GST Audit: Issue in Supply/Output

Transcription

1 Live Webcast organised by Indirect Taxes Committee of ICAI GST Audit: Issue in Supply/Output CA. Shivam Mehta ICAI 07 th July, 2018 Indirect Taxes Committee, ICAI 1

2 Legal provisions. Indirect Taxes Committee, ICAI 2

3 What is supply? Section 7 of the CGST Act (1) Supply includes (a) all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. Key Contents of Definition Consideration Business Indirect Taxes Committee, ICAI 3

4 Draft Form GSTR 9C. (GST Audit Report) Indirect Taxes Committee, ICAI 4

5 Form GSTR-9C: Clause 5(e) Indirect Taxes Committee, ICAI 5

6 Form GSTR-9C: Annexure B Indirect Taxes Committee, ICAI 6

7 Draft Form GSTR 9D. (Audit Form/Statement of Particulars) Indirect Taxes Committee, ICAI 7

8 Form GSTR-9D: Clause 1 and 2 Indirect Taxes Committee, ICAI 8

9 Employee recoveries. Indirect Taxes Committee, ICAI 9

10 Canteen recovery (exempt under service tax) Company pays to caterer Catering Canteen Company recovers subsidized amount from employees Whether GST payable? Indirect Taxes Committee, ICAI 10

11 Canteen recovery: Advance Ruling 2018-VIL-04-AAR: M/s CALTECH POLYMERS PVT LTD From the plane reading of the definition of "business", it can be safely concluded that the supply of food by the applicant to its employees would definitely come under clause (b) of Section 2(17) as a transaction incidental or ancillary to the main business. Even though there is no profit as claimed by the applicant on the supply of food to its employees, there is "supply" as provided in Section 7(1)(a) of the GST Act, The applicant would definitely come under the definition of "Supplier" as provided in sub-section (105) of Section 2 of the GST Act, Since the applicant recovers the cost of food from its employees, there is consideration as defined in Section 2(31) of the GST Act, It is hereby clarified that recovery of food expenses from the employees for the canteen services provided by company would come under the definition of 'outward supply' as defined in Section 2(83) of the Act, 2017, and therefore, taxable as a supply of service under GST. Indirect Taxes Committee, ICAI 11

12 Transportation recovery Company pays to transporter Renting Transportation Company recovers subsidized amount from employees Whether GST payable? What if non-ac? Indirect Taxes Committee, ICAI 12

13 GST Rate on transportation recovery Chapter Section or Heading Heading 9964 (passenger transport services) Description of Service Rate (per cent) Condition Transport of passengers by any motor vehicle designed to carry passengers where the cost of fuel is included in the consideration charged from the service recipient. 5% 12% Same line of business credit available Or N/A Transport of passengers by nonair conditioned contract carriage other than radio taxi, for transportation of passengers, excluding tourism, conducted tour, charter or hire; 0% Indirect Taxes Committee, ICAI 13

14 Other taxable Employee Recoveries Recovery of Mobile phone/laptop/club expenses? Recovery for guest house stay (Declared Tariff> 1000) Recovery of medicine charges (no exemption) Indirect Taxes Committee, ICAI 14

15 Business Indirect Taxes Committee, ICAI 15

16 What is business? business includes Section 2(17) of the CGST Act (a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit; (b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a); (c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction; (d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business; (e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members; Indirect Taxes Committee, ICAI 16

17 Press Release on business? Press Release dated 13th July 2017: Clarification regarding tax in reverse charge on gold ornaments Section 9(4) of the said Act mandates that tax on supply of taxable goods (gold in this case) by an unregistered supplier (an individual in this case) to a registered person (the jeweller in this case) will be paid by the registered person (the jeweller in this case) under reverse charge mechanism. This provision, however, has to be read in conjunction with section 2(105) read with section 7 of the said Act. Section 2 (105) defines supplier as a person supplying the goods or services. Section 7 provides that a supply is a transaction, for a consideration by a person in the course or furtherance of business. Even though the sale of old gold by an individual is for a consideration, it cannot be said to be in the course or furtherance of his business (as selling old gold jewellery is not the business of the said individual), and hence does not qualify to be a supply per se. Accordingly the sale of old jewellery by an individual to a jeweller will not attract the provisions of section 9(4) and jeweller will not be liable to pay tax under reverse charge mechanism on such purchases. Indirect Taxes Committee, ICAI 17

18 Supply of old car Car purchased by company GST: 28% Cess: 15% Credit of GST and Cess not available in terms of Section 17(5)(a) Sold at WDV Value Value capitalized and depreciation claimed Whether GST payable? GST: 28% Cess: 15? Indirect Taxes Committee, ICAI 18

