Demystifying Job Work Under Model GST Law

In normal course of business, when a manufacturing unit is not able to meet it is supply on account of machine line balancing or specific operation being not capable of being performed in the factory or unexpected demand for the product in the market, normally outsources the same to external vendor for getting the processing completed at his premises. This process is called sub-contracting or job work in the tax parlance.

Sub-Section 62 of Section 2 defines Job work as “job work” means undertaking any treatment or process by a person on goods belonging to another registered taxable person and the expression “job worker” shall be construed accordingly;

Goods and Service Tax is levied on the supply of goods and services and transfer of material from factory to the subcontractor’s premises amounts to supply. Till the Model GST Law was made available to the public domain there was a debate going on that is Job work or subcontracting is allowed under GST and to make the industry happy, the Model GST Law has provision for the Job-work under Section 43 A thereby providing lot of relief to the trade and industry. Supplies to job work are specifically excluded as supply in Schedule 1 of the Model GST Law. (for details on supply refer to the blog Demystifying Time of Supply of Goods under Model Law)

Though Job-work provisions are given in the section 43A, there is some change to the existing process of job-work under the Central Excise. As per the Model GST Law, the tax payer I,e the principal is required to obtain a special order from the GST Commissioner for permitting him to send the goods for job work under specific conditions for supply of material without payment of taxes for further processing by the job worker.

The modalities of the form to be used and the process of receiving and sending is not clear now and we need to wait for the relevant notifications once the GST Act is passed.

The principal can send the goods to the job worker from his registered premises and then after processing of the goods at the job workers place, the principal can do any of the following

  1. Request for return of goods to his original premises
  2. Or any of his registered premises
  3. Send the goods from the job workers place to further processing to another job worker
  4. Supply the goods directly from the job worker’s premises on payment of taxes within in India
  5. Export the goods directly from the job worker’s premises without payment of tax

In case if the goods are to be exported or sold in the domestic market, the job worker has to be registered as an additional place of business of the principal, which is not there in the existing provisions of the Central Excise. The same is not required if the job worker is already registered under GST as per provisions of Section 19. (Refer to blog on Demystifying Registration under Model GST Law)

The goods to be processed can be sent directly from the principals registered premises or ask his supplier to ship the goods directly to the job worker’s premises.

Section 43 A of the Model GST Law does not specify the days under which the goods have to be returned back to the principal’s place but section 150 and 151 under transitional provisions specifies the same as 6 months and Section 16A specifies if the goods are brought back within 180 days eligible for input tax credit. A clarification is required on the period as 180 days or 6 months, if this Is not clarified then there will be two-yard sticks on return of goods from the job worker

  1. For claiming input tax credit within 180 days
  2. For payment of duties if the goods are not brought back in 6 months.

Section 150 of the Model GST Law, describes the process for the inputs removed for job work and returned on or after the appointed day. The inputs sent on job work prior the appointed day (the date on which the GST is rolled out) within 6 months, then no taxes are to be paid. In case if the same are returned after 6 months, the jurisdictional commissioner can grant  an additional period of 2 months if he is satisfied with the reasons for the delay. In case if such permission is not granted or being returned after a further extension of 2 months, taxes have to be paid under GST.  The principal or the manufacturer has to pay the taxes.

The above process is applicable only if the principal or manufacturer maintains a proper record of the inputs lying in the premises of the job worker as on the appointed date in the format prescribed by the tax authorities.

Section 150 of the Model GST Law, describes  the process for the semi-finished goods   removed for job work and returned on or after the appointed day. The semi-finished goods   sent on job work prior the appointed day (day on which the GST is rolled out) within 6 months, then no taxes are to be paid. In case if the same are returned after 6 months, the jurisdictional commissioner can grant an additional period of 2 months if he is satisfied with the reasons for the delay. In case if such permission is not granted or being returned after  further extension of 2 months, taxes have to be paid under GST.  The principal or the manufacturer has to pay the taxes.

The manufacturer or principal can ship the goods directly from the job worker’s premises to any other registered tax payer on payment of duties or export the same without payment of duties.

