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.

 

 

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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.

Demystifying Goods and Service Tax – Draft Registration Rules

For the first time under any act, rules have been framed for registration along with other rules for the  invoice, payment, refund and returns. These rules are in public domain and feedback or comments can be given by 28th of Sep 2017.

The Draft Goods and Service Tax Registration Rules is similar to the provisions given in the Model GST law in various sections including the transactional provisions. Here it additionally provides the forms under which the applicant has to file for registration or providing further information or form to be used by the department for communicating to the applicant.

There are 17 Rules for Registration under GST based on the Draft Rules

Rule 1 – Application for registration

Rule 2 – Verification of the application

Rule 3 – Issue of registration certificate

Rule 4 – Separate Registrations for multiple business verticals within a State

Rule 5 – Grant of Registration to persons required to deduct tax at source or collect tax at source

Rule 6 – Assignment of unique identity number to certain special entities

Rule 7 – Display of registration certificate and GSTIN in name board

Rule 8 – Grant of registration to non-resident taxable person

Rule 9 – Amendment to Registration

Rule 10 – Suo moto registration

Rule 11 – Application for cancellation of registration

Rule 12 – Cancellation of registration

Rule 13 – Revocation of cancellation of registration

Rule 14 – Migration of persons registered under Earlier Law

Rule 15 – Method of authentication

Rule 16 – Extension in period of operation by casual taxable person and non-resident taxable person

Rule 17 – Physical verification of business premises in certain cases

Rule 1 – Application for registration

This rule lays down provisions for a person applying for registration for the first time directly under GST. The rule defines an applicant under Sub-Rule 1 as a “Every person, other than a non-resident taxable person, a person required to deduct tax at source under section 37 and a person required to collect tax at source under section 43C, who is liable to be registered under sub-section (1) of section 19 and every person seeking registration under sub-section (3) of section 19”.

The applicant has to provide PAN Number, Mobile Number and email id. All these three will be authenticated by one-time password (OTP) and all the further communication with the department will be through email and mobile through SMS.

Once all the three are authenticated, the applicant has to submit / enter data online for registration and also submit a self-attested copy of Part B of FORM GST REG-01.

Once the documents are received, an acknowledgement is issued in FORM GST REG-02 electronically.

A person applying for registration as a casual tax person will be given a temporary identification number by the common portal for depositing tax under Section 19 (A) of Model GST Law. The amount of tax to be deposited is based on estimated tax liability for the business intended to be carried under this registration for the given period.

Rule 2 – Verification of the application

Once the application is filed, it is forwarded to the concerned officer and if he is satisfied with the information provided, the registration will be accepted and issued within a period of 3 working days from the date of submission of the application.

In case if there is any discrepancy observed by the concerned officer, the applicant will be intimated about the same in FORM GST REG-03 and the applicant is required to provide the feedback within 7 working days from the receipt of the intimation in FORM GST REG-04. The clarification to be provided can also include modification of PAN, Mobile or Email id.

If the concerned office is satisfied with the information provided by the applicant, the registration may be granted within 7 working days’ receipt of intimation. In case if the office is not satisfied, the application may be rejected and same will be informed to the applicant in writing in FORM GST REG-05 electronically.

The application is deemed to be accepted and registration is deemed to be granted in case if the concerned officer does not raise any question

  • Within 3 working days from filing of the application
  • Within 7 working days from the date of filing / providing additional information.

Rule 3 – Issue of registration certificate

Based on the provision of sub-section 11 of Section 19 of the Model GST Law, if the application is accepted and registration is granted under Rule 2, certificate of registration is issued in FORM GST REG-06 for the principal place of business and for the additional place of business based on the information provided in the common portal.

The registration shall be effective from the date on which the person becomes liable to registration where the application for registration has been submitted within thirty days from such date.

Where an application for registration has been submitted by the applicant after thirty days from the date of his becoming liable to registration, the effective date of registration shall be the date of grant of registration under sub-rules (1), (4) or (6) of rule 2.

Rule 4 – Separate Registrations for multiple business verticals within a State

Any person willing or desiring to take registration based on their business verticals can obtain the same based on the provisions provided in Sub-Section 2 of Section 19 of Model GST Law.

