Demystifying Collection of Tax at Source under the Model GST Law

Posted on by CMA Bhogavalli Mallikarjuna Gupta

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 the road ahead for the rollout of GST in India

Posted on by CMA Bhogavalli Mallikarjuna Gupta

There is a lot of buzz on the GST in India again for about last 45 days or so when the Model GST Law has been announced. There are lots of discussions, views, articles on the Model GST Law on the pros and cons of the same. For GST to be a reality in the near future or a dream forever (for the obvious reason that there is no consensus among all the political parties).

IMG_20160716_131210

This is a pic taken during my recent trip to Meghalaya

For Goods and Service Tax to be implemented in India, these are steps to be followed

  1. Get all the stakeholders i.e. political parties consensus on the RNR and tax administration (seems to have been achieved to a greater extent based on the meeting of state Finance Ministers and Central Finance Minister)
  2. Cabinet note to be approved for the changes proposed in the State Finance Ministers meeting on 26th July 2016. It got approved based on the articles on various news sites.
  3. As per plan allow discussion / debate agreed on in Business Advisory Committee for 5 hours in Rajya Sabha before the curtains pulled out for the monsoon session. Not listed in the list of business for 28th July 2016 or on 29th July 2016. Need to wait and see when the same will discussed.
  4. Table the revised Constitutional Amendment Bill – One Hundred and Twenty-Second based on the cabinet note approved on 27th July 2016 for voting and get the same passed with 2/3rd
  5. Once the bill is passed, send the same to Lok Sabha for voting, as there are changes to the bill based on the select committee recommendations and discussion based on state finance ministers meeting.
  6. Once approved in Lok Sabha, the bill has to be sent to the President for his assent.
  7. Since it is a Constitutional Amendment Bill at least 15 states have to pass the bill in their respective state assemblies.
  8. GST Council has to be constituted and it has to conclude on the rates for GST, abatement if any, list of goods under reverse charge, negative list of goods and services, etc
  9. Views of the trade, industry and citizens of the nation on The Model GST Law has to be considered and incorporated based on the suggestions given. Get the nod for the same from the State Finance Ministers on the proposed changes.
  10. Formulate the same into a bill and get the Cabinet approval
  11. Introduce the CGST and IGST Bills in Lok Sabha
  12. CGST and IGST Bills to be passed in Rajya Sabha ( to be tabled as Finance Bill or Monetary Bill to be decided) during the Winter Session of Parliment
  13. On a parallel track, the IT infrastructure of the state and central tax departments have to be scaled up to meet the GST requirements of capturing transactional level data right from the Day one. Alternatively, we can go for the summary returns in the beginning and then scale up to this level at a later point of time and amend the reports. It may look simple but will be a challenge to implement the same.
  14. Training of the Tax officials of both the State and the Central to gear up for the new tax regime
  15. Industry has to train its teams to brace for the changes

As of now, we have achieved only the first step, still have a long road to travel. The rollout date of GST on 1st April 2017 seems to be very ambitious. The possible dates can be 1st July 2017 or 1st Oct 2017 or 1st Jan 2018. The date of 1st Jan 2018 can also be considered if the Central Government decides to change the financial year from Apr -March to Jan – Dec, this date would be idle but can have a negative impact on the upcoming Central elections on account of inflation. Though inflation on the implementation of GST is global trend, in India we may not have as we already have taxes at higher rate.

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 Input Tax Credit under the Model GST Law

Posted on by CMA Bhogavalli Mallikarjuna Gupta

Input Tax Credit, the word which every business person, accountant or cost accountant loves to listen to this and also avail the same on all the purchases made for business. We have seen tax reforms in India for input tax credit under various name, MODVAT was introduced in the year 1986 on certain items with an intention of passing on the tax credit on the purchases, and it has been modified from time to time and finally CENVAT Credit Rules 2004 were introduced where the input tax credit for the Central Excise Taxes was available on most of the inputs and in case of capital goods with some conditions. The taxes levied by the state governments is known as sales tax before the introduction of VAT, and the same were not eligible for input tax credit. As a result, there is an increase in the cost of production of goods and services. When Value Added Tax was introduced, this issues is also addressed, and input tax credit was available.  In spite so many tax reforms from time to time on the input tax credit front, the trade or industry is not happy as it is very restrictive when we take a holistic approach like

  1. Input tax on value added tax is not available for service providers
  2. Taxes on inter-state sales, e., CST is not eligible for input tax credit
  3. Inter utilization of input tax credit like VAT cannot be used for payment of Service tax or vice versa.
  4. Input tax credit cannot be availed on capital goods immediately as in the case of inputs for central excise or VAT. In the case of VAT, it varies from state to state.

