Transfer of Input Tax Credit in Case of Death of Sole Proprietor

For the convenience of any interested readers, we go over the process for transferring an input tax credit in the event that a sole owner passes away in this blog.

What is a Sole Proprietorship?

An unincorporated firm owned and operated by one person is known as a sole proprietorship. It is the most straightforward type of business structure because the owner and the company are not legally distinct. It is sometimes referred to as “sole proprietorship,” “individual entrepreneurship,” or just “proprietorship.” 

The business owner usually referred to as a “proprietor” or a “trader,” uses their legal identity to conduct business. Additionally, they have the option to register a trading name with their local authority and conduct business under a different name.

The simplest and least expensive type of business to start is this one. It is typical among small enterprises, independent contractors, and other self-employed people due to this.

A sole proprietorship starts and ends with the decision of the business owner or with their passing.

If a business expands significantly, a sole proprietorship may change into another, more complicated business structure.

Differences between Sole Proprietorship vs One-Person Company

While choosing the ideal business structure for launching their enterprise, new business owners are frequently baffled. OPCs and sole proprietorships seem to be very similar; however, there are certain differences that are covered in the section below. The following details will help you choose the optimal business structure:

Promoter’s Liability

A sole proprietor is completely exposed because their responsibility is unrestricted. This means that creditors have the right to compel the owner of the firm to sell personal assets in order to satisfy the obligations of the company if it is unable to pay them. This is because a sole proprietorship does not exist as a separate legal entity from its owner. 

The director of a one person company, on the other hand, is completely safe in this scenario. The director’s personal assets are always safeguarded because the entity and the director are separate legal entities. As a result, a sole proprietorship may be appropriate if your business has little risk, but if the opposite is true, a one-person business is preferred.

Start-up Costs

A sole proprietorship is obviously less expensive because there is no official registration required. If you’re a sole proprietor, a goods and services tax (GST) registration and a Shops and Establishments Act license will do. These anxiety disorder registration fees are minimal and won’t break the bank. 

On the other hand, a one person firm will also need to go through the formation process and comply with many regulations in addition to the aforementioned registrations. Given the many additional advantages of the construction, the substantial outlay required for this is justified.

Succession

When a business’s lone owner passes away, their business license expires, and their business’s assets and obligations are transferred to their heirs or children. The heirs or offspring must apply for a new business license if they intend to continue operating the company.

On the other hand, because of perpetual succession, a business can continue to operate even if its owner passes away. When an OPC owner passes away or becomes unable to run the company, their nominee will take over to run the company until his or her estate can be transferred to them. The firm can then carry on without needing to create a new entity, thanks to the heirs.

Annual Compliances

While one-person businesses must also have their books and balance sheet audited, produce annual reports, and notify the Registrar of Companies (RoC) of any changes to their structure, sole proprietorships are just obliged to file income tax filings and maintain their records. For one-person firms, compliance expenditures of at least Rs. 10,000 should be allocated annually.

Registration of Successor/Liability of the Transferee

When a business is transferred to another person for any reason—including the death of the proprietor—the transferee or successor, as the case may be, shall be required to be registered with effect from the date of such transfer or succession. The applicant must specify “death of single owner” as the cause for obtaining registration when submitting an application in Form GST REG-01 electronically using the common GST portal.

To link the GSTIN of the transferor and the GSTIN of the transferee, the GSTIN of the transferee to whom the business has been transferred must also be provided.

Transfer of Input Tax Credit and Tax Liability

If a sole proprietor dies and the business is continued by a transferee or successor, it will be seen as a transfer of the business.

According to Section 18(3) of the CGST Act, when there is a specific provision for the transfer of liabilities, the registered person may transfer the unused input tax credit that is shown in his electronic credit ledger to the transferee in the manner specified in Rule 41 of the CGST Rules.

According to Section 93(1) of the CGST Act, if a person who is responsible for paying tax, interest, or penalties under the CGST Act passes away, the person who continues his or her business will be responsible for paying any tax, interest, or penalties owed by that person under this Act.

Furthermore, it is made clear that, in cases of business transfers resulting from the death of a sole proprietor, the transferee or successor shall be responsible for paying any taxes, interest, or penalties due from the transferor.

How to Transfer Input Tax Credit to Successor

The input tax credit that is still unutilized in the computerized credit ledger is permitted to be passed to the transferee in the event of the death of a single proprietor if the business is continued by any person acting as transferee or successor.

What is the Manner of Transfer of Credit?

In the event of a sale, merger, de-merger, amalgamation, lease, transfer, or change in ownership of a business for any reason, a registered person shall file Form GST ITC-02 electronically on the common portal with a request for the transfer of unutilized input tax credits lying in his electronic credit ledger to the transferee.

When a sole proprietor’s business is transferred due to his or her passing, the transferee or successor must submit Form GST ITC-02 for the registration that needs to be canceled as a result. The transferee or successor must submit Form GST ITC-02 before submitting an application to cancel the registration. The unutilized input tax credit listed in Form GST ITC-02 must be accepted by the transferee or successor before being credited to his electronic credit ledger.

A transfer or change in ownership of a business would include a transfer or change in ownership due to the death of the sole proprietor for the purposes of Sections 18(3), 22(3), and 85(1) of the CGST Act and Rule 43(1) of the CGST Regulations.

