Section 85 of the Central Goods and Services Tax Act, 2017 deals with the liability arising when a business is transferred from one person to another. The provision is important because the transfer of a business does not, by itself, remove the GST liabilities that arose before the transfer.
Where a taxable person liable to pay GST transfers the whole or part of the business, the law can make both the transferor and the transferee jointly and severally liable for tax, interest and penalty that was due from the transferor up to the date of transfer. This applies even where the amount was determined only after the business was transferred.
Section 85 also establishes the GST liability of the transferee for supplies made by the transferee after the date of transfer. If the transferee is already registered, the registration certificate must be amended within the prescribed time.
The provision is therefore relevant in business sales, takeovers, succession, transfer of a going concern, changes in ownership and other arrangements through which a business or part of a business moves from one person to another.
What Is Section 85 of the CGST Act?
Section 85 is titled “Liability in case of transfer of business.”
It contains two main provisions.
Section 85(1)
Where a taxable person liable to pay tax transfers the whole or part of the business by:
- sale;
- gift;
- lease;
- leave and licence;
- hire; or
- any other manner whatsoever,
the transferor and transferee are jointly and severally liable for the tax, interest or penalty due from the transferor up to the time of transfer, subject to the extent of the transfer in case of a partial transfer.
This liability applies whether the tax, interest or penalty:
- had already been determined before the transfer but remained unpaid; or
- is determined after the transfer.
Section 85(2)
Where the transferee continues the business, whether under the same name or another name, the transferee becomes liable to pay GST on supplies of goods or services or both made by the transferee from the date of transfer.
If the transferee is already registered under GST, the transferee must apply within the prescribed time for amendment of the registration certificate.
Why Is Section 85 Important?
A business may have GST liabilities that are not immediately visible on the date of transfer.
For example, a business may have:
- unpaid GST;
- unpaid interest;
- unpaid penalty;
- a pending GST investigation;
- an assessment that has not yet been completed; or
- a tax liability that relates to a period before the business was transferred but is determined only later.
If the law did not address such situations, a person could potentially attempt to avoid GST liabilities simply by transferring the business to another person.
Section 85 prevents the transfer of a business from automatically eliminating the Government’s claim against liabilities connected with the period before the transfer.
Meaning of Transfer of Business
Section 85 uses very broad language.
It specifically covers transfer by:
sale, gift, lease, leave and licence, hire or in any other manner whatsoever.
Therefore, Section 85 is not restricted to an ordinary outright sale of a business.
The nature and legal effect of the particular transaction must be examined to determine whether there has been a transfer of the business or part of it.
Transfer by Sale
The most straightforward example is the sale of a business.
Suppose ABC Traders owns a retail business and sells the entire business to XYZ Enterprises.
If ABC Traders has GST liabilities relating to the period before the sale, Section 85 can make ABC Traders and XYZ Enterprises jointly and severally liable for the relevant tax, interest and penalty due from ABC Traders up to the time of transfer.
This means that the purchaser cannot necessarily assume that all pre-transfer GST liabilities remain exclusively the seller’s responsibility.
Transfer by Gift
Section 85 also expressly covers a gift.
Therefore, transferring a business without monetary consideration does not automatically take the transaction outside the provision.
For example, if a proprietor transfers a running business as a gift to another person, the GST liabilities covered by Section 85 can continue to affect the transferor and transferee.
Transfer by Lease
A business may also be transferred through a lease arrangement.
Section 85 expressly includes lease among the modes through which business can be transferred.
Whether a particular lease arrangement constitutes a transfer of the business for Section 85 purposes depends upon the actual facts and terms of the arrangement.
The parties should therefore examine the transaction as a whole rather than relying only on the title given to the agreement.
Transfer by Leave and Licence
Section 85 also specifically mentions leave and licence.
This is significant because the provision is drafted broadly enough to cover arrangements other than a conventional sale.
Again, the actual nature of the arrangement is important in determining the extent to which Section 85 applies.
Transfer by Hire
The word hire is also included in Section 85.
This demonstrates that the provision is intended to cover different commercial arrangements through which a business or part of a business may effectively be transferred.
“Any Other Manner Whatsoever”
The final expression is particularly broad.
Section 85 covers transfer by “any other manner whatsoever.”
Therefore, the statutory provision is not limited to the specific examples listed in the section.
The legal and commercial substance of the arrangement becomes important when determining whether there has been a transfer of the business.
Transfer of the Whole Business
Section 85 applies where a taxable person transfers the business in whole.
For example, suppose a sole proprietor owns a manufacturing business and transfers the entire running business to another person.