These were some of the challenges which the trade or industry is facing with input tax credit, but going forward under GST, the same are addressed but with some restrictions / limitation. Input tax credit under the Model GST law is given to a large extent very clearly under sections 16 to 18 of Chapter V, Section 28 and Section 29 explains the process of input tax credit, provisional claim, reversal, etc. in chapter VIII, section 37A explains the process of transfer of input tax credit and Section 147 on the transitional provisions for cenvat and VAT tax credit.

Section 2, sub-section 54 defines what are inputs  “input” means any goods other than capital goods, subject to exceptions as may be provided under this Act or the rules made thereunder, used or intended to be used by a supplier for making an outward supply in the course or furtherance of business;

The input means any goods other than capital goods used or to be intended to be used for making the supply of goods or services. It means all inputs used for making of taxable supplies are eligible for input tax credit.

Section 2, sub-section 55 defines “input service” means any service, subject to exceptions as may be provided under this Act or the rules made thereunder, used or intended to be used by a supplier for making an outward supply in the course or furtherance of business;

Input service means any service used by the taxpayer / supplier for making of outward supplies.

Section 2, sub-section 57 defines input tax “input tax” in relation to a taxable person, means the {IGST and CGST}/{IGST and SGST} charged on any supply of goods and/or services to him which are used, or are intended to be used, in the course or furtherance of his business and includes the tax payable under sub-section (3) of section 7;”

Taxes paid on the purchase of goods and services which are eligible for input tax credit are used for making the output tax liability on the supply of goods and services.

Section 2, sub-section 20 defines capital goods as “capital goods” means: –

(A) the following goods, namely:-

(i) all goods falling within Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804 of the Schedule to this Act;

(ii) pollution control equipment;

(iii) components, spares and accessories of the goods specified at (i) and (ii);

(iv) moulds and dies, jigs and fixtures;

(v) refractories and refractory materials;

(vi) tubes and pipes and fittings thereof;

(vii) storage tank; and

(viii) motor vehicles other than those falling under tariff headings 8702, 8703, 8704, 8711 and their chassis but including dumpers and tippers used-

(1) at the place of business for supply of goods; or

(2) outside the place of business for generation of electricity for captive use at the place of business; or

(3) for supply of services,

 (B) motor vehicle designed for transportation of goods including their chassis registered in the name of the supplier of service, when used for

(i) supplying the service of renting of such motor vehicle; or

(ii) transportation of inputs and capital goods used for supply of service; or

(iii) supply of courier agency service;

(C) motor vehicle designed to carry passengers including their chassis, registered in the

name of the supplier of service, when used for supplying the service of-

(i) transportation of passengers; or

(ii) renting of such motor vehicle; or

(iii) imparting motor driving skills;

 (D) Components, spares and accessories of motor vehicles which are capital goods for the taxable person.

Reading the above section, it is apparent that the definition is taken from the current provisions of the central excise and replaced with few words here and there. Going forward under GST also the treatment for inputs and capital goods will be same to a large extent expect in case of definition what is capital good and what is input.

Section 16 of the Model GST Act provides the provisions for input tax credit. Similar to the age-old excise registers, RG 23 Part I / II  – A /C for tracking the input credit maintained by the assesses, we have similar concept called electronic credit ledger and this ledger is maintained by the tax authorities / infrastructure provider of GST and all the taxes paid by the suppliers for the supplies made to this tax payers gets updated in the electronic ledger, the amount can be utilized for making payment of out liability, penalty, interest, or any amount as per provisions of section 35 of the Model GST Act.

Sub-section 2 of Section 16 provides a clear mandate that in case of a business or entity which has opted for the GST registration, the taxes paid by him on the stock held by him on input, semi-finished goods and finished goods immediately on the day he is eligible to pay tax, will be eligible to take input tax credit of such goods. The reason for providing such a provision is that as the tax is being levied on the sales immediately from the date of registration, the taxes paid on his purchases. These provisions are available for the following person

  1. Persons who have opted for registration on crossing of the threshold as specified under section 8, person who crosses the thresholds
  2. Persons who have opted for voluntary registration in spite of not crossing the threshold limits as prescribed

The eligible input tax credit in the above cases will be computed based on the following

  1. The tax invoice should not be more than 12 months old
  2. The amount of tax credit eligible will be computed based on the accepted accounted principles.

