Section 85 CGST Act — Liability on Transfer of Business & GST Dues of the Previous Owner

1. Why Section 85 matters

Searches such as “Section 85 CGST Act”, “Section 85 GST”, “GST liability on transfer of business”, “GST dues when buying a business”, “GST liability of transferee”, “GST old dues after sale of business”, “successor liability under GST” and “GST sale of business tax liability” are directly connected with this provision.

A business transfer is often treated commercially as a transaction between two parties. GST law can look beyond the commercial contract when the business itself is transferred.

Section 85 is designed to protect Government revenue by connecting the old business's unpaid GST dues with the person who receives the business. At the same time, it separately establishes the transferee's responsibility for supplies made after the transfer.

2. Section 85 in very simple language

Suppose A owns a business and has unpaid GST dues relating to the period before the business is transferred to B.

A sells the business to B.

Section 85 can make A and B jointly and severally liable for the tax, interest and penalty due from A up to the transfer, to the extent of the business transferred.

Then, from the date of transfer, B becomes responsible for GST on supplies made by B.

This is why GST due diligence is essential before acquiring an existing business.

3. Complete statutory structure

Section 85 has two sub-sections and should be understood as having two distinct functions.

4. What is transfer of business?

The section deliberately uses broad language. It covers transfer of the business in whole or in part by sale, gift, lease, leave and licence, hire or “in any other manner whatsoever”.

Therefore, the label used in a commercial agreement is not by itself decisive. The substance of the transaction and what has actually been transferred matter.

5. Sale, gift, lease, licence and hire

6. Whole or part of business

Section 85 does not require the entire business to be transferred. It expressly covers transfer of the business in whole or in part.

This matters for large groups that transfer one division, one undertaking, one project vertical, one manufacturing unit or one business segment while retaining other operations.

7. Which old GST dues are covered?

Section 85(1) covers tax, interest or penalty due from the taxable person up to the time of transfer.

Importantly, the liability can exist in two situations:

This second situation is particularly important during due diligence. A clean demand position on the transfer date does not necessarily prove that no later GST demand can arise for pre-transfer periods.

8. Meaning of jointly and severally liable

Jointly means both parties can be liable together. Severally means the liability can be enforced against either party according to the applicable legal framework.

Therefore, a private agreement saying “the seller will pay all old GST” does not automatically prevent the statutory consequence under Section 85 as against the Government.

9. Demand determined before transfer

Example: A receives a GST order determining ₹40 lakh tax plus applicable interest and penalty. A does not pay. A then transfers the business to B.

Because the liability existed and remained unpaid before the transfer, Section 85(1) can make A and B jointly and severally liable, wholly or to the extent of the business transferred.

10. Demand determined after transfer

Example: A transfers the business to B on 1 October. In 2027, the department determines additional GST relating to A's supplies made before 1 October.

Section 85 expressly contemplates this situation. The fact that the demand was determined after transfer does not by itself remove the statutory liability if the dues relate to the transferor's liability up to the time of transfer.

11. Finding the transfer-date cut-off

The phrase “up to the time of such transfer” makes the transfer date a critical tax-due-diligence boundary.

The parties should establish:

12. Transferee liability after transfer

Section 85(2) creates a separate rule: when the transferee carries on the transferred business, the transferee is liable to pay GST on supplies of goods or services made by the transferee with effect from the date of transfer.

This is straightforward but important. The transferee cannot continue the acquired business while assuming that all GST compliance remains with the previous owner.

13. Business under another name

The transferee may carry on the business under its own name or under another name. Section 85(2) expressly says that the post-transfer GST liability applies even if the business is carried on in a different name.

Changing the trade name therefore does not by itself prevent Section 85 from applying.

14. Registration amendment

If the transferee is already a registered person under GST, Section 85(2) requires the transferee to apply within the prescribed time for amendment of its registration certificate.

This should be coordinated with the registration provisions, transfer documentation and the actual structure of the transaction.

For practical implementation, finance/tax teams should review the applicable registration rules and portal procedure at the time of transfer rather than relying only on the wording of Section 85.

15. Going-concern transactions

A going-concern transfer is especially important because the commercial substance often resembles a transfer of an operating business rather than a collection of isolated assets.

However, “going concern” should not be treated as an automatic synonym for every business transfer. The transaction documents and actual facts should be reviewed.

Section 85 is concerned with whether the business, wholly or partly, has been transferred and the consequences of that transfer for GST dues.

16. Mere asset sale vs business transfer

This is one of the most important practical distinctions.

The Andhra Pradesh High Court in JR Metal Chennai Ltd. v. Assistant Commissioner of Central Tax considered whether a transaction involving assets amounted to a transfer of business and treated the question as fact-sensitive, with the nature of the business/successor relationship requiring examination rather than automatically treating every asset sale as Section 85 transfer.