The transferee may take over:
- premises;
- machinery;
- stock;
- employees;
- customer relationships;
- contracts;
- goodwill; and
- other business assets.
If the arrangement amounts to a transfer of the business, Section 85 can apply to the pre-transfer GST liabilities covered by the provision.
Transfer of Part of a Business
Section 85 also applies where only part of the business is transferred.
This is important for businesses operating multiple divisions, branches or business units.
For example, suppose a company operates:
- a manufacturing division;
- a wholesale division; and
- a retail division.
If only the retail division is transferred to another person, Section 85 can apply to the transfer to the extent of that transfer.
The statutory wording specifically states that the transferor and transferee are jointly and severally liable “wholly or to the extent of such transfer.”
What Does “Jointly and Severally Liable” Mean?
This is one of the most important concepts in Section 85.
When two persons are jointly and severally liable, the liability can be enforced against either person according to the applicable law, rather than requiring the Government to divide the liability equally between them.
In the context of Section 85, the transferor and transferee can both be liable for the specified pre-transfer GST dues.
For example, suppose ₹10 lakh of GST-related liability is covered by Section 85.
The existence of joint and several liability means the Government is not necessarily restricted to recovering ₹5 lakh from the seller and ₹5 lakh from the purchaser.
The precise recovery action will depend upon the applicable provisions and facts.
Does the Transferor Remain Liable?
Yes.
Section 85 does not remove the original liability of the transferor.
The transferor remains liable for the tax, interest and penalty due from the transferor up to the time of transfer.
The important additional consequence is that the transferee can also become jointly and severally liable to the extent provided by Section 85.
Therefore, transferring the business does not provide an automatic method of escaping pre-transfer GST liabilities.
Does the Transferee Become Liable for All GST Dues of the Seller?
Section 85 should not be interpreted as making the transferee automatically liable for every GST liability of the transferor regardless of its connection with the transfer.
Sub-section (1) concerns tax, interest and penalty due from the taxable person up to the time of transfer, and in the case of a partial transfer, the provision refers to liability wholly or to the extent of such transfer.
The exact liability therefore needs to be determined with reference to:
- the nature of the transfer;
- whether the whole or part of the business was transferred;
- the time of transfer; and
- the relevant GST liability.
Liability for Amounts Determined After the Transfer
One of the most important features of Section 85 is that the liability does not disappear merely because the tax department determines the amount after the business has already been transferred.
Section 85 expressly covers tax, interest or penalty that:
- was determined before the transfer but remained unpaid; or
- is determined after the transfer.
Example
Suppose ABC Traders transfers its business to XYZ Enterprises on 1 April.
The GST department subsequently completes proceedings in December and determines that ABC Traders had a tax liability relating to the period before 1 April.
The fact that the demand was determined in December does not, by itself, take the liability outside Section 85.
The statutory provision specifically contemplates liabilities determined after the transfer.
Section 85 and Pre-Transfer GST Liability
The timing of the liability is therefore important.
The section is concerned with tax, interest and penalty due from the transferor up to the time of transfer.
This means that businesses involved in a transfer should identify outstanding and potential GST liabilities relating to the period before the transfer date.
A proper due-diligence exercise can include reviewing:
- GST returns;
- tax payment records;
- pending notices;
- demand orders;
- audit proceedings;
- investigation proceedings;
- input tax credit positions;
- refund claims; and
- other tax-related disputes.
GST Liability of the Transferee After the Transfer
Section 85(2) deals with a different issue.
Once the transferee takes over the business and continues it, the transferee becomes liable to pay GST on supplies of goods or services or both effected by the transferee from the date of transfer.
This means that Section 85 covers both:
- certain pre-transfer liabilities; and
- the transferee’s own GST obligations after the transfer.
These two situations should not be confused.
Example of Post-Transfer Liability
Suppose ABC Traders transfers its business to XYZ Enterprises on 1 July.
XYZ continues the same business from 1 July.
Sales made by XYZ from 1 July onwards are supplies made by XYZ.
XYZ is responsible for the applicable GST on those supplies from the date of transfer.
The pre-transfer liabilities of ABC Traders are a separate matter governed by Section 85(1).
Same Business Name or Different Business Name
Section 85(2) specifically states that the transferee may carry on the business:
- in his own name, or
- in some other name.
Therefore, merely changing the business name does not remove the operation of Section 85(2).
For example, if ABC Retail is transferred to XYZ Enterprises and XYZ continues operating it under the name “XYZ Retail,” the transferee’s GST liability on supplies made after the transfer still applies.
GST Registration After Transfer of Business
Section 85(2) provides that where the transferee is a registered person under the GST Act, the transferee must apply within the prescribed time for amendment of the registration certificate.