What does these accepted principles mean? There is no clarity on this. Hope this will not lead to some interpretation issues from the department on the valuation and also on the amount of input tax credit.

Sub-section 5 explains about the usage of goods and services brought but used for business as well as for personal consumption.

Where the goods and/or services are used by the registered taxable person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.

Illustration

A Ltd buys laptops each costing Rs 45,000 and in that he gives one of the laptops for his college going, son.

In the above case, the input tax credit is eligible for only 4 laptops as the fifth one is not used for business purpose.

Sub-section 6 explains the manner of taking input tax credit in the case in the inputs procured are used for making taxable supplies and non-taxable supplies.

Where the goods and / or services are used by the registered taxable person partly for effecting taxable supplies and partly for effecting non-taxable supplies, including exempt supplies but excluding zero-rated supplies, the amount of credit shall be restricted to so much of the input tax as is attributable to the taxable supplies including zero-rated supplies.

Illustration

XYZ Ltd is an electronic goods manufacturer and manufactures both taxable and non-taxable supplies. XYZ Ltd purchases Polyvinyl chloride (PVC), and he makes industrial goods along with doors and windows for residential purpose. Industrial goods manufactured are taxable, and doors and windows used for the residential purpose are tax exempted. When PVC is purchased, it is not known who much will be used for taxable and non-taxable supplies.

The input credit on the purchase of PVC should be reversed to the extent used for manufacturing / sale of doors and windows as they are exempted from tax.

The government will notify the amount of the input tax credit to be reversed and the process to be followed in the above two cases. Based on that it has to be reversed.

In the normal course of business, the business establishment can be sold or merged, or the constitution of it can change from a partnership to the company, etc., in all such cases, the input tax credit will be allowed to be used by the new legal entity. The same is described in sub-section 8 of section 16.

Where there is a change in the constitution of a registered taxable person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provision for transfer of liabilities, the said registered taxable person shall be allowed to transfer the input tax credit that remains unutilized in its books of accounts to such sold, merged, demerged, amalgamated, leased or transferred business in the manner prescribed.

Input tax credit is allowed only under the following conditions

  1. The supplier of goods and services has paid the tax
  2. The goods or services must be received / deemed to be received
  3. The buyer / recipient is in possession of the tax invoice
  4. The tax returns are filed by the supplier of goods / services
  5. Input tax credit can be taken within 1 year from the date of issue of tax invoice
  6. In case if input tax credit is taken on a provisional basis and the supplier does not pay the tax, the same will be reversed along with interest.
  7. In case if the supplier pays the tax after reversal, then he is eligible to take the input tax credit along with the interest.

As in the current taxation, input tax credit is not allowed in some cases, and such cases are listed clearly in the Model GST law clearly under sub-section 9 and 10 of section 16.

(a) motor vehicles, except when they are supplied in the usual course of business or are used for providing the following taxable services—

(i) transportation of passengers, or

(ii) transportation of goods, or

(iii) imparting training on motor driving skills;

(b) goods and / or services provided in relation to food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as leave or home travel concession, when such goods and/or services are used primarily for personal use or consumption of any employee;

(c) goods and/or services acquired by the principal in the execution of works contract when such contract results in construction of immovable property, other than plant and machinery;

(d) goods acquired by a principal, the property in which is not transferred (whether as goods or in some other form) to any other person, which are used in the construction of immovable property, other than plant and machinery;

(e) goods and/or services on which tax has been paid under section 8; and

(f) goods and/or services used for private or personal consumption, to the extent they are so consumed.

Sub-Section 10   Where the registered taxable person has claimed depreciation on the tax component of the cost of capital goods under the provisions of the Income Tax Act, 1961, the input tax credit shall not be allowed on the said tax component.

Section 16A of the Model GST Act lays down the procedures for claiming input tax credit for materials / capital goods sent for job work.

Section 43 of the Model GST Act, gives the procedure for job work on GST. In the normal course of business, the material is received at the taxpayers place and then the same is shipped to the job worker or subcontractor if required for further processing. In such cases where the material is shipped directly to job worker, the input credit can also be claimed, and the process is prescribed under section 16A of the Model GST Act.

