to LLP/Company. In the case of family operated business, the same person/persons will become the person–in–charge of the new entity, this is administrative work may be communicated to the bank for fresh documentation. No stamp duty is required to an existing collateral mortgage if any. Only a guarantee deed in favor of a new entity would be enough to shift the loan. However, banks may negotiate the loan freshly if the risk factor in case of corporatization increases to the bank.
3. Transfer of input tax credit: -We have to apply to the GST department in case of business transfer for transferring the input tax credit. This can be done by methods:
   2. Electronic Transfer (Form GST ITC-02): As per Section 18(3) of the CGST and SGST Acts, where there is a change in the constitution of a registered person on account of the sale, merger, demerger, amalgamation, lease, or transfer of the business with the specific provisions for transfer of liabilities, the said registered person shall be allowed to transfer the input tax credit which remains un-utilized in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in the manner prescribed in the CGST / SGST Rules, 2017 by declaring the same, electronically, on the common portal in Form GST ITC-02.
   3. Transfer by invoice: Alternatively a tax invoice from the existing GSTIN can be made for the sale of the stock available with the dealer to the new GSTIN. This may do in case there is no specific provision of transfer of liabilities. This will be unfavorable in case of GST rates in recent times are revised downward as an invoice in the E-way portal is possible only with the latest applicable GST rates and not at the rates at which items are purchased with. However, this method may have some practical difficulties while preparing E way for the transfer of stock.
4. Income tax calculation in case of corporatization:

As per Section 47(xiv) of the Income-tax Act, the following transaction is not regarded as transfer and hence not subject to capital gains:

Sole Proprietor converted to corporate business:

Where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company :

Provided that—

(a)   all the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company;

(b)   the shareholding of the sole proprietor in the company is not less than fifty percent of the total voting power in the company and his shareholding continues to remain as such for a period of five years from the date of the succession; and

(c)   the sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company;

 

(xiii) Partnership Firm converted to the corporate organization:

Any transfer of a capital asset or intangible asset by a firm to a company as a result of a succession of the firm by a company in the business carried on by the firm,

Provided that—

(a)  all the assets and liabilities of the firm or of the association of persons or body of individuals relating to the business immediately before the succession become the assets and liabilities of the company;

(b)  all the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of the succession;

(c)   the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company; and

(d)   the aggregate of the shareholding in the company of the partners of the firm is not less than fifty percent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession;