Section 85: Buying a Business and Inheriting Its GST

Section 85 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.

The most commercially significant provision in Chapter XVI, and the one most often discovered after completion.

Section 85(1): where a taxable person transfers his business in whole or in part — by sale, gift, lease, leave and license, hire or in any other manner whatsoever — the taxable person and the person to whom the business is transferred shall be jointly and severally liable, wholly or to the extent of such transfer, to pay the tax, interest or any penalty due from the taxable person up to the time of such transfer, whether determined before the transfer and remaining unpaid, or determined thereafter. 85(2): the transferee carrying on the business, in his own name or another, is liable to pay tax on supplies made by him from the date of transfer, and, if registered, must apply within the prescribed time for amendment of his registration certificate.

The four features that make it dangerous

1. Every mode of transfer is covered. Sale, gift, lease, leave and license, hire, "or in any other manner whatsoever". A slump sale, an itemised sale, a business transfer agreement, a lease of an undertaking — all within it.

2. Part transfers count. "In whole or in part." Acquiring one division or one unit brings the liability of that part.

3. Liability is joint and several. The department may proceed against the transferee for the whole, without exhausting remedies against the transferor. The transferee's recourse against the seller is a contractual matter, not a defence to the department.

4. Future determinations are included. "Whether such tax, interest or penalty has been determined before such transfer, but has remained unpaid, or is determined thereafter."

That fourth point is the one that catches buyers. A clean portal on completion day proves nothing about a s.74A notice issued three years later for a period before the transfer — and, since the s.74A limitation runs 42 months from the annual return due date, the exposure can persist for four years or more after completion. The limitation map →

"Wholly or to the extent of such transfer"

The qualification limits the exposure on a part transfer.

Where an entire business is acquired, liability is wholly. Where a part is acquired, liability is to the extent of such transfer.

But "the extent of such transfer" is not self-defining, and on a part transfer it becomes the central question. What helps is contemporaneous allocation:

• a schedule in the transfer agreement identifying exactly what is transferred — units, contracts, GSTINs, product lines;
• a turnover attribution for the transferred part, by period;
• separate books or cost-centre records for the transferred part before the transfer;
• an apportionment methodology agreed and documented at the time.

Without that, an argument that a demand relates to a retained part of the business becomes a matter of reconstruction against a department that will read the transfer widely.

What a buyer should actually do

Portal diligence:

• all GSTINs of the seller, and their status;
• returns filed — GSTR-1, 3B, 9, 9C — for every open period, with gaps identified;
• the electronic liability register, Part I and Part II, obtained from the seller;
• any DRC-01A, DRC-01, DRC-07, DRC-22 on the portal;
• notices in the portal's notices and orders tab, including ASMT-10, ADT-01, ADT-02;
• e-way bill and e-invoice data against reported turnover.

Beyond the portal:

• the department's own view — any audit in progress, any summons under s.70, any DGGI inquiry;
• litigation status at every level, including appeals where a pre-deposit has been made;
• credit exposure — Rule 42/43 reversals not made, Rule 37 balances, s.17(5) credit taken;
• refund claims filed or rejected, since an erroneous refund carries its own 42-month clock from the refund date;
• classification and valuation positions taken, since these are what generate later demands.

In the contract:

• representations and warranties on GST compliance for all open periods;
• an indemnity, uncapped or generously capped, surviving for at least the full limitation period — which for FY 2024-25 onwards means 42 months from the annual return due date plus the order period;
• an escrow or retention against the assessed exposure;
• conduct of claims provisions giving the buyer control of any GST proceeding it must defend;
• access to records post-completion, since the buyer will have to answer notices about periods it did not operate.

Consider s.81. Where the seller has an outstanding liability, the previous permission of the proper officer under the proviso to s.81 removes the risk that the transfer is treated as void against the revenue. Sections 81 and 82 →

Section 85(2): the registration step

The transferee carrying on the business in his own name or in some other name is liable to pay tax on supplies made by him with effect from the date of transfer, and, if already registered, must apply within the prescribed time for amendment of his registration certificate.

Two separate registration consequences:

For a transferee already registered — an amendment under Rule 19, within the prescribed time. Rule 19 amendment timelines →

For a transferee not registered — registration under s.22(3): where a business is transferred as a going concern, the transferee shall be liable to be registered with effect from the date of such transfer or succession.

And the credit transfers. Section 18(3) with Rule 41 allows the unutilised input tax credit to be transferred to the transferee on a sale, merger, demerger, amalgamation, lease or transfer of business, with a specific provision for transfer of liabilities, by filing FORM GST ITC-02. Section 18(3) and ITC-02 →

That is worth sequencing carefully: ITC-02 must be filed by the transferor and accepted by the transferee, and it cannot be done after the transferor's registration is cancelled.

The going-concern exemption is separate

A transfer of a going concern, as a whole, is exempt from GST as a supply of services under the exemption notification. That exemption concerns whether the transfer itself attracts tax.

It says nothing about s.85, which concerns the transferee's liability for the transferor's past dues. The two are frequently conflated in negotiation, and they are entirely independent: a transfer can be exempt and still carry the whole of the seller's GST history.

Key takeaways

• Section 85 makes transferor and transferee jointly and severally liable for pre-transfer dues.
• Every mode of transfer is covered, including part transfers, where liability is to the extent of the transfer.
• Liability includes amounts determined after the transfer — so exposure persists for the full limitation period.
• A part transfer needs a contemporaneous allocation of what was transferred, or attribution becomes reconstruction.
• Protect with portal diligence, warranties, an indemnity surviving the limitation period, and retention.
• Section 22(3) registers the transferee from the date of transfer; s.18(3) / ITC-02 moves the credit.

Read next

• Sections 81 and 82: Void Transfers and the First Charge
• Section 18(3): Transfer of Credit, ITC-02 on Merger or Demerger
• Section 87: Amalgamation and the Retrospective Order Problem
• Change in Constitution and Fresh Registration Under GST

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).