Section 85 of CGST 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.
Section 85 of the CGST Act, 2017 provides that when a taxable person transfers a business — wholly or in part, by sale, gift, lease, leave and licence, hire or any other means — the transferor and the transferee are jointly and severally liable to pay any tax, interest or penalty due in respect of that business up to the time of the transfer, whether that amount is determined before or after the transfer. It is the opening section of Chapter XVI (Liability to Pay in Certain Cases) and ensures GST dues follow the business even when its ownership changes hands.
What Section 85 Says — In Plain English
Section 85 addresses a simple but important problem: what happens to a taxable person\'s unpaid GST when the business is sold or otherwise transferred? Ordinarily a buyer might expect to walk away clean, taking the assets but not the seller\'s tax baggage. Section 85 rejects that. It says the pre-transfer tax dues attach to the business itself, so both the person who sold it and the person who bought it can be pursued for those dues.
The section is deliberately broad in the modes of transfer it covers, and it is time-limited in the liability it creates — the joint liability runs only up to the moment of transfer. Anything the buyer does after taking over is the buyer\'s own affair. In practice this makes GST due diligence a mandatory step in any business acquisition, because the buyer inherits exposure to demands that may not even have crystallised at the time of the deal.
Clause / Sub-section Breakdown
| Provision | What it does |
|---|---|
| Section 85(1) | Where a taxable person liable to pay tax, interest or penalty transfers his business in whole or in part — by sale, gift, lease, leave and licence, hire or any other means — the transferor and transferee are jointly and severally liable, wholly or to the extent transferred, for the dues up to the time of transfer, whether determined before or after that date. |
| Section 85(2) | Where the transferee carries on the business under his own name or a new name, he is liable to pay tax on supplies he makes with effect from the date of transfer, and — if already registered — must apply for amendment of his registration certificate. |
Applicability & Scope
The section applies whenever a business, or a distinct part of it, is transferred. The mode of transfer is intentionally wide — sale, gift, lease, leave and licence, hire or "any other means" — so structuring a deal as a lease or licence rather than an outright sale does not sidestep it. The trigger is independent of timing of the demand: a transferee cannot escape liability merely because the amount was quantified later, so long as it relates to the period before the transfer.
The liability is capped at dues "up to the time of transfer". Post-transfer liabilities on supplies made by the transferee are the transferee\'s own responsibility under sub-section (2), not a joint liability of the transferor. The "wholly or to the extent" language means that on a part transfer, the joint liability is confined to the portion of the business actually transferred.
Worked Examples
Example 1 — full transfer, demand raised later. Alpha Traders sells its entire trading business to Beta Enterprises on 1 August 2026. At that date an assessment for FY 2024-25 is pending; it is finalised in December 2026 raising a demand of Rs. 4,00,000 of tax plus interest. Even though the demand was determined after the transfer, it relates to a pre-transfer period. Under Section 85, both Alpha Traders (transferor) and Beta Enterprises (transferee) are jointly and severally liable for the Rs. 4,00,000. The department may recover the full amount from either party. Supplies Beta makes from 1 August 2026 onward are Beta\'s own liability under sub-section (2), and Beta must amend its registration to reflect the takeover.
Example 2 — part transfer. Gamma Ltd. runs two divisions and sells only its packaging division to Delta LLP for Rs. 90,00,000 on 1 July 2026. GST dues of Rs. 2,00,000 relating solely to the packaging division for earlier periods are later confirmed. Because Section 85 fixes joint liability "to the extent" of the transfer, Delta LLP is exposed as transferee for that Rs. 2,00,000 attributable to the transferred packaging division, while dues of Gamma\'s retained division remain Gamma\'s alone.
Step-by-Step in Practice
- Before signing, the buyer runs a GST due-diligence check — GSTIN status, filed returns, and any pending notices, assessments or appeals of the seller.
- Negotiate protective clauses: indemnity for pre-transfer tax, warranties on GST compliance, and often an escrow holdback of part of the consideration.
