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Manufacturing companies fear loss of input tax credit, GST on transfer to self
December, 22nd 2015

The GST has a dual tax structure, which allows both the Centre and states to levy tax.

In this fourth of the five-part series, TOI finds out why manufacturers are worried ...

India Inc has been waiting for a seamless indirect tax regime and is looking forward to the introduction of GST. However, it hopes that some pain points are resolved before the GST bill becomes law.
The basic framework

The dual GST structure, which enables both the central government and states to levy GST (Central GST, or CGST, and State GST, or SGST), is causing some concerns. In addition, integrated GST (IGST) will be levied by the Centre on inter-state supply of goods.

As Sunil Gabhawalla, indirect tax expert, points out: "The GST design has not been incorporated within the constitutional framework. The role of the GST Council is only recommendatory. This results in a structural flaw whereby any of the states can deviate not only with regard to procedures, rates and exemptions but also with regard to the basic GST design (which is a multiple point tax system with credit at each stage)."

Supply to self & cash outflow problems

The tax trigger under GST is the 'supply' of goods and services. The draft model GST law, which is in wide circulation, has defined 'supply' to also include supply made without a consideration. "This significantly widens the scope of the levy. For example, transactions in goods and services between the head office and a branch of the same company may be covered and subject to GST levy," says Rohan Shah, managing partner, Economic Laws Practice.

Currently, a transfer of goods to warehouses (known as stock transfer) doesn't attract any tax. The volume of stock transfers is high in certain industries, such as pharma and FMCG.Under GST, the stock transfer is likely to come within the GST ambit. "Such goods will need to be valued at the time of the stock transfer, for the purpose of GST levy.Specifically, valuation in case of capital assets, consumables, tools and spares, goods sent for job work or repairs will be very subjective," says Gabhawalla. Government officials say the draft model GST law, which is in circulation, was not released by the government -an official version will be released in the coming weeks for shareholder discussion. India Inc hopes that this issue will be addressed.
Restrictions On Set-Off Of Input Tax Credits

In simple terms, GST is levied on supply of goods and the manufacturer will be allowed credit for the GST paid on purchases of input (an input tax credit will be available). But there are restrictions on utilization of input tax credit, which could impact cash flows.

"A CGST tax credit cannot be set off against a SGST tax liability. While IGST credit can be effectively utilized, a priority order has to be followed for such a set-off (see table)," says Yusuf Hakim, partner at CNK & Associates. "In case a company has opted for separate registrations of its business verticals in the same state, then a SGST set-off even within that state is restricted only to that business vertical. However, most business houses will opt for a common registration within the state, unless the GST law offers some specific tax incentives for a particular business vertical, which seems to be unlikely, given that incentives are likely to be phased out under the GST regime," adds Hakim.

Further, if a company has business operations in different states, SGST cannot be set off pan-India. "As regards, CGST set-off, there is no express clarity. One hopes that offset of excess CGST paid in one state against the CGST payable in the other state is provided for by lawmakers in the final GST bill," sums up Hakim.

Loss Of Input Tax Credit

"The GST IT infrastructure is to be set up such that there will be a matching of the input tax credit claimed by a recipient and the tax paid by the supplier. Accordingly, if a company's vendor is tax non-compliant and blacklisted, the company as a recipient of goods could also be impacted and denied input tax credit," says Shah.

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