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Ever since the inception of taxation system, the world has witnessed a myriad of instances related to tax evasions.  Although the highly distinguished US Supreme Court Justice, Late Oliver Wendell Holmes Jr., once said, “Taxes are what we pay for civilized society,” nonetheless most of the taxpayers worldwide have an inherent characteristic of looking out for loopholes in taxation framework that can help them dodge the entire administrative system.  Their Indian counterparts are also influenced with the same deceitful passion, and therefore, taxation authorities in India are in portentous need of a new administrative framework.

One cannot question the fact that success of any taxation system is unequivocally reliant on the administrative and regulatory capacity of the jurisdiction.  As India has the federal fiscal structure, taxation authorities in the country have consistently been citing concerns related to how various compliance monitoring functions should be streamlined so as to maintain harmonised communication between all the authorities.  The current indirect taxation system in the country has been unable to maintain strategic coordination between the Centre and the States/Union territories, and this has been a prime concern for ages.  However, with the Parliament showing green signal to the GST Bill, it is quite clear that the overall tax administrative framework in the country would undergo a massive overhaul.

 

Though there are a plethora of whys and wherefores of re-structuring the tax administrative framework in India, this article sheds light on four major loopholes of the existing system.

 

Lack of coordination:  Taxation authorities in India have to face numerous unanticipated complications owing to the absence of strategic coordination with each other.  Due to the federal fiscal system of the nation, it indeed becomes a perplexing task for the authorities to establish direct communication with various regulatory bodies of the Centre and the States.  Lack of coordination between authorities becomes nothing less than an exploitable point for all those who are maligned with unethical intentions of evading tax.  Hence, it can be deduced that a new administrative framework is the need of the hour.

 

Corruption:  There are no two doubts about the harsh truth that corruption exists across all sectors, jurisdictions, and departments in India.  Various experts have opined that the current taxation framework and administrative system have been prime reasons behind the existence of such deep-rooted sleaze in the country.  As various commercial activities attract various rates of taxes in varied jurisdictions, it actually opens the room for corruption across the country.  On the flipside, the uniform GST rates across India from July 1st would play substantial role in eliminating the scope of corruption.

 

Administrative inefficiency:  Before questioning the efficiency of taxation authorities, we must acknowledge the fact that lack of cutting-edge technologies has actually made it difficult for the authorities to ensure immaculate management and monitoring of compliance activities.  As most of the vital functions associated with tax compliance in India (such as return filing, payment, refund claims, and so on) are not automated currently, it is so obvious that regulatory bodies would have difficult time managing and monitoring those functions competently.  As each state is enthusiastically passing its respective GST Bill in State Assemblies, it would become much more convenient for taxation authorities to keep a close eye on all automated compliance related functions.

 

Lack of built-in elasticity:  This is yet another major factor that might raise the eyebrows of contemporary economists.  The income from taxation in India does not surge in accordance with the rise in national income.  India has witnessed this unanticipated trend during the last few years, and if this is not checked as immediately as possible, then it might become a point of grave concern in the near future.  Herein, standard GST rates, automation of compliance related activities, and introduction of GST compliance rating concept can actually help the country maintain unswerving tax-income ratio.

 

In a nutshell:  These are the four major loopholes of the existing taxation system in India, and therefore, one must advocate the need of a new administrative framework for taxation authorities in India.

In this blog, we look at a query on whether registration is mandatory for a person whose entire turnover purely comprises export of services.

 

Query:

We are fully export unit providing IT services to US clients. I understand that what we export does not comes under GST. But do we have to register under GST? Is it compulsory for us?

 

Response:

Yes you would need to obtain a registration.

 

Registration is mandatory if the value of taxable supplies effected exceeds Rs. 20 lacs. It is important to note that exports are zero-rated supplies and not non-taxable supplies. Hence, it is important that registration be obtained and other compliance procedures duly observed.

 

Legally, it is important to note that a transaction would qualify as exports, only if the prescribed conditions are fulfilled. Thus, procedure-wise, ‘export’ is a claim that would be made by the supplier and it should go through a test by the tax office – to ensure that the conditions are fulfilled. Thus, it is imperative that an exporter should be registered. Further, an exporter is eligible to claim a refund of input tax credits. This, once again, makes it mandatory that registration is obtained – only a registered person can make an application for refund

 

Legislative reference: Sections 2(6), 2(47), 22 of the CGST Act, 2017 read with Section 16 of the IGST Act, 2017

Authors: Meghana Belawadi and NR Badrinath

 

With GST set to be implemented, www.withdia.com brings to you collaborative wisdom on the GST law and potential impact areas for your business. To read more such curated content or to give us your valuable feedback head to our webpage www.withdia.com, or download our Android/iOS app on your phone and have all this knowledge accessible on the go!

In this blog, we look at a query on billing of services provided up to the day immediately preceding the GST appointed date.

 

Query:

If GST is implemented on Jul-01 can we continue to bill our clients in July for the services up to June and charge Service tax on such invoices?

