Tag: Indirect Tax BMS Notes Mumbai University

Section 2(19): Capital goods means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.

Input Tax Credit on Capital Goods

To avail input tax credit for the Capital Goods the following conditions, in addition to conditions as stated under section 16(2) of the CGST Act, are to be fulfilled.

1. The Capital Goods has been capitalised in books of account of the person and
2. The Capital Goods are used or intended to be used in the course or furtherance of business.
3. The conditions as stated under section 16(2) of the CGST Act are as under:

3.1 The registered person is in possession of Tax Invoice;

3.2 The registered person has received Capital Goods;

3.3 The tax charged on such capital goods has been paid and

3.4 The GST Return has been filed in regard of such of Capital Goods by the Supplier.

4. The further condition as stated in section 16(3) is that where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961 (43 of 1961), the input tax credit on the said tax component shall not be allowed.
5. Blocked Input Tax Credit: Input Tax Credit is blocked on Motor Vehicles, Vessels and Aircrafts subject to exceptions as per section 17(5) of the CGST Act.
6. Total amount of Input Tax Credit is allowed on purchase of capital goods. It is not like with provisions of VAT, Service Tax etc. where input Tax Credit was allowed in instalments year wise.

Treatment of Availed Input Tax Credit on Sale of Capital Goods

In case of supply of used Capital Goods on which input tax credit has been availed, we should consider provisions of section 18(6) of the CGST Act read with rule 44(6). The higher amount of tax shall be paid out of tax charged on transaction value or pro rata input tax credit pertaining to unused period. The following example would help for more clarification in regard of this matter.

Input Tax Credit not allowed on Capital Goods

The Input Tax Credit is not allowed on Capital Goods on following circumstances:

1. If the Capital Goods are not capitalised in the books of account.
2. If the Capital Goods are purchased for non business purpose.
3. If the Capital Goods are purchased to be used exclusively for exempt supply.

Circumstances when availed Input Tax Credit against Capital Goods shall be paid.

The Registered Person shall have to pay input tax credit against availed input tax against purchase of Capital Goods in following cases:

1. When the Registered Person shifts from regular registration to Composition Scheme and
2. When the Registered Person gets his registration cancelled.

Input Tax Credit (ITC) is the core concept of GST as GST is destination-based tax. ITC avoids cascading effect of taxes and ensures that tax is collected in the State in which goods or services or both are consumed.

“Input tax” in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes:

(a) The integrated goods and services tax charged on import of goods;

(b) The tax payable under the provisions of sub-sections (3) and (4) of section 9;

(c) The tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;

(d) The tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or

(e) The tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act, but does not include the tax paid under the composition levy.

Input tax to Output tax set off / Utilization methodology:

Document requirements & conditions for claiming input tax:

The input tax credit shall be availed by a registered person, including the Input Service Distributor (ISD), on the basis of any of the following documents; Rule 36 of CGST and SGST Rules, 2017:

(a) An invoice issued by the supplier of goods or services or both in accordance with the provisions of section 31 [Invoice of supplier of goods or services or both]

(b) An invoice issued in accordance with the provisions of section 31(3)(f), subject to payment of tax [tax paid on reverse charge basis]

(c) A debit note issued by a supplier in accordance with the provisions of section 34.

(d) A bill of entry or similar document prescribed under Customs Act or Rules for assessment of IGST

(e) An invoice or credit note issued by an ISD in accordance with rule 54(1) of CGST Rules, 2017. ITC only if invoice complete in all respects ITC shall be availed by a registered person only if all the applicable particulars as prescribed in Invoice Rules are contained in the said document, and the relevant information, as contained in the said document, is furnished in form GSTR-2 by such person; Rule 36(2) of CGST and SGST Rules, 2017.

Time duration to entitle input credit:

A taxable person shall not be entitled to take input tax credit in respect of any supply of goods and/or services to him after the expiry of one year from the date of issue of tax invoice relating to such supply section 18(2) of CGST Act.