The registration consequences must therefore be dealt with as part of the business transfer process.
The GST registration framework also recognises transfer of business as a reason for obtaining registration where the transferee is not already registered. The prescribed registration application identifies “Transfer of business which includes change in the ownership of business” as a reason for registration.
Transfer of Business and GST Registration
A business transfer may therefore involve changes to the GST registrations of both parties.
Depending on the transaction:
- the transferor may need to apply for cancellation or otherwise deal with the existing registration;
- the transferee may need to obtain GST registration;
- an existing registration of the transferee may need amendment; and
- the effective date of the transfer must be properly reflected.
The exact registration procedure depends upon the structure of the transaction and the applicable provisions.
Transfer of Business After Death of a Sole Proprietor
Section 85 is also relevant where a sole proprietor dies and the business is continued by a successor.
CBIC has specifically clarified that transfer or change in ownership of a business includes transfer or change in ownership due to the death of a sole proprietor.
Where the successor continues the business, the successor is treated as the transferee for the relevant GST purposes.
CBIC’s Circular No. 96/15/2019-GST also explains the related registration and input tax credit consequences.
Registration of a Successor After Death of Proprietor
According to the CBIC clarification, where the business of a deceased sole proprietor is continued by a successor, the successor is liable to obtain GST registration from the date of transfer or succession where registration is required.
The registration application is filed electronically in FORM GST REG-01, with the appropriate reason for obtaining registration.
The legal heirs can also apply for cancellation of the deceased proprietor’s GST registration through FORM GST REG-16, with the reason linked to the death of the sole proprietor.
Transfer of Input Tax Credit Along With Business
Section 85 deals primarily with liability, but a business transfer may also have input tax credit consequences.
Section 18(3) of the CGST Act permits transfer of unutilised input tax credit in the electronic credit ledger in cases such as sale, merger, de-merger, amalgamation, lease or transfer of business where there is a specific provision for transfer of liabilities.
The prescribed mechanism is provided through FORM GST ITC-02.
This is important because a business transfer can involve both:
- transfer of liabilities; and
- transfer of eligible unutilised ITC.
These are separate legal consequences and should be documented properly.
Conditions for Transfer of Unutilised ITC
The GST rules provide a mechanism under which the transferor furnishes details of the business transfer electronically and requests transfer of unutilised ITC to the transferee.
The transferor is required to submit a certificate from a practicing chartered accountant or cost accountant certifying that the sale, merger, de-merger, amalgamation, lease or transfer has been made with a specific provision for transfer of liabilities.
The transferee accepts the details, after which the eligible unutilised credit is credited to the transferee’s electronic credit ledger.
This makes the treatment of liabilities particularly important when structuring a business transfer.
Section 85 and Transfer of a Going Concern
A business may be transferred as a going concern, meaning that the business activity is transferred with the intention that it continues as an operating business.
Such transactions can have important GST consequences beyond Section 85, including the treatment of the supply itself and transfer of input tax credit.
Section 85 should therefore be considered alongside the other GST provisions applicable to the specific transfer.
The fact that a business is transferred as a going concern does not by itself eliminate the statutory liability consequences under Section 85.
Example: Sale of an Entire Business
Suppose ABC Pvt. Ltd. operates a manufacturing unit.
On 1 April, ABC transfers the entire business to XYZ Pvt. Ltd.
Before the transfer, ABC has unpaid GST liability of ₹12 lakh relating to supplies made before 1 April.
The GST department later determines an additional ₹3 lakh liability relating to the pre-transfer period.
The total relevant liability becomes ₹15 lakh.
Because Section 85 covers liabilities that may be determined after the transfer, the transfer itself does not automatically remove the liability consequences.
Subject to the statutory conditions, ABC and XYZ can have joint and several liability for the relevant pre-transfer dues.
Example: Transfer of Only One Division
Suppose a company operates two independent business divisions:
- electronics;
- furniture.
The company transfers only the furniture division to another person.
Section 85 can apply to the transfer to the extent of the transferred business.
This is why the transaction documents should clearly identify:
- the business or division being transferred;
- assets transferred;
- liabilities transferred;
- effective date;
- contracts transferred; and
- other relevant components of the transaction.
Example: Business Transfer Through Lease
Suppose a taxpayer leases the entire operating business to another person, who then conducts the business.
Because Section 85 expressly includes lease, the transaction may fall within the provision depending on its actual nature and terms.
The parties should therefore not assume that a lease arrangement automatically avoids Section 85 merely because ownership of the underlying assets may not have been permanently transferred.