 

Response:

No. All invoices issued on / after 01.07.2017 should be GST compliant. Service tax law will cease to apply on such invoices.

Ideally, for services provided upto 30.06, there should be a hard close of the invoices – should be issued not later than 30.06. However, if there are any revisions for the same (both upward or downward), the same may be effected by way of supplementary invoices, debit notes or credit notes, as the case may be during the GST period.

Note – such revisions would be liable to GST.

 

Legislative reference: Sections 142(11) and 173 of the CGST Act, 2017

Authors: Meghana Belawadi and NR Badrinath

 

With GST set to be implemented, www.withdia.com brings to you collaborative wisdom on the GST law and potential impact areas for your business. To read more such curated content or to give us your valuable feedback head to our webpage www.withdia.com, or download our Android/iOS app on your phone and have all this knowledge accessible on the go!

In this blog, we look at a query on the distribution of credits on account of services attributable to more than one GST registration belonging to the same entity.

 

Query:

We have a significant amount of marketing expenses which we incur in Mumbai while most other services are billed to our head office in Noida. The marketing team in Mumbai cannot be moved to the head office for various reasons. How can we distribute the credits accumulating in both locations?

 

Response:

For distributing credits, the law carves out a provision for obtaining a registration as an Input Service Distributor (ISD). This ISD registration would be separate from the registration obtained for business purposes. Further, there is no restriction on the number of ISD registrations that a person can obtain. Therefore, in addition to registering Noida and Mumbai (and other locations from where taxable supplies are made), 2 ISD registrations – one in Noida and the other in Mumbai – can be obtained.

 

Legislative reference: Section 20 of the CGST Act, 2017

Authors: Meghana Belawadi and NR Badrinath

 

With GST set to be implemented, www.withdia.com brings to you collaborative wisdom on the GST law and potential impact areas for your business. To read more such curated content or to give us your valuable feedback head to our webpage www.withdia.com, or download our Android/iOS app on your phone and have all this knowledge accessible on the go!

In this blog, we look at a query on the restriction of credits in case of exports.

 

Query:

A company is engaged in providing software support services to MNCs having operations in India and overseas. If the entire contract is with the Indian companies, will there be any input tax restrictions as the services in India would be taxed and services to overseas locations would qualify as exports?

 

Response:

No. In the instant case, there would no restrictions on input credits. Input tax restrictions would apply where a person supplies taxable as well as exempt services. Although export of services would not suffer tax, they are classified as “zero-rated supplies”. Consequently, they would be reckoned as taxable supplies for the purposes of input tax credits.

Given this, there are no exempt supplies, and therefore, no restriction of input tax credits. This would hold good even where the contract for services to overseas locations is entered into with the overseas entities:

 

Legislative reference: Section 17 of the CGST Act, 2017 read with Section 16 of the IGST Act, 2017

Authors: Meghana Belawadi and NR Badrinath

 

With GST set to be implemented, www.withdia.com brings to you collaborative wisdom on the GST law and potential impact areas for your business. To read more such curated content or to give us your valuable feedback head to our webpage www.withdia.com, or download our Android/iOS app on your phone and have all this knowledge accessible on the go!

In this blog, we look at a query on the number and types of returns to be filed by a registered person.

 

Query:

What are the returns that a Company in the IT ITeS sector be required to file, in a financial year?

 

Response:

The following returns would be required to be filed by every registration (i.e., if operations in two States, by each of the two registrations):

  1. Form GSTR-1: Details of outward supplies (By 10th of every month, for the previous month) – 12 returns
  2. Form GSTR-2: Details of inward supplies (By 15th of every month, for the previous month, based on acceptance/ rejection/ modification/ deletion/ addition of entries to those auto-populated from the GSTR-1 of the various suppliers) – 12 returns
  3. Form GSTR-3: Return for the month (By 15th of every month, for the previous month, based on auto-populated details from furnished Form GSTR-1 & GSTR-2, and payment of taxes through electronic credit ledger or electronic cash ledger) – 12 returns
  4. Form GSTR-9: Annual return (By 31st December of the following financial year) along with audit accounts and a reconciliation statement between the details furnished in the returns and the figures ion the audited accounts (Annual return alone would suffice where the aggregate turnover in the year does not exceed Rs.2 Crore) – 1 return

 

Additionally, where applicable, the below returns would also have to be filed:

  1. Form GSTR-6: Return for distribution of credits by every registration as an Input Service Distributor (By 13th of every month, for the previous month, based on acceptance/ rejection/ modification/ deletion/ addition of entries to those auto-populated from the GSTR-1 of the various suppliers of service) – 12 returns
  2. Form GSTR-8: Only if the Company acts as an e-commerce operator for the supply of goods or services by other suppliers for tax collected at source (By 10th of every month, for the previous month) – 12 returns, if applicable 

 

Legislative reference: Section 37, 38, 39 and 44 read with Section 20 and 52 of the CGST Act, 2017

Authors: Meghana Belawadi and NR Badrinath

 

With GST set to be implemented, www.withdia.com brings to you collaborative wisdom on the GST law and potential impact areas for your business. To read more such curated content or to give us your valuable feedback head to our webpage www.withdia.com, or download our Android/iOS app on your phone and have all this knowledge accessible on the go!