The registration will be issued for each business vertical and the taxes have to be paid for each vertical for the supplies made in the respective verticals.

In case if the person is willing to have registration based on business vertical a separate application has to be filed in FORM GST REG-01 for each business vertical.

The provisions of Rule 1, 2 and 3 will also apply for the registrations under each business vertical.

Rule 5 – Grant of Registration to persons required to deduct tax at source or collect tax at source

GST Registration is required to be obtained if the person is required to deduct tax under GST based on the provisions of sub-section 1 of section 37 or required to recover tax under the provision of Section 43C. The applicant has to file FORM GST REG-07 for obtaining registration either on the common portal or facilitation centers.

The concerned officer may grant registration after due verification within 3 working days in FORM GST REG-06 on submission of application.

The certificate of registration issued can be cancelled subsequently if the concerned officer or any other officer feels that the applicant is no longer required to recover tax under section 37 (tax deducted at source) or section 43 C (tax collection at source) intimating it in FORM GST REG-08. The concerned officer has to provide an opportunity for the applicant to be heard before cancelling the registration.

Rule 6 – Assignment of unique identity number to certain special entities

 Entities falling under Sub-Section 6 of Section 19 of the Model GST Law, as given below are required to take

  • any specialized agency of the United Nations Organization or
  • any Multilateral Financial Institution and Organization notified under the United Nations (Privileges and Immunities) Act, 1947 (46 of 1947),
  • Consulate or Embassy of foreign countries and any other person or class of persons as
  • may be notified by the Board / Commissioner

to take registration under GST by filing of FORM GST REG-06, the concerned officer on receipt of the same, if satisfied will issue the unique identification number within 3 working days from the date of receipt of application.

Rule 7 – Display of registration certificate and GSTIN in name board

 For every taxable person to whom registration certificate is issued under GST is required to display the registration certificate in a prominent location at the principal place of business and additional place of business’s registered under GST.

GSTIN is also required to be displayed on the name board exhibited at the entry of the principal place of business and additional place of business.

Rule 8 – Grant of registration to non-resident taxable person

 Every person carrying on business in India is required to have a registration under GST based on the provisions specified in Section 19 of the Model GST Law, the same is applicable in the case of non-resident person also. A non-resident tax payer is also required to be registered under GST by filing in FORM GST REG-10. The FORM GST REG-10, has to be filed by the non-resident tax payers at least before 5 days of commencement of business.

 The non-resident person will be given a temporary identification number and based on that the tax has to be deposited by him, the amount of tax to be deposited is based on the estimated turnover of his business during the said period in India.

The issue of registration certificate process under GST for the non-resident tax payer is also same as specified in Rule 1 and Rule 2

Rule 9 – Amendment to Registration

 This rule provides provisions for amendment to registration obtained under GST. The amendment to registration can be for one of the following reasons

  • Where the change relates to
  • the Name of Business,
  • Principal Place of Business,
  • and details of partners or directors, karta, Managing Committee, Board of Trustees, Chief Executive Officer or equivalent, responsible for day to day
  • for any other reasons not mentioned above

in all such cases, the tax payer has to file in FORM GST REG-11 within fifteen days from the change.

The concerned officer within 15 days of the receipt of FORM GST REG-11, if satisfied will issue the FORM GST REG-12 electronically for change of details. The date for change of the details will be from the date requested in the form.

If there is a requirement to change the mobile number or email id, then the process given in Rule 1 will be followed.

In the case of change of the constitution of the business, which results in the change of PAN Number, then a fresh application for registration has to be filed in FORM GST REG-01.

The concerned officer on receipt of FORM GST REG-11 is not satisfied for the request for change within 15 working days shall issue Form GST REG-03 asking for further information for change of the details.

The taxable person within 7 working days on receipt of the Form GST REG-03 has to file FORM GST REG-04 submit his reply.

The certificate of registration is deemed to be amended in the following conditions

  • If the concerned officer does not take any action within 15 working days from the receipt of the FORM GST REG-11
  • If the concerned officer does not take any action within 7 working days from the receipt of the GST REG-04

Rule 10 – Suo moto registration

 If an officer during the course of any survey, inspection, search, inquiry or any other proceedings under the act finds that a person is liable for registration but has not obtained registration under GST shall issue a temporary registration number based on the order in FORM GST REG 13.