Input Credit in case of Inputs

  • Input tax credit on the material sent to job worker is allowed only when they are returned within 6
  • Credit can be availed only if the supplier pays the tax.
  • In the case of material already sent before the rollout of GST, 6 months should be computed from the accounted date of the GST rollout, mentioned in the transitional provisions of Section 150 of the Model GST Act.

Input Credit in case of Capital goods

The treatment for capital goods is different from that of the inputs for availing input tax credit.

  • The input credit for capital goods can be taken if the goods capital goods is used by the job worker and the same is returned within 2 years from the date on which it is sent out to job worker.
  • In case if the inputs or the capital goods are not returned within in the stipulated period, the taxpayer has to pay an equivalent amount of input tax credit availed along with interest. In such cases, interest is also required to be paid as prescribed under sub-section 1 of section 36.

The input tax credit will be allowed only if the supplies of the seller and buyer are matched, in the case of any mismatch, the same is informed to the supplier and recipient by the GSTN for rectifying the mistakes. The returns have to be matched as well as the taxes have to be paid for availing the credit. The process is mentioned in sub-section 28 and 29 of the Model GST Act.

There is a provision to take input tax credit on provisional basis by the recipient without waiting for the tax being paid by the supplier of goods or services. In such cases, the recipient has to enter these invoices manually in the GSTR -2. A window period of two months is given for matching of the records, and if the same does not happen within this period, the input tax credit taken on such invoices will be reversed along with the interest for the two months.

Once the supplier pays the same, the records will be verified and matched by GSTN, once it is matched, the recipient will be eligible to take the input tax credit along with the interest paid. The only challenge with is process is that the ratings of the recipient will be impacted as the department has taken the approach of giving ratings for all the taxpayers based on their tax payment, the filing of returns from time to time.

The taxpayer has to take a judicious call on to take the credit on the provisional basis or wait for payment of taxes till the supplier pays the taxes. In the case of the second approach, there may be some impact on the cash flows and working capital management. While making purchases or entering into contracts, the tax history of the supplier of goods and services also has to be considered along with the quality, delivery, prices and other factors. This will amount to change in the business process, and for this to be implemented, the concerned teams have to be trained accordingly.

Input Service Distributor

Under GST also there is a provision for registration as Input Service Distributor similar to the current provisions. Section 17 of the Model GST Act lays down the procedure for distribution of the input tax credit by Input Service Distributor.

The credit of CGST can be transferred as IGST input tax credit if the input service distributor and the recipient of credit are located in different States.

The credit of SGST can be transferred as IGST input tax credit if the input service distributor and the recipient of credit are located in different States.

The credit of SGST & IGST can be transferred as SGST input tax credit if the input service distributor and the recipient of credit are located in same State.

To conclude the input tax credit process is simple under GST as per the Model Law provisions but only the difference with the current regulations is that input tax credit can be availed only on payment of taxes by the supplier. The government wants to ensure that there is no revenue leakage on account of black sheep and also safeguard its revenue collections.

Utilization of Input Tax Credit

This is one the most important change in the input tax credit process compared to the current process under various tax regulations. The major drawbacks under the current tax regulations are

  1. Input tax credit on all business expenses is not allowed like VAT credit is not allowed for a service provider
  2. Excise / Service Tax credit, e., CENVAT Credit is not utilized for payment of VAT liability or vice versa
  3. Input tax credit is not eligible for all taxes like CST applicable on interstate transactions.

All these are being addressed in the GST to a large extent with some restrictions but by large very useful for the business / industry as a whole. This will ensure that input tax credit is available in whole supply chain process seamlessly and thereby providing a feasibility of lowering the cost of goods and services and pass on the benefits to the end consumer.

Central Goods and Service Tax – input tax credit of Central Goods and Service tax has to be utilized for payment of Central Goods and Service Tax liability, and if any amount is remaining, the same can be used for payment of a liability of Integrated State Goods and Service Tax.

CGST Credit

State Goods and Service Tax – input tax credit of State Goods and Service tax has to be utilized for payment of State Goods and Service Tax liability, and if any amount is remaining, the same can be used for payment of a liability of Integrated State Goods and Service Tax.