 In this blog, we look at a query on taxability of services provided by unregistered persons.

 

Query:

We engage computer science graduates on specific engagements on a contract basis. Should all such persons be registered under GST?

 

Response:

No. Only persons whose aggregate PAN-India turnover exceeds Rs. 20 Lakhs in a financial year (or 10 Lakhs in where persons operate from Special Category States), or when such persons effect inter-State supplies etc. (other cases where registration is mandatory), a supplier of goods or services would be liable for registration. However, whenever a registered person inwards a supply (may be a supply of goods or a supply of service) from an unregistered person, the recipient of the supply would be liable to discharge tax on the same on reverse charge basis. Consequently, GST would be payable by the Company engaging the graduates, on reverse charge basis, and after making payment of the same, and on receipt of services, the Company would be entitled to claim credit of the taxes paid.

 

 

Legislative reference: Section 9 read with Section 49 of the CGST Act, 2017

Authors: Meghana Belawadi and NR Badrinath

 

With GST set to be implemented, www.withdia.com brings to you collaborative wisdom on the GST law and potential impact areas for your business. To read more such curated content or to give us your valuable feedback head to our webpage www.withdia.com, or download our Android/iOS app on your phone and have all this knowledge accessible on the go!

The implementation of the Goods and Services Tax (GST) is one of the biggest tax reforms in the country. The principle reason why GST is such a landmark tax reform is because, for the first time in the history of the country, there will be the ability for the tax payer to take credit for all taxes incurred in the supply chain that are eligible for credit. 

 

This is vastly different from the pre GST scenario, where credit for state taxes was not allowed while paying central taxes and vice versa. For example, an IT service provider liable to pay tax on services rendered is permitted to take credit of central levies ie service tax and excise duty, but is not permitted to take credit of state VAT / Central Sales Tax on its purchases.  This results in a cascading effect on taxes, as not creditable taxes increase the cost base of the service provider, in turn increasing the price of the service on which the service tax is levied.

 

Under the GST regime, all taxes paid will be creditable while paying tax on the next leg of the economic chain. As such, there will be tax only on the net value add at each stage.  However, there are rules attached to the manner in which input tax credit can be claimed.  It is essential that these rules are followed to ensure that there is no loss of credit in the chain.  These have been elaborated further in the following paragraphs:

 

Who is eligible to claim credit of input taxes?

 

Only a registered person is entitled to claim credit of input taxes and therefore it is essential that a supplier takes a registration in each state where it has credit pools.

 

Can credits be claimed on all types of expenses?

 

Input tax credit can be claimed with respect to:

 

  • Inputs;
  • Input services; and
  • Capital goods

 

Input tax credit on capital goods can be claimed in the first year of purchase, provided income tax depreciation is not claimed on the GST paid thereon. There would be a requirement to reverse credit in the event of sale of the capital goods in subsequent years, based on a depreciated value. 

 

Capital goods would cover all goods which are capitalized in the financial statements.

 

What are the conditions to be fulfilled for claiming credit of input tax?

 

The following conditions would have to be fulfilled in order to claim credit of input taxes paid:

 

  • The expenses / tax in question would have to be declared as an inward supply in its return of inward supplies (GSTR 2) and would have to be electronically matched with the corresponding return of outward supplies (GSTR 1)
  • The expenses should be incurred in the course or furtherance of business
  • The goods / services should have been received
  • Possession of a tax invoice, debit note, or such other taxpaying document
  • The expenses should not fall within the list of expenses for which credit will not be allowed
  • The vendors should be paid within 180 days from the date of the invoice

 

What happens when the tax paid to the supplier has not been deposited by him and not disclosed in his return?

 

When a supplier does not disclose a supply made in his return and has therefore failed to discharge the taxes with respect to the same, the customer would not be entitled to such credit.

 

These mismatches are reflected in the customer’s auto populated return for inward supplies and the customer is given time until the filing of his return for the subsequent return to rectify the same.

 

Discrepancies not ratified are added to the output liability of the customer in the return succeeding the month to which the error pertains to. In other words, a recipient claiming input tax credit has effectively 2 months from the month of procurement to rectify mismatches in the claims he makes. 

 

This is in line with the philosophy of seamless flow of credit through the chain from manufacturer/ importer to the end customer and also with the concept of matching of invoices, ie, linking the invoice disclosed and tax payment by the supplier to the availment of input credit to the purchaser. . 

 

What happens when the supplier is not registered and has therefore not charged a tax on his invoice?

 

Where GST on taxable supplies has not been charged by a supplier, one of the reasons for this could be that his turnover is below the threshold for registration.

