As these transactions are within the same legal entity, it would typically not involve any consideration and thereby carry no value to estimate the GST liability.
By Santosh Dalvi
It is imperative that businesses obtain a registration in each state where they have an establishment or any business activity is undertaken even if such activities are only provided to the head office of such businesses.Here, we discuss some of the key issues surrounding the valuation to be adopted for taxing such support services under GST.
With the levy of tax on inter-branch/office transactions, every supply of goods or services or between the establishments of the same business, but located in different states or having separate registrations, would now be required to be tracked by the businesses for the purpose of payment of tax. As these transactions are within the same legal entity, it would typically not involve any consideration and thereby carry no value to estimate the GST liability. Consequently, there arises a need for attributing an appropriate value for these transactions. This is for the purpose of arriving at the amount of tax liability to be discharged thereon.
With regard to this, the GST law has prescribed the following values to be adopted for such transactions, in the following order, as mentioned below:
– ‘Open Market Value’ of such supplies; or
– Value of supply of goods or services of like kind and quality; or
– 100% and 10% of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services; or
– Value determined using reasonable means, consistent with the principles and provisions under the GST law.
In addition to the above, the provisions also state that wherever the recipient is eligible for full input tax credit of the GST applicable on such inter branch/office transactions, the value declared in the invoice raised by the supplying branch/office, shall be deemed to be the ‘Open Market Value’ of the goods or services. On a conjoint reading of these provisions, it can be understood that where the recipient/receiving branch/ office is eligible for availing the full credit of the GST chargeable on such supplies, whatever value is charged in the invoice by the supplier/supplying branch shall be considered to be the ‘Open Market Value’ of such supply.
Also, as the supplies undertaken at the branch locations are essentially input services provided to the receiving branch for the furtherance of business, such supplies shall be eligible for the full credit of the GST discharged on the value of these supplies. Accordingly, as the full credit is available, businesses can adopt any reasonable estimate of the costs of as the value for payment of GST.
Interesting to note is, as the above provisions provide a certain amount of lenience in the value to be adopted, businesses may choose to adopt nil or values which are far lesser than the costs of such supplies. This could then be disputed by tax authorities, leading to litigations in some cases. Further, such practices could also result in the supplying branch/office locations not being able to make use of the Input Tax Credit of the goods or services or both received by them from third parties.
For instance, if the cost of goods procured is Rs 100 and the GST paid thereon is Rs 18 (i.e., @ 18%), and these goods have been transferred to another branch of the entity for a value of Rs 50 with GST of Rs 9 (@ 18%), then the receiving branch would only be able to avail the credit of GST of Rs 9 declared in the tax invoice by the transferring branch. The balance credit of Rs 9 shall remain with the transferring branch and not be available for utilisation by the receiving branch towards the output of GST on the subsequent supply of the said goods. This declaration of lower values in the invoices, more often than not, could lead to accumulation of credits at the transferring branch. On the contrary, a declaration of higher values in the invoices, could result in accumulation of credits at the receiving branch in the absence of any substantial output tax liability.
In order to avoid such scenarios leading to possible litigation and unutilised credits, it would be advisable for businesses to consider adopting appropriate valuation mechanisms, based on evaluating the facts on a case-to-case basis.
With contributions from N Vijay Kumar, CA.