19 Sale of old car: Advance Ruling 2018-VIL-18-AAR: CMS INFO SYSTEMS LIMITED The disposal of the scrap vehicles for consideration is a sale and section 7 explaining the expression 'supply' covers supply of goods such as sale or disposal made for a consideration. Section 7, further, says that the supply has to be in the course or furtherance of business. With regard to this, we see that the applicant is in the business of having a cash management network involving transportation of cash. The disposal of the cash carrying vans is a transaction in connection with or incidental or ancillary to the business of having a cash management network. As and when the vehicles become scrap, they have to be disposed off and the proceeds therefrom to be identified as income for the business which is reflected in the Profit & Loss Account of the business. Buying new assets and discarding the old and unusable assets is an activity in the course of carrying on of the business. Hence, we conclude that supply of such motor vehicles as scrap after its usage is an activity of 'supply' in the course or furtherance of business and such transaction would attract GST. Indirect Taxes Committee, ICAI 19

20 GST Rate on supply of old car NN 37/2017-CTR (w.e.f ) 65% of Normal Tax and Cess NN 8/2018-CTR (w.e.f ) 18%/12% on margin* Cess Nil How to calculate margin* (i) (ii) in case of a registered person who has claimed depreciation under section 32 of the Income-Tax Act, 1961(43 of 1961) on the said goods, the value that represents the margin of the supplier shall be the difference between the consideration received for supply of such goods and the depreciated value of such goods on the date of supply, and where the margin of such supply is negative, it shall be ignored; and in any other case, the value that represents the margin of supplier shall be, the difference between the selling price and the purchase price and where such margin is negative, it shall be ignored. Indirect Taxes Committee, ICAI 20

21 Form GSTR-9C: Annexure A Indirect Taxes Committee, ICAI 21

22 Schedule I supplies Indirect Taxes Committee, ICAI 22

23 Form GSTR-9C: Annexure A.contd Indirect Taxes Committee, ICAI 23

24 Clause 1: Business Asset Permanent transfer or disposal of business assets where input tax credit has been availed on such assets. Issues: 1. Business Assets is not defined? Business Asset? CSR Expenses, Brochures, Pamphlets Indirect Taxes Committee, ICAI 24

25 Business Asset: Foreign Jurisprudence According to the Transfer of Business as a Going Concern Guide- Malaysia Goods and Service Tax, business assets are any assets of a business whether movable or immovable and include trading stock, machinery, furniture, fixture and fittings and premises. According to Capital Gains Tax, U.K., business assets includes land and buildings, fixtures and fittings, plant and machinery, eg a digger, shares, registered trademarks and business s reputation. Customs and Excise Commissioners v West Herts College 2000 WL : Prospectuses were not, at any stage in their life, while in the ownership of the college, part of the assets of the business. They were instead simply part of the means by which the business was conducted and promoted. Indirect Taxes Committee, ICAI 25

26 Clause 2: Distinct Persons Supply of goods or services or both between distinct persons Concept of distinct Persons: Support service? Case 1: Supply between 2 different GSTN located in one or more states or union territories. Cranes, Forklifts? XYZ, Delhi GSTN - 1 XYZ, Gujarat GSTN - 2 XYZ H.O. Delhi XYZ, Branch Offices in other States Case 2: Supply between Establishments of one person located in two or more states. Case Study: Office Accessories/Equipment(s) are procured centrally by the Head Office of XYZ. Now, the H.O. of XYZ is transferring such laptops to its other offices. Whether it would amount to Supply? Indirect Taxes Committee, ICAI 26

27 Clause 2: Circular No. 21/21/2017-GST Inter-State Conveyance Movement Further exclusions in respect of inter-state movement of various modes of conveyance, between distinct persons as specified in section 25(4) of the said Act, not involving further supply of such conveyance, including trains, buses, trucks, tankers, trailers, vessels, containers, aircrafts Carrying goods or passengers or both or For repairs or maintenance Except where such movement is for further supply of the same conveyance inter-state movement of rigs, tools and spares, and all goods on wheels [like cranes] Indirect Taxes Committee, ICAI 27

28 Clause 2: Employees Supply of goods or services or both between related persons Related Persons: Explanation stated under Section 15: o Officers or directors of one another s businesses o Legally recognised partners in business o Employer and Employee o Person directly or indirectly controls, owns more than 25 percent of outstanding voting stock or share o One directly or indirectly controls the other o Both directly or indirectly controlled by a third person o Together directly or indirectly control a third person o Members of the same family ISSUES: What if Gift is Rs. 50,001? What about perks? Specific exception to the aforesaid clause: In case, the employer supply goods or services by way of gift to its employee for a value not exceeding rupees fifty thousand would not constitute as supply. Indirect Taxes Committee, ICAI 28