 

Given this, he would qualify as an unregistered dealer. A person making purchases from an unregistered dealer is required to discharge GST on such purchases as the recipient of service under reverse charge. 

 

He would subsequently be eligible to input credit of such tax paid subject to it qualifying as an input credit.

 

What are the list of goods/ services that are not eligible as credits?

 

  • Motor vehicles - except when
    • used for further taxable supply of such vehicle or conveyance;
    • used for providing taxable service of transportation of goods/ passengers;
    • Imparting training on driving, flying, navigating such vehicle or conveyance
  • Any goods / service that are given as personal use of for consumption by the employee (examples: health and fitness center, rent-a-cab, life and health insurance etc)
  • Works contract services used for construction of immovable property(except plant and machinery);
  • Goods or services received by a taxable person for construction of immovable property on his own account (except plant and machinery);
  • Goods/ services on which tax has been paid under composition scheme;
  • Goods/ services used for private or personal consumption;
  • Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.

 

Are there any restrictions applicable in case the input tax credit pertains to expenses incurred for exports / exempt / non taxable supplies?

 

Input tax credit would be available for expenses incurred for exports / supplies to SEZ’s. Such input tax credit could be utilized to pay domestic liability or could be claimed as a refund.

 

Input tax credit for expenses exclusively incurred for exempt / non taxable supplies would not be available. Such credit would have to be tracked separately. 

 

Additionally, proportionate reversal method has been prescribed for common credits.

 

What are the conditions applicable for common input credits used for both business and non-business purposes?

 

In the event of common inputs / assets / services that are used for both business as well as non-business purposes, 5% of input tax credit would have to be reversed.

 

What is the time limit for availing credit of input taxes?

 

Input tax credit can be claimed on invoices issued within the financial year upto September 30 of the following year. Therefore, for an invoice dated August 1, 2017 as well as an invoice dated March 31, 2018, the last date for the claim is September 30, 2018.

 

Do watch this space for our next article in the GST series – Place of supply: Relevant provisions for the IT / ITES segment

 

Disclaimer

The above blog is based on inputs from our GST knowledge partner, BMR Advisors. The blog is with the intent to provide general guidance and does not render any definitive opinion. Prior professional advice is recommended before implementation of any aspects covered above.

Follow BMR Advisors on LinkedIn, Facebook, Twitter and YouTube.

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Once the first question of whether GST is applicable on a supply is answered, the next question that arises is when the tax is required to be paid.  This question can be answered by applying the provisions of time of supply.  The provisions pertaining to time of supply of goods is different from the provisions pertaining to the time of supply of services as different parameters are relevant for the different types of supply. 

 

Delay in raising of the invoice would result in delay in payment of tax which would in turn result in the levy of interest, so establishing the time of supply accurately is important.

How is the time of supply of goods / services determined?

The time of supply of goods / services will be the earlier of:

a) The date of issue of invoice by the supplier, if the invoice is issued within the specified period; or

b) The date of receipt of payment.

In the event that the invoice is not issued within the specified period, the time of supply of goods / services will be the earlier of:

a) The date of provision of service; or

b) The date of receipt of payment.

If the above are not applicable, the date where the recipient accounts for the receipt of services in his books of accounts would be treated as the time of supply.  This provision would be applicable in very few cases.

What is treated as the date of receipt of payment?

The date of receipt of payment shall be the earlier of the following:

a) Entry in the books of account of the supplier; or

b) Credit to the suppliers bank account

What is the specified period within which an invoice should be raised?

In case of a taxable supply of services, the invoice shall be issued within a period of thirty days from the date of supply of service.

In the case of a taxable supply of goods, the invoice shall be issued before or at the time of:

a) Removal of goods for supply to the recipient; where the supply involves movement of goods

b) Delivery of goods or making available thereof to the recipient; in all other cases

Is the specified period within which an invoice has to be raised different for a continuous supply?

In case of continuous supply of services (ie a supply of services which is provided continuously on a recurrent basis under a contract for a period exceeding three months with periodic payment obligations), the invoice would have to be raised as follows:

a) Where the due date of payment is ascertainable from the contract, the invoice would have to be issued on or before the due date of payment;

b) Where the due date is not ascertainable from the contract, the invoice would have to be raised before or at the time of receipt of payment;

c) Where the payment is linked to the completion of an event, the invoice would have to be raised on or before the date of completion of the event.

For a continuous supply of goods where successive statements of accounts or successive payments are involved, the invoice shall be issued before or at the time each statement is issued / payment is received.

What is the time of supply where tax is required to be paid on reverse charge basis for goods?

The time of supply in such a case would be the earliest of the following dates:

a) Date of receipt of goods;

b) Earlier of ( i) date of payment as entered in the books of account of the recipient or (ii) the date when the payment is debited in his bank account;

c) Date immediately following 30 days from the date of issue of the invoice or any other document, in lieu thereof by the supplier

In the event it is not possible to determine the time of supply as given above, the time of supply shall be the date of entry in the books of account of the recipient of the supply.

