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GST

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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.

In this blog, we look at a query on possible carry forward of accumulated CENVAT credit as CGST credit, and no SGST credits while SGST would be payable on future supplies.

 

Query:

As part of the transitional credits, unutilised CENVAT credits would be carried forward as CGST credit only, and if the company has local supplies (intra-State), it would be liable to pay CGST and SGST. While it would use the balance of credit in CGST, SGST would be a cash outflow - how should one manage this?

 

Response:

Yes, the above situation would result in a case of carry forward of CGST credit balance and a payable (cash outflow) of SGST. This would arise only in cases where the company would effect local / intra-State supplies. Nevertheless, this would not apply if the purchases during the post GST period (till such time the CGST balance is exhausted) are largely inter-State. In such a situation, the credit that would accrue on inward supplies would be IGST which can be fully utilised for payment of SGST on local supplies – this would also ensure that the CGST balance does not further accumulate.  

 

Additional Comments: Would not apply if the supplies are inter-State, since such supplies would be liable to IGST and CGST balance can be completely utilised for payment of IGST.

 

Author: N R 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:

The company has obtained a Centralized Registration under the Service Tax law. The ST-3 return for the period ended 31st March 2017 has been filed under this registration. The company will also file the short period return upto the day immediately preceding the appointed day under this registration. However, since the company has development centres in Bangalore, Chennai, Hyderabad, Pune, Trivandrum, Kolkatta, Gurgaon, Noida, and Delhi, the company will be obtaining GST registration in the States of Tamil Nadu, Telangana, Maharashtra, Kerala, West Bengal, Haryana, Uttar Pradesh and Delhi.  How will the CENVAT Credit appearing in the short-period return be apportioned and carried forward under various State-wise registrations under GST?

 

Response:

The whole of the CENVAT credit carried forward in the short period return filed in Bangalore – centralised registration will be allowed to be carried forward as CGST in the GST registration in the State of Karnataka. 

While the law provides that such credit can be transferred to any other registered persons under GST, having the same PAN as that of the Bangalore registration, there is no prescribed mechanism for apportionment to various States, of CENVAT credits appearing in the short period return filed under the current centralized service tax registration.

 

Author: P V Srinivasan

 

 

 

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 registration requirement for a start-up. 

 

Query:

 

A Start-up company, with its registered office in the State of Karnataka, engaged in a business which involves innovation, development, deployment or commercialization of mobile Apps driven by information technology has commenced commercial operations during FY 2016-17. The users download the APP on their mobile phones on payment of an annual subscription / licence fee. The turnover of the company for the year is not likely to cross Rs 20 lakhs in a financial year. Is the company required to obtain a registration?

 

Response:

 

The Start-up company, no doubt, is supplying a service for a consideration. However, the aggregate turnover in the financial year does not exceed Rs 20 lakhs, which is the threshold limit upto which a supplier is not required to obtain registration. Hence, the Start-up company would not ordinarily be required to obtain registration under the Central Goods and Services Tax Act, 2017 [CGST Act] and the Karnataka State Goods and Services Tax Act, 2017 [SGST Act].

However, clients of the Start-up company are mobile users. It may be possible that the address on record of the location of such users is another State i.e. other than Karnataka. In such an event, there would an inter- State supply of service from Karnataka. Since the Start-up company is making an inter-State supply, it would be required to obtain registration under the CGST Act and the SGST Act in Karnataka and the threshold of Rs. 20 lacs indicated above would not be applicable.

Additional comments: Where the Start-up company referred above may not be required to keep a record of the App users. The Start-up company merely establishes a payment gateway for collecting the annual subscription fee.

It is unlikely that the nature of services provided by the Start-up company could be carried on without establishing a complete identity of any App user including his address. Thus, the address would be available on record on the supplier of service i.e. Start-up company.

Nevertheless, if it is possible to render the service without seeking the address of the App users, then the address of the location of service recipients i.e. App users, would not be available on the record of the supplier. In such circumstances, the place of supply would be the location of the supplier of services i.e. the registered or fixed establishment of the Start-up company. The supply of services will be intra-State i.e. within the State of Karnataka. Since the aggregate turnover in a financial year is not exceeding Rs 20 lakhs in the financial year, the Start-up company need not seek a registration. 

https://withdia.com/dia.html#/home?contentId=12883

Author: P V Srinivasan

 

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 registration requirement for a start-up. Log in to withdia.com to read more related Q&A on the topic.

 

Query:

A Start-up company, with its registered office in the State of Karnataka, engaged in a business which involves innovation, development, deployment or commercialization of mobile Apps driven by information technology has commenced commercial operations during FY 2016-17. The users who download the APP on their mobile phones are located across India. Will a Start-up company be required to obtain registration in each of the States of India for the reason that the App users are spread all over India?

 

Response:

GST law in India is destination based. However, the administration through registration and consequential compliance are only in the origin State. Since the Start-up company is providing the service wholly from a location within Karnataka, the requirement of obtaining a registration arises only in the State of Karnataka, from which supplies are made.

 https://withdia.com/dia.html#/home?contentId=12887

 Author: P V Srinivasan

With GST set to be implemented, withdia.com brings to you collaborative wisdom on the GST law and potential impact areas for your business.To read more such carefully 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!