(Photographer: Danial Acker/Bloomberg)

GST Rules: Relief For Self Supply Services And A Worrying Provision For Existing Stock

Judicial precedents in India have laid down that service tax is not applicable when an entity renders service to itself. The Goods and Service Tax (GST) law is set to change this. Once GST becomes effective, every company that has offices in different states will have to charge for services it renders to its branches. The GST Council has, via rules, now proposed methods to value such services. Experts say while the prescribed methods are likely to throw up challenges, the rules mitigate the impact by allowing entities to self-value services in certain cases.

While industry has welcomed the proposed rules on self-supply services, the provisions applicable to transition stock and Special Economic Zones have come as a surprise.

Transition Rules: 40 Percent Credit Too Less?

The draft transition rules allow credit on goods held in stock where invoice or duty paying document is not available. The credit can be availed at the rate of 40 percent of the Central or state GST payable on supply of transition stock under GST. The 40 percent allowance is lower than industry expectation, Pratik Jain, an indirect tax partner at consultancy firm PwC India, told BloombergQuint.

Jain explained this by way of an illustration:

  • Let’s say a car manufacturer, having paid excise duty, sells a car to a dealer.
  • The manufacturer only charges value added tax (VAT) on it. The dealer now has this car but does not have invoice of excise duty.
  • Assume excise duty was 20 percent and VAT is 13 percent.
  • Once GST becomes effective, let’s say the applicable rate on this car is 28 percent.
  • The dealer will now have to pay 15 percent GST from his own pocket (28 percent GST minus 13 percent VAT that the he has already paid).
  • Since Central GST is in lieu of excise duty, it would be unfair that the dealer is required to pay this tax again.
  • It is for such dealers that the GST rules propose to permit a deemed credit of 40 percent on Central GST.
Out of 28 percent GST that the dealer will have to pay, let’s say 14 percent is Central GST. So the dealer will get 40 percent of the Central GST rate. In this example, the dealer will get a credit of 40 percent of 14 percent which is, let’s say, 6 percent. But in the example above, the loss is of 15 percent but this dealer will get an offset of only 6 percent. So such a dealer is left with 9 percent extra tax in addition to cess.
Pratik Jain, Partner, PwC India

Hence, this 40 percent deemed credit has to be relooked at for certain sectors where GST rate is going to be higher, Jain added.

Valuation Rules: Welcome Move For Self-Supply Services

Supplies between two registered persons will attract GST even if the registered persons are two different registered premises of a same legal entity. For instance ‘X’ - a head office- is registered in Mumbai. ‘Y’ and ‘Z’ - are branches of ‘X’ registered in Gujarat and Delhi respectively. Once GST becomes effective, any services provided by ‘Y’ or ‘Z’ to ‘X’ or by ‘Y’ to ‘Z’ and vice versa will attract GST.

The GST Council, in the draft valuation rules, have now proposed methods to value such services.

  • The value of such self-supply of services between two different registered premises of same legal entity would be the open market value of such supply.
  • Where open market value is not available, value of services of like kind and quality will be the basis of valuation.
  • If valuation cannot be determined by either of these means, value would be 110 percent of the cost of provision of such service.

Jigar Doshi, a partner at SKP Business Consulting, said that determining the value of services based on any of these methods will prove to be difficult.

Unlike goods, which are tangible and for which open market value or value of goods of like kind and quality can be compared or for which cost of production can be computed, for services which are intangible in nature and value of which is highly subjective, using these methods will be a challenging task.
Jigar Doshi, Partner, SKP Business Consulting

But this is partly mitigated by another provision that says that if the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value.

This would be a major relief to service entities such as telecom companies, IT companies, banking & financial institutions, etc which will have multiple registrations under GST, Doshi said. He explained that companies would now be able to raise invoice with value computed as per their normal accounting practices and procedures for allocation of costs for self-supply of services.

The value declared in the invoice would be accepted as such as value for self-supply services. This appears more logical also because if at recipient location anyways the tax credit was to be available, prescribing any value for such transaction would be a revenue neutral situation only. 
Jigar Doshi, Partner, SKP Business Consulting

Registration Rules: SEZ A Distinct Person

The revised registration rules mandate that Special Economic Zones (SEZs) will need to compulsorily obtain registration as a separate business vertical. SEZs will be treated as a distinct person and so all the issues related to distinct persons will apply to it, Badri Narayanan, a partner at law firm Lakshmikumaran & Sridharan, said.

You will have to file separate returns for SEZs. The minute you file separate returns, you will have to show your procurement of SEZ separately, you must provide the output of SEZ separately. When the head office and SEZ will be considered as distinct persons, you will have to account for inter-unit supplies without consideration such as HR, accounting and management costs. Secondment will also become complicated.
Badri Narayanan, Partner, Lakshmikumaran & Sridharan

The transfer of credit from the head office to the SEZ will also become challenging, he added.

Industry has time until April 10, 2017 to feedback and comment on the draft rules on input tax credit, valuation, transition and composition.