Example: Business Transfer After Death
Suppose a sole proprietor dies while operating a GST-registered business.
A successor continues the same business.
CBIC has clarified that a transfer or change in ownership arising due to the death of the sole proprietor is treated as a transfer of business for the relevant GST provisions.
The successor may therefore have GST registration obligations and can also be affected by the liability provisions of Section 85.
Section 85 and Joint and Several Liability: Practical Meaning
The phrase “jointly and severally” is particularly significant for a business purchaser.
Suppose:
- pre-transfer GST liability = ₹20 lakh;
- transferor = Seller;
- transferee = Buyer.
If the liability falls within Section 85, both parties may be liable for the amount.
The purchaser should therefore conduct GST due diligence before acquiring a business.
A business acquisition agreement may contain contractual provisions allocating economic responsibility between the parties, but such private contractual arrangements do not necessarily determine the Government’s statutory rights under Section 85.
Can a Contract Between Buyer and Seller Remove Section 85 Liability?
The parties can enter into contractual arrangements concerning who will bear the economic burden of tax liabilities.
However, a private agreement between the transferor and transferee does not automatically override a statutory liability imposed by the CGST Act.
Therefore, a clause stating that “the seller alone will be responsible for all GST liabilities” should not be assumed to prevent the GST authorities from exercising statutory rights available under Section 85.
Such contractual arrangements may be relevant between the parties for indemnity or reimbursement, but their effect against the Government must be considered separately.
Importance of GST Due Diligence Before Buying a Business
A purchaser acquiring an existing business should consider reviewing the seller’s GST position before completing the transaction.
Important areas can include:
- GST registration status;
- GSTR-1 and GSTR-3B filings;
- outstanding tax liabilities;
- electronic liability ledger;
- GST notices;
- audit proceedings;
- investigation proceedings;
- pending appeals;
- disputed demands;
- input tax credit issues;
- refund claims;
- e-way bill issues; and
- other GST correspondence.
The purpose is to identify potential liabilities that could become relevant after the transfer.
Documents That Can Be Important in a Business Transfer
A business transfer transaction may involve:
- business transfer agreement;
- sale agreement;
- lease agreement;
- asset transfer schedule;
- liability schedule;
- GST registration documents;
- GST returns;
- tax payment records;
- demand orders;
- pending litigation details;
- GST notices;
- financial statements;
- ITC reconciliation;
- ITC-02 documentation, where applicable; and
- professional certifications.
Maintaining complete records can help both parties establish the actual scope and date of the transfer.
Section 85 and the Date of Transfer
The date of transfer is extremely important.
Section 85(1) refers to liabilities due from the taxable person up to the time of such transfer.
Section 85(2), meanwhile, makes the transferee liable for supplies made by the transferee with effect from the date of transfer.
Therefore, the transfer agreement should clearly specify the effective date.
For accounting and GST purposes, records should clearly distinguish:
Before transfer → transferor’s business operations
From transfer date → transferee’s business operations
Section 85 and Pending GST Proceedings
A business transfer does not necessarily bring pending GST proceedings to an end.
If the tax department subsequently determines tax, interest or penalty relating to the period before the transfer, Section 85 can become relevant because the provision expressly covers liabilities determined after the transfer.
The parties should therefore identify pending proceedings during due diligence rather than assuming that an unresolved demand disappears when the business changes ownership.
Difference Between Section 85 and Section 84
These two provisions appear close together in Chapter XV, but they deal with different subjects.
| Basis | Section 84 | Section 85 |
|---|---|---|
| Main subject | Continuation of recovery proceedings | Liability after transfer of business |
| Main situation | Government dues are enhanced or reduced | Business is transferred |
| Persons involved | Taxpayer and recovery authorities | Transferor and transferee |
| Key issue | Revised demand and recovery | Liability for pre-transfer and post-transfer periods |
| Joint and several liability | Not the central feature | Specifically provided |
| Business transfer | Not the subject | Central subject |
Difference Between Section 85 and Section 81
Section 81 deals with certain transfers of property intended to defraud Government revenue.
Section 85 deals with the liability arising from a genuine transfer of a business.
A business can be transferred through sale or another permitted arrangement without the transaction necessarily being fraudulent. Section 85 addresses the tax consequences of the transfer itself.
Therefore:
Section 81 = certain transfers intended to defeat Government revenue
Section 85 = liability when a business is transferred
Difference Between Section 85 and Section 82
Section 82 provides for a first charge on property for specified GST liabilities, subject to the Insolvency and Bankruptcy Code.
Section 85 is concerned with the transferor and transferee of a business and their liability for specified GST dues.
