GST Tip – 309

As per Rule 118 of the CGST Rules, FORM GST TRAN-1 has to be filed within 90 days from the appointed date i.e, 1-July-2017 to avail the transitional input tax credit (VAT and Service Tax) for goods and services received after the appointed date but invoiced before the appointed date.

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GST Tip – 60

As per the transitional provisions in GST, Central Excise and Service Tax Credit will be carried forward as CGST Credit, Value Added Tax Credit will be carried forward as SGST Credit in the electronic credit ledger based on the input tax credit shown in the returns filed immediately prior to the appointed day.

GST Tip – 59

As per the transitional provisions, existing input tax credit under Central Excise, Service Tax and Value Added Tax is available is carried forward to GST if the same credit is taken in the books and part of the return filed before the date of rollout of GST and the same is available under GST also as input tax credit.

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.

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.