The above process is applicable only if the principal or manufacturer maintains a proper record of the semi-finished goods   lying in the premises of the job worker as on the appointed date in the format prescribed by the tax authorities.

We need to have further information on the job work under GST

  1. The format of the letter to be sent the commissioner for requesting permission for job work.
  2. The format of the document under which the goods can be shipped without payment of taxes.
  3. The format of the document under which the goods can be sent directly from the supplier to job worker.
  4. Clarity on the time period under which the goods have to be returned back from job worker – 180 days or 6 months.
  5. The format for declaring the goods laying at the job worker as on appointed date.
  6. Applicability of Section 61 of the Model GST Law for the moment of goods from tax payers location to job workers location.

There are some changes that need to be adopted by the tax payers going forward under GST for job work.

  1. If the job worker is not a registered taxable person, then his address is also to be included in the place of business of the taxpayer in his registration application. This needs to be updated from time to time as the goods can be sent to different job workers based on the business requirements.
  2. Reverse charge will be applicable on the charges paid to the job worker  if the job worker is not a registered tax payer.
  3. In case of goods not returned within 180 days from the job worker, before payment of duty proper care has to be taken to identify if the goods sent are before the rollout of GST, if yes, then 180 days should be considered from the rollout date and not from the actual date on which the goods are sent to the job worker.

Any views or opinions represented above are personal and belong solely to the author and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.

 

 

Advertisements

Demystifying Collection of Tax at Source under the Model GST Law

e-commerce is a booming industry and this is enabling the local and small sellers to sell their products in wider markets and from the consumer perspective he is having a wide range of products at his door step at a competitive price.  In this process, the buyer and seller are getting benefited and in between the e-commerce operator who does not own any stocks but sells on behalf of the seller by providing his infrastructure and reach, for this services the e-commerce operator charges some amount from the seller. So far it is so good but the real issue starts from the taxman’s perspective.  In the whole game, the e-commerce operator issues an invoice on behalf of the seller to the buyer and on this respective taxes are collected. Now the question raised by the taxman is the transaction between the e-commerce operator and the seller is taxable, there are various disputes on this matter and the interpretation is even more complex like does the transaction between the e-commerce operator and the seller amounts to sale of goods and VAT is applicable on the commission or is it a service or is it a composite contract. Various state governments have taken different views on the same and started collecting VAT.

Now let’s see what is there in the store in Model GST Law for the e-commerce. Section 43B lays down the definitions in context to the above services.

Aggregator has been clearly defined in the sub-section ( a)  of Section 43B. it literally nails down who is an aggregator, it says any person who provides services either by an application or communication device which enables a buyer and seller to connect and procure goods or services under any brand / trade name is termed as an aggregator. This means that cab operators like Ola or Uber or selling of goods electronically like Amazon, Flipkart or food delivery mobile applications like Swiggy or Tinmen all are defined as aggregators. And they are required to take registration under GST as per Section 19 of the Model GST Law.

Sub-section (b) defines what is brand or trade name clearly. It says any brand or trade name, registered or not, for using a name or mark or symbol or monogram or writing or logo or symbol or signature which is used for service or furtherance of business. That means all the brand / trademarks are also under the purview of the GST.

Sub-section (c) defines what is branded service. It says branded service is service which is supplied by an e-commerce operator under his name whether registered or unregistered is a branded service like Amazon or Flipkart etc.

The final nail in the coffin is given in Sub-section (d), where it defined what is electronic commerce. It did not spare a word which used in the today’s’ internet era like download, File transfer, shopping cart, electronic data interchange (EDI), download, messaging in any form, web services, services for transmitting funds or data, etc are termed as e-commerce. This means any entity which provides any of the above services falls under the definition of electronic commerce operator and has to obtain registration under GST irrespective of the turnover refer to Schedule III of the Model GST Act. This means all the startups have to register themselves under GST. What is left over in the definition of electronic commerce operator is Internet of things (IOT).

Section 43C gives in details about the process of collecting money from the supplier of goods or service provider by the e-commerce operator before paying them.

