As two months have passed with the largest overhaul of the Taxation Structure in India. Many persons across various fields like Tax professionals, Government Officers, CFOs, etc, are steadily adopting to the new structure and intend to come out successfully thru this transition period.
To, emerge out successfully in this transition period, many enterprises have overhauled not only their tax compliance structure, but also their business processes. One of the major impact of the GST on the business processes is “Taxation of the supply without consideration.”
In the earlier indirect tax regime, there was no concept of supply, and taxability arise on sale of goods or provision of services for a consideration. However, under the GST structure, the taxability is on supply of goods and service. The “Scope of Supply”, as defined under Section 7 of CGST Act, 2017, as below:
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;
(b) import of services for a consideration whether or not in the course or furtherance of business;
(c) the activities specified in Schedule I, made or agreed to be made without a consideration; and
(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.
(2) Notwithstanding anything contained in sub-section (1),––
(a) activities or transactions specified in Schedule III; or
(b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council,shall be treated neither as a supply of goods nor a supply of services.
(3) Subject to the provisions of sub-sections (1) and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as—
(a) a supply of goods and not as a supply of services; or
(b) a supply of services and not as a supply of goods.
Our discussion in this article, would touch upon clause (c) of subsection (1), section 7, r.w.t Schedule I of CGST Act, 2017, which have direct effects the business processes. The activities specified in Schedule I of CGST Act, 2017, which are treated as Taxable Supply, even if made without consideration:
The important aspect to be noted in above sentence is term “BUSINESS ASSET”. This term is not defined anywhere in CGST or respective SGST Acts. Going by financial terminology, it generally represent the items which are in the Assets side of the balance sheet, which includes both Capital and Current Assets. As business practice, we transfer or dispose out these business assets in way of Sale, Gifts, M&A, Impairment, Write-off, etc. In the earlier indirect tax regime, in case transfer of assets without consideration, as it was not recorded in books of accounts, they could easily escape from the gamut of the taxation. But now, even any supply without consideration is included gamut of taxation and by using the term “business asset”, the scope of activities covered has also expanded.
Permanent transfer” means transfer without any intention of receiving the goods back. Similarly, goods sent on job work or goods sent for testing/certification will not qualify as supply as there is no permanent transfer.
For example, where a business entity named Alpha, recognizes impairment of business assets on which it has taken the benefit of the input tax credit, question would come whether impairment of asset fall under the definition of “disposal” or not.
Similarly, an individual who is carrying on business and registered under normal tax provisions, transfers a car used for its business to another individual, permanently as a gift than it would constitute a taxable supply under GST. However, same individual register under composition scheme, this transfer would not be a taxable supply. Additionally, valuation of such gift transactions would have be done at the Open Market Value. Further, whenever there is any property without consideration, provisions of clause (x) of subsection (2), Sec. 56 of the Income tax act, would also attract.
Additionally, where, by or under the direction or a person carrying on a business, goods held or used for the purposes of the business, but are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, the usage or making available or such goods is a supply under this Schedule.
Donation of business assets or scrapping or disposal in any other manner like giving the laptops to employee after period of use (other than as a sale – i.e., for a consideration) would also qualify as ‘supply’, where input tax credit has been claimed.
Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.
Generally, the transactions in-between the related persons are most of the time either inadequate consideration or no consideration. So, in-order to bring such transactions in ambit of tax, the CGST act under explanation to Sec 15, defined the related persons to be:
For the purposes of this Act,––
(a) persons shall be deemed to be “related persons” if––
(i) such persons are officers or directors of one another’s businesses;
(ii) such persons are legally recognised partners in business;
(iii) such persons are employer and employee;
(iv) any person directly or indirectly owns, controls or holds twenty-five per-cent or more of the outstanding voting stock or shares of both of them;
(v) One of them directly or indirectly controls the other;
(vi) both of them are directly or indirectly controlled by a third person;
(vii) together they directly or indirectly control a third person; or they are members of the same family;
(b) the term “person” also includes legal persons;
(c) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.
