Introduction: As businesses expand their geographical footprint, complexities arise when they establish in multiple locations. Whether they’re opening branches across countries, states, or cities, there’s a web of compliance intricacies related to stock transfers, invoicing, and more. Central to this are the GST regulations governing transactions between distinct persons or establishments of the same entity in different locations. Through the lens of Mr. X’s M/s ABC Enterprise, we’ll unravel these complexities and understand how the GST framework navigates such transactions.
Background: –
With increasing competitions and pace of businesses, Suppliers or Businesses tends to increase their market reach by establishing multiple branches, depots or godowns in more than country, in same country but in different States or in a same State but with different cities and locations so that they can reach-out more consumers.
Now, due to complexity of transactions between these establishment of a same person in different location, adds up more compliances related to transfer of stocks, value of supply, time of supply, invoicing and much more. These leads to various new concepts and matters related to separate registrations for different states under same PAN.
For better understanding of upcoming concepts, we will take example, wherever requires, of Mr. X (Proprietor) of M/s ABC Enterprise, Supplier of Goods, who has a turnover of more than registration limit and registered under Gujarat State.
Distinct Person and Separate GST Registration: –
“Section 22 (1) (Registration) of CGST Act, 2017, Every supplier shall be liable to be registered under this Act in the State or Union territory, from where he makes a taxable supply of goods or services or both, if his aggregate turnover in a financial year exceeds Rs. 40/20/10 Lacs.”
“Section 25 (1) (Procedure for Registration) of CGST Act, 2017, Every person who is liable to be registered under section 22 or section 24 shall apply for registration in every such State or Union territory in which he is so liable within thirty days from the date on which he becomes liable to registration, in such manner and subject to such conditions as may be prescribed”
“Section 25 (2) (Procedure for Registration) of CGST Act, 2017, a person seeking registration under this Act shall be granted a single registration in a State or Union territory:
[Provided that a person having multiple places of business in a State or Union territory may be granted a separate registration for each such place of business, subject to such conditions as may be prescribed.”
“Section 25 (4) (Procedure for Registration) of CGST Act, 2017, A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.”
“Section 25 (5) (Procedure for Registration) of CGST Act, 2017, Where a person who has obtained or is required to obtain registration in a State or Union territory in respect of an establishment, has an establishment in another State or Union territory, then such establishments shall be treated as establishments of distinct persons for the purposes of this Act.”
That means if the aggregate turnover of a person/an entity crosses the threshold prescribed, then he has to get registered in each of the states from where he is making taxable supply of goods/ services. He is required to obtain registration for branch offices irrespective of the turnover of such branch offices, if such branch(es) is/are in different states then mandatorily or if in same state than voluntarily, if required business verticals have a risk, returns and functions different from that of the other components considerably.
Now let’s take an example,
M/s ABC Enterprise is already registered in Gujarat, having business place at Surat-Gujarat, as its turnover from Gujarat is already more than threshold limits. Now Mr. X plans to start new branch at Mumbai-Maharashtra and one establishment at Chennai-Tamil Nadu to store Goods and supply as and when requires.
In case of Mumbai, it is pretty much straight forward that he is plan to open whole new branch so that he will have to take separate registration as it’s in different State even if the turnover of said branch i.e., Mumbai-Maharashtra, does not/ will not exceed threshold limits.
But in case of establishment in Chennai-Tamil Nadu, he is only plan to store goods and not to make it as sale point. Even though it’s an only establishment, he will have to take separate registration.
Supply, Invoice and Time of Supply: –
“Schedule I (activities to be treated as supply even if made without consideration) Para (2) states that Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business.”
“Schedule I (activities to be treated as supply even if made without consideration) Para (4) states that Import of services by a [person] from a related person or from any of his other establishments outside India, in the course or furtherance of business.”
In situations where proper invoicing and consideration for transfer of goods or provision of services to/from distinct person have been dealt with, then there is no need to look into Schedule I as it normally covers under Section 7 – Scope of Supply like other transactions.
However, in cases where transactions are of mere stock transfer from one branch/ HO to another, situated in another State or Country, even where no consideration between two distinct person exists, Schedule I comes into picture and drags such transactions into Scope of Supply even without considerations.
Now, the moment such transactions fall into Scope of Supply, whatever the reasons be, GST becomes leviable on such transaction and all the provision related to Tax Invoice and Time of Supply becomes applicable. Hence, in the transactions between two distinct person Tax Invoices* should be prepared.
(*also, an E-Invoice and E-Way bill, if applicable)
Valuation: –
“Section 15(1) (Value of Taxable Supply) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.”
“Section 15(4) (Value of Taxable Supply) where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed.”
“Rule 28. Value of supply of goods or services or both between distinct or related persons, other than through an agent. –
The value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall-
-
- be the open market value of such supply;
- if the open market value is not available, be the value of supply of goods or services of like kind and quality;
- if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 (110% of Cost) or rule 31 (Residual Method-reasonable means), in that order:
[Provided that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person:]
[Provided further that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services.”
M/s. ABC Enterprises and distinct persons outside the state of Gujarat are different legal persons, hence both are said to be related as per the explanation to Section 15 of the CGST Act. Therefore, the value to be adopted is governed by rules prescribed as per Section 15(4) of the CGST Act.