Section 43 (C) sub-section 1

(1) Notwithstanding anything to the contrary contained in the Act or in any contract, arrangement or memorandum of understanding, every electronic commerce operator (hereinafter referred to in this section as the “operator”) shall, at the time of credit of any amount to the account of the supplier of goods and/or services or at the time of payment of any amount in cash or by any other mode, whichever is earlier, collect an amount, out of the amount payable or paid to the supplier, representing consideration

towards the supply of goods and /or services made through it, calculated at such rate as may be notified in this behalf by the Central/State Government on the recommendation of the Council.

Illustration 1

XYZ is an e-commerce operator and many sellers are registered with them for selling their products on the portal. A, who is small time seller of handicrafts also places his products on xyz.com. B, an end consumer places an order for few handicrafts items from xyz.com supplied by A. B Pays an amount for his order of Rs 15,000 to xyz.com. xyz.com has to pay A for the item being purchased by B. As of now xyz.com is paying Rs 15,000 less commission charged by them. Going forward under GST, xyz has to deduct certain percentage as specified by the GST council and then only pay the net amount to A.

Now the question here arises is does xyz.com have to recover the tax after deducting commission or on the full amount? If we go by the valuation under Model GST Law as given in section 15, is clearly says on the gross amount, so xyz.com has to recover tax on Rs 15,000 but not on Rs 15,000 net of commission if any.

The amount collected from the supplier of goods and service provider by the e-commerce operator has to be deposited with the tax authorities by 10th of the next month.

Every operator has to submit a report electronically within 10 days from the end of the month, this report is to be filed separately other than the regular returns filed. The format of the report will be announced in due course and it should contain the details of all the suppliers of goods / services from whom the amount is being withheld and paid to the respective governments like supplier name, amount, date, tax recovered etc.,

The details filed by the e-commerce operator are verified with the returns filed by the sellers and if there is any mismatch, the same is informed to both the parties for correction. In case if there is any discrepancy and which is communicated to the supplier and no corrective action is taken, then the same is added as a liability to the suppliers return in the month in which it is communicated. The supplier is liable to pay tax along with interest, as determined by the concerned officer to the department.

The operator may be asked to furnish information relating to the details of his suppliers like quantity of goods held by him under his custody along with other places of business of the supplier.

From the above, it is clear that government does not want to lose a single penny in form of tax revenue. This process is ensuring that all the suppliers who are dealing with e-commerce are registered, in order to utilize the amount deducted by the e-commerce operator while receiving his payments. The amount deducted by the e-commerce operator one paid to the tax authorities is reflected in the electronic cash ledger of the supplier and he can utilize the same for payment of GST taxes.

Though it is titled as “Collection of Tax At Source” it is technically “tax deducted at source”, the reason is when the e-commerce operator is paying to the supplier of services or goods, certain amount is withheld and then only paid, it is similar to the tax deduction at source in direct taxes. In a way now TDS is applicable on goods also in indirect taxes for e-commerce transactions.

This provision has put an end to all the confusions which are there for the e-commerce currently.

The amount deducted by the e-commerce operator will be reflected in the GSTR -2 return of the seller on the e-commerce website as well as in the electronic cash ledger maintained by the common portal for the seller on the e-commerce website.

The amount to be paid by the e-commerce operator will be part of the monthly outward supplies in GSTR – 1 and also will be shown in the Electronic Liability Register maintained in the common portal. The E-commerce operator has to file another return separately called GSTR – 8 under GST with all the relevant details as required.

The taxes applicable will be of CGST and SGST for TCS in the case of intra state transaction and in the case of interstate transactions it will be IGST for TCS. This is based on the information provided in the Draft Invoice Formats.

Any views or opinions represented above are personal and belong solely to the author and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.

These examples are based on the model law and may change based on the actual law passed.

Demystifying Goods and Service Tax – Draft Payment Rules

Under the Central Excise, the concept of maintaining the mandatory registers have been done any over a decade back still we are maintaining them in the same formats like RG 23 A /C – Part I / II expect for RG 1 (Production Register and RG 23 D (trading).  When these records are replaced it did not mean that they are totally scrapped but private records can be maintained as long as the required information is present in the report any format but still the range officials even today insist for the reports in old formats only. Hopefully, this practice will go way once the GST is implemented.

