Conversion of a Proprietorship into a Partnership under GST

                               

 

Conversion of a Proprietorship into a Partnership under GST

There is no specific provision under the Goods and Services Tax (GST) Act on how to convert a proprietorship into a partnership. Nevertheless, there are various mentions in the Act to convert a Proprietorship into a Partnership firm. This includes obtaining GST registration for partnership, transfer of unutilized input tax credit (ITC) to partnership firm, and cancellation of proprietary GST registration.

• Requirements for new GST registration

In order to convert the Proprietorship Entity into a Partnership Firm and obtain the PAN, GST Registration, and Bank Account of the Partnership Firm, it is necessary to form a Partnership Firm. To begin with, the partners are required to write an agreement called "Partnership Deed", which specifies all the terms and conditions under which such partnership applies. Once the partnership deed is generated, the taxpayer will have to apply for a PAN number with the Income Tax Department as it is a mandatory condition for applying for registration under GST.

• Obtaining GST Registration for Partnership

Once the PAN of the partnership firm is received, apply for GST registration in Form REG-01. Following list of documents required to apply under GST:

* Firm's PAN card

* partnership deed

* PAN card of all the partners

* Aadhar Card/Passport/Driving License/Voter ID of all the partners with a proper address as given in the Partnership Deed

* photos of all partners

* Authorization letter to make the partner the accepted signatory for GST registration on behalf of the partnership

* A document proving the business place (address) of the company

* Utility bill/property tax receipt of such business place (latest of two months)

* Bank Account Details/Passbook

* A copy of the certificate of registration under any other Act

* After getting all the above documents, apply for GST registration for a partnership firm.

• Filing of Return by Proprietorship and Partnership

While submitting the cancellation for GST registration of Proprietorship, the taxpayer has to give the date from which the registration is to be canceled. Also, while applying for new GST registration of partnership firm, the taxpayer has to submit the same as on the date on which the liability to register arises. The taxpayer has to ensure that both the above dates are the same, and this will be the effective date for the GST registration of the partnership.

Hence, the Proprietorship entity will have to file all the GST returns till the new GST registration date is announced. The partnership firm has to start filing GST returns from the date of new GST registration.

• Transfer of business to partnership firm

Transfer of stock or other assets is exempted under GST while converting an existing proprietary concern into a new partnership firm, as such goods/assets are transferred for carrying on the same business. This exemption is specified in Schedule II of the CGST Act. This benefit is available when the existing firm ceases to be a taxable person after such conversion. Further, transfer of a going concern is exempted as per CGST (Rate) Notification 1/2017. Therefore, it is clear that the transfer of a going concern will not be taxable under GST.

• Transfer of unutilized ITC to partnership

After filing the pending return, the taxpayer can transfer the unused ITC to the partnership firm. Following are the steps to transfer the unutilized ITC to a partnership firm:

* Form GST ITC-02 is to be filed by the proprietorship business for transferring the unutilized ITC in the electronic credit ledger of the partnership firm.

* The Proprietorship Entity shall also file a copy of the certificate issued by a Practicing Chartered Accountant or Cost Accountant certifying that the business has been transferred with a specific provision for transfer of liabilities.

* The Partnership shall accept the information provided by the Proprietorship Company on the GST Portal and on such approval, the unutilized ITC specified in Form GST ITC-02 shall be credited to its Electronic Credit Ledger.

* The inputs and capital goods so transferred shall be adequately included by the partnership firm in its books of account.

• Balance Transfer in Electronic Cash Ledger

There is no provision under the GST Act to transfer balances from one entity to another in the electronic cash ledger. Therefore, the taxpayer has to file Form RFD-01 with the refund type of "Refund of excess balance in Electronic Cash Ledger" or "Refund on account of any other reason" to get a refund of the balance in the electronic cash ledger.

• Cancellation of GST Registration of Proprietorship

Once the pending returns have been filed, and all tax dues have been paid, request cancellation of GST registration in Form GST REG 16 citing reasons for 'change of legal structure of the company'. It will also ask for the GST number of the new partnership firm.

This is the whole process of converting a proprietorship firm into a partnership business. It should also be noted that the same procedures mentioned above apply in other cases, where one legal entity converts into another legal form. Such as converting a partnership firm into a proprietorship firm, a private limited/OPC/public limited, or vice versa.