SGST Credit

Integrated State Goods and Service Tax – input tax credit of Integrated Goods and Service tax has to be utilized for payment of Inter-State Goods and Service Tax liability, and if any amount is remaining, the same can be used for payment of liability of Central Goods and Service Tax and if credit is still available the same can be used for payment of liability of Inter-State Goods and Service Tax.

IGST Credit

To conclude the input tax credit process is simple under GST as per the Model Law provisions but only the difference with the current regulations is that input tax credit can be availed only on payment of taxes by the supplier. The government wants to ensure that there is no revenue leakage on account of black sheep and also safeguard its revenue collections.

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 Supply under the Model GST Law

Posted on by CMA Bhogavalli Mallikarjuna Gupta

Currently, taxes are levied on manufacturing or removal of goods in case of central excise and on sales in case of value added tax. In the Model GST law sale or manufacturing or removal of goods is being replaced with the word “supply”. The word supply is expanding the scope for levy of tax as well as reducing the scope of interpretation. Though the word supply is a broader word compared to sales, the definition for the supply of goods and services is given very clearly under the Model Law. Since supply is being used in place of supply, taxes will be applicable on some of the transactions like branch transfers and supply of material for job work is outside the scope of supply.

In the current tax regulations in India, we have multiple taxes like Central Excise, Value Added Tax, Central Sales Tax and local levies like Octroi in few cities. There is no proper definition for sale under any of the above laws, this gives a wider scope for interpretation and raises disputes between the industry and tax regulators. If have a close look at the Central Excise Act, as per Section

2, sub-section (h) it is, “sale” and “purchase”, with their grammatical variations and cognate expressions, mean any transfer of the possession of goods by one person to another in the ordinary course of trade or business for cash or deferred payment or other valuable consideration;

As per Gujarat Value Added Tax 2005, Section 23 ,

“sale” means a sale of goods made within the State for cash or deferred payment or other valuable consideration and includes,-

(a) transfer, otherwise than in pursuance of a contract, of property in goods for cash, deferred payment or other valuable consideration,

(b) transfer of property in goods (whether as goods or in some other form) involved in execution of a works contract,

(c) delivery of goods on hire purchase or any system of payment by installments,.

(d) transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration,

(e) supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration,

(f) supply of goods by a society or club or an association to its members on payment of a price or of fees or subscription or any consideration,

(g) supply of goods by way of or as part of any service or in any other manner whatsoever, of

(h) supply of goods being food or any other article for human consumption or any drink (whether or not intoxicating) where such supply or service is for cash, deferred payment or other valuable consideration,

(i) supply by way of barter of goods,

(j) disposal of goods by a person in the manner prescribed in

Explanation (iii) to clause 10 but does not include a mortgage, hypothecation, charge or pledge; and the words “sell”, “buy” and “purchase” with all their grammatical variations and cognate expressions shall be construed accordingly.

Explanation.- (i) – For the purposes of this clause, “sale within the State” includes a sale determined to be inside the State in accordance with the principles formulated in sub-section (2) of section 4 of the Central Act;

(ii) for the purpose of sub-clause (b) of the expression “works contract” means a contract for execution of works and includes such works contract as the State Government may, by notification in the Official Gazette, specify;

(iii) every transfer of property in goods by the Central Government, any State Government, a statutory body or a local authority for cash, deferred payment or other valuable consideration, whether or not in the course of business, shall be deemed to be a sale for the purposes of this Act;

As per Central Sales Tax Act 1956 sale is defined as per section 2, sub-section (g ) as

“sale”, with its grammatical variations and cognate expressions, means any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration, and includes,–

  • a transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;
  • a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;
  • a delivery of goods on hire-purchase or any system of payment by installments;
  • a transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;
  • a supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;
  • a supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, but does not include a mortgage or hypothecation of or a charge or pledge on goods;

We have seen three different acts, and the meaning of sale is different, this leads to confusion on levy of taxes, say for example in the case of the lease transaction, is VAT applicable or service tax is applicable or both? It is left for the judiciary to decide the applicability and levy of tax. By going through the definitions of the lease, sales, service tax, etc. it is clear that for a lease there is a transfer of ownership, that means sales tax is leviable under Article 366(29A)(c) of Constitution and states can levy a tax on lease transactions under Entry 54 of List II.  Going forward under GST as there is only one tax for goods and services, this confusion does not arise and moreover, in the definition of supply, it is clearly mentioned supply includes Lease as per section 3 of the Model GST Act.