The date of registration is valid from the day on which the order is issued.

Every person to whom temporary registration issued under Sub-Rule 1 of Rule 10 shall file for registration under Rule 1 within 30 days from the date of issue of temporary registration. Alternatively, the person can also file an appeal against the temporary registration number within 30 days.

The provisions of Rule 2 and 3 will be applicable for issue of certificate.

Rule 11 – Application for cancellation of registration

There is a provision for cancellation of registration under GST in Model law vide sub-section 1 of section 21. In case if a taxable person wants to apply for cancellation of registration, he has to file FORM GST REG-14 including the details of the closing stock along with liability on it along with other required documents.

The application for cancellation will be considered only after one year of issue of registration under GST on a voluntarily basis and the same condition is not applicable in the case of migration of registration from VAT / Excise / Service Tax.

Every taxable person, other than a person paying tax under section 8, seeking cancellation of registration under sub-rule (1) shall furnish a final return under rule Return.19.

 Rule 12 – Cancellation of registration

The concerned officer on receipt of FORM GST REG-14 for cancellation of registration can issue a notice calling for why the registration has to be cancelled within a 15 days on receipt of the   FORM GST REG-14.

The taxable person within 7 days of receipt of FORM GST REG-15 has to file a reply and if the officer is satisfied, will issue an order for cancellation of registration FORM GST REG-16 within 30 days. The officer will also direct the taxpayer to pay all the arrears of tax, penalty, interest if any liable to paid to the department.

Rule 13 – Revocation of cancellation of registration

A taxable person who has voluntarily cancelled his registration can apply for revocation of cancellation of registration by filing FORM GST REG-17 within 30 days of the issue of the cancellation order by the concerned officer.

The officer if satisfied with the reasons for revocation of cancellation of registration within 30 days of receipt of FORM GST REG-17, shall revoke the cancellation of registration by issue of an  order in FORM GST REG-18 and communicate the same to the applicant.

The officer can also reject the FORM GST REG-17 for revocation of cancellation of registration if he is not satisfied with reasons given by the tax payer will be communicated in FORM GST REG- 05.

In case if the officer wants additional information from the tax payer then FORM GST REG–03 will be issued and the tax payer has to file his reply in within 7 working days in FORM GST REG-04.

The officer on receipt of FORM GST REG-04 will dispose of the same based on provisions of Rule 2.

Provided that the application shall not be rejected without affording the applicant an opportunity of being heard by issue of a notice in FORM GST REG-19 within thirty days from the date of receipt of such application.

Rule 14 – Migration of persons registered under Earlier Law

All the tax payers registered under the earlier law and are having a valid PAN number issued under Income Tax Act, 1961 (Act 43 of 1961) shall be issued a provisional registration for GST and issued GSTIN wide FORM GST REG- 21.

 As per the transition provisions provided under Model GST Act under section 142, all the required additional information has to be submitted by the tax payer within 6 months from the date of issue of provisional registration number or if the officer is satisfied for some reason can grant an extension of additional two months for submission of additional information.

The additional information has to be filed in FORM GST REG–20 and submitted duly signed by the tax payer.

If the information provided by the tax payer is correct, the concerned officer may issue final registration certificate of registration under FORM GST REG-06.

 The provisional certificate issued can be cancelled if the tax payer has not provided additional information or the tax payer has not provided correct information. The same will be communicated in FORM GST REG-23.

 The provisional certificate will be cancelled if the information provided is not correct or incomplete and the same will be communicated wide FORM GST REG-22.

 In case if a tax payer who is migrated from the existing tax registration can have an option to cancel the provisional registration under GST by filing GST REG-24. The concerned officer if satisfied on the hearing can issue the order for cancellation of provisional registration issued to him.

Rule 15 – Method of authentication

All applications, replies, additional information, notices, appeals submitted online have to be authenticated by the tax payer or his authorized representative. The authentication can be done through a digital signature or through e-signature as specified under Information Technology Act, 2000 (21 of 2000) or through any other mode of signature notified by the Board/Commissioner in this behalf.

