K. R. Sreedhar
“Should I pay GST on supplies to myself “. To the surprise of ordinary persons, the answer is YES. As per the framework of GST in India, there are strong conceptual reasons, justifying this principle. However, this rule results in anomalous situations in certain cases, imposing unjustifiable burden on certain types of businesses. This article deals with both the above aspects and requests the Government to give proper clarifications to remove difficulties in anomalous situations.
The Indian GST system consists of two distinct components i.e., Central GST and State GST, with the revenue from these taxes going to Central and State governments respectively. Hence, the law mandates for a separate registration in each state / union territory, so that the respective states can keep track and collect their due revenues as per the supplies consumed in their tax jurisdiction. Remember, GST is a destination based tax, wherein the state wherein the final consumption occurs, would get the State GST revenue. Hence, all the supplies originating from one state GST tax jurisdiction to another state / tax jurisdiction would be subject to GST, even if it involves, “I supplying from one state to myself in other state.”
Each one of the multiple registrations made by the same legal entity (with same PAN Number), in different states/union territories is treated as “Distinct person”. Section 25 (4) provide as under.
Section 25 (4): 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.
Suppose simply due to the nature of activity, registration may not be required in some states where the business entity has got operations. Even in such cases, the law regards the establishment in state where registration is not required, as Distinct person. Section 25 (5) provides as under.
Section 25 (5): 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 establishment of distinct persons for the purposes of this Act.
To be called as “Supply” and hence be subjected to GST, the presence of “Consideration “flowing from the entity receiving the supply to the entity making the supply, is a must. (See definition of Supply as per section 7 (1)(a) of the CGST Act). However, the law expressly states that the activity of supplies between distinct persons, without consideration are also to be treated as “supplies” for the purpose of CGST Act.
Schedule I of the CGST Act which lists the Activities to be treated as supplies even if made without consideration has the following entry.
2) Supply of goods or services or both between related persons or between distinct person as specified in section 25, when made in the course of or furtherance of business.
The above rule applies not only for the finished goods and the purchased inputs which directly go into the production of saleable goods and services, but also for the supporting services, required for activities in the course of business or for the furtherance of business. The following extract from the FAQ published by CBEC clarifies the position.
However, law recognizes that the GST paid on such self – supplies would be ultimately set off by the entity receiving the supplies, against the its GST dues on the final output. Secondly it may not be appropriate to apply the same norms of valuation which is appropriate for the transaction between two independent commercial entities, for the supplies made between two wings of the same legal entity.
Recognizing this fact, in respect of supplies between distinct persons, the GST valuation rules a lot of flexibility in determining the value of such self-supplies. The relevant rules are quoted below.
Rule28 (Chapter V of the CGST Rules 2017): Value of supply of goods or services or both between distinct or related persons, other than through an agent.
The value of 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
a) Be the open market value of such supplies
b) If open market value is not available, be the value of supply of goods or services of like kind and quality
c) If the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or 31, in that order
Provided 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 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 goods or service.
Hence, an assessee who is dealing with taxable goods or services and having multiple registration in different states, would have no problems in complying with the above provisions. In fact, it makes his life much easier, as the input tax credit availed in the state of purchase / manufacture, would flow along with the goods to the state where the goods are ultimately sold in the form of IGST. This flow enables such input tax credit availed in one state, to be set off against the output liability of sales of goods or services in another state. It also enables the input tax credits on services obtained on administrative / marketing / support activities incurred in HO situated in one state, to be effectively utilized to set off against the output liability against the sale made in other states.
Also note the flexibility given to the assessee in determining the value of such self – supplies, which shall be deemed to be the value declared in the invoice, provided the recipient is eligible for full input tax credit. Utilizing this concept, an entity, can declare such values, the GST output liability of which is exactly matching to the input credit availed on such services and which needs to be flowed out to the state where it can be used to set off against the output liability. The following example would clarify the point.
|Valuation of Head Offices services provided to “Distinct Persons ”
( HO in Delhi and manufacturing unit and sales in Haryana and UP )
|Sly No||Cost Elements||Cost incurred||GST thereon availed as input credit|
|A||HO Rent||Rs 10 lakhs||Rs. 1.80 Lakhs|
|B||Capital items purchased in HO||Rs. 5 Lakhs||Rs. 0.90 Lakhs|
|C||HO Salaries and Wages||Rs. 85 Lakhs||NIL|
|E||T O T A L||Rs. 100 Lakhs||Rs. 2.70 Lakhs|
|F||Total cost Distributed to 2 states equally based on sales volume ( D / 2 )||Rs. 50 Lks each||IGST should have been Rs. 9 Lakhs each|
|G||“Self – Supply value” distributed is limited to the value on which Input Credit is availed i.e., A + B only||Rs. 7.5 Lks each||IGST would be Rs. 1.35 lakhs only|
In the above example, the actual value of service provided by HO to two units should have been Rs. 50 lakhs each and the IGST should have been Rs. 9 lakhs each. Of course, this Rs. 9 lakhs are not an additional burden on the legal entity as a whole as it would have been set off against the output liability of UP and Haryana Units. However, this valuation would have resulted in additional cash outflow of Rs. 15.30 Lakhs (Rs. 18 lakhs Minus Rs. 2.70 lakhs) which would have got locked up in current asset “GST Input credit “causing cash flow burden.