These are separate legal mechanisms.
Difference Between Section 85 and Section 89
Section 89 deals with the liability of directors of a private company in specified circumstances where tax, interest or penalty cannot be recovered from the company.
Section 85 instead deals with transfer of business.
Therefore, the two provisions address different situations and different categories of persons.
Common Misunderstandings About Section 85
Does Selling a Business Erase Old GST Liability?
No.
Section 85 specifically provides for joint and several liability of the transferor and transferee for specified tax, interest and penalty due from the transferor up to the time of transfer.
Does the Transferee Become Responsible Only If the Tax Was Already Determined?
No.
Section 85 expressly covers liabilities that are determined after the transfer as well.
Does Section 85 Apply Only to Sale?
No.
It expressly covers sale, gift, lease, leave and licence, hire and any other manner of transfer.
Does It Apply to Part of a Business?
Yes.
The section expressly covers transfer of the business in whole or in part, with liability extending wholly or to the extent of the transfer.
Can Changing the Business Name Avoid Section 85(2)?
No.
Section 85(2) expressly covers a transferee carrying on the business either in the transferee’s own name or under another name.
Does the Transferee Need to Deal With GST Registration?
Yes, as applicable.
Section 85(2) specifically requires a registered transferee to apply within the prescribed time for amendment of the registration certificate. The GST registration framework also separately recognises transfer of business as a registration-related event.
Practical Checklist for the Seller
Before transferring a business, the transferor should consider:
- identifying all outstanding GST liabilities;
- checking pending GST notices;
- reviewing pending audits and investigations;
- reconciling GST returns;
- reviewing input tax credit;
- identifying pending appeals;
- determining the exact date of transfer;
- documenting assets and liabilities;
- ensuring proper GST registration action; and
- preserving all relevant GST records.
Practical Checklist for the Buyer
A prospective transferee should consider:
- conducting GST due diligence;
- checking the seller’s GST registration;
- reviewing GSTR-1 and GSTR-3B;
- checking outstanding liabilities;
- reviewing notices and demand orders;
- identifying pending disputes;
- checking audit or investigation proceedings;
- documenting the exact scope of the transfer;
- clearly recording the transfer date;
- addressing tax liabilities in the business transfer agreement; and
- considering the procedure for transfer of eligible unutilised ITC where applicable.
Key Points to Remember About Section 85
The most important points are:
- Section 85 deals with liability in case of transfer of business.
- It applies when a taxable person transfers the whole or part of a business.
- Transfer can occur through sale, gift, lease, leave and licence, hire or another manner.
- The transferor and transferee can be jointly and severally liable.
- The liability relates to tax, interest and penalty due from the transferor up to the time of transfer.
- The liability can apply even if the tax, interest or penalty is determined after the transfer.
- In a partial transfer, the statutory liability applies wholly or to the extent of the transfer.
- The transferee becomes liable for GST on supplies made by the transferee from the date of transfer.
- The transferee may carry on the business in the same or another name.
- A registered transferee must apply within the prescribed time for amendment of the registration certificate.
- Transfer of business can also have consequences for unutilised ITC under Section 18(3) and Rule 41.
- CBIC has clarified that transfer of business due to the death of a sole proprietor is also covered as a transfer or change in ownership of business for the relevant GST provisions.
👉 Read More → Section 84 – Continuation and validation of certain recovery proceedings
Conclusion
Section 85 of the CGST Act, 2017 is an important provision for businesses that are sold, transferred, leased, gifted, hired or otherwise moved from one person to another.
Its most important feature is the joint and several liability of the transferor and transferee for tax, interest and penalty due from the transferor up to the time of transfer, subject to the extent of the transfer where only part of the business is transferred. This liability can apply even when the relevant tax, interest or penalty is determined only after the business has already been transferred.
The provision also establishes the GST responsibility of the transferee after the transfer. Where the transferee continues the business, the transferee becomes liable for GST on supplies made from the date of transfer and must comply with the applicable GST registration requirements.
For this reason, a business transfer should not be treated merely as a commercial transaction between a seller and buyer. The parties should also examine the GST consequences, including outstanding liabilities, pending proceedings, registration requirements and the possible transfer of unutilised input tax credit.
CBIC has specifically clarified that transfer or change in ownership arising from the death of a sole proprietor can also constitute a transfer of business, with corresponding registration, liability and input tax credit consequences.
The practical importance of Section 85 is therefore clear: transferring a business does not automatically eliminate GST liabilities arising before the transfer, and the transferee must carefully consider the tax consequences before taking over the business.
Frequently Asked Questions About Section 85 of the CGST Act
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