The documents filed online will also have to be signed manually and submitted by the tax payer or by his representative.

(a) in the case of an individual, by the individual himself or by some person duly authorized by him in this behalf and where the individual is mentally incapacitated from attending to his affairs, by his guardian or by any other person competent to act on his behalf;

(b) in the case of a Hindu Undivided Family, by a Karta and where the Karta is absent from India or is mentally incapacitated from attending to his affairs, by any other adult member of such family or by the authorized signatory of such Karta;

(c) in the case of a company, by the chief executive officer or authorized signatory thereof;

(d) in the case of a Government or any Governmental agency or local authority, by an officer authorized in this behalf;

(e) in the case of a firm, by any partner thereof, not being a minor or authorized signatory;

(f) in the case of any other association, by any member of the association or persons or authorized signatory;

(g) in the case of a trust, by the trustee or any trustee or authorized signatory; and

(h) in the case of any other person, by some person competent to act on his behalf.

All the orders / notices issued by the officers electronically will be digitally signed.

Rule 16 – Extension in period of operation by casual taxable person and non-resident taxable person

 A non-resident taxable person who has taken registration under Rule 8 can seek for extension of validation of the registration period by filing of Form GST REG-25. It will be filed before the end of the registration period granted to him.

 The application under sub-rule (1) shall be acknowledged only on payment of the amount specified in sub-section (2) of section 19A.

Rule 17 – Physical verification of business premises in certain cases

 Physical verification of the place of business can be carried on by the concerned officer only after the issue of the registration certificate. If the concerned officer who is satisfied on the verification of the place of business of the tax payer will upload Form GST REG-26 along with the date of verification and other documents if any.

Items which need clarification

  1. It is a known rule that for a tax payer there will be one registration number per state. As per the rules, it is clear that all places of business should be registered at the time of registration. In case if the tax payer does not register one place of his business and does transfer of material to that place of business, will tax invoice has to be issued for such transactions?
  2. In Form GST REG-24, Provisional ID is mentioned, does it mean it is a temporary registration number till the GSTIN is issued? If yes, there is no mention of the same in the GSTR Return Formats, there it talks about only GSTIN. What is the usage of this provisional ID, does it needs to be printed as GSTIN on the tax invoice and other documents till GSTIN is issued?
  3. Only 3 working days is provided in case of queries raised for fresh application but in the case of cancellation, revocation of cancellation or updating any other information 7 working days is provided. What is the rationale for such a differentiation ?

Registration Forms under GST

registration-forms-1

registration-forms-2

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 Draft Invoice Rules for Goods and Service Tax

The Model GST Law was placed in the public domain on 14th June 2016 and thereafter we could see a lot of moment on the implementation of GST like, passage of the Constitutional Amendment Bill the Rajya Sabha on 3rd August 2016 and the same being ratified in the Lok Sabha on 8th August 2016. Majority of the states have also adopted the same in their state assemblies in a very short span of time paving the way for the President to give the assent on the Constitutional Amendment Bill and thereafter the Central Government has constituted the Goods and Service Tax Council, key body for the rollout of GST in India. The GST Council had its first meeting on 22nd and 23rd of this month.

The GST Council in its first meeting has taken the following decisions

  1. Increase the threshold limit from Rs 10 Lacs to Rs 20 Lacs for all states except for the north eastern states
  2. Increase the threshold limit from Rs 5 Lacs to Rs 10 Lacs in case of north eastern states
  3. The jurisdiction of the taxpayers will be with the state governments on the tax payers whose turnover is less than Rs 150 Lacs in case of supply of goods and in case of Service, the same will be with the central government as the state tax officials do not have the complete knowledge and expertise on the assessment of service tax. The same will be passed on to state governments once they have the expertise on the same down the line.

