From 1st July 2022, A new section in Income tax act was inserted under TDS provisions- “Deduction of tax on benefit or perquisite in respect of business or profession.” Under this section TDS is required to be deducted on benefits given by one person to another in kind, without consideration. We shall not elaborate income tax provisions any further but to discuss the GST implication over this particular transaction from all angles and dimensions.
Our discussion shall be guided through a case study based upon the nature of transaction in which a benefit is provided without taking any money consideration in return. This case study will analyse GST implication from the payer and payee standpoint.
Case Study
There are 2 parties, one party is manufacturer (hereinafter to be referred as M) and second party is dealer (hereinafter to be referred as D) of such manufacturer and selling goods.
M launches various schemes to augment the sale by D. One such scheme Is if D achieves a particular quantum of supply then M shall provide a trip of 7 days of Singapore to D (all inclusive). M procures such trip from market at 150000/- per person plus GST. M pays the consideration and provides this to D and D travels on that tour package.
As per newly introduced provision under section 194R, M shall deduct TDS over that and report on PAN of D.
Now in this transaction, various question wrt GST arise. We shall analyze each question one by one.
1. Whether this is Supply? Yes, sec 7 we have to refer, Sec 7 Scope of supply.
Analysis
7. (1) For the purposes of this Act, the expression “supply” includes—
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
2. Whether this transaction falls under Any of the forms of supply?
To understand it, 3 terms are important to discuss,
a) for a consideration,
b) by a person and
c) in the course or furtherance of business.
Each such terms are defined in forgoing paras
Consideration- Section 2(31)
“consideration” in relation to the supply of goods or services or both includes—
(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:
Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;
From this definition it is clear that consideration can be in money or otherwise also. Under this case study, benefit is flowing from M to D in the form of Tour, that is not in money but in kind. There has to be quad pro quo, consideration should flow from D to M also. D is providing supply of augmentation of sales on behalf of M. So, this is clear from above discussion that consideration is there from M to D but in kind. How to value that, will discuss in further questions.
Next term to ponder is “by a person”. For that lets refer to definition-:
Section 2(84) “person” includes—
(a) an individual;
(b) a Hindu Undivided Family;
(c) a company;
(d) a firm;
(e) a Limited Liability Partnership;
(f) an association of persons or a body of individuals, whether incorporated or not, in India or outside India;
(g) any corporation established by or under any Central Act, State Act or Provincial Act or a Government company as defined in clause (45) of section 2 of the Companies Act, 2013;
(h) any body corporate incorporated by or under the laws of a country outside India;
(i) a co-operative society registered under any law relating to co-operative societies;
(j) a local authority;
(k) Central Government or a State Government;
(l) society as defined under the Societies Registration Act, 1860;
(m) trust; and
(n) every artificial juridical person, not falling within any of the above;
Definition of the person is so vast that it includes all forms legal entities. Naturally M also would fall under this. So, this term also gets covered.
Next phrase to discuss “ in the course or furtherance of business”
This term is not defined in the law. But generally, all the activities relating to business and developing or growing the business shall fall under this phrase. This tour package is given on account of sales promotion of M. And Supply of augmentation of sales is also in the course of bunnies only given by D to M. Therefore, this criterion also gets fulfilled.
Now as all the conditions of becoming a transaction as supply gets fulfilled under this scenario and it can be classified as supply. There is no doubt about the fact that this transaction is supply of services. Next question arises, is it taxable?
For any transaction to be taxable, one has to check exemption notification appended to the Act. For checking whether any supply is exempt supply of service, notification 12/2017 Central Tax Rate shall be checked. As per that notification, no such exemption is provided to the transaction in question. Therefore, this is supply as well as taxable.
3. In whose hands that shall be taxable?
Analysis
Now, as we have decided that it is supply and taxable. Next in line is who is the taxable person in this case. Two parties M and D. D is providing supply of augmentation/promotion/business support of sales to M in the form of desired target achieved. Therefore, D is the supplier and M is the recipient here. So, D shall be the taxable person who shall charge tax over this transaction. D shall raise invoice for this to M.
4. At What value that shall be taxable?
Analysis
As the consideration from M to D is not in cash but in kind, so value can not be determined as per
Sec 15 of the Act. For this have to refer to Rule 27.
Value of supply of goods or services where the consideration is not wholly in money
Rule 27 Where the supply of goods or services is for a consideration not wholly in money, the value of the supply shall, –
(a) be the open market value of such supply;
(b) if the open market value is not available under clause (a), be the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money, if such amount is known at the time of supply;
(c) if the value of supply is not determinable under clause (a) or clause (b), be the value of supply of goods or services or both of like kind and quality;
(d) if the value is not determinable under clause (a) or clause (b) or clause (c), be the sum total of consideration in money and such further amount in money that is equivalent to consideration not in money as determined by the application of rule 30 or rule 31 in that order.
As per this rule, if consideration is not wholly in money then one has to resort to Open market value of such supply from D to M. As per facts of the case study, M procuring this tour package at 150000/- from market.
This explanation is added to rule 35.