As per Rule 28 of the CGST Rules, the valuation to be adopted is OMV i.e., the price of sale charged to an independent buyer by distinct person i.e., Mumbai-Maharashtra; if such OMV is not available, then value charge of like kind goods and quantity is adopted and if value cannot be ascertained by both the above means, then value is to be determined by cost construction or best judgement method. However, there are 2 provisos to Rule 28:
When goods are intended to be supplied a such, then supply to the related person can be valued at 90% of the ultimate sale value and this is at the option of supplier;
When recipient is eligible for full ITC, then value declared in the invoice is deemed to be OMV.
Now, Relied on AAAR, Tamil Nadu in Re: Specmakers Opticians Private Limited [Order No. 9/2019 dated November 13, 2019]
The value in respect of supply between distinct persons can be any of the following:
1. The available OMV;
2. In cases of ‘as such’ supply by the recipient, the supplier has an option to value the supply at 90% of the ultimate sales value;
3. When the recipient is eligible for full ITC, the invoice value is deemed to be the OMV.
Based on the above, in our case where M/s. ABC Enterprise, Surat-Gujarat, transfers stock to its distinct person, Mumbai-Maharashtra, which will ultimately be sold to Unrelated person, Mumbai branch is eligible to claim whole ITC based on value of supply decided under any of the above three methods.
Now, here is the benefit or say loophole of 2nd Proviso of Rule 28:
ABC Enterprise operates in 2 different branches in India, one in Surat-Gujarat and another in Mumbai-Maharashtra having different GST registration. Let us assume that Surat branch has huge accumulated ITC on account of various service with higher tax rate and Surat branch is unable to utilize it fully and it keeps increasing on monthly basis. On other side Mumbai branch has huge payable due to higher profit margins on products and not accumulated ITC. As per 2nd proviso of rule 28, when transferee is eligible for full ITC, the invoice value is deemed to be the open market value, hence Surat branch can transfer any assets or inventories with any higher hypothetical amount, then Surat branch will pay such liability on that invoice through accumulated ITC and Mumbai branch can utilize such ITC against its payables.
“Second proviso to sub-section (2) of section 16 of CGST Act, 2017, Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be [paid by him along with interest payable under section 50] in such manner as may be prescribed:”
“First proviso to Rule 37 (Reversal of input tax credit in the case of non-payment of consideration), Provided that the value of supplies made without consideration as specified in Schedule I of the said Act shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16”
There is one problem is that payment to supplier by recipient within 180 days, if not paid, leads to reversal of ITC with Interest. However, this problem can be resolved due to First proviso of Rule 37 which states that payment under Second Proviso to Section 16(2) will be deemed to be paid if such supply covers under Schedule I.
Export and Import: –
Export of Good:
“Section 2(5) of IGST Act, 2017, “export of goods” with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India;”
Export of Service:
“Section 2(6) of IGST Act, 2017, “export of services” means the supply of any service when,
(i) the supplier of service is located in India;
(ii) the recipient of service is located outside India;
(iii) the place of supply of service is outside India;
(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange [or in Indian rupees wherever permitted by Reserve Bank of India]; and
(v) the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8;”
Now, here is the twist that if person transfer goods to its distinct person located outside India then it will be called an Export of Goods and also be covered under zero rated supply and person can get benefit of it, but in case of service, such transactions does not fulfil 5th condition specified under section 2(6) of IGST Act, 2017 so that it will not be an Export of Service and also not be covered under and zero rated supply and because of that it will be taxable.
Import of Goods:
“Section 2(10) of IGST Act, 2017, “import of goods” with its grammatical variations and cognate expressions, means bringing goods into India from a place outside India;”
Import of Services:
“Section 2(10) of IGST Act, 2017, “import of services” means the supply of any service, where;
(i) the supplier of service is located outside India;
(ii) the recipient of service is located in India; and
(iii) the place of supply of service is in India;
“Schedule I (activities to be treated as supply even if made without consideration) Para (4) states that Import of services by a [person] from a related person or from any of his other establishments outside India, in the course or furtherance of business.”
If Import of services happens for consideration, even not for business purpose, then it will cover under Section 7(1)(b) of CGST Act, 2017, however on other side if it is without consideration then it will cover under Schedule 1 if it is related to business or furtherance of business. Remember that in case of Import of Service from distinct person, with or without consideration, will attract tax payable under reverse charge.
Other Points: –
♦ If the person is having different line of business in same State, can get itself registered for both the business separately and be called distinct person for the purpose of GST.
♦ If the person has two branches one in SEZ and another in normal area, then transactions between them will attract Inter-state Supply even if both branches are in same State.
♦ “As per Section 49(10) of CGST Act, A registered person may, on the common portal, transfer any amount of tax, interest, penalty, fee or any other amount available in the electronic cash ledger under this Act, to the electronic cash ledger for,
(a) integrated tax, central tax, State tax, Union territory tax or cess; or
(b) integrated tax or central tax of a distinct person as specified in sub-section (4) or, as the case may be, sub-section (5) of section 25,
The above can be possible through filing PMT-09 from Common Portal.
Conclusion: The intricate tapestry of GST regulations surrounding transactions between distinct persons underscores the need for businesses to stay informed. Whether it’s understanding the need for separate registrations, decoding the nuances of supply and valuation, or navigating the waters of international trade under GST, it’s crucial for enterprises to ensure compliance. This not only safeguards them from potential penalties but also leverages the provisions for optimal tax benefits. As businesses continue to grow and expand, a firm grasp on these regulations will ensure smoother transitions across geographies.
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Author Bio
Very Helpful to understand the whole concept.👍