The government has issued the Draft Rules and these rules play a key role in the adoption of the GST by the trade and industry and also provide information on the do’s under GST. The Draft Rules are issued for the following areas

  • Draft Registration Rules
  • Draft Registration formats
  • Draft Payment Rules
  • Draft Payment formats
  • Draft Invoice Rules
  • Draft Invoice formats

Draft Invoice Rules

The information given in the Draft Invoice Rules is in addition to the information provided under Section 23 of the Model GST Law. It lists out all the elements to be shown on different documents likes the Tax Invoice, Bill of Supply, Supplementary Tax Invoice and Debit or Credit Notes and issue of tax invoice in special cases along with the Manner of Issue of Tax Invoice.

One of the important or major change is the same tax invoice is applicable for the Central as well as state taxes which is not the case in the current tax requirements.

The Manner of issue of tax invoice is similar to the provisions given in Central Excise with

(a) the original copy being marked as ORIGINAL FOR RECIPIENT;

(b) the duplicate copy being marked as DUPLICATE FOR TRANSPORTER; and

(c) the triplicate copy being marked as TRIPLICATE FOR SUPPLIER.

From the above, it is clear that goods have to be accompanied with the tax invoice, as the point b says duplicate for the transporter. There is an interpretation that under GST, tax invoice need not accompany the goods.

The usage of the word gives room for one more taught in case of branch transfers, the FAQ’s released by the department says that in case of branch transfer there is no need to issue tax invoice, if it is within the state, but when the goods are being shipped with what document the same should be sent. Do we have a concept of Challan or some other document? We need to wait for some more  time on clarity on such transactions.

The information to be shown on the Tax Invoice

(a) name, address and GSTIN of the supplier;

(b) a consecutive serial number containing only alphabets and/or numerals, unique for a financial year;

(c) date of its issue;

(d) name, address and GSTIN/ Unique ID Number, if registered, of the recipient;

(e) name and address of the recipient and the address of delivery, along with the name of State and its code, if such recipient is unregistered and where the taxable value of supply is fifty thousand rupees or more;

(f) HSN code of goods or Accounting Code of services;

(g) description of goods or services;

(h) quantity in case of goods and unit or Unique Quantity Code thereof;

(i) total value of goods or services;

(j) taxable value of goods or services taking into account discount or abatement, if any;

(k) rate of tax (CGST, SGST or IGST);

(l) amount of tax charged in respect of taxable goods or services (CGST, SGST or IGST);

(m) place of supply along with the name of State, in the case of a supply in the course of inter-State trade or commerce;

(n) place of delivery where the same is different from the place of supply;

(o) whether the tax is payable on reverse charge;

(p) the word “Revised Invoice” or “Supplementary Invoice”, as the case may be, indicated prominently, where applicable along with the date and invoice number of the original invoice; and

(q) signature or digital signature of the supplier or his authorized representative.

Provided that the Board/Commissioner may, by notification, specify –

(i) the number of digits of HSN code for goods or, as the case may be, the Accounting Code for services, that a class of taxable persons shall be required to mention, for such period as may be specified in the said notification, and

(ii) the class of taxable persons that would not be required to mention the HSN code for goods or, as the case may be, the Accounting Code for services, for such period as may be specified in the said notification:

The above information to be provided on the Tax Invoice is similar to that of the information we provide on the excise invoice expect for not showing the range and divisional details of the central excise.

The following are the notable differences under GST on comparing with the existing tax invoice

  • HSN code to be shown mandatorily on the tax invoice for all the taxes
  • Service Tax accounting code to be shown, which is not there currently
  • In case of supply of goods, the reverse charge details have to be shown on the tax invoice, this is similar to the current provision for services
  • There is a restriction on the invoice number format, it says it has to be either numerical or alphabetic only. The reason for this could be upload of invoices and matching as a string can cause problems in some of the system checks
  • Rule 1 (j) talks about abatement to be shown on the tax invoice, but if we see the format of the tax invoice there is no specific provision where we can show the same. Probably the tax rate to shown is net of abatement. If such is the case, the validation in the common portal should be built accordingly.
  • Sub-Rule 4 of Rule 2 talks about the Invoice Reference Number, which needs to be shown on the tax invoice and this number can be obtained only after uploading the same on the common portal. Does that mean, the tax invoice has to be printed only after obtaining this number? The same is given clearly in the format of the tax invoice given by the department.This means that before every shipment goes out, the tax invoice has to be uploaded on the common portal and reference number is to be derived and then printed on the tax invoice. It also means that internet connection is mandatory now and it will be challenge in case of plants located in remote locations.
  • No longer required to maintain two different series of tax invoices for domestic and exports as in central excise today. It will be an organizational call.