(1) Supply includes

(a) all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business,

(b) importation of service, whether or not for a consideration and whether or not in the course or furtherance of business, and

(c) a supply specified in Schedule I, made or agreed to be made without a consideration.

Illustrations

Let’s try to understand the meaning and scope of supply with few examples

Illustration for transfer

A Ltd has a manufacturing unit in State X and sales depots in states Y & Z. A Ltd transfers it’s finished goods from factory to depots. When goods are transferred from Factory to depot GST is applicable or not?

As per the definition of Supply under Section 3, supply includes transfers, so GST is applicable on transfers also. Under the current laws only excise duty is applicable on transfers but going forward under GST even VAT, i.e., SGST is also applicable along with CGST and in the case of inter-state transfers IGST will be applicable.

Illustration for Exchange

A walk in customers enters into an Electronics Shop and wishes to buy a new laptop by exchanging his old laptop. The price of the new laptop is Rs 46,000 and under the exchange, he pays on Rs 34,000. Under GST tax payable on which amount? Rs 46,000 or Rs 34,000.

GST is payable on Rs 46,000 as the definition of the supply includes exchange, under GST on the exchange also GST is to be levied, and this is a change in the business process which retailers have to adopt it, and consumers must also accept the fact that tax has to be paid on exchanged products.

Illustration for Importation of Service

C Ltd hires services of a service engineer for one of its machinery imported for annual maintenance. Is GST applicable on this transaction?

Yes, GST is applicable on this transaction as subsection 2 of section 3 of the model GST Act clearly states that GST is applicable in the case of importation of services also.

Illustration for transfer of assets

XYZ Ltd is an IT company and uses desktops and laptops. As policy change, XYZ decides to upgrade all the desktops to laptops and decides to donate the desktops to a government school so that students there can gain computer literacy. Is GST applicable on this transaction as consideration is not being received as it is a charity?

Yes GST is applicable on this transaction as there is a transfer of business assets from XYZ’s name to the school. GST has to be levied based on the transaction price.

 Illustration for disposal of business assets

PQR Ltd wants to enhance its manufacturing capacity to retain more market share. It decides to sell the existing machinery. If GST applicable on sale of machinery?

Yes, GST is applicable on sale of old machinery as it is business asset

Illustration for temporary application of business assets for private use

B runs earth moving equipment hiring business and rents out JCB’s, procaliner, etc. on rental basis. B acquires a residential plot for construction of his house; he puts to uses one JCB at the plot to make it for leveling for the ground, is GST applicable on this transaction.

Yes, GST is applicable as the business asset is put to use for personal use, B Ltd has to pay GST on this as business and individual are different entities.

 

Schedule II of the Model GST Act explains clearly to distinguish the what is a supply of goods and what is a supply of services.

  1. Transfer

(1) Any transfer of the title in goods is a supply of goods.

(2) Any transfer of goods or of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services.

(3) Any transfer of title in goods under an agreement which stipulates that property in goods will pass at a future date upon payment of full consideration as agreed, is a supply of goods.

  1. Land and Building

(1) Any lease, tenancy, easement, licence to occupy land is a supply of services.

(2) Any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.

  1. Treatment or process

Any treatment or process which is being applied to another person’s goods is a supply of services.

  1. Transfer of business assets

(1) Where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person.

(2) Where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, the usage or making available of such goods is a supply of services.

(3) Where any goods, forming part of the business assets of a taxable person, are sold by any other person who has the power to do so to recover any debt owed by the taxable person, the goods shall be deemed to be supplied by the taxable person in the course or furtherance of his business.

(4) Where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless—

(a) the business is transferred as a going concern to another person; or

(b) the business is carried on by a personal representative who is deemed to be a taxable person.

  1. The following shall be treated as “supply of service”

(a) renting of immovable property;

(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or before its first occupation, whichever is earlier.

Explanation.- For the purposes of this clause-

(1) the expression “competent authority” means the Government or any authority authorized to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:–

(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or

(ii) a chartered engineer registered with the Institution of Engineers (India); or

(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(2) the expression “construction” includes additions, alterations, replacements or remodeling of any existing civil structure;

(c) temporary transfer or permitting the use or enjoyment of any intellectual property

right;

(d)development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software;

(e)agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;

(f) works contract including transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

(g) transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; and

(h) supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than

alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.

