Branch Transfers – How to Calculate the Taxable Value
Branch transfer refers to the transfer of materials from one unit/location to another unit/location belonging to the same business entity. It is also known as Stock Transfers. Branch transfers are done for various reasons, such as:
- Transfer of semi-finished goods from the manufacturing unit to another unit for further processing
- Transfer of goods to godowns/warehouse for further supply
- Trader may transfer goods to another branch due to demand
- From the perspective of compliance- to enable the customers (B2B) to avail input tax credit, branch transfers are done and then the sale is affected.
Whatever may be the reason for transfer of goods, it is vital for businesses to understand the tax implications on such transfers.
- How are these transfers treated for the purpose of statutory compliance? Are they taxable?
- If taxable, what is the value to be considered for the purpose of tax levy?
Let us understand the treatment of transfers under the current Indirect Tax regime and in GST
Under Central Excise, the valuation of stock transfers depends on the nature and the purpose for which the transfer is effected by a manufacturer. A transfer may be for any of the following reasons:
- For further processing to another manufacturing unit
- Transfer to a depot
- Transfer to any other premises from where the sale is done.
|Type of Transfer||Valuation||Example|
|Finished goods are transferred from the manufacturing unit to:||The value shall be the normal transaction value of such goods sold from such a place at or at about the same time.||Rose Polymers, a registered manufacturer in Delhi, transferred finished goods to their depot located in Noida, UP. At the time of removal, the selling price of finished goods at depot is Rs.20000.|
Hence, the value of transfer of finished goods from the manufacturing unit to their depot in Noida will be Rs.20000.
|Semi-finished goods are removed from the manufacturing unit to another unit for further processing or used in the manufacturing of finished goods||The value of transfer will be at 110% of the cost of production of such goods.||Rose Polymers, a registered manufacturer in Delhi, transferred semi-finished goods to another manufacturing plant located in Noida, UP, for further processing. The cost of production of the semi-finished goods was at Rs.25,000.|
The value of goods transferred will be Rs.27,500 (25,000*110/100)
Under VAT, stock transfers are not taxable on furnishing ‘Form F’. However, input VAT on purchase of goods should be reversed at a certain percentage which differs from state to state. 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.
|Transfer of goods from one branch to another branch||On furnishing Form F, stock transfers are exempted.||Ganesh Trading, located in Karnataka, transferred the goods to another branch located in Maharashtra.|
The stock transfer will be exempted on furnishing Form F.
Stock transfer under GST Regime
Under GST, levy of tax is on supply which includes transfers to distinct persons, and transfers are taxable under the following two cases:
- Intrastate stock transfer: Taxable only when the entity has more than one registration in one state. These entities will be considered as ‘distinct persons’.
- Interstate stock transfer: Transfer between two branches/units located in different states under the same PAN will be taxable
Now, we know the taxability of stock transfers. Let us discuss the calculation of value of stock transfers on which GST is levied.
Broadly, GST is levied on the transaction value when price is the sole consideration received for supply and when supply is not between related or distinct persons. As a result, on stock transfer, the transaction value cannot be applied since it is a supply between 2 branches of the same entity, which is referred to as a distinct person. Hence, for stock transfers, the value of supply should be calculated by applying the following metrics:
|1||Open Market Value||Open market value of supply of goods or services is the full value in money, excluding the GST and cess, payable by a person for a transaction.|
If the recipient is eligible for full input tax credit, then the value declared in the invoice will be considered as the open market value.
|2||Value of supply of goods and/or services of like kind and quality||This method is applicable when the open market value of the goods or services is not available.|
|3||90% of price charged for supply of goods and/or services of like kind and quality by the recipient to his customer who is not a related person||This metrics is at the option of Supplier and only applicable If goods are intended for further supply by the recipient.|
Let us understand the applicability of the above valuation in different scenarios
|Finished goods are transferred from the manufacturing unit to a depot, from where the goods are to be sold||Rose Polymers, a registered manufacturer in Delhi, transferred finished goods to their depot located in Noida, UP.|
At the time of transfer, the open market value of the finished goods was Rs.20,000. Also, the depot supplied goods of like kind and quality at price of Rs.22,000.
|The stock transfer will be valued at the open market value of Rs.20,000. However, Rose Polymers can also opt to pay 90% of price charged for the supply of like kind and quality goods i.e. Rs.19,800. This is because, the finished goods are transferred for further supply.|
|Semi-finished goods are removed from manufacturing unit to another unit for further processing.||Rose Polymers, registered manufacturer in Delhi, transferred semi-finished goods to another manufacturing plant, registered in Noida, UP, for further processing. The invoice value of such goods was at Rs.18,000.||Since the manufacturing unit is registered in Noida and fully eligible for input tax credit, the invoice value of Rs.18,000 will be considered as open market value and Rose Polymers are required to pay GST on Rs.18,000.|
|Finished goods are transferred from Manufacturing unit to another unit engaged in 100 % manufacture and supply of exempted goods.||Rose Polymers, registered manufacturer in Delhi, transferred finished goods to another manufacturing plant, registered in Haryana. The unit in Haryana is engaged in manufacturing goods which are exempted.|
Assume, the open the market Value is not available at the time of transfer and value of like kind and quality of goods was at Rs. 25,000
|In arriving the taxable value of such transfers, Rose Polymers needs to value the supply of goods and/or services of like kind and quality. Hence, branch transfer will be valued at Rs.25,000 and GST will be levied on it.|
Here, the invoice value cannot be considered as the open market value because the manufacturing plant registered in Haryana is engaged in 100 % supply of exempted goods and is not eligible to avail input tax credit
If for any reason the above methods cannot be applied for determining the value of supply, it will be determined by applying the cost of the product+ 10 % or by using the residual method. This will be explained in detail in our upcoming blogs.
Determining value supply between Principal and Agent
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