Instead the assessee can declare the invoice of such services as Rs. 7.50 Lakhs only and pay IGST of Rs. 1.35 lakhs only by means of “Set – Off” of the input credit availed on purchases.
Hence, the scheme of GST payable on self-supplies, is perfectly in order and easily implementable for the entities who deal is taxable goods and services.
Now the problem area. How about the business entities, which deal in exempt goods? Will their GST compliance requirements on Self Supplies be as simple and straight forward as that of companies dealing in Taxable goods? Take the example of an Agriculture seeds company (ABC Seeds) which sells high quality hybrid seeds of Cotton and Sunflower to farmers . Since these are of seed quality, meant to be used by the farmers for sowing in their farms, they are subject to NIL GST as per HSN Code 1207.
Let us say ABC Seeds, has HO in Hyderabad – Telangana and processing and packing plants in Telangana and Andhra Pradesh and marketing offices cum stocking points in Maharashtra and Gujarat. Since running seeds processing and packing operation of the size more than Rs.100 Crores, would certainly involve generation of scrap, (used gunny/ polythene bags, scrap packing materials etc.,) worth more than Rs. 20 lakhs both the plants would have registered under GST for this limited purpose of discharging liability on sale of scrap.
In applying the principle of GST on Self Supplies, the following questions would arise.
a) Since the final output of ABC Seeds is exempt from GST, Corporate Office of ABC Ltd, would not have availed input credit on any of its expenditure and hence there is no input credit, to flow out to other states, for set off against output liability.
In such a situation should the HO in Telangana pay IGST on the services rendered (HR, IT etc.), for its operations in AP, Gujarat and Maharashtra! Again the recipients of such a debit would not be able to avail input tax credit, as their final output is exempt from tax. Such an absurd proposition would increase the cost of operation, as the IGST paid by HO would amount to expenditure for the entire entity.
b) Secondly, Should the packing materials, processing chemicals etc., moved between processing plants located in AP and Telangana be taxed under IGST as Self – Supplies? Please note the key point, that the final output is taxed at NIL rate in GST and hence, the GST paid on these items when purchased, would not have been claimed as input credit.
When the transferor plant in AP purchased the packing material, it was very much on the expectation that the same would be used in AP plant itself. Due to market dynamics, beyond the control of the Seeds company, the demand did arise in Telangana plant instead of AP plant and hence the transfer took place. To insist for payment of GST on supplies (on which input credit has not been availed) from AP plant to Telangana Plant under the same establishment does not make any commercial sense. Likewise, to insist that transferor entity should go back in time, and avail input credit only for that portion of supplies, now being transferred to another distinct entity and use that input credit for payment of IGST would only add to the compliance burden, without making any commercial sense, .
Also note that according to section 18 (2) of the CGST Act, a registered person shall not be entitled to take input tax credit, ….., after the expiry of one year from the date of issue of tax invoice relating to such supply. If unfortunately, the nonmoving goods purchased over one year back were to be moved to distinct entity in another state, transferor entity, can not go back in time even to avail input Credit.
To avoid all such anomalies in the practical implementation of the concept of GST on Self- supplies, Government may please come out with a clarification to state the following principle.
“The value of supply of goods or services or both between distinct persons as specified in sub – section (4) and (5) of section 25, shall be deemed to be NIL, where
> No input credit has been taken on those supplies,
> The final output for which these inputs are used, is either exempted or taxed at NIL rate of duty
The above clarification, does not affect the GST revenue, since this is applicable only for the cases where the input credit is not availed and hence, GST on such inputs has already been added to the net GST revenue.
A provision on similar lines to declare the value of taxable services as NIL, already exist in GST rules which is quoted below.
Rule 32 (7) (Chapter V of the CGST Rules 2017): The value of taxable services, provided by such class of service providers, as may be notified by the Government, on the recommendation of the Council, as referred to in paragraph 2 of Schedule I of the said Act between distinct persons as referred to in section 25, where input tax credit is available, shall be deed to be NIL.
However, the above rule does not help in our case, as this rule applies for cases where input tax credit is available, which is opposite to the case in question where input tax credit is NOT available.
During the course of GST implementation, GST Council has shown a great amount of pragmatism and sensitivity to the needs Industry and has made a number of course correction to ease the compliance burden. GST council, is requested to examine the above aspect and come out with the clarification which will help in avoiding unnecessary compliance burden and resultant legal disputes for business entities dealing in exempted / Nil rated supplies and having multi state operations.