Requirements for availing input Tax Credit

As per section 16(2) of CGST Act, registered taxable person shall not be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless following conditions are satisfied:

(a) He is in possession of a tax invoice or debit note issued by a supplier registered under GST Act or such other taxpaying document as may be prescribed,

(b) He has received the goods or services or both,

(c) Subject to section 41 of CGST Act, the tax charged in respect of such supply has been actually paid to the credit of the appropriate Government, either in cash or through utilization of input tax credit admissible in respect of the said supply [section 41 of CGST Act allows taking input tax credit in electronic credit ledger on self assessment basis], and

(d) He has furnished the return under section 39 [every taxable person is required to file electronic return every month as per section 39 of CGST Act].

Section 15 of the CGST Act provides common provisions for determining the value of goods and services. It provides the mechanism for determining the value of a supply which is made between unrelated persons and when price and only the price is the sole consideration of the supply. When value cannot be determined under section 15, the same is determined using Chapter IV: Determination of Value of Supply of CGST Rules.

Section: 15 Value of Taxable Supply

Section 15(1): The value of goods or services or both shall be the transaction value, which is actually paid or payable for the said supply of goods or services or both:

• Where the supplier and the recipient of the supply are not related and
• The price is the sole consideration for the supply.

Section 15(2): Inclusion to Transaction Value

a) Duties and taxes: All taxes levied under any law for time being in force other than GST Acts if charged separately.

b) 3rd Party Payments: Any payment incurred by the recipient for which supplier is liable to pay.

Second proviso to rule 37(1) of CGST Rules, inserted w.e.f. 13-6-2018 stating that Payment by the recipient on behalf of supplier is deemed to be paid to the supplier and reversal of proportionate credit (for non-payment in 180 days) is not required.

c) Incidentals Expenses: Any incidental expenses charged by supplier & any amount charged for anything done by the supplier at the time of supply or before delivery. For e.g.- Packing, labelling, designing, Excise Duty, Royalty, warranty charges etc.

d) Interest, Late Fees, Penalty: for delay payment of consideration.

e) Subsidy: Subsidy directly linked to the price excluding subsidies directly provided by Central and State Government.

Section 15(3): Deduction of Discount

The value of supply shall not include any discount which is given:

a) Any discount is given before or at the time of supply: Deductible from value.

b) Any discount is given after supply:

Agreed at the time of supply or before supply; Deduction allowed if:

• Linked to the Invoice
• ITC Reversed by the recipient.

Not Agreed at the time of supply or before supply; Not Deductible from value.

Section 15(4): Where the value of supply of goods or services or both cannot be determined under subsection (1), the same shall be determined in such a manner as may be prescribed. (i.e. GST RULES,2017).

Section 15(5): Notwithstanding anything contained in subsection (1) or subsection (4), the value of such supplies as may be notified by the Govt. on the recommendation of the council shall be determined in such manner as may be prescribed.

Determination of Value of Supply

1. Open Market Value: Of a supply of goods or services or both means the full value in money, excluding GST payable by a person in a transaction,

• Where the supplier and recipient of supply are not related
• Price is the sole consideration

To obtain such a supply at the same time when the supply being valued is made.

2. Supply of Goods or Services of Like Kind and Quality: Means any other supply of goods or services or both made under similar circumstances that, in respect of the characteristics, quality, quantity, functional components, materials and the reputation of the goods or services or both is mentioned, is the same as, or closely or substantially resembles, that supply of goods or services or both.
3. Sec 2(5) Agent: means a person, including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another;
4. Sec 2(88) Principal: Means a person on whose behalf an agent carries on the business of supply or receipt of goods or services or both.