There are some special cases under which a Tax Invoice can be issued like for exports on payment of duty or export under bond. Another interesting to be noted is that, it talks about the printing of the ARE -1 number on the tax invoice, does this mean that we will still have the concept of deemed exports under GST, where goods can be purchased under existing process only. This is contrary to the views expressed by the trade and industry and tax consultants.

In the above cases, the invoice has to be endorsed clearly under which the exports are under which the supply is taking place “SUPPLY MEANT FOR EXPORT ON PAYMENT OF IGST” or “SUPPLY MEANT FOR EXPORT UNDER BOND WITHOUT PAYMENT OF IGST”. In such cases the information shown in Clause (e) has to be replaced with the following information

  • name and address of the recipient;
  • address of delivery;
  • name of the country of destination; and
  • number and date of application for removal of goods for export [ARE-1].

In case of services, the existing provisions of issue of service tax invoice to be issued within 30 days on completion of service is retained under GST also.

There is also a provision for issue of supplementary invoices or debit or credit notes in line with section 23 of the Model GST Law. The Model GST Law or the Invoice rules does not talk about the provision of issue of debit or credit notes in case of shortage or rejections or transit loss on quantity. This remains an open question.

Rule 4, does not talk about the above requirements but asks for showing the following information on these documents

(a) name, address and GSTIN of the supplier;

(b) nature of the document;

(c) a consecutive serial number containing only alphabets and/or numerals, unique for a financial year; (d) date of issue of the document;

(e) name, address and GSTIN/ Unique ID Number, if registered, of the recipient;

(f) name and address of the recipient and the address of delivery, along with the name of State and its code, if such recipient is unregistered;

(g) serial number and date of the corresponding tax invoice or, as the case may be, bill of supply;

(h) taxable value of goods or services, rate of tax and the amount of the tax credited or, as the case may be, debited to the recipient; and

(i) signature or digital signature of the supplier or his authorized representative.

The rules also give a provision to issue a consolidated revision documents for non-registered taxable supplies, in case if the need arises. There is also a provision to issue a consolidated revised document in case of interstate supplies also if the amount is less than Rs 2.50 Lacs

Rule 5 details about the provision on the  issue of tax invoices in special cases like by input service distributor or a banking company or a transport operator.

The tax invoice to be issued by the input service distributor should contain the following information

(a) name, address and GSTIN of the Input Service Distributor;

(b) a consecutive serial number containing only alphabets and/or numerals, unique for a financial year;

(c) date of its issue;

(d) name, address and GSTIN of the supprovies plier of services, the credit in respect of which is being distributed

and the serial number and date of invoice issued by such supplier;

(e) name, address and GSTIN of the recipient to whom the credit is distributed;

(f) amount of the credit distributed; and

(g) signature or digital signature of the supplier or his authorized representative:

In the case of banking company or non-banking company or a financial institution, should show the information mentioned in Sub-Rule 1 of Rule 5 by calling the document in whatsoever name even though it is not serially numbered.

Not sure how will the common portal handle such cases as there is serial number for these transactions and also will there be a provision to upload the documents without serial number i.e invoice number? There can be cases where the banking charges are more than Rs 2.50 Lacs especially in case of Letter of Credit or bill discounting etc.

In case of goods transport agency, the information given in the sub-rule 1 of Rule 5 should be contained along with the gross weight, net weight, name of the consignor and the consignee, registration number of goods carriage in which the goods are transported, details of goods transported, details of place of origin and destination, GSTIN of the person liable for paying tax whether as consignor, consignee or goods transport agency, and also contains other information as prescribed under rule 1.