In GST it is stated that the key record / reports maintained by the common portal as the taxpayer is expected to upload each and every transaction data on the common portal. The returns / reports to be maintained under GST on the common portal are

  • Electronic Tax Liability Register
  • Electronic Credit Ledger
  • Electronic Cash Ledger

Rule 1 – Electronic Tax Liability Register

An Electronic Tax Liability register will be maintained on the common portal as per Sub-Section 7 and section 35 of the Model GST Law in the FORM GST PMT-1 and it will contain all the amounts payable by the taxable person.

The Electronic Tax Liability Register will be debited with the following

  • amount of tax payable,
  • interest, late fee or
  • amount of tax payable along with interest on account of mismatch of credit based on provisions of Section 29 or Section 29A or section 43C.
  • any other amount payable by the tax payer or directed by the board on account of any proceeding’s carried out under the GST Act

The Electronic Tax Liability Register will be credited with the following

  • Amount deducted under Section 37 (Tax Deduction at Source)
  • Amount collected under Section 43 C (Tax Collection at Source)
  • Amount payable under Sub-section3 of Section 7 (tax payable under reverse charge)
  • Amount payable by the department against any interest, refund, penalty, late fee or any other amount determined under the proceedings under this Act

Rule 2- Electronic Credit Register

An Electronic Credit Ledger will be maintained on the common portal in FORM GST PMT-2 for the tax payer for the amount being claimed as input tax credit, will be credited to this ledger.

The Electronic Credit Register will be credited with the total amount of tax payable on account of liability, interest, late fee etc as determined under Section 35 of the Model GST Law.

The Electronic Credit Register will be debited with any amount of refund under provisional basis under Sub-Section 4A of section 38 of Model GST Law received or transfer of input tax credit under Section 37 of the Model GST Law.

In case if the refund is rejected, the amount debited under provisional basis under Sub-Section 4A of section 38 of Model GST Law will be debited through FORM GST PMT-2A.

Rule 3 – Electronic Cash Ledger

An Electronic Cash Ledger will be maintained on the common portal for every tax payer based on the provisions of Sub-Section 1of section 35 of Model GST Law in FORM GST PMT-3 towards the amount deposited by the tax payer towards discharge of his tax liability or interest or late fee or penalty any other amounts.

The payment will be done by the tax payer using the FORM GST PMT-4 on the common portal for the amount being paid for tax liability or interest or late fee or penalty any other amounts. The FORM GST PMT-4 generated on the common portal will be valid for a period of fifteen days.

The payment of tax liability or interest or late fee or penalty any other amounts under GST can be done using any of the following methods

  • Internet banking – authorized by the board
  • Through credit card or debit card
  • National Electronic Fund Transfer (NEFT) or Regal Time Gross Settlement (RTGS)
  • Over the counter (OTC) for amounts less than Rs 10,000 in cash or through cheque or demand draft

Usage of debit / credit card for payment of tax is a new feature added which is not existing under any of the acts currently in India.

If any payment is required to be made by non-taxable person, a temporary identification number will be generated by the concerned tax offer and payment has to be done in FORM GST PMT-5.

Where the payment is made by way of NeFT or RTGS mode from any bank, the mandate form shall be generated along with the challan and the same shall be submitted to the bank from where the payment is to be made.

A Challan Identification Number (CIN) will be generated when the amount is credited to the concerned tax account by the bank and the same will be mentioned in the Challan.

In case if the amount is not credited to the electronic cash ledger of the tax payer but the amount got debited from the taxpayer’s account FORM GST PMT-6 has to be filed with the bank or the payment gateway for the amount to be updated in his electronic cash ledger.