Cancellation of GST Registration due to a Sole Proprietor’s Death

Cancellation of GST Registration on account of transfer of business for any cause, including the death of the proprietor, is covered by Section 29(1)(a) of the CGST Act, 2019. The legal heirs of a deceased single proprietor of a firm may submit an application for cancellation of registration in Form GST REG-16 electronically on the common platform, according to Section 29(1)(a) of the CGST Act. The reason for the cancellation must be listed as “death of single proprietor” on Form GST REG-16. The transferee is needed to upload the proprietor’s death certificate when filing for cancellation.

To link the GSTIN of the transferor and the GSTIN of the transferee, the GSTIN of the transferee to whom the business has been transferred must also be provided.

Income Tax Compliance After the Death of a Sole Proprietor

According to Section 159 of the Income Tax Code, the spouse, legal representative, or executor is responsible for completing the income tax return and paying off any outstanding tax debts of the deceased assessee if they pass away tragically before doing so for any year in which filing is required. Although a deceased individual is eligible for all deductions and exemptions for the whole year, only the income earned up until their death is subject to tax. The income would thereafter be taxable in the hands of the legal heir and included in his return of income.

The return of the deceased, however, would only include income up until the date of the assessee’s death. The assessee’s lawful heirs receive both the income from his or her assets and the tax debt upon his or her death. Thus, the legal heir is now responsible for filing tax returns. This indicates that the legal heir may file tax returns on the decedent’s behalf.

The following steps must be followed in order to register as a legal successor on the e-filing website in the event that the assessee passes away. The legal heir must also file the return on the assessee’s behalf.

Step 1: Use your personal login information, such as legal heir, to access the “e-Filing” section of the Income Tax India website.

Step 2: Next, select the “Register as Representative” option under the “My Account” page.

A redirect will take you to the “Register as Representative” page.

Step 3: Next, use the “Proceed” option after selecting the “Deceased (Legal Heir)” category and the “New Request” request type.

Step 4: Now enter the information below:

1. The deceased’s PAN
2. Name and birthdate of the deceased according to PAN
3. Bank information for the legal heir
4. Upload the necessary files

Click the “Submit” button after filling out and uploading the aforementioned information. Upon the submission of the Register as an authorized signatory request, a success message will be shown. The e-Filing Admin will receive the request and approve it. An email and SMS will be issued to the user who submitted the request when the e-Filing Admin has verified the request’s legitimacy and has the option of approving or rejecting it.

Note

1. In order to file an income tax return on behalf of the deceased person, the legal heir must register.
2. Upload the following files in PDF format (maximum 1 MB):

• Certificate of death
• The deceased person’s PAN card
• Copy of the legal heir’s PAN card and
• Certificate of legal heir

3. The following documents will be accepted as a legal heir certificate:

• The court-issued legal heir certificate
• The local revenue authorities’ legal heir certificate
• The local revenue authorities’ certificate for surviving family members
• The legally binding will
• The State or federally-issued Family Pension Certificate
• A letter stating the name of the nominee or joint account holder for the deceased at the time of death, issued by the banking or financial institution on its letterhead with its seal and signature
• To submit the legal heir certificate and the will’s Hindi/English translation. accompanied with a copy of the original certificate, suitably notarized

Conclusion

In this section, we quickly review the process of transferring an input tax credit in the event of a sole proprietor’s death as it has been described thus far in this blog.

When a sole proprietor passes away and the transferee or successor wishes to carry on with the business, a question regarding the transfer of unused input tax credits that are stored in the electronic credit ledger of the deceased proprietary firm will arise because, in accordance with Section 41(1)’s procedure, the transferor is required to file the Form GST ITC-02.

The list of relevant sections and regulations is as follows:

1. The Central Goods and Service Tax Act, 2017, Section 18(3)—Transfer of Unused Input Tax Credit Lying in the Transferor’s Electronic Credit Ledger; and
2. The process to be followed for the transfer of the unused input tax credit is outlined in Rule 41 of the Central Goods and Service Tax Regulations, 2017.

Steps a Transferee Must Take

1. The transferee or successor must submit an application in the form GST REG-01 in order to obtain a GST registration.
2. The transferee or successor must specify “death of the proprietor” as the reason for seeking registration when submitting the registration application in Form GST REG-01.
3. When a sole proprietor’s business is transferred due to his or her passing, the transferee or successor must submit Form GST ITC-02.

It is significant to note that the transferee or successor must submit Form GST ITC-02 before submitting an application to revoke the deceased proprietary firm’s GST registration.

The unutilized input tax credit as stated in Form GST ITC-02 shall be credited to the electronic credit ledger of the transferee or successor upon acceptance by the transferee or successor, who is required to accept the same.

1. The legal heirs must submit Form GST REG-16, Application for Cancellation of GST Registration of Deceased Sole Proprietary Firm, with their application.
2. The “death of the sole proprietor” must be stated as the basis for the cancellation of registration when submitting Form GST REG-16 to request cancellation of registration.

To ensure that the GSTIN of the transferor and the GSTIN of the transferee match, an additional GSTIN of the transferee (obtained by filing for a new GST registration; see step 1 above) must be provided.

Based on what we’ve covered so far, we believe that this blog will be helpful to any readers who are interested in learning how input tax credits are transferred in the event that a single proprietor passes away.

If you are a sole proprietor or a family member of a deceased sole proprietor, it is crucial to understand the process of transferring input tax credit in case of death. Failing to do so may result in the loss of significant tax benefits and could result in legal consequences.

We recommend consulting with a qualified tax professional to guide you through the transfer process and ensure that all necessary steps are taken to avoid any penalties or fines. Don’t hesitate to take action and protect your business and assets by seeking Kanakkupillai expert advice today.

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