The above definition covers widest possible scenarios to bring related persons under the ambit.
i. Such persons are officers or directors of one another’s businesses- even though the sentence seems simple, it is quite complex in what it trying to infer and it covered in below examples:
If A who is director/officer in entity named Alpha and B is director/officer in entity name Beta. If A is also become director/officer in Beta and B becomes/officer in Alpha, it can be said that Alpha & Beta to be related parties. Similarly, if A becomes director/officer in both Alpha & Beta, both can be said to be related persons.
ii. Such persons are legally recognised partners in business- This provision not only brings transactions between persons who are partners of partnership firm, but also it would also cover persons who are entered into Joint-Venture agreement too.
iii. Such persons are employer and employee- In General sense, transactions between employer and employee is not seen as related to revenue generation activity, is more to do with generating revenue out of the work done by the employee. However in GST, after reading Schedule III, the transaction between employer to employee, which is not linked employment, is taxable. Additionally, any gift by the employer to the employee, exceeding the value of the Rs. 50,000, is treated as supply.
iv. Any person directly or indirectly owns, controls or holds twenty-five percent or more of the outstanding voting stock or shares of both of them; One of them directly or indirectly controls the other; both of them are directly or indirectly controlled by a third person; together they directly or indirectly control a third person; they are members of the same family – These provisions deal when a person in directly or indirectly control of another person or persons. Normal business practice, transaction between them where there is consideration, it is easily captured for taxability. However under GST, any supply made even without consideration would be taxable, this point is enumerated in below eg:
a. In group companies under same family, they have shared services department which provide services for such companies and generally cost of these shared services are not charged in between these companies. However, now they even if not charged, they would be taxable.
b. Similarly, if the Indian parent entity, supply goods and services, to its subsidiaries without any consideration, would become taxable in hands of parent entity.
Supply of goods or services or both between distinct persons as specified in section 25-:
Sub-section 25(4) & 25(5) states that “A person/ an establishment 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”. In earlier indirect tax regime, we used to make transfer of stock in-between branches at concessional rate by issuance of Form -F, and there is no charging of service tax for the services rendered in between the branches, or branch & HO. With concept of destination and consumption based tax under GST regime, the tax must follow to the state whether the goods/service is consumed. To implement this concept, the persons/establishment under different states or One state (different vertical or SEZ unit), are treated as Distinct Persons, any supply of goods/service would be taxable, in normal manner, just as supply to external entity. This would create requirement of extensive records for calculation of proper transaction price at which taxes must be paid. For eg, an entity has branches across various states, from where it sells the goods, for its internal purpose, it treats these branches as SBU and it apportion the HO cost to all these units. Now, with all these units treated as distinct persons, the HO must charge tax as and when it apportions the cost, irrespective of recovery of the consideration. Additionally, with the benefit of concessionary rate no longer available for inter-unit transfer, it would prudent to check whether it would cost-effective to have branches across various states or not.
(a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or
(b) by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal
In the business model, the principals supply the goods through agents, without any consideration being received from the agent. The agent in turn makes sales on behalf of principal and is entitled to a commission thereof on the sale. The agent may collect payments on behalf of the principal or the customer might make direct payment to the principal. In either case there is no sale because agent does not receive any consideration from the principal and the ownership of the goods still lie with the principal. However, as per schedule I, supply of goods by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal will be considered as supply and if the good are taxable than be subject to GST, irrespective whether any consideration is received by the principal or not.
Similarly, supply of goods by an agent to his principal, where the agent undertakes to receive such goods on behalf of the principal, is deemed to be a supply of goods by the agent to the principal. Even though agent receives no consideration for providing goods to the principal except commission, which is his income for handling goods on behalf of the principal.
As India becomes the hub of IT&ITES, KPO,BPO, etc, across the world, many overseas entities have established their units across various cities in India like Bangalore, Hyderabad, Gurgaon, etc, there is exchange of the services between the units and its overseas parent companies. On most of occasions, whether there is import of services with consideration of payment, it is accounted and taxes are paid on it. However, with expansion of taxability of services without payment of consideration, it has opened door to tax new area of services.
For eg, the key decisions pertaining to the Indian Units are taken by the management of Overseas parent entity, and at times, the Overseas parent doesn’t charge the Indian entity for such services. Similarly, Overseas entity send its officers to overlook its India operation and remuneration of these officers are paid by parent and these cost is not charged to its India unit. But, now with inclusion of the such services as taxable supply in Schedule I of CGST, the India entity would have to pay tax on transaction on open market value on reverse charge mechanism. So, the Indian entity would have pay special attention on all its interactions with its Oversea parent.
Additionally, where the Indian parent establishes oversea subsidiaries or liaison offices, to sell its services. Any services imported from the oversea subsidiaries, would also treated as taxable supply in lieu of Schedule I of CGST.
As, this new taxation structure in India is evolving. The business entities must adapt themselves to ensure they are compliant with law and at the same time also make sure the cost of compliance is also as low as possible.