17. Death of proprietor

Death of a sole proprietor can result in succession to the business. CBIC Circular No. 96/15/2019-GST clarified that transfer/change in ownership of business includes transfer or change in ownership due to death of the sole proprietor.

The circular also explains the registration position of the successor and the transfer of unutilised ITC in the prescribed manner.

This means succession should be treated as a formal GST transition exercise, not merely as an accounting change.

18. Section 85 and ITC transfer

Section 85 itself deals with liability for tax, interest and penalty and post-transfer supplies. Transfer of unutilised ITC is dealt with through the separate statutory and Rules framework, including Section 18(3) and Rule 41 where applicable.

Therefore, do not assume that Section 85 itself automatically transfers the seller's electronic credit ledger to the buyer.

19. Circular 96/15/2019-GST

Circular No. 96/15/2019-GST dated 28 March 2019 is particularly relevant to transfer/succession questions. It clarifies that transfer or change in ownership includes succession caused by the death of a sole proprietor and discusses registration and transfer of unutilised ITC in such circumstances.

It is useful when analysing Section 85 together with Section 22(3), Section 18(3) and Rule 41.

20. Judicial development

The most useful current judicial point is that a dispute over whether assets constitute a transfer of business can be fact-sensitive.

In JR Metal Chennai Ltd. v. Assistant Commissioner of Central Tax, the Andhra Pradesh High Court considered a Section 85 dispute concerning whether the transaction amounted to transfer of business. The court did not treat a mere asset transaction as automatically establishing transfer of business and considered the factual/successor issue appropriate for the appellate forum.

21. Section 85 vs Section 87

22. Section 85 vs Section 29

Section 29 deals with cancellation of GST registration. Section 85 deals with liability when the underlying business is transferred.

Cancellation of the seller's registration does not by itself erase pre-transfer tax, interest or penalty. Section 29(3) separately provides that cancellation does not affect liability for periods before cancellation.

23. Section 85 vs Section 22

Section 22 deals with liability to obtain registration. Section 85 deals with liability arising from business transfer.

A transferee can therefore have two separate questions:

• What GST registration is required after the transfer?
• What historical GST liability follows the transferred business under Section 85?

24. Transferor/transferee risk matrix

25. Construction & infrastructure examples

Road project business transferred

A company transfers an operating road-project division, including contracts, employees, project assets and ongoing business operations. The buyer should conduct GST due diligence for the transferred undertaking and historical dues.

Construction company acquisition

A buyer acquires a construction business with ongoing projects and subcontractor arrangements. Historical GST exposure can include notices relating to periods before acquisition even if the demand is determined later.

Mining division transfer

A group transfers its mining undertaking to another group entity. The fact that both entities are under common ownership does not by itself eliminate the need to examine the statutory transfer and GST registration consequences.

Project-specific transfer

A business transfers one infrastructure vertical while retaining unrelated operations. Section 85 expressly covers transfer “in whole or in part”, so the scope of the transferred business should be documented carefully.

26. Detailed practical examples

Example 1 — Business sold with ₹50 lakh old GST dues

A sells the business to B. ₹50 lakh tax was already determined and remains unpaid. Section 85 can make A and B jointly and severally liable to the extent of the transfer.

Example 2 — Old liability discovered after acquisition

B buys the business in April. A GST audit later determines ₹80 lakh relating to the period before April. Section 85 expressly contemplates liabilities determined after transfer.

Example 3 — Business sold but old owner continues unrelated business

The old owner retains another business division. Section 85 applies to the transferred business to the extent of the transfer; the facts must establish what business was actually transferred.

Example 4 — Only machinery sold

A company sells machinery but retains employees, contracts, customers and business operations. This does not automatically establish transfer of business under Section 85. The transaction requires factual analysis.

Example 5 — Going-concern sale

A business is transferred as an operating undertaking with contracts, employees and assets. This is a strong scenario requiring Section 85 due diligence.

Example 6 — Lease of operating business

An operating unit is transferred through a lease arrangement. Lease is expressly included in Section 85's modes of transfer, subject to the facts.

Example 7 — Business continues under new name

B acquires the business and uses a new trade name. Section 85(2) still applies because the provision expressly contemplates the transferee carrying on the business in its own name or another name.

Example 8 — Death of proprietor

The proprietor dies and the successor continues the business. The GST registration, ITC and business-transfer implications should be processed using the applicable succession provisions and the CBIC clarification.

Example 9 — Seller gives indemnity

The sale agreement says the seller will bear all pre-transfer GST dues. The clause is commercially useful between the parties, but it should not be treated as automatically extinguishing statutory liability to the Government.