 Electronic Cash Ledger will be credited under the following cases also

  • Amount deducted under Section 37 (Tax Deduction at Source)
  • Amount collected under Section 43 C (Tax Collection at Source)
  • Amount payable under Sub-section3 of Section 7 (tax payable under reverse charge
  • Amount payable by the department against any interest, refund, penalty, late fee or any other amount determined under the proceedings under this Act

 Electronic Cash Ledger will be debited when a refund is rejected.

Rule 4 – Identification number for each transaction

A unique identification number will be generated by the common portal for every debit or credit to the Electronic Cash Ledger or Electronic Credit Register.

Any views or opinions represented above are personal and belong solely to the author and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.

Demystifying Invoicing Under Model GST Law

Invoice is a document between the buyer and seller which confirms the sale / purchase of goods or services along with the details like item or nature of service, cost per unit, if any applicable taxes on the transaction, any incidental charges like freight, packing charges, etc., apart from the buyer and seller details. Invoice is to be serially numbered for tracking and reference purpose. If the transaction is being taken for a taxable good or service, then the invoice becomes a tax invoice. The tax invoice apart from having the above-mentioned details, it will also have the tax registration number of the buyer and seller along with the address under which jurisdiction the buyer and seller falls.

In the current tax regime in India we have the following invoices which are considered as tax invoice from taxation perspective Excise Invoice, VAT Invoice & Service Tax Invoice. All these invoices are also required to be numbered serially and the tax payer has to  inform the tax authorities the tax invoice numbering sequence being followed for the financial year.

Under GST also there is a requirement to issue tax invoice as per section 23 of the Model GST Law at the time of supply of goods or services as per Section 12 and Section 13 of the Model GST Law. Section 23 of the Model GST Law prescribes the information to be shown on the tax invoice in case of supply of goods

  • Description of the goods
  • Quantity of the goods being sold
  • Value of the goods being sold
  • CGST / SGST or IGST levied on the goods
  • And any other information as requested

The following information is to be shown in case of supply of services

  • Description of the service
  • Value of the service
  • CGST / SGST or IGST levied on the goods
  • And any other information as requested

If we dissect the Section 15 of the model GST Law (value of taxable supply) it says that all the amounts being collected or reimbursed from the buyer has to be included in the valuation of the taxable supply of goods / services. This means that all charges related to the transaction directly or indirectly have to be shown on the tax invoice. The charges or reimbursable expenditure on which the tax have to be levied are freight, insurance, packing charges, loading charges, unloading charges, special / specific charges being levied, subsidies if any, royalties or any other incidental charges have to be included in the tax base and these amounts are being paid by the buyer to the seller or being reimbursed by the buyer to pay to third parties.

THE JOINT COMMITTEE ON BUSINESS PROCESS FOR GST on Returns has given the tentative formats of the Returns to be filed under GST Regime once rolled out. If we review the GSTR 1 Report, monthly outward supplies report to be filed by the tax payer has the following information

  • GSTIN / UIN
  • Invoice – Number, Date, Value, HSN/SAC, Taxable Value
  • Tax Rate and Amounts – CGST / SGST / IGST
  • State of the buyer
  • Reverse Charge applicable for the transaction

Though the reports to be filed under GST are not yet notified, on interpreting the information given in the Model GST Law and the Business Process Reports for Returns we can conclude that the following information is to be shown on the tax invoice else reporting will become complex

  • Description of the goods / service
  • Quantity of the goods being sold – applicable only in case of supply of goods
  • Value of the goods / services
  • CGST / SGST or IGST levied on the goods
  • GSTIN / UIN
  • Invoice – Number, Date, Value, HSN/SAC, Taxable Value
  • Tax Rate and Amounts – CGST / SGST / IGST
  • State of the buyer
  • Reverse Charge applicable for the transaction
  • Free goods if any issued

We can also conclude that if goods or services being supplied are applicable or eligible under reverse charge, the same needs to be shown on the tax invoice stating that tax applicable is under the reverse charge and the tax amount should not be included in the invoice total. This is similar to the existing service tax provision for invoicing under reverse charge.

As per the valuation rules, if goods are being issued as sample or freebie on the purchase of any other goods, then GST has to be levied on such free good or freebie. It will be a business decision to collect the tax from the customer or absorb it as business expenditure. This is not applicable under VAT currently not it is getting extend to SGST or IGST under the new tax regime.