What is the time of supply where tax is required to be paid on reverse charge basis for services?

The time of supply in such a case would be the earliest of the following dates:

a) Earlier of ( i) date of payment as entered in the books of account of the recipient or (ii) the date when the payment is debited in his bank account;

b) Date immediately following 60 days from the date of issue of the invoice or any other document, in lieu thereof by the supplier

In the event it is not possible to determine the time of supply as given above, the time of supply shall be the date of entry in the books of account of the recipient of the supply.

In the case of supply by associated enterprises where the supplier of services is located outside India, the time of supply shall be the earlier of the two:

a) The date of entry in the books of account of the recipient of supply;

b) The date of payment

 

Key takeaways

 

The Time of Supply rules for IT/ ITES sector is similar to the current Point of Taxation Rules under service tax.  Hence, key parameters continue to be to determine the “date of supply of service”, along with the date of invoice and payment.

 

Do watch this space for our next article in the GST series – Input tax credit: Building efficiencies into the supply chain

 

Disclaimer

 

The above blog is based on inputs from our GST knowledge partner, BMR Advisors. The blog is with the intent to provide general guidance and does not render any definitive opinion. Prior professional advice is recommended before implementation of any aspects covered above.

 

Follow BMR Advisors on LinkedIn, Facebook, Twitter and YouTube.

 In this blog, we look at a query on supplies between units of the same entity.

 

Query:

We have two trading units for IT goods (one in Karnataka, one in Maharashtra) and another unit for ITeS (in Karnataka). Will supplies from the trading units to the ITeS unit and vice-versa be taxable?

 

Response:

Under GST, while all units within the same State would be reckoned as one taxable person for the purposes of GST, every branch or a unit would be deemed to be a distinct person, if they are located in different States (or Union Territories). However, at the option of the taxable person, even different units within the same State can be registered as separate taxable persons, if they are different business verticals.

 

Accordingly, the IT Unit (trading) and ITeS Unit (services) in Karnataka will prima facie be one taxable person and the IT Unit (trading) in Maharashtra will be another taxable person for the purposes of GST, even though this unit is also covered within the same PAN (under Income Tax) as that of the Karnataka units.

 

Given that the Karnataka Units together and the Maharashtra Unit will be treated as separate taxable persons, any supplies between units in the two States will also qualify as ‘supply of goods or services’, as relevant, and will be liable to GST – even though such supplies may be without any consideration. However, supplies between the ITeS Unit and the IT Unit in Karnataka will not be taxable supplies.

 

Legislative reference: Schedule I of the CGST ACt, 2017 read with Section 7 & 8 of the IGST Act, 2017

Authors: Meghana Belawadi and NR Badrinath

 

 

 With GST set to be implemented, www.withdia.com brings to you collaborative wisdom on the GST law and potential impact areas for your business. To read more such curated content or to give us your valuable feedback head to our webpage www.withdia.com, or download our Android/iOS app on your phone and have all this knowledge accessible on the go!

In this blog, we look at a query on centralised registration and carry forward of CENVAT Credit.

 

Query:

We are a company in the ITeS sector. The supplies made by us are treated as pure services under the existing laws. We understand that the place of supply provisions are very similar to the POPS Rules, 2012 under the service tax law. Will there be any impact of the place of supply provisions under GST law, on us?

 

Response:

Yes, the provisions of place of supply under GST and place of provision of service under the service tax law are similar. Yet, there would be a two-fold impact on the company.

 

Primarily, GST is a destination-based consumption tax. Under the service tax regime, whether the levy is origin-based or destination-based was of low relevance; given that it was a central tax, the complete tax amount was accruing to the Central Government irrespective of the location of the supplier and the location of the recipient, so long as the ‘place of provision of service’ (as determined under the POPS Rules, 2012) was within the taxable territory.

 

However, under the GST law, GST would be levied simultaneously by the Centre and the State. Where the location of the supplier and place of supply are within the same State (or Union Territory (“UT”)), the supply would be an intra-State supply and consequently, the tax payable on the supply would be Central Tax + State tax; whereas, if the two are in different States (or UTs or one is in a State and the other in a UT), the supply would be an inter-State supply and consequently, the tax payable would be Integrated tax.

 

Identifying the place of supply of the services would accordingly be relevant for the following:

  • To determine the type of tax that the transaction will be subjected to;
  • To determine the location where the credits will accrue to the recipient of such ITeS - credits would accrue in the State in which the ‘place of supply’ falls.

For instance, if the company provides ITeS from Bangalore to a recipient located in Noida, the company must indicate on the invoice that the place of supply is ‘Uttar Pradesh’, and the recipient would be eligible to utilise credits of integrated tax arising on this supply to discharge tax on its outward supplies from Noida (and not from any other location, even if it has operations in other locations).