  1. The following shall be treated as supply of goods

(a) supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration.

In the Model GST Law tries to address lot of ambiguity we have today in the definition of what is supply of goods and services. Guidelines have been laid clearly for identifying what is supply of goods and what is supply of services and as it is a single law it also avoids the confusion of levy of taxes easily unlike the current regulations.

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.

Views on Joint Committee on Business Process for GST – Registration Number

Posted on by CMA Bhogavalli Mallikarjuna Gupta

Goods and Service Tax is a tax to be levied on supply of goods and services in India and it is in discussion for almost a decade now.  In the current taxation we have different laws for supply of goods and services this gives lot of room for confusion and high cost in compliance from a business house perspective and from government perspective also.  Across the globe in about 160+ counties GST has been introduced and it is also known as Value Added Tax in some countries.

During the last one year on wards there is lot of buzz or activity on the GST front in India.  In the second week of October 2015, the joint committee has released documents on business process

  • Registration
  • Payment Process
  • Refund Process
  • Returns

This blog covers on all the above topics in different sections. First we will review the business process document on the Registration titled by empowered committee as “GST Registration”.

Registration Number is key to any taxation as it helps in tracking of all the supplies i.e sales of goods or services, helps in taking the input tax credit, helps the tax authorities in determining the tax collection to sales, reconciliation between the tax collected and input tax claimed by the business houses. In the current tax regime, the business house is required to have registration numbers from multiple tax authorities like ECC number from the Central Excise, Service Tax Registration Number from the Service Tax Department, TIN and CST Registration number from the State Tax Authorities, IEC number from the Director General of Foreign Trade etc. This is tedious process and more over the thresholds for obtaining these registration numbers is also different. This adds to the complexity and the compliance cost. In the proposed GST, there will be only one number replacing most of the registration numbers. In the proposed GST regime, GST registration number will be termed as GSTIN i.e Goods and Service Taxpayer Identification Number.

Who has to obtain GSTIN

  • Any person who supplies goods and services and has turnover above the threshold limit
  • Who wants to collect and take credit of the GST
  • Who has interstate supply of goods or services
  • It is also called UID any buyer wants to refund of the taxes paid like UN Bodies / Government authorities / PSU’s

If an organization has breached / crossed the prescribed threshold, the person has to file for GSTIN registration number within 30 days. The applicant or the person who is filing for the registration number is eligible for claiming the input tax credit from the date of filing of the application for GSTIN.

A person can have GSTIN if he opts for compounding scheme, the threshold limit for the compounding scheme will be in the GST Law and the tax payer will not be allowed to take credit or collect GST.

A person can take GSTIN voluntarily and this will ensure that the tax payers is in credit chain even before he crosses the prescribed turnover limit.

Format of GSTIN

According to the Business Process document issued for GST on registration, the registration number is based on PAN similar to the current Excise Control Code ( ECC ) or Service Tax Registration Number. It is being proposed to be 15 digit number.

Registration number format

The first two digits, determine the state in which the GSTIN in being obtained, the list of the states is based on 2011 Indian Census. Under this each state will be allocated a two digit number.

Next 10 digits are PAN number of the entity issued by the Income Tax Department.

Thirteenth digit is alpaha numeric and it is based on the users requirement to get registration based on the business vertical. There can be 35 sequences maximum for this 1-9 numbers and alphabets a – z . If the tax payer is going for a single registration then it will be 1 in the thirteenth field but if he goes for more than one registration like one two business vertical say for example one for consumer durables and another for automobiles then the second one will be having 2 in the thirteenth number and the third registration number will be having 3 in the thirteenth field.

14th digit is a being reserved by the GSTN for the future use and the 15th digit is check digit.

 How to get GSTIN

GSTIN can be obtained in the following manner

  1. Directly applying from the GST Common Portal
  2. Tax Return Preparer (TRP)
  3. Facilitation Center

The GST Common Portal will be setup by the Goods and Service Tax Network (GSTN) and it will be integrated with the IT Systems of the State and Central Governments.  The final decision will be taken by the GST Law drafting committee on the TRP and FC centers.

There is no restriction on the number of applications being submitted by the taxable person, this facility is being provided so that if any taxable person has presence in more than on state, can file the application for registration numbers in one go.