Example 10 — Multiple GST registrations

A group transfers one State-wise business undertaking. GSTIN-wise due diligence is required because the tax history and registration consequences can differ by registration.

Example 11 — Post-transfer invoice

B issues invoices after the transfer date. Section 85(2) places GST liability for B's supplies from the transfer date on B.

Example 12 — Historical audit after acquisition

An audit initiated after acquisition finds a pre-transfer under-reporting. The buyer should not assume the timing of the audit removes Section 85 exposure; the relevant period and transfer facts must be analysed.

27. Due diligence before acquisition

A prudent buyer should obtain a GST due-diligence pack before signing or closing the transaction.

28. Business-transfer agreement clauses

The transaction agreement should clearly identify the GST risk allocation between buyer and seller.

Useful commercial clauses

• Pre-transfer tax liability responsibility.
• Post-transfer tax liability responsibility.
• GST representations and warranties.
• Disclosure of notices and proceedings.
• Tax indemnity.
• Escrow/holdback where commercially appropriate.
• Cooperation in responding to historical GST notices.
• Access to books and records for historical periods.
• Procedure for handling future demands relating to pre-transfer periods.

29. Documents to maintain

30. Internal controls

31. Professional workflow

32. Common mistakes

• Assuming sale of assets and transfer of business are always the same.
• Assuming old GST dues disappear when ownership changes.
• Ignoring liabilities that may be determined after transfer.
• Relying only on the sale agreement's indemnity clause.
• Failing to establish the exact transfer date.
• Not reviewing pending GST notices and appeals before acquisition.
• Mixing Section 85 liability with ITC transfer under Section 18(3).
• Forgetting that the transferee is liable for its own post-transfer supplies.
• Failing to amend registration where required.
• Not preserving historical records needed for later GST proceedings.
• Assuming a new trade name removes the old business-transfer consequences.

33. Legislative development

The current statutory text as in force on 14 September 2026 contains the same basic two-part structure: joint and several liability for pre-transfer dues and transferee liability for post-transfer supplies.

34. Section 85 GST FAQs

What is Section 85 of the CGST Act?

Section 85 deals with liability when a taxable person transfers a business, wholly or partly, to another person.

Who is liable for old GST dues after a business is sold?

Section 85 can make the transferor and transferee jointly and severally liable for tax, interest and penalty due from the transferor up to the time of transfer, to the extent of the transfer.

Can GST dues be recovered from the buyer of a business?

Yes, where the statutory conditions of Section 85 are satisfied.

What if the GST demand is raised after the business was sold?

Section 85 expressly covers tax, interest or penalty relating to the transferor's liability up to the time of transfer even where the amount is determined after the transfer.

Does Section 85 apply only to sale of business?

No. It expressly covers sale, gift, lease, leave and licence, hire and other modes of transfer.

Does Section 85 apply to part of a business?

Yes. The section expressly covers transfer of business “in whole or in part”.

Does changing the business name avoid Section 85?

No. Section 85(2) expressly covers a transferee carrying on the business in its own name or another name.

Is the buyer always liable for every GST liability of the seller?

The statutory liability is connected with the transfer of the business and the dues of the transferor up to the time of transfer, wholly or to the extent of the transfer. The facts and scope of transfer must therefore be examined.

Does a sale of machinery automatically mean transfer of business?

No. A mere asset sale does not automatically establish transfer of business. The factual nature of the transaction must be examined.

Can a contract indemnity protect the buyer?

An indemnity can allocate the economic burden between buyer and seller, but it should not be treated as overriding statutory liability toward the Government.

Who pays GST on supplies after transfer?

The transferee is liable for GST on supplies of goods or services made by the transferee from the date of transfer.

Does Section 85 transfer ITC?

No. Transfer of unutilised ITC is governed by separate provisions such as Section 18(3) and Rule 41 where applicable.

What happens when a sole proprietor dies?

Where the business continues with a successor, the transfer/succession and registration/ITC consequences should be processed under the applicable provisions. CBIC Circular 96/15/2019-GST specifically addresses death of a sole proprietor.

Is Section 85 applicable to lease of business?

Lease is expressly mentioned in Section 85(1), subject to the facts establishing the relevant transfer.

What records should a buyer obtain?

At minimum, historical GST returns, demands, notices, appeals, reconciliation workings, registration records, books, contracts and the complete transfer documentation should be reviewed.

Why is the transfer date important?

Because Section 85(1) links the historical liability to dues of the transferor up to the time of transfer, while Section 85(2) makes the transferee liable for its supplies from the date of transfer.

35. Related provisions