There is no specific provision under the Goods and Services Tax (GST) Act on how to convert a proprietorship into a partnership. Still, there are various mentions in the Act on converting a proprietorship into a partnership firm. It includes obtaining GST registration for partnership, transfer of unutilized Input Tax Credit (ITC) to partnership firm, and cancellation of proprietorship GST registration.

• Prerequisites for New GST Registration

It is essential to create a partnership firm to convert the proprietorship entity into a partnership firm and obtain the partnership firm’s PAN, GST registration, and bank accounts. To start with, partners have to write an agreement called “Partnership Deed”, which specifies all the terms and conditions under which such partnership comes into force. Once the partnership deed is ready, the taxpayer has to apply for the PAN number with the income tax department as it is a mandatory prerequisite to apply for registration under GST.

• Obtaining GST Registration for Partnership

Once the partnership firm’s PAN has been obtained, apply for GST registration in form REG-01. The following list of documents needed to apply under GST:

* PAN card of the firm

* Partnership deed

* PAN card of all partners

* Aadhaar Card/passport/driving license/voter ID of all partners with the appropriate address which is given in partnership deed

* Photos of all partners

* Authorisation letter to make a partner an approved signatory for GST registration on behalf of the partnership

* A document evidencing the company’s business place(s) address

* Utility bill/Property Tax Receipt (latest of two months) of such business place

* Bank account statement/passbook

* A copy of the certificate of registration under any other act

* After obtaining all of the above documents, apply for the GST registration for the partnership firm.

• Filing of Returns by Proprietorship & Partnership

While submitting the cancellation for GST registration of proprietorship, the taxpayer has to give the date from which the registration is to be canceled. Also, while applying for new GST registration of the partnership firm, the taxpayer has to submit the date on which liability to register arises. The taxpayer has to make sure that both the above dates are the same, and this will be the effective date for GST registration of partnership.

Therefore, the proprietorship entity has to file all GST returns till the new GST registration date is announced. The partnership firm has to start filing the GST returns from the date of new GST registration.

• Transfer of Business to Partnership Firm

The transfer of stock or other assets while converting an existing proprietorship entity into a new partnership firm is exempted under GST, because such goods/assets are transferred for the continuance of the same business. This exemption has been specified in Schedule II of the CGST Act. This benefit is available when the existing firm ceases to be a taxable person after such conversion. Further, the transfer of a going concern is exempted as per the CGST (Rate) notification 1/2017. Hence, it is clear that the transfer of a going concern shall not be taxable under GST.

• Transfer of Unutilised ITC to Partnership

After completing the filing of the pending returns, the taxpayer can transfer the unutilized ITC to the partnership firm. Following are the steps for transferring unutilized ITC to the partnership firm:

* Form GST ITC-02 has to be filed by the proprietorship business to transfer the unutilized ITC to the electronic credit ledger of the partnership firm.

* The proprietorship entity shall also file a copy of a certificate issued by a practicing Chartered Accountant or Cost Accountant certifying that the business has been transferred with a specific provision for the transfer of liabilities.

* The partnership shall accept the information so provided by the proprietorship company on the GST portal and, upon such approval, the unutilized ITC specified in Form GST ITC-02 shall be credited to its electronic credit ledger.

* The inputs and capital goods, thus transferred, shall be adequately accounted for in its books of account by the partnership firm.

• Transfer of Balance in Electronic Cash Ledger

There is no provision under the GST Act to transfer the balance in an electronic cash ledger from one entity to another entity. Hence, the taxpayer has to file the Form RFD-01 with a refund type of either “Refund of Excess Balance in Electronic Cash Ledger” or “Refund on Account of Any Other Reasons” to get the refund of the balance in the electronic cash ledger.

• Cancellation of GST Registration of Proprietorship

Once the pending returns have been filed, and all tax dues have been paid, request cancellation of GST registration in Form GST REG 16 citing reasons for 'change of legal structure of the company'. It will also ask for the GST number of the new partnership firm.

This is the complete process of converting a Proprietorship Firm into a Partnership Business. It should also be noted that the same procedures described above apply in other cases, where one legal entity is converted into another legal form. Like converting a Partnership Firm into a Proprietorship Firm, Private Limited/OPC/Public Limited, or vice versa.

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