The process of obtaining registration number is simple, the tax payer has to submit all the documents along with the application form. Scanned copies of the documents have to be submitted along with application online.  Once the documents are submitted a confirmation mail is sent and based on the confirmation Acknowledgement number will be generated. Once the application is approved, GSTIN will be issued along with the login credentials to the mail id of the authorized person.

Documents to be submitted

The following documents have to be submitted along with the filing of the application online

  • Constitution of business
  • Details of principal place of business
  • Details of bank accounts
  • Details of authorized signatory
  • Photographs of authorized signatory

 

Type of Registration forms

There are different application forms for the GSTIN based on the nature of activity.

  • Application for Registration under Goods and Service Tax
  • Application for surrender of Registration under Goods and Service Tax
  • Application to opt out of composition scheme
  • Application for withdrawal from Composition Scheme
  • Application for amendments after registration

Open Items

  1. State Code for Registration Number –     This does not have any direct impact on the end user but on the tax distribution between the center and the states. As per the business process document, the list of states to   be considered is from the 2011 Census data. By that time there was no bifurcation  of the Combined State of Andhra Pradesh, then how the fund distribution is going to take between the states Telangana and AP as we are talking about destination principle for GST.
  1. State Code for Registration Number – business impact – If a registered person sells goods from Hyderabad to Vijayawada which are falling under two different states, as per the GST Registration  document  the state code is same, is IGST applicable on this transaction or not?
  1. AS 17 for registration number –   There is point in the registration number which says based on the line of business registration number can be obtained with a maximum combination of 35. But what is the     real     usage of it when it comes to the registration number? Such process is not available across the globe even in EU where we call it is as VAT, which is in place for more     than 20     years? How is the same going to be mapped or configured in the accounting softwares? What are the guide lines for this? Another question is as per AS 17, in segment reporting if the turnover is more than 10% then only it has to be reported. Assuming the turnover falls below 10% after two years, still the registration number by segment is applicable or not? Can it be merged with other registration numbers?
  1. Registration Numbers for different states –     As per the document if the entity is having presence in multiple states, registration number has to be obtained in the state where the goods or services being sold. Say for     Example if Company A is selling goods from Hyderabad to Mumbai, Delhi, Bangalore etc A tax invoice has to be issued and which must be accompanied along with the     goods.     Now on the tax invoice which registration number of the Company A is to be printed is it State from where the shipment is taking place or of the state where the     goods are     being shipped? Or is it that when I have dispatches from those states, then i need to print the registration number of the state along with the generic registration number?
  1. Date of application of Registration – In the document it is mentioned that the date of filing of the application for registration should be considered for the Input Tax Credit. Logically or legally how can the credit be     availed when there is no registration number? Is the returns software capable of handling such requirements, how will the system know about the date of application for     registration? I feel it would create more complexity in the whole process. Assume a buyer take the credit based on the date of application of the seller but latter the     registration is rejected by the tax authorities, what happens to the credit taken by the buyer?  Assuming that the returns software is prepared in such an intelligent way, will     the credit gets rejected in the subsequent month?
  1. Date on which liability to pay tax arises – If we see the registration form given in the Annexure III, the point # 8 talks about this? Under this does the user has a flexibility to determine the date on his own? If yes how     can the matching of records happen for the credit to be availed only based on the sellers payment? Or is it a common date, if it is common date, then why do we need to capture and show this? Or are we talking about for SGST, which is state specific, there can be different dates? If yes is not contradicting the basic principle of having common tax structure and process?
  1. Input Service Distributor – Say for example Company A is located in Pune and it is doing centralized procurement for all its offices in India and bills are raised on Pune Office. The Services are delivered        in Hyderabad, Chennai & Delhi etc. The service provider is based in Mumbai, since Pune and Mumbai are in the same state, there will be no IGST applicable but the     services        are delivered in different parts of the country? How input service is to be transferred to other offices as they are outside the State of Maharashtra? Is IGST applicable as services being delivered in different states? The place of supply rules must address all such requirements.
  1. Migration of the existing registration numbers – Is this required as i see lot of difference in the data elements captured between the states for VAT and Excise or Service Tax? Can data be migrated from different servers to a     single databases? How pratical is this as the document itself says some data is missing? This is going to open a can of worms. The government should desist for such a     process as it is a onetime activity and they should ask for fresh applications and can validate the new applications with existing data available to see all entities have been registered under GST.

Any views or opinions represented in this section 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.