CGST rules 2017

RULE 27: When consideration is not wholly in money

a) Open market value (OMV)

b) If (a) is not available,

VALUE = Consideration in money + FMV of consideration not in money

c) If (a) & (b) not determinable,

VALUE = Value of Like, Kind & Quality

d) If (a), (b) & (c) not determinable then apply Rule 30 & Rule 31 in that order. (Discussed latter)

RULE 28: Supply Between Distinct or Related Person

a) Open market value (OMV)

b) If (a) is not available,

VALUE = Value of Like, Kind & Quality

c) If (a) & (b) not determinable, then apply Rule 30 & Rule 31 in that order. (Discussed latter).

PROVISO 1: if the further supply of goods is as such by the recipient at the option of the supplier,

VALUE= 90% OF THE PRICE CHARGED FOR LIKE, KIND & QUALITY BY THE RECIPIENT.

PROVISO 2: If the recipient is eligible for full ITC then,

OMV= Value declared in the invoice for the supply of goods or services.

RULE 29: Supply Between Principal and Agent

a) Open market value (OMV)

OR

90% of the price of like, kind and quality by the recipient. Where such goods are intended for further supply.

b) If (a) is not available then Rule 30 or 31 in order.

RULE 30 & 31 are applicable in order in the following cases:

• If the situation is covered under Rule 27, 28, 29 and valuation cannot be determined by applying the principal mentioned in respective rules.
• If the Situation is not covered by aforesaid rules.

RULE 30: Value of Supply Based on Cost

VALUE = 110% OF

• Cost of production
• Cost of acquisition
• Cost of the provision of Services.

RULE 31: Residual method or best judgment by using reasonable means

Consistent with principles & general provision of Sec 15

Provisions of Rule 27 to Rule 30 of CGST Rules

PROVISO: In case of the supply of services suppliers may opt for rule 31 instead for rule 30.

Where goods are sent on approval basis, an invoice would not be required at the time of removal of goods, and shall be issued only at the time of receipt of approval from the recipient.

Notwithstanding anything contained in sub-section (1), where the goods being sent or taken on approval for sale or return are removed before the supply takes place, the invoice shall be issued before or at the time of supply or six months from the date of removal, whichever is earlier.

Section 31 A: Facility of digital payment to recipient

The Government may, on the recommendations of the Council, prescribe a class of registered persons who shall provide prescribed modes of electronic payment to the recipient of supply of goods or services or both made by him and give option to such recipient to make payment accordingly, in such manner and subject to such conditions and restrictions, as may be prescribed.

“Continuous Supply” in context of GST laws in India and discuss about how GST shall be levied on goods & services which falls under the continuous supply. The term “Continuous Supply” has been defined by Section 2(32) & 2(33) of the CGST Act, 2017.

In case of continuous supply of goods, where successive statements of accounts or successive payments are involved, the invoice shall be issued before or at the time each such statement is issued or, as the case may be, each such payment is received.

As per Section 2(32) of CGST Act, ‘Continuous Supply of Goods’ means:

• A supply of goods which is provided or agreed to be provided, continuously or on recurrent basis.
• Under a contract
• Whether or not by means of a wire, cable, pipeline or other conduit.
• For which the supplier invoices the recipient on a regular or periodic basis.
• Includes supply of goods as notified by the Government.

‘Continuous Supply of Goods’ have five important elements:

(a) There should be a supply of goods on a continuous or recurrent basis. The word ‘recurrent’ means frequently or regularly. Thus, we can interpret that where there is an agreement to supply an agreed quantity of goods over a period of time in multiple consignments to a customer, it would be treated as continuous supply of goods.

(b) The supply should be under a contract. However, the contract need not be in writing.

(c) Supply of goods may be done by means of a wire, cable, pipeline or conduit. The words “Whether or not” in the definition shows that the above list is only illustrative. The supplier may deliver goods through other transport means to be treated as a continuous supply.

(d) The supplier invoices the customer on a regular or a periodic basis as agreed between them.

(e) The Government may notify or specify any goods supply of which shall be treated as continuous supply of goods.