As per the Model GST Law, post to issue of a tax invoice for supply of goods or services, if there is any change in the price of goods / service or tax rates, a debit memo or credit memo can be issued for such cases and the debit / credit memo should have the reference of the original tax invoice. In GSTR – 1, the debit / credit memos have to be reported under table / section 8.

In case if the tax payer is supplying both taxable goods / services along with non-taxable goods / services, a separate bill has to be issued. This is similar to the existing VAT provisions where a non-vatable invoice has to be issued for sale of non-vatable goods. Now the same is getting extend to CGST and IGST under GST regime.

As in the current excise or VAT requirements there will not be likely a format being suggested by the GST Council and the tax payers can issue tax invoice based on their business need but have to ensure that all the required information is shown / printed on the tax invoice being issued under section 23 of the Model GST Law.

Malaysia which has implemented GST from 1st April 2015 have suggested some invoice formats also. It has also recommended that simplified tax invoice can be issued and on which input tax credit can be availed if the tax amount is not exceeding RM 30. As per Malaysian GST, under specific conditions simplified tax invoice can be issued and such invoices need not show the buyer details like in the case of regular tax invoice. In India, we do not see any such provisions as the Model GST Law has made it clear that input tax credit can be availed on supplier payment of GST Liability.

Some of the common issues which the trade and industry may face with rollout of GST on the Tax invoice front are

  1. Free Samples – as per the Model GST Law, the tax has to be levied on free samples also, this may impact the pharmaceutical industry where samples are given to Physicians for promotion. Now going forward GST has to be paid before the issue of samples. The pharmaceutical industry may have to absorb the same that means it impact their profitability. Same in case of consumer goods also where freebies are given on merchandise.
  2. Loading Charges – will there be a separate Service Accounting Code for loading and unloading charges, which are collected from the buyer. This is applicable in case of commodities like iron, steel, aluminum etc
  3. Insurance Charges – in some case where the goods are transported are high value, insurance is also part of such contracts / sales. The insurance charges may be collected from the recipient or the tax payer may pay himself. Whatever may be the case, does the tax payer has to levy GST on the insurance premium and also mention in his registration form “Insurance” also as his business?
  4. Packing charges – in some cases, the customers may ask for special packing based on their business requirements, in such cases also GST is to be levied on packing charges. As such packing charges may not be having a separate HSN code in few cases like material being shipped in gunny bags / jute bags, in such cases what will be the HSN code?

Another change from the existing business process

  1. In the case of purchase of goods or services from non-registred tax payers, the reverse charge is applicable and basing on the rules provided in Model GST Law, the time of supply for the reverse charge is either accounting or creation of receipt or payment of supplier whichever is earlier. At this point, a tax invoice is also required to be issued. Currently the same is not required in the Service Tax.
  2. In the draft rules it is clearly mentioned that separate invoice has to be issued for non-gst supply of goods or services individually if the transaction amount is less than Rs 100 or at the end of the month a consolidated document to be issued called bill of supply for all the transactions where bill of supply has been not issued during the day.
  3. The existing invoice number series has to be modified as the draft rules talks about only invoice series being alphabetical or numeric
  4. There is also a requirement to print the reference number generated from the common portal on the tax invoice
  5. There is no concept of tax invoice being cancelled under GST once issued, in case if there is a need for such a case, then taxpayer has to issue a debit or credit memo.

At this point of time we may not have the full information on the Tax Invoice under GST, but we have an overview of the same based on that we need to do critical analysis of the business and come out of open issues where clarity is required and make representations to the concerned authorities to avoid last minute surprises, which may impact the continuity of business when GST is rolled out.

From the Model GST Law and the Business Process Reports on Returns, it is clear that government wants to track each and every transaction and avoid possible revenue leakages. A silver lining for the trade and industry is that the Model GST Law has clearly stated that input tax credit can be claimed on the debit / credit memos also.

Any views or opinions represented above are personal and belong solely to the author and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.