Precautions to Be Taken at the Time of Closure of Business

Closing a business — When a business shuts down, the process doesn’t end with stopping operations. Under the Goods and Services Tax (GST) regime, businesses must fulfill certain compliance obligations to avoid future tax liabilities, penalties, or legal consequences. The GST law mandates proper intimation, final filings, and clearance of dues at the time of closure.

Below are the key precautions a business must take under GST while closing operations:

1. Apply for Cancellation of GST Registration

As per Section 29 of the CGST Act, when a registered person ceases to carry on business, they must apply for cancellation of GST registration.

File Form GST REG-16 on the GST portal within 30 days from the date of business closure.

Provide reasons for cancellation, such as “discontinuance of business.

Declare closing stock, capital goods, and any input tax credit (ITC) lying unutilized.

Relevant judgment- Being a bogus firm is not a ground enumerated under Section 29(2). [2023] 58 TAXLOK.COM 045 (Allahabad)

2. File Final Return – GSTR-10

Once cancellation is initiated, the taxpayer must file a final return in Form GSTR-10.

As per section 45 of CGST Act, every registered person who is required to furnish a return under sub-section (1) of section 39 and whose registration has been cancelled shall furnish a final return within three months of the date of cancellation or date of order of cancellation, whichever is later, in such form and manner as may be prescribed.

3. Reverse Input Tax Credit (ITC) on Stock

As per Section 29(5) of CGST Act, Every Registered person whose registration is cancelled shall pay an amount, by way of debit in the Electronic credit ledger or Electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock or Capital goods or plant and machinery on the day immediately preceding the date of such cancellation or the Output tax payable on such goods, whichever is higher, calculated in such manner as may be prescribed.

As per Rule 44 of CGST Rules:

• ITC availed on closing stock, inputs, and capital goods must be reversed.

• ITC reversal amount will be whichever is higher of:

  1. ITC on stock, or

  2. Tax payable on stock under Section 29(5)

Provided that in case of Capital goods or plant and machinery, the Taxable person shall pay an amount equal to the Input tax credit taken on the said Capital goods or plant and machinery, reduced by such percentage points as may be prescribed or the tax on the transaction value of such Capital goods or plant and machinery under section 15, whichever is higher.

4. Clear Outstanding GST Liabilities

Before closure:

• Ensure all tax dues, interest, and late fees are paid.

• Reconcile books of accounts with GST returns (GSTR-1, 3B, 9, etc.).

• Pay off any pending demand notices, if applicable.

5. Reconcile Input Tax Credit (ITC)

Match ITC claimed in GSTR-3B with GSTR-2B to ensure no ineligible credit remains. Reverse ineligible ITC if wrongly availed earlier

6. Preserve Records

As per section 36 of CGST Act, Every Registered person required to keep and maintain books of account or other records in accordance with the provisions of sub-section (1) of section 35 shall retain them until the expiry of seventy-two months from the due date of furnishing of annual return for the year pertaining to such accounts and records.

Accordingly, Business records must be retained for 6 years from the date of cancellation.

8. Inform Vendors & Customers

Communicate GSTIN cancellation to vendors/customers to:

• Prevent future billing issues

• Ensure they don’t erroneously claim ITC on your invoices post-cancellation

Conclusion- Proper GST compliance during business closure ensures a clean exit without attracting future tax demands or penalties. The key steps include applying for cancellation, filing the final return, reversing ITC, and clearing liabilities.