Section 85 – Liability in case of transfer of business
Section 85 of CGST Act, 2017 – Liability in Case of Transfer of Business
Updated on: February 2026 (as applicable till date)
Prepared by: Yours Tax Consultant
1. Objective of Section 85
Section 85 ensures that GST liabilities do not escape when a business is transferred by way of sale, gift, lease, merger or any other mode.
It fixes responsibility on both the transferor and transferee for past GST dues.
2. Statutory Provision – Section 85
Section 85(1):
Where a taxable person
transfers his business in whole or in part,
by sale, gift, lease, leave and licence,
hire or in any other manner whatsoever,
the taxable person
and the person to whom the business is transferred
shall, jointly and severally,
be liable to pay
any tax, interest or penalty
due from the taxable person
up to the time of such transfer,
whether such dues are determined
before or after the transfer.
Section 85(2):
Where the transferee
carries on the business
under a new name,
the transferor shall apply
for cancellation of registration
and the transferee shall apply
for fresh registration.
3. Key Features of Section 85
- Applies to whole or partial transfer
- Liability exists even if dues are determined later
- Joint and several liability
- Mode of transfer is irrelevant
4. Meaning of “Joint and Several Liability”
Joint and several liability means:
- Department can recover entire dues from transferor, or
- Entire dues from transferee, or
- From both in any proportion
Internal agreement between parties does not bind the tax department.
5. Types of Transfer Covered
- Sale of business
- Slump sale
- Merger or amalgamation
- Gift or succession
- Lease or licence of business
6. Liability Period Covered
Liability under Section 85 covers:
- Tax dues up to the date of transfer
- Interest and penalty related to that period
Even future adjudication relating to past period binds the transferee.
7. Section 85 vs Section 18 (ITC Transfer)
- Section 18: Deals with transfer of input tax credit
- Section 85: Deals with transfer of tax liability
ITC transfer does not absolve liability.
8. Registration Implications
If business is transferred:
- Transferor must cancel registration
- Transferee must obtain new registration
- Proper officer must be informed
9. Practical Examples
- Purchase of running factory with past GST dues
- Merger of partnership into company
- Slump sale of division
In all cases, GST due till transfer date can be recovered from transferee.
10. Judicial Principles
Courts have held that:
- Section 85 has wide application
- Liability exists even without knowledge of dues
- Due diligence is transferee’s responsibility
11. Due Diligence Checklist
- Verify GST returns filing status
- Check pending notices or proceedings
- Obtain indemnity clauses in agreement
12. Related Provisions
13. Professional Insight
Section 85 places heavy responsibility on business purchasers and successors. GST due diligence is as important as financial and legal due diligence. Ignoring past GST exposure can convert a good acquisition into a costly mistake.
Disclaimer: This article is prepared based on the CGST Act, CGST Rules, notifications and prevailing legal position as applicable till date. GST liability in business transfer cases depends on facts, timing and documentation.
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