- On the transfer date, the transferee applies for amendment of its existing registration (or fresh registration) to reflect the acquired business under Section 85(2).
- Unutilised ITC of the seller is transferred by filing FORM GST ITC-02 under Section 18(3) read with Rule 41.
- Post-transfer, the transferee discharges GST on its own supplies from the date of transfer and monitors any legacy demand notices for the pre-transfer period.
Common Mistakes & Practical Notes
- Assuming a buyer takes assets free of tax dues — Section 85 makes pre-transfer tax, interest and penalty follow the business.
- Ignoring that liability attaches whether the amount is determined before or after the transfer, so a "clean" balance sheet at signing is not conclusive.
- Treating a lease or leave-and-licence as outside the section — the mode of transfer is expressly wide.
- Forgetting to file ITC-02 for the unutilised credit, or to amend registration under sub-section (2).
- Skipping escrow or indemnity, leaving the buyer to recover from the seller after the department has already collected from the buyer.
Timelines & Related Sections
The liability under Section 85 is joint and several: the department can proceed against the transferor, the transferee, or both, and recover the whole of the pre-transfer dues from whichever party it chooses. There is no statutory "notice" the transferee must give to limit liability the way a retiring partner must under Section 90 — instead the transferee\'s protection is contractual (indemnity, escrow) plus the sub-section (2) duty to promptly amend registration from the date of transfer.
Section 85 works alongside Section 18(3) and Rule 41 (transfer of unutilised ITC on sale, merger or transfer of business), Section 22 (persons liable for registration, including a transferee of a going concern), and the recovery machinery in Section 79. It is the first provision of Chapter XVI, followed by Sections 86 to 94 dealing with agents, amalgamation, liquidation, directors, partners and other special cases of liability.
Recent Amendments & Context
Section 85 has stood without substantive amendment since the GST rollout on 1 July 2017 — the concept of successor liability on transfer of business is long-settled and was carried over from earlier tax regimes. Its practical importance has grown with the rise of slump sales and business-transfer agreements, where a going concern is transferred as a whole. Note that the transfer of a business as a going concern is itself treated as an exempt supply of service under the relevant GST exemption notification, but that exemption on the transfer transaction does not dilute the successor liability that Section 85 imposes for the transferred business\'s past dues.
In deal practice, Section 85 is the reason GST due diligence is never optional in an acquisition. A buyer\'s legal and tax advisers will typically obtain a portal-based status check of the seller\'s GSTIN, a schedule of open notices, assessments, appeals and audits, and a representation from the seller that all returns are filed and taxes paid to date. Where a going-concern transfer is structured to be exempt, care is also taken to satisfy the conditions of the exemption — chiefly that the business is transferred as a whole and is intended to be carried on by the buyer — while separately pricing in the inherited pre-transfer liability that Section 85 keeps alive. The section therefore shapes not only who ultimately pays past dues, but also how consideration, indemnities and escrow are negotiated in the sale agreement.
Key Facts About Section 85 of CGST
- Applies in: All states across India, under the relevant central law.
- Mode: Mostly online via the official government portal.
- Typical timeline: Ranges from a few days to a few weeks depending on the case.
- Non-compliance: May attract penalties, interest or late fees.
- Expert help: TaxClue completes the entire process end to end for you.
Who is liable for GST dues when a business is sold?
Under Section 85, both the transferor (seller) and the transferee (buyer) are jointly and severally liable for tax, interest and penalty relating to the business up to the time of transfer. The department can recover the full amount from either party.
Does Section 85 apply if the demand is raised after the business is transferred?
Yes. Liability attaches whether the amount is determined before or after the transfer, so long as it relates to the period up to the time of transfer. A buyer cannot escape merely because the demand was quantified later.
Over 90% of compliance penalties in India arise from missed due dates — timely handling can save businesses thousands of rupees each year.
Section 85 of CGST: a key compliance topic in Indian tax and corporate law that businesses and individuals must understand to remain compliant.
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