Continuous Supply of Services Under GST:

“Continuous supply of services” means a supply of services which is provided, or agreed to be provided, continuously or on recurrent basis, under a contract, for a period exceeding three months with periodic payment obligations and includes a supply notified as being a continuous supply of services. In case of continuous supply of goods, the invoice has to be issued before or at the time of each of the successive statements is issued or each of the successive payments are received. Similarly, in case of a continuous supply of services the invoice has to be issued.

• Where the due date of payment is ascertainable from the contract, the invoice must be issued on or before the due date of payment;
• Where the due date of payment is not ascertainable from the contract, the invoice must be issued before or at the time when supplier of service receives payment;
• Where the payment is linked to the completion of an event, the invoice should be issued on or before the date of completion of that event.

Time of issuing of tax invoice for continuous supply of services

When the due date of payment can be identified from the contract

The invoice will be issued before or after the payment is to be made by the recipient but within specified time. Invoice will be issued, whether or not any payment has been received by the supplier. For example, telecom service provider sends telephone bill every month. This is mentioned in the contract with the telecom company.

When the due date of payment is cannot be identified from the contract

The invoice shall be issued before or after each time when the supplier of service receives the payment but within specified time.

When the payment is linked to the completion of an event

The invoice shall be issued before or after the time of completion of that event but within specified time.

When the supply of services ceases under a contract before the completion of the supply

The invoice shall be issued at the time when the supply ceases and such invoice shall be issued to the extent of the service provided before stopping. For example, a works contract starting on 1st August 2017 was due for completion in March 2018. But it was stopped on 11th Nov 2017. The contractor will issue an invoice on 11th November 2017 to the extent of work performed.

Specified Time

The invoice must be issued within 30 days from the date when each event, specified in the contract and requiring the recipient to make any payment, is completed.

If the supplier of service is a bank/financial institution/NBFC

The invoice must be issued within 45 days from the date of supply of service. The Centre or a State Government may notify the supply of goods or services to be treated as continuous supply of goods or services.

Tax Invoice in respect of Goods:

Tax Invoice in respect of Services:

Rule 46 Contents of Tax invoice: Tax invoice issued by the registered person in respect of goods and services shall be containing the following particulars:

Invoices for Exports or Supplies to SEZ

Provisions under Section 31 of the Central Goods and Services Tax (CGST) Act, 2017 relating to “Tax Invoice”, are as under:

(1) A registered person supplying taxable goods shall, before or at the time of,

a) Removal of goods for supply to the recipient, where the supply involves movement of goods; or

(b) Delivery of goods or making available thereof to the recipient, in any other case, issue a tax invoice showing the description, quantity and value of goods, the tax charged thereon and such other particulars as may be prescribed:

Provided that the Government may, on the recommendations of the Council, by notification, specify the categories of goods or supplies in respect of which a tax invoice shall be issued, within such time and in such manner as may be prescribed.

(2) A registered person supplying taxable services shall, before or after the provision of service but within a prescribed period, issue a tax invoice, showing the description, value, tax charged thereon and such other particulars as may be prescribed:

Provided that the Government may, on the recommendations of the Council, by notification and subject to such conditions as may be mentioned therein, specify the categories of services in respect of which:

(a) Any other document issued in relation to the supply shall be deemed to be a tax invoice; or

(b) Tax invoice may not be issued.

(3) Notwithstanding anything contained in sub-sections (1) and (2):

(a) A registered person may, within one month from the date of issuance of certificate of registration and in such manner as may be prescribed, issue a revised invoice against the invoice already issued during the period beginning with the effective date of registration till the date of issuance of certificate of registration to him;

(b) A registered person may not issue a tax invoice if the value of the goods or services or both supplied is less than two hundred rupees subject to such conditions and in such manner as may be prescribed;

(c) A registered person supplying exempted goods or services or both or paying tax under the provisions of section 10 shall issue, instead of a tax invoice, a bill of supply containing such particulars and in such manner as may be prescribed:

Provided that the registered person may not issue a bill of supply if the value of the goods or services or both supplied is less than two hundred rupees subject to such conditions and in such manner as may be prescribed;

