Last Updated on August 29, 2024 by Kanakkupillai
In the context of goods and services tax (GST), the input tax credit (ITC) is vital to help companies recover the tax paid on inputs. However, when a solitary owner dies, ITC’s distribution can become a complicated matter. The seamless flow of corporate activities depends on an awareness of the regulatory framework and the required actions for moving ITC in such sad conditions. Everything you need to know about the ITC transfer should be available to you on this site should the death of a sole proprietorship be expected.
Legal Framework
Specific clauses in the GST law control the passing of ITC upon the death of a sole owner. Primarily, Section 18(3) of the Central Goods and Services Tax (CGST) Act explains the conditions under which ITC can be passed to the legal relatives or successors of the dead. Additionally, Rule 41 of the CGST Rules gives the legal rules for this move.
It is important to remember that the duty to transfer ITC lies with the receiver or replacement. Legal heirs must be aware of their responsibilities to ensure compliance with GST laws.
Process of ITC Transfer
Transferring ITC after the death of a sole proprietorship includes several steps that the replacement must take to ensure a smooth transfer.
The first step for the replacement is to receive GST registration. This can be done by filling out Form GST REG-01, where the application must state “death of the proprietor” as the reason for registering. This filing is essential as it creates the successor’s legal position to claim the ITC.
- File Form GST ITC-02
Once the successor has gotten GST registration, the next step is to file Form GST ITC-02. This form was specially created to move the ITC from the dead owner to the legal heir. It is important to file this form before closing the deceased’s GST registration.
In Form GST ITC-02, the replacement must provide data such as the dead owner’s GSTIN, the amount of ITC to be moved, and any other relevant information. This form serves as an official request for the transfer of ITC and must be filled out correctly to avoid any problems.
Responsibilities of the Successor
Upon the death of a sole owner, the replacement takes on specific duties. One essential duty is to settle any outstanding taxes, interest, or fines that the dead may have earned. The legal owner must understand that they are responsible for these dues, and addressing them may lead to legal problems.
Moreover, the replacement must accept the ITC move. This acceptance is essential for the continuation of business operations and ensures that the business can benefit from the ITC that the dead had earned.
Transfer of Input Tax Credit and Tax Liability
If a sole proprietor dies and the business is continued by a transferee or successor, it will be seen as a transfer of the business.
According to Section 18(3) of the CGST Act, when there is a specific provision for the transfer of liabilities, the registered person may transfer the unused input tax credit that is shown in his electronic credit ledger to the transferee in the manner specified in Rule 41 of the CGST Rules.
According to Section 93(1) of the CGST Act, if a person who is responsible for paying tax, interest, or penalties under the CGST Act passes away, the person who continues his or her business will be responsible for paying any tax, interest, or penalties owed by that person under this Act.
Furthermore, it is made clear that, in cases of business transfers resulting from the death of a sole proprietor, the transferee or successor shall be responsible for paying any taxes, interest, or penalties due from the transferor.
How to Transfer Input Tax Credit to Successor
The input tax credit that is still unutilized in the computerized credit ledger is permitted to be passed to the transferee in the event of the death of a single proprietor if the business is continued by any person acting as transferee or successor.
What is the Manner of Transfer of Credit?
In the event of a sale, merger, de-merger, amalgamation, lease, transfer, or change in ownership of a business for any reason, a registered person shall file Form GST ITC-02 electronically on the common portal with a request for the transfer of unutilized input tax credits lying in his electronic credit ledger to the transferee.
When a sole proprietor’s business is transferred due to his or her passing, the transferee or successor must submit Form GST ITC-02 for the registration that needs to be cancelled as a result. The transferee or successor must submit Form GST ITC-02 before submitting an application to cancel the registration. The unutilized input tax credit listed in Form GST ITC-02 must be accepted by the transferee or successor before being credited to his electronic credit ledger.