 

Legislative reference: Section 7 & 8 of the IGST Act, 2017

Authors: Meghana Belawadi and NR Badrinath

 

 

 

With GST set to be implemented, www.withdia.com brings to you collaborative wisdom on the GST law and potential impact areas for your business. To read more such curated content or to give us your valuable feedback head to our webpage www.withdia.com, or download our Android/iOS app on your phone and have all this knowledge accessible on the go!

The Goods and Services Tax (GST) ushers in a significant move away from multiple triggers for taxation (‘Manufacture’ for excise duty, ‘Sale’ for VAT etc) to a single trigger of ‘Supply’.  It is therefore important to understand what would be considered as a supply in the context of GST as this would be the starting point of any obligations that a tax payer would have under the GST.

 

One of the other significant changes for the IT services segment is that supply now needs to be accounted for on a state level as opposed to the centralised service tax regime that most tax payers are familiar with.  This requirement stems from the federal structure of GST arising from the constitutional right of States to levy a tax.

 

Another unique feature, more prominent for the IT sector having offices across the country, is that intra entity supply of services between different offices/ branches in light of the sector having a feature of pan India operations.

 

What does ‘supply’ cover?

 

The key triggers for being treated as a supply under GST is as follows:

 

  • There should be a supply of goods or services or both (this would cover all forms such as sale, transfer, barter, exchange, license, rental, lease or disposal)
  • The supply should be made or agreed to be made for a consideration in the course or furtherance of business.

 

The GST law also specifically calls out the following to be a supply: 

 

  • Import of services for a consideration whether or not in the course or furtherance of business
  • Specified activities made or agreed to be made without a consideration – the most specific activity relates to “supply of goods or services or both between distinct persons, ie, registered branches of the same entity”. This has been elaborated below.

 

What supplies are taxable without a consideration?

 

The GST law deems the following supplies to be treated as a supply even if made without a consideration:

 

  • Supply of goods or services or both between related persons (ie a third party who is related to the supplier in the manner specified under the GST law) or between distinct persons (ie registered branches of the same entity). However, gifts provided by an employer to an employee shall not be treated as a supply provided the value of such gifts does not exceed Rs 50,000;
  • Permanent transfer or disposal of business assets where input tax credit has been availed on such assets;
  • Supply of goods by a principal to an agent and vice versa; and
  • Import of services by a taxable person from a related person or any of his fixed establishments outside India, in the course or furtherance of business.

 

Would a free of cost supply be taxable?

 

A supply without consideration would not be taxable unless the supply is made to a related person or a distinct person. 

 

Therefore, for example, provision of software on a test basis to a potential customer or provision of services out of goodwill should not be taxable provided that the supply is being made to an unrelated person.

 

Why are supplies between branches taxable under GST?

 

Supplies to branches have been made taxable under GST as a result of the Federal structure of GST.  The principle being applied is that the taxes follow the movement of the goods or services, with tax paid on a supply from one branch to another being made taxable in the hands of the supplier and simultaneously creditable in the hands of the recipient branch.

 

In a goods scenario, this would mean that when the Maharashtra branch of X moves assets from its location to the Karnataka branch of X, there would be a requirement to levy GST (as IGST) on such movement by the Maharashtra branch.  The IGST would then be available as credit in the hands of the Karnataka branch.  This is akin to the existing provisions under state VAT laws where a movement of goods would be subject to CST unless a Form F is furnished.

 

In a services scenario, the identification of such supplier is more challenging and would be best explained with the help of an example.  Say, Company X sells software to customers across India from Karnataka.  The supply being the sale of software from Karnataka would be subject to GST.  Now, if Company X has sales and marketing personnel stationed in offices in Maharashtra and Delhi, the services provided by such sales and marketing personnel could be treated as a self‑supply to Karnataka and could be subject to GST (as IGST).

 

This is a new requirement for service providers as currently most service providers are under a centralised registration and therefore are only required to issue a single invoice to the end customer.  The law effectively requires a service provider to inventories, monetise and bill itself. This is a concept unique to India, with most taxing jurisdictions not having this requirement.

 

Is there a requirement to raise an invoice between branches of the same entity?

 

Yes, there is a requirement to raise an invoice for movement of assets or self supply of goods or services between branches of the same entity.  

 

Can credit be used to discharge liability on self supply?

 

Yes, credit can be used to discharge such liability. 

 

Therefore, in the example on services above, the Maharashtra branch of Company X could utilize the input credits available to it to discharge the liability arising at the time of self supply to the Karnataka branch.  In turn, the GST on the self supply by the Maharashtra branch would become input credit in the hands of the Karnataka branch which could be utilized to discharge the liability arising at the time of supply to third party customers.

 

How are supplies to be valued?

 

If supplies are being made to unrelated persons, the transaction value would be the price actually paid or payable provided price is the sole consideration of the supply. 

 

As an example of a supply where price is not the sole consideration, take a case of a sale of a laptop valued at Rs 40,000 for Rs 35,000 where the old laptop has been given by the customer in exchange.  In such a case, the value for GST purposes would be Rs 40,000 even if the invoice is raised only for Rs 35,000.

