Last updated on July 10th, 2017 at 02:14 pm
Our Nation is on the brink of GST, a single unified indirect tax system. This is the largest taxation reform in the indirect taxation regime and it subsumes a host of indirect taxes. GST introduces the concept of seamless flow of input tax credit across the supply chain (from manufacture till it reaches the consumer) and across state borders. Secondly, supply being the taxable event under GST, the concept of manufacture, trade and provision of services become irrelevant.
The term Supply includes transfers. The taxability of certain specific supplies without consideration implies that stock transfer under GST is taxable. It becomes imperative for businesses to understand its implication. Here, we bring you the impact of GST on Stock Transfers for businesses.
Taxability of stock transfers
Under Central Excise, a registered manufacturer making a stock transfer of excisable goods, should pay excise duty on 100% +10 % of cost of production and under VAT, on furnishing Form F, stock transfers are not taxable. However input VAT on purchase of goods should be reversed at certain percentage which differs from state to state.
Under GST, levy of tax is on Supply which includes transfers and with the definition of distinct person, branches need to be treated as a different entity. Accordingly, any stock transfers are taxable in the following two cases:
- Intrastate stock transfer: Only when an entity has more than one registration in one state
- Inter state stock transfer: Transfer between two entities located in different states is taxable
The taxability of stock transfers under GST will have an impact on cash flow. This is because, tax is paid on the date of stock transfer, and ITC is effectively used when stock is liquidated by the receiving branch. Hence, under GST, for businesses engaged in stock transfers, especially in case of pharma and FMCG goods, the need of additional working capital arises due to tax instances. This will be a challenge for SMEs who operate with thin working capital.
Consider a seasonal business where production happens throughout the year, but sale happens during a particular season. In such cases, funds may be blocked for long duration. This is because GST needs to be paid in the month in which branch transfers are done, but credit will be effectively utilised during the month in which sale is done.GST needs to be paid in the month in which branch transfers are doneClick To Tweet
Impact on input tax credit
The Input VAT on goods or inputs used in manufacturing of finished goods which are transferred, will be available at reduced rate. The rate of reversal differs from State to State. Generally, Input VAT credit is available in excess of 4 % of tax paid on purchase. For example, If VAT paid on purchase is 12.5 %, then the excess of 4 % i.e. 8.5% will be allowed as Input VAT credit and 4% will be reversed. The ITC reversed will be added as product cost and will result in cascading effect.
|Purchase Value (10 qty@Rs.10,000/Nos)||1,00,000|
|Stock Transfer (10 qty)||–|
|VAT paid @14.5%||14,500|
|ITC eligible in excess of 4% i.e. 10.5% (14.5% Minus 4%)||10,500|
|ITC Reversed @ 4%||4,000|
|Rs 4,000 is added as Product Cost|
However, under GST, tax paid on stock transfer will be fully available as input tax credit. Thus, it eliminates the cascading effect and as a result, the product will be cost effective.
|Purchase Value (10 Qty@10,000/Nos)||1,00,000|
|Stock Transfer (10 qty)||–|
|CGST@ 9% *||9,000|
|SGST@ 9% *||9,000|
|18,000 is fully available as ITC|
*Rate of GST is considered at 18%. For purpose of illustration, purchase cost Rs 1, 00,000 is considered as stock transfer value and accordingly GST is calculated.Under GST, tax paid on stock transfer will be fully available as input tax creditClick To Tweet
No declaration forms = faster processing of stock transfers
Under VAT, in order to get tax exemption on stock transfers, the receiving branch has to issue Form F to the source branch which sends the goods. This has to be produced to the assessing authority to prove that the goods are sent to another branch and not for sale.
With GST, all the declaration forms will be abolished. As a result, there will be no need to furnish any forms for stock transfers. This will ease the process of stock transfers by eliminating the time and effort involved in such activities.With GST, all the declaration forms will be abolished. As a result, there will be no need to furnish any forms for stock transfers.Click To Tweet
Determining tax on stock transfers
Usually, stock transfers are movement of goods to another unit or branch. These are done without any consideration. But the complexity arises in determining the value on which tax needs to be discharged. Under Central excise, the excise duty is to be paid on 100 % + 10 % of cost of manufacture of goods and under VAT, stock transfers are exempted from levy.
In GST, transaction value is broadly considered as the value on which GST is levied. In case of stock transfers, transaction value cannot be applied since transfers are done without consideration. The complexity will still remain under GST era. The tax will likely be valued on par with goods of like kind and quality, or similar methodology of considering the cost of production plus profit.
Clarity on this will emerge when the GST laws and rules are finalised.
Examining the need of branches
Today, in order to leverage tax benefits, many businesses have established branches purely out of statutory needs. This is to enable the business to do billing with local VAT which allows buyer to get the credit. Also, as stock transfers are not taxable, volume of branch transfers is high.
With the seamless flow of input tax credit across state borders in GST, the need for businesses to open multiple branches across states is no longer required. They may have to re-look the branches only from the perspective of business operations. The effective planning of branches may scale down the number of branches, and subsequently cut down the volume of branch transfer.
Understanding the impact of cross branch transfer
Owing to demand and abundant availability of inventory, a branch may engage in cross branch transfers, that is, goods are transferred multiple times from different branches. For example, head office transfers to their branch in Chennai. These goods are again transferred from Chennai to Bangalore. Today, these transfers are tax free. Under GST, this will prove to be a costly affair. This is because, on each transfer, GST needs to paid and will impact cash flow at each branch. This needs to be avoided and it will be beneficial to transfer the goods directly from the primary warehouse or branch.
However, businesses can leverage this by transferring the goods to a branch having high demand. This way goods are liquidated quickly and there will be lesser impact on the working capital needs of the business.Under GST, it is better to avoid cross branch transfers as tax needs to paid on each transferClick To Tweet
Though stock transfers are taxable under GST, the tax is fully allowed as credit. This will eradicate the cascading effect which exists under current regime and as a result, products will be more cost effective. Although this is bound to create a crunch in working capital, effective planning of branches and leveraging of cross branch transfers can reduce the impact on working capital.
This article written by Tejas Goenka, Executive Director, Tally Solutions was originally published in The Economic Times.
Contributors: Pugal T and Yarab A
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