(d) A registered person shall, on receipt of advance payment with respect to any supply of goods or services or both, issue a receipt voucher or any other document, containing such particulars as may be prescribed, evidencing receipt of such payment;

(e) Where, on receipt of advance payment with respect to any supply of goods or services or both the registered person issues a receipt voucher, but subsequently no supply is made and no tax invoice is issued in pursuance thereof, the said registered person may issue to the person who had made the payment, a refund voucher against such payment;

(f) A registered person who is liable to pay tax under sub-section (3) or sub section (4) of section 9 shall issue an invoice in respect of goods or services or both received by him from the supplier who is not registered on the date of receipt of goods or services or both;

(g) A registered person who is liable to pay tax under sub-section (3) or sub section (4) of section 9 shall issue a payment voucher at the time of making payment to the supplier.

(4) In case of continuous supply of goods, where successive statements of accounts or successive payments are involved, the invoice shall be issued before or at the time each such statement is issued or, as the case may be, each such payment is received.

(5) Subject to the provisions of clause (d) of sub-section (3), in case of continuous supply of services:

(a) Where the due date of payment is ascertainable from the contract, the invoice shall be issued on or before the due date of payment;

(b) Where the due date of payment is not ascertainable from the contract, the invoice shall be issued before or at the time when the supplier of service receives the payment.

(c) Where the payment is linked to the completion of an event, the invoice shall be issued on or before the date of completion of that event.

(6) In a case where the supply of services ceases under a contract before the completion of the supply, the invoice shall be issued at the time when the supply ceases and such invoice shall be issued to the extent of the supply made before such cessation.

(7) Notwithstanding anything contained in sub-section (1), where the goods being sent or taken on approval for sale or return are removed before the supply takes place, the invoice shall be issued before or at the time of supply or six months from the date of removal, whichever is earlier.

The tax liability on a composite or a mixed supply shall be determined in the following manner, namely:

(a) A composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply.

(b) A mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.

Composite Supply

(Tax rate is applicable the tax rate of Principal Supply)

As per section 2(30) “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;

Comprising

• Two or more Taxable Supplies,
• Which are naturally bundled and supplied in conjunction with each other,
• in the ordinary course of business,
• One of which is a Principal supply.

It should be a combination of two or more goods or services or both, and this combination is normally supplied by the industry to its customers in the ordinary course. The most important thing is one supply among these should be Principal supply and other supplies depended on that main Principal supply.

Mixed Supply

(Tax rate is applicable the higher tax rate)

Comprising

*As per sec 2(74) “mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.

*Individual Supplies means independent supplies of each other and are not naturally bundled.

In a GST invoice, the location of supplier and location of recipient play an important role in the determination of the applicability of IGST or CGST and SGST. If the supply is inter-state, IGST would be applicable. If the supply is intra-state, CGST and SGST would be applicable. In this article, we look at how to determine the location of the supplier and location of the recipient as per rules provided in the GST Act.

Location of supplier is usually where a supply is made from, a place mentioned as a principal place of business on the GST registration certificate. In case the supplier distributes the supplier apart from the places as mentioned on the GST registration certificate, the supplier can use the location of a place mentioned on the GST registration certificate.

If the supplier makes the supply from more than one location, the supplier can treat the location of the supplier which directly reflects the concerned supply. If the supplier is unable to determine the place of supply, the concerned individual shall use the usual place of residence of the supplier as the location of the supplier on the GST invoice.

Recipient

Recipient of the supply of goods or services is someone who is liable for payment of consideration for the supply of goods or services. If no consideration is payable, the person to whom the goods are delivered or made available, or uses the goods or services shall apply as the recipient. The word recipient shall also apply to the reference to an agent acting on behalf of a recipient.