 

If price is not the sole consideration of the supply, then the supply would have to be valued in accordance with the valuation rules which require the adoption of either of the following:

 

  • Open market value of supply
  • Value of supply of goods or services of like kind and quality
  • Criteria linked to cost of production/ manufacture / provision

 

If supplies are being made to related persons or distinct persons, then again the valuation rules would have to be followed.  However, considering that inter branch / related person transactions would typically be B2B supplies and therefore creditable, a relaxation has been provided in the rules that the invoice value would be deemed to be the open market value of the supply provided that the recipient is eligible for “full input tax credit”.  This area of valuation should be examined carefully before final positions are taken

 

Do watch this space for our next article in the GST series –Time of supply: Relevant provisions for the IT / ITES segment

 

Disclaimer

 

The above blog is based on inputs from our GST knowledge partner, BMR & Associates. The blog is with the intent to provide general guidance and does not render any definitive opinion. Prior professional advice is recommended before implementation of any aspects covered above.

In this blog, we look at a query on centralised registration and carry forward of CENVAT Credit.

 

Query:

As part of the transitional credits, the company apprehends that it will have an accumulation of CGST credit (carry-forward CENVAT Credit) in the electronic credit ledger under the GST registration in the State where it was centrally registered (say, Karnataka) while it will be required to pay the GST under the registrations in other States as well. Will the company be forced to make such payments out of electronic cash ledger i.e. by transferring funds as no credit is available initially in the form of brought forward credits?

 

Response:

Under the transitional provisions, the entire amount of admissible CENVAT credits will be carried forward into ‘electronic credit ledger’ as CGST in the State where the company was centrally registered (Karnataka).

 

Importantly, the credit may be transferred from the centrally registered location (in Karnataka) to a unit in any other State which was a part of the centralised registration under the current Service tax laws (say, in Maharashtra) provided that the Karnataka Branch and Maharashtra Branch are under the same PAN. This will be by way of transfer from the Karnataka Branch to the Maharashtra Branch after credit has been claimed in Karnataka.

 

Legislative reference: Third proviso to Section 140(8)

 

Authors: PV Srinivasan and NR Badrinath

 

With GST set to be implemented, www.withdia.com brings to you collaborative wisdom on the GST law and potential impact areas for your business. To read more such curated content or to give us your valuable feedback head to our webpage www.withdia.com, or download our Android/iOS app on your phone and have all this knowledge accessible on the go!

The GST Council has finalized GST rates for Services and Goods along with suitable grandfathering provisions of the current service tax exemptions. The council also approved seven rules pertaining to Valuation, ITC, Registration, Invoice, Payment, Refund and Composition under GST together with relevant formats. The relevant rate schedules are attached for your reference and the final rules can be accessed from here:

 

http://www.cbec.gov.in/htdocs-cbec/gst/index#

 

Please find below a preliminary analysis of the GST rates announced on goods and services and its relevance to the IT sector.  

 

  1. IT services are proposed to be taxed at 18% at (sl no 36 – residual categories of the GST rate for services)
  2. IT software (shrink wrapped) on media falling under HSN 8523 – 18% (ref: chapter wise rate wise gst schedule)
  3.  Software products (electronic downloads) – 18% (Sl no 36 - residuary category of the GST rate for services).
  4.  Temporary transfer or permitting the use or enjoyment of any Intellectual Property (IP) to attract the same rate as in respect of permanent transfer of IP – 12% (sl no 20 of the GST rate for services)

 

The above referred  entries iii and iv under services may lead to disputes re classifications for software downloaded electronically, as permitting right to use IP will be at 12%. Software products usually are sale of copyrighted items, and not the copyright itself i.e. – it is sale of right to use the IP. Therefore, despite harmonizing the rates of shrink wrapped software products and software services including electronic downloads at 18%, classification issues may continue.

 

v. On rent-a-cab services, it appears to be a neutral situation where the rate is 5% without ITC, and it is same for radio taxi, and cabs (entry 6, 7).

 

vi. 1% TCS will render selling online as a relatively expensive channel. TCS on eCommerce will require registrations of all sellers even if they were below the income threshold, leading to additional compliance. This makes selling using online channel more onerous for the small enterprises.

 

vii. On laptops, computers & networking equipment, 18% is higher than expected, as earlier effective Tax (VAT and Excise duty) was about 14%-15%.  Peripherals like projectors and some printers to attract an even higher rate of 28%.