Bill of Supply

Rule 3 is in line with the provisions of Section 23 of the Model GST Law, where in the tax payer deals with exempted supplies, he can issue a bill of supply in lieu of tax invoice and it should contain the following information

(a) name, address and GSTIN of the supplier;

(b) a consecutive serial number containing only alphabets and/or numerals, unique for a financial year;

(c) date of its issue;

(d) name, address and GSTIN/ Unique ID Number, if registered, of the recipient;

(e) HSN Code of goods or Accounting Code for services;

(f) description of goods or services;

(g) value of goods or services taking into account discount or abatement, if any; and

(h) signature or digital signature of the supplier or his authorized representative:

The taxpayer need not issue a bill of supply if the transaction value is less than Rs 100 unless asked by the buyer.

The taxpayer has to issue a consolidated bill of supply end the day for all the cases where he has not issued a bill of supply during the day. This provision is again to keep track of all such transactions which are not being tracked directly.

From the invoice formats it is clear that in case of costs like freight, insurance, packing charges should be part of the taxable value of the goods.

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 Time of Supply of Services under Model GST Law – Part II

In the First Part “Demystifying Time of Supply of Services under Model GST Law” we have seen the various provisions for the time of supply for services under the Model GST Law. Now in the section of the article, we will see the impact of the rate change on the time of supply of services along with few open items for which we need to have clarity in the GST Bill. Section 14 of the Model GST Laws lays down the various provisions for the tax rate implications on the supply of services for tax rate changes.

Service Provided before the change of tax rate

Sub-Section 1 (a) of section 14, lays down the provision for the treatment of tax change in case the taxable service has been provided before the change in the effective tax rate.

For our analysis let’s consider a case that the tax rate till 30th Nov 2017 is 18% and from 1st Dec 2017 the tax rate is being increased to 18.5%.

Sub-Section 1 (a) of Section 14

(i) where the invoice for the same has been issued and the payment is also received

after the change in effective rate of tax, the time of supply shall be the date of receipt of

payment or the date of issue of invoice, whichever is earlier; or

Illustration -1

A Ltd agrees to do the service of diesel generator and accordingly it has issued an invoice on 5th Dec 2017 and completed the service on 20th Nov 2017 and received the payment on 10th Dec 2017.

In this case, the service has been provided before the change of the tax rate i.e prior to 1st Dec 2017 and the earliest date and the time of supply is 5th Dec 2017 as invoice is issued on 5th Dec 2017 and payment is received on 10th Dec 2017 (earliest of the invoice or the payment date). The tax rate applicable here is 18%.

Illustration -2

A Ltd agrees to do the service of diesel generator and accordingly it has issued an invoice on 15th Dec 2017 and completed the service on 20th Nov 2017 and received the payment on 7th Dec 2017.

In this case, the service has been provided before the change of the tax rate i.e prior to 1st Dec 2017 and the earliest date and the time of supply is 7th Dec 2017 as payment is received 7th Dec 2017 invoice is issued on 15th Dec 2017 (earliest of the invoice or the payment date). The tax rate applicable here is 18%.

Sub-Section 1 (a) of Section 14

(ii) where the invoice has been issued prior to the change in effective rate of tax but the

payment is received after the change in effective rate of tax, the time of supply shall be

the date of issue of invoice; or

If the invoice is issued prior to the date of the change in effective tax rate and service is completed before the same date, then the effective tax rate will be the older rate only.

Illustration -3

B Ltd enters into a contract to provide special security with C Ltd for their factory located in Badi from the period 1st Nov 2017 to 30th Nov 2017. B Ltd issues an invoice on 25th Nov 2017 and receives payment on 9th Dec 2017.

Invoice has been issued on 25th Nov 2017 and service is completed on 30th Nov 2017 and these two dates are before the date of effective change of tax rate, the time of supply for services is 25th Nov 2017, so the effective tax rate will be 18%.

Sub-Section 1 (a) of Section 14

(iii) where the payment is received before the change in effective rate of tax, but the

invoice for the same has been issued after the change in effective rate of tax, the time of

supply shall be the date of receipt of payment;

If service is completed and payment is also received before the tax rate change, then the tax rate applicable will be old rate only and not the new tax rate.

Illustration -4

B Ltd enters into a contract to provide special security with C Ltd for their factory located in Badi from the period 1st Nov 2017 to 30th Nov 2017. B Ltd receives payment on 19th Nov 2017 and issues an invoice on 4th Dec 2017.