29 Press Release dated : Perquisites to employees Facilities provided to employees by the employer without any consideration. It is pertinent to point out here that the services by an employee to the employer in the course of or in relation to his employment is outside the scope of GST (neither supply of goods or supply of services). It follows therefrom that supply by the employer to the employee in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST. Further, the input tax credit (ITC) scheme under GST does not allow ITC of membership of a club, health and fitness centre [section 17 (5) (b) (ii)]. It follows, therefore, that if such services are provided free of charge to all the employees by the employer then the same will not be subjected to GST, provided appropriate GST was paid when procured by the employer. The same would hold true for free housing to the employees, when the same is provided in terms of the contract between the employer and employee and is part and parcel of the cost-to-company (C2C). Indirect Taxes Committee, ICAI 29

30 Liquidated Damages/Penalties Indirect Taxes Committee, ICAI 30

31 Issues Whether the following deductions would be covered under the above-said entry: Liquidated damages/penalty etc. deducted from vendor s bill on account of delayed delivery/low quality etc. Notice pay recovery from employees wherein employer is agreeing to terminate employee prior to due date in lieu of consideration (recovery from notice pay). Writing back of creditors for deficiency in service. Indirect Taxes Committee, ICAI 31

32 Foreign Jurisprudence The GST Ruling GSTR 2001/4 (GSTR), issued by the Australian Tax Office (ATO) explains the GST treatment of court orders and out of court settlements. In the said ruling at Para 73, it has been clarified that the damages is the most common form of remedy arising out of the termination or breach of contract. This damage, loss or injury, being the substance of the dispute, cannot in itself be characterized as a supply made by the aggrieved party. This is because the damage, loss or injury in itself does not constitute a supply under the provision of Australian GST. Further, under GSTR 2003/11 which has been issued under Australian GST to answer the question as to whether GST is payable on a payment made on early termination of a lease of goods. In the said Ruling, it has been clarified that a payment received to compensate the lessor for damage or loss flowing from early termination as a result of a default by the lessee is not consideration for a supply, even though the lessor brings the lease to an end by exercising the right to terminate the lease. The Ruling further provides that in such cases, there will be no taxable supply because a payment for genuine damages, which is not consideration for any earlier or current supply, cannot be said to be made in connection with any supply. Indirect Taxes Committee, ICAI 32

33 Schedule II: Clause 5(e) Clause (e) to S.No. 5 of Schedule II to CGST Act states that agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act shall be considered as supply of services. FAQs issued by Government: FAQ 1 Question: Whether deduction of Liquidity Damage (LD)/Penalty deduction from contractor s bills and charging Penalty for non-lifting of coal till targeted minimum level to Annual Contractual Quantity (ACQ) will attract GST? Answer: Yes, it is a service being tolerating an act as per Schedule II of the CGST Act,2017 thus GST shall apply. FAQ 2 Question: What is the significance of services provided by Government or a local authority by way of tolerating non-performance of a contract for which consideration in the form of fines or liquidated damages is payable to the Government or the local authority? Answer: Non-performance of a contract or breach of contract is one of the conditions normally stipulated in the Government contracts for supply of goods or services. The agreement entered into between the parties stipulates that both the service provider and service recipient abide by the terms and conditions of the contract. In case any of the parties breach the contract for any reason including nonperformance of the contract, then such person is liable to pay damages in the form of fines or penalty to the other party. Non-performance of a contract is an activity or transaction which is treated as a supply of service and the person is deemed to have received the consideration in the form of fines or penalty and is, accordingly, required to pay tax on such amount. Indirect Taxes Committee, ICAI 33

34 Exempt supplies Indirect Taxes Committee, ICAI 34

35 Exempt Supply (Implication: Credit Reversal) Section 2(47) exempt supply means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply Section 2(78) non-taxable supply means a supply of goods or services or both which is not leviable to tax under this Act or under the Integrated Goods and Services Tax Act Indirect Taxes Committee, ICAI 35

36 Form GSTR-9C: Annexure G Indirect Taxes Committee, ICAI 36

37 Form GSTR-9D: Annexure 6 Indirect Taxes Committee, ICAI 37

38 Types of exempt supply under GST Recovery of rent and electrical charges for residential quarters Recovery of ambulance charges Supply of electricity to State GRID Recovery of interest on loans/advances (no ITC reversal required) Recover of transportation charges on ex-works supplies Indirect Taxes Committee, ICAI 38