 

Summary of GST rates of Software and related Items (before and after)

 

Goods / Services category

GST rate

Indirect Tax rate under current regime*

Remarks

Electronic supply of software

18%

15% (service tax) plus 5% (VAT)

 

Software services, ie, development, design, programming, customisation, adaptation, upgradation,

enhancement, implementation of information technology software;

18%

15% (service tax)

 

Temporary transfer or permitting use of IP

12%

15% (service tax)

 

Shrink Wrapped software product (on media)

18%

15% (excise duty & VAT)*

Will increase cost

Laptops, desktops, peripherals, parts, etc

18%

15%*

Increased cost for companies

Printer, photo copying, fax machines, ink cartridges

Ambiguity on the type of printers hence more details are awaited. Expected around 28%

13%* (ADP printers)

Increased cost for companies

Monitors and projectors (capable of connecting to ADP)

28%

13% * 

Increased cost for companies

Majority of Networking products

18%

13%*

Increased cost for companies

Mobile phones

Imported

12%

Over 13.5%*

Domestics manufacturing

12%

11%*

Slight increase in cost to end customer

 

*Please note that this is effective rate of indirect taxes for products is a total of VAT and Excise duty (after considering abatement, where applicable)

With the release of the proposed rates under the Goods and Services Tax (GST) for most goods and services, the stage seems set for implementation of GST from July 1, 2017. 

 

In fact, the first phase of migration of existing tax payers to GST has already been completed as on April 30, 2017.  As per recent news reports, the Finance Ministry has confirmed that as many as 87 percent of central excise assessees and 84 percent of service tax assessees have migrated and registered themselves with the Goods and Services Technology Network (GSTN). 

 

The next phase of migration of existing tax payers is expected to be open between June 1 and June 15, 2017, and existing tax payers who have not yet completed the migration process could use this window to complete the migration process. 

 

For tax payers who have not received a login id and password, registration could also be done as a new registration.  As of now, it is not known as to whether new registrations would be enabled prior to the appointed date, or whether such applications would only be possible once GST comes into force. 

 

Who is required to migrate?

 

All existing central excise law, service tax and state VAT registrants holding a registration under the existing tax regime are required to migrate into GST, unless they are small tax payers who have an all India turnover of less than Rs 20 Lakhs (or Rs 10 Lakh for North East States). 

 

Further, registration would be mandatory notwithstanding the threshold prescribed, in the following cases:

 

(a) Persons making inter-state supplies ie those persons making supplies to another state / exports;

(b) Persons required to pay tax under reverse charge (whether imports or domestic);

(c) Input service distributor;

(d) Person who are required to deduct TCS (TCS list yet to be notified);

(e) Electronic commerce operators and suppliers who sell through e-commerce operator(s); and

(f) Persons supplying online information and database access or retrieval services from a place outside India to a person in India.

 

It is important to note that registrations are required for all states from where a tax payer makes a taxable supply of goods or services or both.  This is a major departure for service providers in the IT / ITES space, many of whom have a centralized registration under existing service tax law, and are used to filing centralized returns and facing a single audit basis such return.

 

Why is migration important?

 

Migration into GST also becomes important where an assessee wishes to carry forward credit of taxes from the current regime. 

 

How would a tax payer be identified under GST?

 

Every assessee choosing to register in a State under the GST regime would be allotted a unique identification number (the GSTIN number) which is PAN based.  The GSTIN number is a vital number for a tax payer.  The GSTIN of both the seller is required to be mentioned on the invoices raised by the seller.  The GSTIN is one of the key fields that would be matched in the matching process for availment of credit.  Also, the GSTIN of a tax payer is required to be displayed mandatorily on the name board at the entry of all his places of business. 

 

Currently, all existing tax payers who have completed the migration process have been allotted a provisional GSTIN at the time of migration.  Once the final registration certificate is issued, a final number would be allotted by the tax authorities.  While it is possible that the provisional GSTIN would be the final GSTIN that is allotted as it appears to be based on the format that a GSTIN would be issued, based on interactions with the tax authorities, it is understood that is a possibility that there could be a change in the last four digits of the provisional GSTIN that has been issued. 

 

Can a tax payer obtain more than one GSTIN number in a State?

 

While the GSTIN is PAN based and would typically be issued only once for all operations within a State, the GST law provides for certain exceptions:

 

Option of tax payer - A separate registration for each business vertical present in a particular State can be taken at the option of the tax payer.

 

Separate ISD registration - A separate registration is required to be obtained by an Input service distributor (ISD). An ISD is typically the head office of a company which receives bills for common services pertaining to all its branches/ offices.  Such common credits would need to be apportioned, given that they pertain to all branches/ offices. The ISD registration is separate from the GSTIN number that the head office receives, and the ISD GSTIN would have to be quoted for all invoices which are required to be distributed.

 

Tax payer having SEZ operations - All SEZ units in a State are required to have a separate registration based on the draft registration rules.

 

Before the GST regime comes to fruition, it is important for all suppliers to assess the registration requirements in every State that they operate in and ensure that the enrolment process has been complete in order to ensure business continuity during the transition phase. 

 

Please see the attachments for the detailed process of registration under GST, instructions for GST enrolment and document checklist. 

 

Do watch this space for our next article in the GST series – Supply: Trigger to tax under GST

 

Disclaimer

 

The above blog is based on inputs from our GST knowledge partner, BMR & Associates. The blog is with the intent to provide general guidance and does not render any definitive opinion. Prior professional advice is recommended before implementation of any aspects covered above.