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
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.