GST is settling down and the council is the ray of hopes for further journey and so far. Although, we are trying to comply with the stringent provisions about availment of the Input Tax credit, we are still grappling with few of the input services.
Typically, industry keeps importing inputs and capital goods from outside India, upon imports the clearing work is normally entrusted to the Customs Broker. The Customs Broker undertakes to provide end to end solution in terms of customs formalities, availing third party services wherever required, making payment of customs duties, arranging transport from port to importer’s premises etc. The Customs Broker arranges all such services and charge consideration in terms of agency charges which are fixed if the consignment value is less than threshold or in term of percentage of the consignment value. The Customs Broker community typically accepts an ad hoc advance towards clearing charges and makes the payment on behalf of client, once the assignment is over a detailed invoice is issued showing reimbursement of expenses and his charges separately. The Custom Broker normally avails the benefit under ‘Pure Agent’ and accordingly collects the amount towards reimbursement separately and towards consideration in terms of agency charges separately.
It would be worthwhile to note that the Customs Brokers procures services on behalf of the clients which generally includes packing, unpacking, loading, unloading, bringing or removing the goods to or from the customs area, vessels or aircrafts etc. These services are provided by different agencies such as Port Trust, Steamer Agents, Cargo Handlers, Warehouse keepers, Packers, Goods Transport Agents. Either Customs Broker would make the payment of such charges from advance received or initially pay the service charges to these agencies and later recover these charges from the clients along with their own charges. Similar arrangement can occur for payment of statutory levies like Custom Duties, Port charges, Cesses etc. leviable on the goods.
It could be observed that there are number of sub agencies involved in the total transaction, wherein there is no privity of contract between client (importer /exporter) and such sub-agencies, as those sub-agencies are directly hired by the Customs Broker. The natural corollary would be, the invoices of such sub agencies would be in the of name of the Customs Broker with a reference to on account of “Name of importer/exporter”. Now, the issue arises of availment of input tax credit on the invoices issued by the sub-agencies.
Even in the erstwhile regime, under the CENVAT Credit Rules, while availing CENVAT Credit upon fulfillment of basic conditions such as name, address and registration of the service provider, name and address of the service recipient would suffice to avail the CENVAT Credit. Since there was no linkage of registration number and credit was solely paper driven, as long as basic conditions were satisfied the credit was eligible.
In the GST regime, same business practices have been followed by most of the customs brokers. Upon instructions by the clients the customs brokers are now passing on GST registration Number to sub agencies and few of the sub-agencies started putting number of ultimate client.
Now look at the practical aspect of the transactions and difficulty arises while availing credit under GST:
1. What if sub agencies issues invoice in the name of Customs Broker:
- Normally sub agencies are employed by the Customs Broker, therefore such sub agencies issues invoices in the name of the Customs Broker. However, customs broker works under ‘Pure Agent’, therefore invoices of sub agencies are not booked as expenses in the books of account of customs broker, naturally the expenses does not belongs to customs broker, the input tax credit appearing in GSTR 2A would not be eligible to the Customs Broker. As there is no legitime claimant for the credit, the credit would be lapsed.
- What if the broker does not follow ‘pure agent’ mechanism and choose to charge full tax on the whole bunch of services procured by him on account of his clients. Although, looks an easy solution, the customs broker should agree for the same. As in terms of direct taxation and accounting, the compliance burden would go up in multifold for customs broker. g. The turnover reflected in financials let’s say 1.20 Cr, out of which 1 Cr could be reimbursement and 20 Lakhs would be actual agency income. As against there would be straight way 1 Cr is cost towards third party services apart from his own administrative cost which is to be knocked off against agency income, in all effect the remained margin would be very minimal and may not be comparable to the other customs broker who does not follow the identical accounting practice.
- Even, we presume for the time being that the Customs Broker has received all invoices form sub-agencies on his own account, still there would be challenge on eligibility of input tax credit. As per Section 16 of the Central Goods and Service Tax, 2017, which talks about eligibility of the input tax credit of any supply of goods or services of both to a registered person ‘which are used or intended to be used in the course or furtherance of his business’. Therefore, even Customs Broker would not be able to avail the input tax credit as the goods or services are not used in his own business.
2. What if sub agencies issues invoice in the name client:
- For the time being, we may assume that the customs broker passes on the details of the client to respective sub agencies and such sub-agencies issues invoices in the name of the end client. Thus, there would be bunch of documents including agency invoice along with all supporting invoices (from sub-agencies). However, as per the normal accounting practice, only Customs Brokers invoice gets booked in accounting as it includes all expenses (though reimbursement), further which is logically correct also as the privity of contract lies between Client and customs broker.
- Now the issue arises where the assessee wish to avail the Input Tax Credit, then such entries needs to be plotted in books of account, as the data would be flowing from the accounting system only. Therefore, the environment like SAP and other ERP, where separate vendor needs to be created, which itself is a task. Upon creation of the vendor, number of entries needs to be posted based on number of documents and sub-agencies involved. After doing all these exercise, there won’t be any direct payment and all payment entries needs to be routed though Customs broker.
- In the first case, GSTR 2A would reflect the separate line item for each of the invoice issued by sub-agencies, however the said credit would not be there in books as the consolidated entry has been passed based on customs broker invoice. If the number of transactions are high in volume then the credit involved would also be high, therefore the assessee can not afford to leave the amount as expenses. The practical way to avail the credit is to book the credit based on GSTR -2A as reflected by the respective sub-agencies, however there won’t be any control in terms of correctness and completeness of the data.
- The appropriate way could be as envisaged in second case, however there would be lot of entries needs to be passed in accounts and those needs to be reconciled with GSTR -2A. This seems to be practically challenging, considering the number of documents and agencies involved.
- Surprisingly, custom brokers are not following uniform practice across India, which is causing hardship in terms of availing Input Tax Credit for the clients. As of now, the clients are not able to claim input tax credit in absence of uniform methodology by customs brokers and compulsorily needs to be expensed out. Further, the issue arises for reconciliation with GSTR – 2A vis-à-vis credit booked in books of account.
- Thank god for a time being reverse charge on unregistered service providers have been postponed, else another nagging issue would have been, how to compute GST liability on such supplies?
- The similar issue is with airline booking, where the booking is done through agents.
In view of the difficulty faced while availing credit, there should be some mechanism to be devised to avoid such leakages of legitimate input tax credit.
By CA Mahesh Bandre and CA Nilesh Saboo
Author Bio
The services can be seen to be used in the course/ furtherance of the BUSINESS because lack of those service would hinder the CHA services and then the credit can be availed by CHA as per section 16.