Explanation. — For the purposes of the provisions of this Chapter, the expressions—
(a) “open market value” of a supply of goods or services or both means the full value in money, excluding the Integrated tax, Central tax, State tax, Union Territory tax and the cess payable by a person in a transaction, where the supplier and the recipient of the supply are not related and the price is the sole consideration, to obtain such supply at the same time when the supply being valued is made;
Under this transaction, as per definition of open market value, transaction between M and tour operator can be safely considered to be the transaction value, where the supplier and the recipient of the supply are not related and the price is the sole consideration, therefore can be called as open market value.
OMV shall be 150000/- in this transaction and value for which invoice to be raised and tax to be paid.
5. Is it income in the hands of D, whose TDS is deducted?
TDS under section 194R of the Income Tax act is deducted on this particular amount and it reflects in the 26AS of D. It clearly becomes income in the hands of D and very much taxable. Again, the amount which shall be added in the income in D shall be a question. As the benefit received is for 150000/- therefore amount of 150000/- shall added as income of D.
6. Whether it shall be supply of goods or services?
Activity as listed above is squarely supply and taxable. Now question is whether this supply is of goods or services. Why do we need to determine this question? This would help us to solve next question about rate of tax applicable to this transaction. As discussed earlier, this transaction is supply of service.
7. At what rate it shall be taxable?
Supply is supply of services and there is no specific rate at which its taxed therefore rate of tax shall
be 18% which is generally applicable to transactions of supply of services.
8. Whether ITC of gifts procured for distribution shall be available to M?
For Claiming any input tax credit two conditions need to be fulfilled. First, the inward supply on which ITC is availed should be in the course or furtherance of business and second, ITC proposed to be claimed should not be blocked under law.
ITC available on procurement of tour package is on the inward supplies which is used in the course of business only. So, first condition is met.
For checking second conditions, we have to refer to blocked credit section 17.
As per Section 17(5)(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and
ITC on this account shall not be available even if first condition is met.
In our case study, it can be considered as that such tour package is given as gift to D, therefore ITC to M shall be blocked and second condition is failed here. Therefore, ITC for procurement of tour package shall not be available to M.
9. Whether ITC of this transaction of 194R shall be available to person who is giving gifts or incentives or facilities?
Here the moot question is when D shall raise the invoice to M at 150000/- plus GST. Then whether
GST on this invoice available to M as ITC?
Again, same twin condition formula applies. First it is very much in the course of business to increase sales by D for M. And there is no blockage under section 17 of the Act. Therefore, twin conditions comply and ITC to M shall be available.
10. If invoice is to be raised by D to M at 150000/- (open market value) then would this amount be considered as including tax or tax shall be charged over and above this value?
There is no specific mention of tax whether that’s included in the value or separately charged. In this situation value received by D is 150000/- only and not any thing extra above that. If that be the case, it can be assumed safely that 150000/- includes tax also. To determine tax under such scenario we have to refer to rule 35 of Valuation provisions which is as under.
Value of supply inclusive of integrated tax, Central tax, State tax, Union territory tax Rule 35. Where the value of supply is inclusive of integrated tax or, as the case may be, Central tax, State tax, Union territory tax, the tax amount shall be determined in the following manner, namely, —
Tax amount = (Value inclusive of taxes × tax rate in % of IGST or, as the case may be,
CGST, SGST or UTGST) ÷ (100 + sum of tax rates, as applicable, in %)
According to the formula given under this rule on 150000/- reverse calculation (assuming rate of tax @18%) shall be made and value shall be 127119/- over which GST of 22881/- shall be charged
11. What if D further gave this trip to Retailer(R)? Now whether this shall be again taxable in the hands of R also?
In this chain if another retailer is added and instead D himself utilizes this trip but pass this on to R for the same reason. Then same corollary shall apply as it is again in the course of business. Although, TDS under section 194R is deducted by M for D but in our opinion, it is required to be deducted by D of R also. And similarly, all the above questions are Mutatis mutandis (Medieval Latin phrase meaning “with things changed that should be changed”) apply on the transaction between D and R also.
12. What are accounting entries which are to be made in the respective books of M and D?
In the books of M
A. Tour Package Dr 150000(including GST on this)
To Tour Operator
B. Sales Promotion expenses 150000/- (Plus GST if separately charged)
To D
C. D Dr
To Tour Package
D. Tour Operator
To Bank
In the books of D
A. M Dr 150000/-
To Sales Promotion Services -Income
B. Tour Package Dr
To M
C. Director Remuneration/Employees Perquisite (Salary of Employee)/Partner/Prop Drawing Dr
To Tour Package
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DISCLAIMER: This publication serves as a general guide for informational purposes only. The references and content provided are for educational purposes and should not be considered as legal advice. We assume no liability for any losses incurred directly or indirectly through the use or reliance upon the information or conclusions presented in this publication. Prior to taking any action based on this publication, it is recommended that you seek professional advice. This work is solely intended to contribute to the subject of GST and serves the best interests of the profession.
Author Bio
Generally we get to know about this only through Amount appearing in 26AS, where we do get GST number or be it inter state or intra state, how to identify this to be IGST or CGST/SGST.
What shall be it Place of Supply.