Section 18(3): Transferring ITC on Merger, Demerger or Sale

Section 18 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

A business is sold as a going concern with ₹80 lakh of unutilised credit in the ledger. The seller has no output tax left to absorb it; the buyer has plenty.

Credit is registration-specific and does not follow the assets automatically. Section 18(3) is the only route by which it can move.

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 provision for transfer of liabilities, the registered person shall be allowed to transfer the unutilised input tax credit to the transferee. Rule 41 requires a declaration in FORM GST ITC-02, a certificate from a practising chartered accountant or cost accountant certifying that the transfer has been made with a specific provision for transfer of liabilities, and acceptance by the transferee on the portal.

The two conditions

A change in constitution on account of one of the listed events — sale, merger, demerger, amalgamation, lease, or transfer of the business.

With a specific provision for the transfer of liabilities.

The second condition is the one that fails. A business transfer agreement that transfers assets and is silent on liabilities does not satisfy s.18(3), however commercially complete it may be. The provision must be specific and it must cover liabilities, not merely obligations under named contracts.

The demerger apportionment

Rule 41(1) proviso: in the case of a demerger, the input tax credit shall be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme.

The Explanation clarifies that "value of assets" means the value of the entire assets of the business, whether or not input tax credit has been availed thereon.

Two consequences:

The ratio is asset value, not turnover, not headcount, not the scheme's own allocation of credit. A scheme purporting to allocate credit differently does not displace the rule.

Assets on which no credit was taken still count in the denominator and numerator. Land, for instance, enters the ratio even though it carries no credit.

Rule 41(1) second proviso requires the value of assets to be taken at State level for the apportionment — so a demerger affecting several States produces a separate ratio for each registration.

The procedure

Rule 41(1) — the transferor files FORM GST ITC-02 electronically, with a request for transfer of unutilised credit, along with a certificate from a practising chartered accountant or cost accountant certifying that the transfer has been done with a specific provision for transfer of liabilities.

Rule 41(2) — the transferee shall, on the common portal, accept the details furnished by the transferor, and on acceptance the unutilised credit is credited to his electronic credit ledger.

Rule 41(3) — the transferee shall duly account for the inputs and capital goods so transferred in his books of account.

The acceptance step is not a formality. Until the transferee accepts, nothing moves, and a transferor who has already surrendered its registration cannot re-file.

Sequencing, and where it goes wrong

The single most common failure is cancelling the transferor's registration before filing ITC-02.

Once the registration is cancelled, the transferor cannot access the portal to file, and the credit is lost. The correct sequence:

1. complete the business transfer with a specific liabilities provision in the agreement;
2. obtain the CA or CMA certificate;
3. transferor files ITC-02;
4. transferee accepts on the portal;
5. transferee accounts for the assets in its books;
6. transferor files GSTR-10 final return and applies for cancellation in REG-16.

What can and cannot transfer

Can transfer: the unutilised balance in the electronic credit ledger, across CGST, SGST, IGST and cess heads.

Cannot transfer:

• balance in the electronic cash ledger — that is refunded under s.54 or transferred under PMT-09 between heads of the same registration, not to another person;
• credit not yet availed on invoices in hand at the date of transfer — the transferee has no invoice in its name;
• credit where the transferor's registration has already been cancelled;
• credit blocked under Rule 86A.

The related supply question

Is the business transfer itself a supply?

Schedule II paragraph 4(c) treats goods forming part of the assets of a business as supplied immediately before cessation — except where the business is transferred as a going concern to another person.

And the services exemption notification exempts services by way of transfer of a going concern, as a whole or an independent part thereof.

So a genuine slump sale as a going concern is exempt, and the credit moves under s.18(3). An itemised asset sale is a series of taxable supplies, each invoiced, with s.18(6) applying to capital goods — and s.18(3) does not apply at all. Selling a capital good →

Key takeaways

• s.18(3) permits transfer of unutilised credit on sale, merger, demerger, amalgamation, lease or transfer of business.
• There must be a specific provision for transfer of liabilities.
• Demerger: credit apportioned in the ratio of the value of assets, taken at State level, including assets carrying no credit.
• FORM GST ITC-02 plus a CA or CMA certificate, and acceptance by the transferee.
• File ITC-02 before cancelling the transferor's registration.
• Only the credit ledger transfers; the cash ledger does not.

Read next

• ITC-02: Declaration for Transfer of ITC on Business Transfer
• ITC Transfer on Sale of Business: Section 18(3)
• Selling a Capital Good: Section 18(6) and Rule 44(6)
• Section 18 CGST: ITC in Special Circumstances

Disclaimer: Positions stated as on 5 September 2026, based on the CGST Act and Rules as amended to 31 March 2026 (ICAI Bare Law, 12th edition).