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.

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

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

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

  • Registration
  • Payment Process
  • Refund Process
  • Returns

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

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

Who has to obtain GSTIN

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

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

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

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

Format of GSTIN

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

Registration number format

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

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

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

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

 How to get GSTIN

GSTIN can be obtained in the following manner

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

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

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

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

Documents to be submitted

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

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

 

Type of Registration forms

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

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

Open Items

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

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