The GST implementation in India has created challenges for textile industry branch transfers, as movements between units with separate GSTINs are taxed, even under the same PAN. This differs from the pre-GST VAT regime, where such transfers were often tax-exempt. Key issues include working capital strain due to upfront GST payments and delayed ITC, increased operational costs from taxing each stock transfer, and a higher compliance burden from multiple GST registrations and complex valuation rules. Supply chain disruptions and valuation complexities of partially processed goods further complicate matters. Possible solutions include streamlining ITC refunds, industry-specific consultations with the GST Council, and re-evaluating stock transfer treatment for SMEs. Businesses can utilize job work provisions under Section 143 of the CGST Act to avoid unnecessary GST liabilities, and maintain proper documentation of job work challans. Addressing these issues by simplifying processes and providing clear guidelines will improve the financial health and operational efficiency of textile businesses under GST.
The implementation of GST in India has significantly impacted branch transfers within the textile industry, where the movement of goods between units with separate GSTINs (even under the same PAN) is considered a taxable supply. According to Para 2 of Schedule-I of the Central Goods and Services Tax (CGST) Act, 2017, supplies of goods or services or both between distinct persons, even without consideration, are treated as taxable supplies. This has led to several issues affecting textile businesses’ operational efficiency and financial health.
Comparison to Pre-GST Regime: The treatment of branch transfers under GST marks a significant change from the pre-GST era. Under the Value Added Tax (VAT) regime, branch transfers could often occur against Form F without attracting tax. The GST regime has removed this concept, treating inter-state transfers between distinct persons as taxable supplies.
Branch transfers under GST are taxable in two specific scenarios:
1. Intrastate transfers: When an entity maintains multiple GST registrations within the same state, movements between these registered entities are taxable.
2. Interstate transfers: When goods move between branches located in different states (with different GSTINs but the same PAN), the transfers attract GST.
Key Issues:
1. Working Capital Implications: Textile businesses, especially SMEs, face challenges with working capital due to the upfront payment of GST on stock transfers and the potential time lag in claiming the Input Tax Credit (ITC), as the availment for eligible credits is available however utilisation depends on the scenario for further output supply by the receiving unit. This can strain cash flow, particularly for businesses with long production cycles or seasonal sales.
2. Increased Operational Costs: Textile businesses with operations across multiple states or with separate GSTINs for different business verticals face increased operational costs due to the GST levied on each stock transfer. This is in addition to the increased documentation and administrative processes required for compliance.
3. Higher Compliance Burden: The need for separate GST registrations for different branches or business verticals necessitates the filing of multiple GST returns, increasing the compliance burden. Furthermore, the valuation of stock transfers without consideration requires strict adherence to complex GST valuation rules. It also includes E-way bill compliance where the goods are valued more than INR 50,000, and in case of inter state supplies, registration requirement would also arise under Section 24 of the GST Act.
4. Complexity in Valuation: Determining the taxable value of stock transfers between distinct persons, where no monetary transaction occurs, is complex and often subjective, where the input tax credit is ineligible and provisio to Rule 28 is not applicable. The lack of clear guidelines can lead to inconsistencies and potential disputes with tax authorities. Applicability of the provisio to the rules and which will override what is still the confusion. Rule 28 has three mechanisms in which valuation can be done. (Along with additional two in provisio)
5. Supply Chain Disruptions, including job work: The tax on interstate stock transfers might incentivize textile businesses to consolidate operations within a single state to avoid this tax, potentially disrupting established supply chains and impacting regional economies. Textile businesses frequently send raw materials (fabrics, yarns) to job workers for processing within the state and outside. If processed goods are transferred between branches, GST may apply if they are not returned within the time limit prescribed.
6. Partially Processed Goods: Determination of the fact that at what stage the textile item transforms from fabric to apparel affects its classification under GST and creates confusion as to the nature of the product and its use. Alongside, as there are multiple rates for products which have different natures, for example, blended yarns containing both cotton and man-made fibres have challenges as to classification and rate.
Proposed Solutions and Recommendations:
1. Supply to Oneself: A possible view that can be taken is that taxing transactions between different units of the same legal entity might be subject to judicial challenges, arguing that one cannot be taxed for transactions with oneself. This indicates a potential area of future legal interpretation and possible changes. However, this proposition is not at all suggestible as it too risky to take this view and disputable in the eyes of law.
2. Job work transactions under GST: Maintain proper documentation of job work challans to differentiate job work from taxable transfers. One can Utilize job work provisions under Section 143 of the CGST Act to avoid unnecessary GST liability, which gives a time limit to get back the goods from the job worker to own premises.
3. Facilitate Faster ITC Refunds: Streamline the process for Input Tax Credit refunds, especially for taxes paid on stock transfers, to ease the working capital strain on textile businesses. In case the assessee has the option to avail refunds under the inverted duty structure, he may avail so, basis the input-output ratio and avoid the accumulation of the credits.
4. Industry-Specific Consultations: The GST Council should conduct regular consultations with textile industry stakeholders to understand their specific challenges related to branch transfers and tailor regulations or provide necessary clarifications.
5. Re-evaluate Stock Transfer Treatment for SMEs: The government should consider exempting or simplifying the GST process for stock transfers between entities with the same PAN, which is under the same name and line of business, specifically for SMEs, to reduce their working capital burden. To overcome this, representations may be required to be done by Trade Associations, institutes and bodies involved in the process.
Addressing these issues through the proposed solutions can help streamline operations, reduce the compliance burden, and improve the financial viability of textile businesses in India under the GST regime.
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For more information or questions, you can connect with us at roopa@hnaindia.com or yash@hnaindia.com. For further insights on inter-branch supplies can refer to Guide to GST on Textile Industry by Taxsutra.
Author: CA Yash Shah [FCA, DIIT, FAFD, B. Com] | Partner Designate | H N A & Co. LLP | (Formerly known as Hiregange & Associates LLP) | Chartered Accountants
Rule 28 provide the relief for stock transfer, where 100% itc avaialble to receipent.