Article on GST

Published on: Jul 11th, 2017

An Overview of the Goods and Services Tax

The Goods and Services Tax (G.S.T.) is a landmark step taken by the Government of India to boost the GDP and introduce a more effective tax regime.

GST is a win-win situation for the entire country. It brings benefits to all the stakeholders of the industry, government and the consumer.  It will lower the cost of goods and services to give a boost to the economy and make the products and services globally competitive. By subsuming most of the central and state taxes into a single tax and by allowing a set-off of prior-stage taxes for the transactions across the entire value chain, it would mitigate the ill effects of cascading and improve competitiveness and liquidity of the businesses.

GST will be applicable to all dealers whose aggregate turnover in a financial year exceeds INR 2.00 Million (INR 1.00 Million in case of eleven special category states). Separate registration will be required in every state from where a taxable supply of goods or services is made.

This article covers below some of the peculiar provisions of GST having a crucial impact on the industry and provides an insightful perspective regarding the same.

Reverse Charge:

If the supplier is not registered under GST and is supplying taxable goods or services to a recipient who is registered, the GST on such taxable supplies shall be borne by the recipient on reverse charge basis. Meaning registration seems to be mandatory for every party; else it is quite possible that owing to extra compliance issues people might be interested in doing business only with those parties who are registered under the GST legislation. With few days left  with GST coming into force , this registration parameter might create a big time hassle among small trader’s as they might lose some business until they get registered under GST. Thus, in order to counter this issue, a monetary threshold limit in place will act as a cushion for such small business houses till the time they come fully under the ambit of GST compliance.

Ratings:

  • The government will give an online rating on level, timeliness and efficiency of compliances. Non-compliance will not just lead to penalties but also blacklisting, which can affect the future creditability, reputation and can harm the business growth of a business.
  • This online rating is going to be available on the web portal and one can check and decide business associations on the basis of these ratings.

GST on Stock Transfer:

  • GST is chargeable on stock transfers to depots and stockists. This will further increase the working capital requirement as the suppliers have to incur cost on transfer of goods to own godowns and depots without any actual revenue getting accrued or realized.
  • The GST paid in such a case can be claimed as input tax credit on sale of goods from depots or warehouses.

Area Based Exemptions:

Under the current tax laws North East, Uttarakhand and Himachal Pradesh have certain areas exempted from excise duty and other state taxes.  Department of Industrial Policy and Promotion is working on a scheme where companies will have to pay tax upfront and can claim refund of the same in the areas stated above. Taxes paid also can be claimed as set off against any liability. The industry wants clarity on policy and time for adjustment. It is keen on availing smooth and hassle free refunds.

 Free of Cost Supply as Sample/Gifts/Promotional Schemes:

  • Free samples and gifts offered with purchases as well as popular ‘buy-one-get-one-free’ deals may attract GST.
  • GST will be entirely based on the concept of a ‘supply’, which now includes even goods and/ or services supplied without consideration by a taxable person in the course of or furtherance of business. This will impact the sales and marketing cost of companies which follow such schemes. Buyers will have to pay GST on articles they receive free.
  • Presently, for a free sample of goods, excise duty is payable but VAT/ CST is not payable. However, proportionate input tax credit under VAT is reversible in some states. The net impact for businesses will therefore be the difference between the existing excise and VAT cost, and the GST which will become payable.
  • Now again, the question that arises is about the goods replaced under a warranty as these goods are again free of cost. But, generally the vendor is charged the warranty cost at the time of supply, which is hidden in the final price of the product.

GST on Allocation of Common Expenses:

Intra-company transactions are proposed to be taxed under GST. Any secondment of employees, sharing of common expenses between related companies would be taxed. Though, the receiving entity would be entitled to avail credit of tax charged by the supplying company, this would result in the requirement of additional working capital for all such companies.

Branch Office (“BO”) and Head Office (“HO”) Transactions:

  • BO and HO are separate persons for the purposes of GST levy. It becomes important to determine the place of supply of the transaction in order to determine GST implications. Should the place of supply be in India, then as per Section 10 of the Integrated Goods and Service Tax (“IGST”), the transaction shall be subject to IGST under reverse charge.
  • GST will be applicable where overseas BO is supplying to Indian HO, Indian BO supplying to Indian HO and vice versa.

GST on Advance Payment:

From some peculiar provision under the GST Act, GST on advance payment is one. In the present situation except service tax no other law requires to pay tax on advances. Now the taxpayer will have to pay GST on the advancement of goods and services in GST. After giving advance to the supplier the buyer will not get the credit of GST. Whenever the supplier supplies goods or services and gives the tax invoice to the receiver then only the buyer will get the credit of GST. If the rates can’t be ascertained at the time of taking advance, then GST will be charged @ 18%. The money will be blocked for during this time until the supply is completed. Similarly, the supplier will charge GST on the remaining amount by deducting the advance from the total amount. Every small or large business will have to pay attention towards accounting and must be compliant with the law. Accounting software’s need to be upgraded to charge tax based on receipt invoice.

While GST is yet to come into effect, it will evolve post implementation. Further, though clarity on various critical issues affecting the industry are still unanswered, the benefit to the economy cannot surely be undermined.

For any clarification or further information, please contact

Ritu Bala
services@rbassociates.net