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Conversion of Proprietorship into Partnership under GST

conversion 2

A proprietorship firm means a firm owned by one natural person only who is the sole owner of such business. All capital investment, risks & rewards, profits & losses, assets & liabilities obtains to such person only. Whereas, in a partnership firm, there are at least two persons, who may or may not be ordinary persons, and where the share of each person in capital investment, risks & rewards, profits & losses, assets & liabilities is pre-determined through an agreement which may be oral or written.

It is essential to keep in mind that there is no specific provision under the GST Act, 2017, to convert a proprietorship into a partnership. However, there are various mentions in the Act on converting a proprietorship into a partnership firm. Broadly, it includes obtaining GST registration for collaboration, transfer of unutilized input tax credit to a partnership firm, and cancellation of proprietorship GST registration.

Prerequisites for new GST registration
Indeed, the legal form of both types of entities is not the same, so the PAN, GST number and bank accounts of both entities will always be different from each other. The PAN of the sole proprietor serves as the PAN of both the person and the firm. But, in the case of a partnership, the PAN of the firm and the partners has to be different.

Thus, to convert a proprietorship firm into a partnership firm, it is the foremost requirement to establish a partnership firm and then arrange for the PAN, GST number and bank accounts of the partnership firm. To start with, partners have to execute a partnership deed that will specify all the terms and situations under which such partnership comes into force. Once the partnership act is ready, the partners will apply for obtaining the PAN with the income tax department, being a mandatory requirement to apply for GST registration.

Obtaining GST registration for partnership
After obtaining the partnership firm’s PAN, there arises the need to apply for GST registration through REG-01. The following is the list of documents which are needed to be furnished under GST:

  • PAN card of the firm and all partners;
  • Partnership deed as executed between partners;
  • Aadhaar card/ passport/ driving license or voter ID of all partners with the address which confirms the partnership deed;
  • Passport-sized photos of all the partners;
  • Authorization letter to empower one partner as an approved signatory for GST registration on behalf of the firm;
  • A document evidencing the address of business place(s) of the firm;
  • Utility bill/Property Tax Receipt (latest of 2 months) of above said business place;
  • Bank account statement or passbook;
  • A copy of the certificate of registration under any other act, if any.

Filing of returns by proprietorship & partnership
The taxpayer has to provide the date from which the GST registration of proprietorship is to be cancelled before applying for cancellation of GST. Additionally, while using for new GST registration of the partnership firm, the taxpayer must declare and relent the date on which liability to register under GST arises. The taxpayer has to ensure that both the above dates are the same; the effective registration under GST will come into force from this date.

Eventually, the proprietorship firm has to file all the GST returns before the new GST registration date is announced. The partnership firm will start filing its GST returns from the date of new GST registration.

Final conversion process
When the proprietorship firm has filed all the pending returns and paid off all tax dues, it may request the cancellation of the GST registration of the proprietorship firm in Form GST REG 16, citing reasons as “Changing the company’s legal framework”.

After this, transfer all assets and liabilities into a partnership firm to sell the business by proprietor to  partnership firm.

Transfer of business assets to partnership firm
The transfer of stock or any other assets while converting a proprietorship firm into a partnership firm is exempted by GST because such goods or assets are transferred to continue the same business. This exemption has been mentioned in schedule II of the CGST Act, 2017. Further, the transfer of support as a going concern is exempted as per the CGST (Rate) notification 1/2017. The existing proprietorship firm shall cease to be a taxable person hereafter.

Transfer of unutilized ITC to partnership
As and when the taxpayer completes all the returns, he can transfer the unutilized ITC to the partnership firm. Following steps can be followed for sharing unutilized ITC to the partnership firm:

  • Firstly, the proprietorship firm needs to fill form GST ITC-02 to transfer the unutilized ITC to the partnership firm;
  • The proprietorship firm is also required to submit a copy of a certificate issued by practising chartered accountant or a cost accountant certifying that the transfer of business has been done with a certain provision for the transfer of liabilities;
  • The partnership firm shall accept the information so provided by the proprietorship firm on the GST portal and, upon such acceptance, the unutilized ITC mentioned in the Form GST ITC-02 shall be transferred to its electronic credit ledger;
  • The inputs and capital goods, so passed, shall be appropriately accounted for in the books of account by the partnership firm.

Transfer of balance in electronic cash ledger
There is no condition under the GST Act regarding transferring the balance in an electronic cash ledger from one entity to another. Hence, to get the refund of balance in electronic cash ledger, the taxpayer shall file 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”.

At AJSH, we assist our clients in dealing with various GST matters (GST registration, GST advisory, GST assessments, filing of GST returns, claiming refund & GST audits) by providing them adequate support and guidance from our end. If you have any questions or would like to know more about proprietorship into partnership conversion under GST, kindly contact us.



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