Payment has been received on 19th Nov 2017 and service is completed on 30th Nov 2017 and these two dates are before the date of effective change of tax rate, the time of supply for services is 19th Nov 2017, so the effective tax rate will be 18%.

Service provided after the tax rate change

Sub-Section 1 (b) of section 14, lays down the provision for the treatment of tax change in case the taxable service has been provided / completed after the change in the effective tax rate.

For our analysis let’s consider a case that the tax rate till 30th Nov 2017 is 18% and from 1st Dec 2017 the tax rate is being increased to 18.5%.

Sub-Section 1 (b) of Section 14

(i) where the payment is received after the change in effective rate of tax but the

invoice has been issued prior to the change in effective rate of tax, the time of supply

shall be the date of receipt of payment; or

Illustration -5

X Ltd agrees to do preventive maintenance for all the critical machinery in the factory by 25th of Dec 2017 and accordingly it has received payment on 28th of Dec 2017 and issued an invoice on 27th of Nov 2017 on completion of service.

In the above case, the time of supply will be the date on which payment has been received i.e 28th Dec 2017 and the effective tax rate would be 18.5% as service is completed after the tax rate change.

Sub-Section 1 (b) of Section 14

(ii) where the invoice has been issued and the payment is received before the change in

effective rate of tax, the time of supply shall be the date of receipt of payment or date of

issue of invoice, whichever is earlier; or

In case if the invoice is issued and payment is also received before the date of tax rate change, then the time of supply of service will be earlier of the invoice date or payment receipt date and the tax rate applicable will be old rate only.

Illustration -6

A Ltd agrees to do the service of diesel generator and accordingly it has issued an invoice on 15th Nov 2017 and completed the service on 20th Dec 2017 and received the payment on 17th Nov 2017.

In the case, the effective tax rate would be 18%, as the time of supply is 15th Nov 2017, this is the earliest date of issue of invoice or receipt of payment.

Illustration -6

A Ltd agrees to do the service of diesel generator and accordingly it has issued an invoice on 10th Nov 2017 and completed the service on 20th Dec 2017 and received the payment on 7th Nov 2017.

In the case, the effective tax rate would be 18%, as the time of supply is 7th Nov 2017, this is the earliest date of issue of invoice or receipt of payment.

Sub-Section 1 (b) of Section 14

(iii) where the invoice has been issued after the change in effective rate of tax but the

payment is received before the change in effective rate of tax, the time of supply shall

be the date of issue of the invoice.

A Ltd agrees to do the service of diesel generator and accordingly it has issued an invoice on 10th Dec 2017 and completed the service on 20th Dec 2017 and received the payment on 7th Nov 2017.

In this case, the time of supply will be the issue of invoice date i.e 10th Dec 2017 and the tax rate will be 18.5%

Though the law is very clear on the time of supply of services in case of tax rate changes, the following are the challenges

  1. What should be the treatment in case if the payment received is partial to the contract value. In such cases, will the tax rates apply to the extent of the amount received? We need clarity on this, hope it will be taken into consideration.
  2. Though GST is dubbed to the ease of doing business but seeing the laws above, it is clear that is very complex and manual intervention is required as any of the accounting packages will not be able to handle this correctly. Persons handling this portion of the business have to be trained to ensure that there are no compliance issues.
  3. What should be the accounting treatment if there is change in financial year in case of Illustration 5 if we extrapolate the same with this example

As per law – (i) where the payment is received after the change in effective rate of tax but the invoice has been issued prior to the change in effective rate of tax, the time of supply shall be the date of receipt of payment; or

Assuming tax rate change is from 1st of April 2018 i.e from new financial year

X Ltd agrees to do preventive maintenance for all the critical machinery in the factory by 25th of April 2018 and accordingly it has received payment on 10th of April 2018 and issued an invoice on 27th March 2017.

In the above case, the time of supply will be the date on which payment has been received i.e 10th April 2018 and the effective tax rate would be 18.5% as service is completed after the tax rate change.

  1. Will there be similar rules for the supply of goods also, there can be cases like this when goods also ?

All the above issues need to be addressed before the GST bill is passed else we will have lot’s of confusion and leads to compliance issues.

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 interpretations and 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

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

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.

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