39 Sale of Scrips, REC and PSLC Duty Credit Scrips (MEIS/SEIS) to : 12% to : 5% to present: 0% Circular No. 34/8/2018- GST dated S.No.3 clarifying that PSLCs (akin to REC) are taxable as goods at a standard rate of 18 % under the residual entry S. No. 453 of Schedule III of notification No. 01/2017-Central Tax (Rate). Circular No. 46/20/2018 dated In modification of S. No. 3 of Circular No. 34/8/2018- GST dated , it is hereby clarified that Renewable Energy Certificates (RECs) and Priority Sector Lending Certificates (PSLCs) and other similar documents are classifiable under heading 4907 and attract 12% GST. NN 11/2018-Central Tax (Rate): Reverse charge on supply of PSLC Indirect Taxes Committee, ICAI 39

40 Exports/Deemed Exports Indirect Taxes Committee, ICAI 40

41 Form GSTR-9C: Annexure A Indirect Taxes Committee, ICAI 41

42 Exports: Timeline to : Higher rate of drawback available. Thus, only LUT supplies to present: Only lower rate of drawback available to : Full rate of tax on merchant exports No refund on account of deemed exports No Exemption of IGST against EPCG and Advance License Indirect Taxes Committee, ICAI 42

43 Exports: Timeline to Present: Exemption of IGST against EPCG and Advance License to Present: Refund on deemed exports available to recipient/supplier to Present: 0.1% tax on supply to merchant exporters to Present (w.e.f ): No option to export on payment of IGST if: Exemption from IGST claimed under EPCG/AA Supplies received against 0.1% Refund taken by the recipient on deemed exports Indirect Taxes Committee, ICAI 43

44 Form GSTR-9D: Clause 7 Goods? Indirect Taxes Committee, ICAI 44

45 HIGH SEA SALES In-bond sales Indirect Taxes Committee, ICAI 45

46 Relevant Legal Provisions Section 5 (1) of the IGST Act inter alia provides that there shall be levied a tax called the integrated goods and services tax on all inter-state supplies of goods or services or both, on the value determined under section 15 of the Central Goods and Services Tax Act and at such rates, not exceeding forty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person Proviso to Section 5 (1) of the IGST Act provides that the integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975 on the value as determined under the said Act at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962 Further, Section 7(2) of the IGST Act provides that supply of goods imported into the territory of India till they cross the customs frontier of India shall be treated as a supply of goods in the course of inter-state trade or commerce. As per 2(10) of IGST Act, "import of goods" with its grammatical variations and cognate expressions, means bringing goods into India from a place outside India Section 2(4) of the IGST Act defines Customs frontier of India as the limits of the customs area as defined in Section 2 of the Customs Act, 1962 (hereinafter referred to as the Customs Act ). As per Section 2(11) of the Customs Act, Customs frontier of India is an area of a customs station or a warehouse (inserted vide Taxation Amendment Act 2017) and includes any area in which imported goods or export goods are ordinarily kept before clearance by Customs Authorities Indirect Taxes Committee, ICAI 46

47 Reversal of credit on High Sea Sales As per Section 17(2) of the CGST Act, where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under IGST Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zerorated supplies. Section 2(47) of the CGST Act defines exempt supplies to include within its ambit non-taxable supplies. Non-taxable supplies as defined in Section 2(78) of the CGST Act are supplies which are not subject to tax under the CGST Act or the IGST Act. Tax is levied under the CGST Act only on the intrastate supplies and under the IGST Act on the inter-state supplies. Whether High Sea Sales is non-taxable supply and proportionate credit is to be reversed? Indirect Taxes Committee, ICAI 47

48 Circular No. 3/1/2018-IGST: In-bond sales (on or after the 1st of April, 2018) In case of supply of the warehoused goods, the point of levy will be the time of clearance of such goods as per Customs Act in terms of proviso to Section 5(1) of IGST Act. IGST shall be levied and collected at the time of final clearance of the warehoused goods for home consumption i.e. at the time of filing the ex-bond bill of entry Value will be either the transaction value or the valuation made at the time of filing the into-bond bill of entry, whichever is higher in terms of Section 3(8A) of CTA Section 3(8A)(a) of CTA provides that where the goods deposited in a warehouse under the provisions of the Customs Act are sold to any person before clearance for home consumption or export under the said Act, the value of such goods for the purpose of calculating the IGST under subsection (7) shall be the value determined under sub-section (8) or the transaction value of such goods, whichever is higher, where the whole of the goods are sold. Indirect Taxes Committee, ICAI 48

49 Thank you. Indirect Taxes Committee of ICAI and Register on for updates and resource material from ICAI Indirect Taxes Committee, ICAI 49