Wherever the government imposes any taxes, people are keen to develop ways of tax planning and to derive maximum advantage out of the provisions, wherever there is a scope. One such tax is goods and services tax, having a very wide reach. It has a major impact on the working capital of the business and hence, tax planning is crucial. Let’s look into some of the measures of goods and services tax planning.
Goods procurement planning
If the business concern is into manufacturing or trading then the major cost component is the raw material cost or the cost of goods purchased for sale. These goods purchased for sale or the raw material, both are eligible for input tax credit and thus, can significantly contribute towards discharging tax liability. Hence, goods procurement planning is vital. The following points are considerable –
To avail of maximum Input Tax Credit
i. Ensure more and more procurement from registered dealers to get 100% availability of Input Tax Credit in respect of purchased goods.
ii. Input tax credit on purchases from composite dealers is not available. However, taxes are duly charged as inclusive of the prices. Non-availability of input will make the goods more costly and will have an impact on the profit margins. It’s better to avoid purchases from composite dealers.
iii. Avoid purchases from unregistered dealers not only due to the non-availability of input tax credit but also to reduce extra compliances, as tax needs to be paid on a reverse charge basis.
To ensure maximum utilization of Input Tax Credit
One should make sure that maximum tax liability gets discharged through an input tax credit. It resulted in a reduction in working capital and cash requirements.
As we know, an input tax credit of integrated GST can be utilized to set off the output tax liability of IGST, CGST, and SGST. However, the input tax credit of CGST cannot be used to set off the output tax liability of SGST. Similar is the case with SGST, the input of SGST cannot be utilized against CGST output tax liability. Hence, input tax credits comprising integrated GST will lead to maximum advantage.
Inter-state purchases attract IGST, unlike intra-state purchases. To ensure the maximum composition of integrated GST in the input tax credit, inter-state purchases must be given preference over intra-state purchases, wherever possible.
Nowadays, the business environment is such that organizations have reached over many states and are not just confined to a single place/ state. Such multi-locational entities have to set up their establishments across the country in different states in line with the nature of their business. For such multi-locational entities, effective GST planning is imperative to avoid blockage of the input tax credit at any stage within the organization.
For instance, let’s consider a situation, XYZ Pvt. Ltd. has three branches located at Gurugram, Hyderabad, and Delhi. The Head Office of the company is situated in Delhi. Now the services for common functions of the entity are taken by head offices such as Admin work, audit, and legal services, etc. Similarly, services of human resources, accounting, etc. may be taken at any other branch owing to the availability of a competent workforce at a reasonable cost, etc. and hence, the input tax credit is available to the head office and to that particular branch respectively in respect of such services, however, let’s suppose the head office has not enough output tax liability to set off the whole of the available credit balance while the branches of the company are short of input tax credit and have to use their bank balance to discharge tax liability. This will have an impact on their working capital. The solution to this is cross-charge.
There is a concept of state-wise GST registration in GST law i.e. if an organization has multiple places of business, in different states then separate registration has to be taken for each state. Further, if it has multiple places of business in the same state then separate registration may also be taken for each such place at the discretion of the organization.
For the purpose of GST, each such registration with a single PAN is treated as ‘distinct persons’ as per the provisions of section 25(4) of the CGST Act, 2017. When one distinct person invoices the other for a supply of goods or services, it is known as cross-charging.
Cross charging – Mandatory or Discretionary
Schedule 1 of CGST Act, 2017 in the extension of section 7 specifies the activities to be treated as supply. As per entry 2 of the said schedule, the supply of goods and services between distinct persons is treated as supply and hence, comes within the ambit of GST. Hence, if there is a supply of goods or services amongst distinct persons then cross-charging is imperative and not discretionary and supply will be undertaken by properly accounting them for the purpose of GST backed by issuance of tax invoice.
When it comes to multi-locational entities and utilization of input tax credits, the first thing that comes into one’s mind is the concept of input service distributor. It is crucial to differentiate it from cross charge.
I. The input service distributor is registered just to distribute the input tax credit availed by it in respect of common functions of the entity to its branches and cannot carry out any outward supply. Hence, ideal for the businesses any of its business units is a head office/ corporate office meant for only availing input services for the common benefit of all its branches such as admin work, HR, IT, etc.
II. The office registered as ISD only avails input services as the name also suggests and cannot distribute input tax credit in respect of goods, unlike cross charge.
III. Registering as an input service distributor is all discretionary, however, cross-charging in a requirement of law.
IV. More or less both are the ways of transfer of input tax credit between units as entitled to them, however, compliances are much higher in ISD like getting the unit registered, filing of returns, etc. then cross charge.
Understanding the cross charge
Let’s understand the concept through an example. M/s ABC Pvt. Ltd. is a company having its units in Mumbai, Bangalore, Noida, and Delhi. All the units are carrying business activities including outward supply. The third-party input services of audit and consultancy are taken by the Noida branch while the human resource and IT services are taken by the Mumbai branch. Further, the Delhi branch is taking accounting and legal services for the entity. All these services are for the benefit of all the branches, however, the invoice shall be issued to that branch that directly avails it and contacts the supplier and hence, the input tax credit shall be available to it only.
In this situation, cross-charging comes into the picture. On the ground that the Noida branch is providing the human resource and IT services to all the other branches, it shall issue the invoice to other branches treating the same as taxable supply duly charging GST to the extent such service is beneficial for that branch. In this way, such branch to which such supply is made shall be eligible to avail input tax credit on such service taken by it from its other branch, hence, ensuring a seamless flow of credit between branches.
Thus, cross-charging is an effective way to transfer input tax credit between branches and makes it possible to work as a single unit though having separate registrations.
About the Author : The author is Ruchika Bhagat, FCA helping foreign companies in setting up and closing businesses in India and complying with various tax laws applicable to foreign companies while establishing a business in India. Neeraj Bhagat & Co. Chartered Accountants is a well-established Chartered Accountancy firm founded in the year 1997 with its head office in New Delhi.