Demystifying Collection of Tax at Source under the Model GST Law

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

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

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

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

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

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

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

Section 43 (C) sub-section 1

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

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

Illustration 1

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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 Supply under the Model GST Law

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

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

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

As per Gujarat Value Added Tax 2005, Section 23 ,

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

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

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

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

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

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

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

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

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

(i) supply by way of barter of goods,

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

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

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

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

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

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

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

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

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

(1) Supply includes

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

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

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

Illustrations

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

Illustration for transfer

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

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

Illustration for Exchange

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

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

Illustration for Importation of Service

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

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

Illustration for transfer of assets

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

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

 Illustration for disposal of business assets

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

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

Illustration for temporary application of business assets for private use

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

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

 

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

  1. Transfer

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

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

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

  1. Land and Building

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

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

  1. Treatment or process

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

  1. Transfer of business assets

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

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

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

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

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

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

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

(a) renting of immovable property;

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

Explanation.- For the purposes of this clause-

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

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

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

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

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

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

right;

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

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

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

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

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

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

  1. The following shall be treated as supply of goods

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

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

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

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