Importance of Place of Supply

Wrong classification of supply between interstate or intra-state and vice-versa may lead to hardship to the taxpayer as per section 19 of IGST Act and section 70 of CGST Act

Where wrong taxes have been paid on the basis of the wrong classification, a refund will have to be claimed by the taxpayer

The taxpayer will have to pay the correct tax along with interest for the delay on the basis of revised/correct classification.

Also, correct determination of place of supply will help us in knowing the incidence of tax. As if the place of supply is determined as a place outside India, then tax will not have to be paid on that transaction.

Determining The Place Of Supply Of Services

GST is destination-based tax i.e consumption tax, which means tax will be levied where goods and services are consumed and will accrue to that state. Under GST, there are three levels of Tax, IGST, CGST & SGST and based on the ‘’place of supply’’ so determined and the location of the supplier, the respective tax will be levied.

IGST is levied where the transaction is inter-state, and CGST & SGST are levied where the transaction is intra-state. For understanding the place of supply for services, the following two concepts are very important namely:

• Location of the recipient of services
• Location of the supplier of services

Location of the Recipient of Services

Location of the provider/Supplier of services

Domestic Transactions

These are the transactions where both the parties i.e the supplier as well as the recipient of service are in India. Domestic transactions can be further categorised as below:

• Inter-State (i.e between two different states)
• Intra-State (i.e within the same state)

International Transactions

These are the transactions where either the service recipient or the provider is outside India. Transactions in which both the recipient as well as a provider are outside India are not covered here.

General Rule: The Place of supply for services treated as international transactions shall be:

• The location of the service recipient
• In the case where the location of the service recipient is not available, the place of supply shall be the location of the supplier.

The taxable event in GST is supply of goods or services or both. Various taxable events like manufacture, sale, rendering of service, purchase, entry into a territory of State etc. have been done away with in favour of just one taxable event i.e. supply. The constitution defines “Goods and Services tax” as any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption.

The term, “Supply” has been inclusively defined in the Act. The meaning and scope of supply under GST can be understood in terms of following parameters, which can be adopted to characterize a transaction as supply:

• Supply of goods or services or both (Supply of anything other than goods or services does not attract GST).
• Supply should be made for a consideration.
• Supply should be made in the course or furtherance of business.
• Supply should be a taxable supply.

[Sec. 7(1)(a)]

All forms of supply of goods and/or services such as:

• Sale: Transferring the property in goods from one to another, upon valuable consideration
• Transfer: Any transfer of goods or right in goods or of undivided share in goods without transfer of title thereof.
• Barter: To exchange one commodity for another without use of money.
• Exchange: To swap, to part with, give or transfer for an equivalent with the use of money.
• License: Permission granted by competent authority to exercise certain privileges without such authorization the activity would have constituted as an illegal act.
• Rental: Periodical payment for the use of another property.
• Lease: Contractual agreement by which one party conveys an estate in property to another party, for a limited period, subject to various conditions, in exchange for something of value, but still remain ownership.
• Disposal: To pass or into the control of someone else; to alienate, bestow, or part with.

Import of services [Sec. 7(1)(b)]

Import of services for a consideration whether or not in the course or furtherance of business:

Analysis:

• Import of goods is dealt separately under the Customs Act, 1962, wherein IGST shall be levied as additional duty of customs in addition to basic customs duty under the Customs Tariff Act, 1975.
• Persons importing services for personal purposes shall also be liable to GST on reverse charge basis.
• It should be noted that there is no threshold limit in reverse charge.
• This is an exception of supply in the course or furtherance of business.

Supply without consideration [Sec. 7(1)(c)]

The activities specified in Schedule I, made or agreed to be made without a consideration.

Whether activity to be treated as Supply of goods or supply of services [Sec. 7(1)(d)]

The activities to be treated as supply of goods or supply of services as referred to in Schedule II.

Nor supply of goods or services [Sec. 7(2)]

Notwithstanding anything contained in sub-section (1)

(a) Activities or transactions specified in Schedule III.

(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.

Issue of Notification by Government [Sec. 7(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.

(b) A supply of services and not as a supply of goods.