# M&A in Startups: Don’t Overlook the GST Angle

Published: 14 May 2025  |  Last updated: 16 Jul 2025
Author: Treelife
Practice area: Quick Takes
Source: https://treelife.in/quick-takes/ma-in-startups-dont-overlook-the-gst-angle/

## Summary

- Mergers and acquisitions involving startups carry a significant but often overlooked GST compliance layer that founders, investors, and advisors must address.
- Section 18(3) of the CGST Act read with Rule 41 allows transfer of unutilised Input Tax Credit through Form GST ITC-02.
- In demergers, ITC must be apportioned based on asset value ratios as prescribed under Circular 133/03/2020-GST, and errors can cause ITC loss or scrutiny.
- A transfer of business as a going concern (TOGC) is exempt from GST only if all business elements are transferred and properly documented.
- A slump sale may or may not trigger GST depending on the type of assets being transferred.
- Demergers require careful ITC allocation across states and entities to avoid credit reversals and future disputes.
- Section 87 of the CGST Act requires realignment of GST registration and liabilities after an amalgamation, and oversight here can create dual tax exposure.
- Investors and advisors should conduct detailed GST due diligence covering returns, liabilities, and pending litigation before closing a deal.
- ITC transfers should be certified by a chartered accountant and GST compliance should be aligned with the deal structure early, with cash flow planning for potential credit reversals or tax costs.

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Blog Content Overview

- [1 Transfer of Input Tax Credit (ITC):](#Transfer_of_Input_Tax_Credit_ITC)
- [2 Structure Determines GST Impact](#Structure_Determines_GST_Impact)
- [3 GST Registration & Post-Deal Liabilities](#GST_Registration_Post-Deal_Liabilities)
- [4 Investor/Advisor Checklist Before Closing a Deal](#InvestorAdvisor_Checklist_Before_Closing_a_Deal)

Mergers & Acquisitions are transformative for startups—but beneath the surface lies a complex layer often overlooked: **GST compliance**.
Whether you’re a founder preparing for exit, an investor funding scale-ups, or a financial advisor structuring the deal—understanding GST in [M&A](https://treelife.in/services/legal-support/fundraising-mergers-acquisitions/) is critical for protecting value and ensuring seamless integration.
Here’s what you need to know:

### **Transfer of Input Tax Credit (ITC):**

Unutilized **ITC** can be a significant cash asset—if transferred correctly.
Section 18(3) of the **CGST Act** and **Rule 41** enable ITC transfer via **Form GST ITC-02**.

💡 **In demergers, ITC must be apportioned based on asset value ratios** (as per **Circular 133/03/2020-GST**). Missteps here can lead to **ITC loss** or scrutiny.

### **Structure Determines GST Impact**

- **Transfer as a Going Concern (TOGC)** – Exempt from GST. But only if all business elements are transferred and documented.

- **Slump Sale** – May trigger GST depending on asset type.

- **Demerger** – Requires meticulous **ITC allocation** across states/entities to avoid **credit reversals** and future disputes.

### **GST Registration & Post-Deal Liabilities**

Under **Section 87 of the CGST Act**, **GST registration** and **liabilities** need realignment post-amalgamation. Any oversight here can carry risks or dual tax exposures.

### **Investor/Advisor Checklist Before Closing a Deal**

✔️ Conduct detailed GST due diligence: returns, liabilities, pending litigations.
✔️ Certify ITC transfers with **CA validation**.
✔️ Align **GST compliance** with deal structure early—don’t leave it for post-closing.
✔️ Plan **cash flows** factoring in credit reversals or tax costs.

The **GST** layer in M&A isn’t just about compliance—it’s about preserving deal value, ensuring smooth transitions, and protecting stakeholder interests.
Have you encountered GST-related roadblocks during a merger, acquisition, or demerger? Let’s discuss in the comments—or connect if you’re planning a transaction and want to future-proof your GST strategy.

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- [Why Do Related Party Transactions Matter in Financial Due Diligence?](https://treelife.in/quick-takes/why-do-related-party-transactions-matter-in-financial-due-diligence/)

- [Key Terms in Share Dematerialization](https://treelife.in/quick-takes/key-terms-in-share-dematerialization/)

- [What’s in a Name? – A Short Guide on Selecting the Right Name for Your Company](https://treelife.in/quick-takes/whats-in-a-name/)

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This is informational content from Treelife. For advice specific to your situation, contact support@treelife.in