A transfer or change in ownership of a business would include a transfer or change in ownership due to the death of the sole proprietor for the purposes of Sections 18(3), 22(3), and 85(1) of the CGST Act and Rule 43(1) of the CGST Regulations.
Cancellation of GST Registration due to a Sole Proprietor’s Death
Cancellation of GST Registration on account of transfer of business for any cause, including the death of the proprietor, is covered by Section 29(1)(a) of the CGST Act, 2019. The legal heirs of a deceased single proprietor of a firm may electronically submit an application for cancellation of registration in Form GST REG-16 on the common platform, according to Section 29(1)(a) of the CGST Act. The reason for the cancellation must be listed as “death of single proprietor” on Form GST REG-16. The transferee is needed to upload the proprietor’s death certificate when filing for cancellation.
To link the GSTIN of the transferor and the GSTIN of the transferee, the GSTIN of the transferee to whom the business has been transferred must also be provided.
Income Tax Compliance After the Death of a Sole Proprietor
According to Section 159 of the Income Tax Code, the spouse, legal representative, or executor is responsible for completing the income tax return and paying off any outstanding tax debts of the deceased assessee if they pass away tragically before doing so for any year in which filing is required. Although a deceased individual is eligible for all deductions and exemptions for the whole year, only the income earned up until their death is subject to tax. The income would thereafter be taxable in the hands of the legal heir and included in his return of income.
The return of the deceased, however, would only include income up until the date of the assessee’s death. The assessee’s lawful heirs receive both the income from his or her assets and the tax debt upon his or her death. Thus, the legal heir is now responsible for filing tax returns. This indicates that the legal heir may file tax returns on the decedent’s behalf.
The following steps must be followed in order to register as a legal successor on the e-filing website in the event that the assessee passes away. The legal heir must also file the return on the assessee’s behalf.
Step 1: Use your personal login information, such as legal heir, to access the “e-Filing” section of the Income Tax India website.
Step 2: Next, select the “Register as Representative” option under the “My Account” page.
A redirect will take you to the “Register as Representative” page.
Step 3: Next, use the “Proceed” option after selecting the “Deceased (Legal Heir)” category and the “New Request” request type.
Step 4: Now enter the information below:
- The deceased’s PAN
- Name and birthdate of the deceased according to PAN
- Bank information for the legal heir
- Upload the necessary files
Click the “Submit” button after filling out and uploading the aforementioned information. Upon the submission of the Register as an authorized signatory request, a success message will be shown. The e-Filing Admin will receive the request and approve it. An email and SMS will be issued to the user who submitted the request when the e-Filing Admin has verified the request’s legitimacy and has the option of approving or rejecting it.
Note
- In order to file an income tax return on behalf of the deceased person, the legal heir must register.
- Upload the following files in PDF format (maximum 1 MB):
- Certificate of death
- The deceased person’s PAN card
- Copy of the legal heir’s PAN card and
- Certificate of legal heir
- The following documents will be accepted as a legal heir certificate:
- The court-issued legal heir certificate
- The local revenue authorities’ legal heir certificate
- The local revenue authorities’ certificate for surviving family members
- The legally binding will
- The State or federally-issued Family Pension Certificate
- A letter stating the name of the nominee or joint account holder for the deceased at the time of death, issued by the banking or financial institution on its letterhead with its seal and signature
- To submit the legal heir certificate and the will’s Hindi/English translation. Accompanied with a copy of the original certificate, suitably notarized
Conclusion
Clearly, the loss of a sole proprietorship is a difficult period for operations and emotional well-being. Nevertheless, knowing the procedure for passing the Input Tax Credit helps to smooth the change for legal heirs. Following the right processes and carrying out their duties will help successors guarantee GST compliance and preserve the continuation of company activities.
If you find yourself in this position, you really should get expert help. Speaking with a GST consultant or a tax professional can help you guarantee that all legal requirements are satisfied and provide the direction required to negotiate the complexity of ITC transfer.
