In this blog post, Kaushik Neogi,  a student pursuing his LL.B (4th year) from Delhi Metropolitan Education, affiliated to Guru Gobind Singh Indraprastha University and a Diploma in Entrepreneurship Administration and Business Laws from NUJS, gives a detailed analysis of the applicability of the GST Act, 2016 and the GST Valuation Rules, 2016.

kaushik

Background

  • The first proposition for GST was made in 2011 in the Lok Sabha through the Constitution (115th Amendment) Bill, 2011. The attempt was unsuccessful as the bill lapsed because of dissolution of the 15th Lok Sabha.
  • The proposition of GST was again introduced in 2014 on the 19th of December in the Lok Sabha through the Constitution (122nd Amendment) Bill, 2014.
  • Lok Sabha passed the bill on the 6th of May 2015.
  • The Bill gets referred to a Select Committee of Rajya Sabha on the 14th of May 2015.
  • Rajya Sabha passes the Bill with amendments on the 3rd of August 2016.
  • Lok Sabha unanimously passes the Bill with the amendments as suggested by Rajya Sabha with all the 443 members of the House voting for the Bill on the 8th of August 2016.
  • The government wishes to bring the provisions of the Bill to effect from the 1st of April 2017.

Introduction

The GST regime is the Indian government’s initiative to check and curtail the existing tax system of indirect taxes in India. Currently, the indirect taxes imposed in India are on goods and services, some levied by the Centre and some by the States.
The GST regime intends to classify most indirect taxes under a single taxation regime. GST is a value added tax levied on goods and services. The implementation of GST is aimed to increase tax compliance, broaden the tax base and to avoid leakages and distortions due to inter-state tax variations.[2]

The Finance Ministry in June 2016 released the Model GST Law[3] under which the following were released-
Goods and Services Tax Act, 2016, The Integrated Goods and Services Tax Act, 2016 & GST Valuation (Determination of the Value of Supply of Goods and Services) Rules, 2016.

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Certain aspects of the Goods and Services Tax Act, 2016[4]

 GST-BillExtent and Applicability:

Section 1 provides for the Short title, extent, and commencement, as per 1(2) the Act will extend to the whole of India, meaning this tax regime for Indirect taxes will be applicable in the State of Jammu and Kashmir too.

This is the first time when an indirect tax law has been uniformly made applicable to the state of Jammu and Kashmir along with the rest of India. 

Important definitions under Section 2:

 

Composite supply Section 2(27)
  • “Means a supply consisting of –

o   two or more goods;
o   two or more services; or
o   a combination of goods and services

provided in the course or furtherance of business, whether or not the same can be segregated.”
Continuous supply of goods Section 2(30)
  • “Means a supply of goods which is provided, or agreed to be provided, continuously or on a recurrent basis, under a contract, whether or not using a wire, cable, pipeline or another conduit, and for which the supplier invoices the recipient on a regular or periodic basis.”
Continuous supply of services Section 2(31)
  • “Means a supply of services which is provided, or agreed to be provided, continuously or on recurrent basis, under a contract, for a period exceeding three months with periodic payment obligations and includes supply of such service as the Central or a State Government may, whether or not subject to any condition, by notification, specify”
Input service Section 2(54)
  • “Means any goods other than capital goods, subject to exceptions as may be provided under this Act or the rules made thereunder, used or intended to be used by a supplier for making an outward supply in the course or furtherance of business.”
Input Section 2(55)
  • “Means any service, subject to exceptions as may be provided under this Act or the rules made thereunder, used or intended to be used by a supplier for making an outward supply in the course or furtherance of business.”
Input Service Distributor Section 2(56)
  • “Means an office of the supplier of goods and / or services which receives tax invoices issued under section 23 towards receipt of input services and issues tax invoice or such other document as prescribed for the purposes of distributing the credit of CGST (SGST in State Acts) and / or IGST paid on the said services to a supplier of taxable goods and / or services having same PAN as that of the office referred to above”
  • For distributing the credit of CGST (SGST in State Acts) and IGST, Input Service Distributor shall be deemed to be a supplier of services.

 
Input tax Section 2(57)
  • “In relation to a taxable person, means the (IGST and CGST)/(IGST and SGST) charged on any supply of goods and/or services to him which are used, or are intended to be used, in the course or furtherance of his business and includes the tax payable under sub-section (3) of section 7”
Output tax Section 2(72)
  • “In relation to a taxable person, means the CGST/SGST chargeable under this Act on taxable supply of goods and services made by him or by his agent and excludes tax payable by him on reverse charge basis.”
services Section 2(88)
  • “Means anything other than goods.”

 

Meaning and Scope of Supply:

Section 3 of the Act provides for the meaning and scope of supply.

As per 3(1) Supply includes:

  • All forms of supply of services and/or goods such as:
  • barter;
  • transfer;
  • sale;
  • license;
  • exchange;
  • rental;
  • lease; or
  • disposal

made or agreed to be made for consideration by a person in the course or furtherance of business;

  • Importation of service, whether or not for a consideration and whether or not in the course or furtherance of business; and
  • A supply specified in Schedule I made or agreed to be made without consideration.
SCHEDULE I

MATTERS TO BE TREATED AS SUPPLY WITHOUT CONSIDERATION

When there is Permanent disposal or transfer of business assets.
When the business assets are Temporarily applied for a private or non-business use.
When Services are put to a non-business or private use.
When Assets are retained after the registration.
When there is a supply of services and goods by one taxable person to another taxable/nontaxable person in the course or furtherance of business.

Note* supply of goods by a registered taxable person to a job-worker in terms of section 43A shall not be treated as a supply of goods.

3(2) provides that the matters mentioned in Schedule II shall apply for determining what is, or is to be treated as a supply of goods or a supply of services.

SCHEDULE II

MATTERS TO BE TREATED AS SUPPLY OF GOODS OR SERVICES
Transfer

 
  • Where there is any transfer of the title in goods, it is a supply of goods.
  • Where there is any:

§  transfer of goods or

§  of an undivided share in goods or

§  of right in goods
without the transfer of title thereof, it is a supply of services.

  • Where there is any transfer of title in goods under an agreement which stipulates that property in goods will pass at a future date upon payment of full consideration as agreed, it is a supply of goods.
Land and Building
  • Where there is any:

§  Tenancy;

§  easement;

§  lease; or

§  license
to occupy the land, it is a supply of services.

  • Any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.

 
Treatment or process Any treatment or process which is being applied to another person’s goods is a supply of services.

 
Transfer of business assets
  • Where goods are forming part of the assets of business by or under the directions of the person carrying on the business are transferred or disposed of so as no longer to form part of those assets, whether or not for consideration, such transfer or disposal is a supply of goods by the person.
  • Where, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, by or under the direction of a person carrying on a business, whether or not for a consideration, the usage or making available of such goods is a supply of services.
  • Where any goods, forming part of the business assets of a taxable person, are sold by any other person who has the power to do so to recover any debt owed by the taxable person, the goods shall be deemed to be supplied by the taxable person in the course or furtherance of his business.
  • Where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless—
    • The business is transferred as a going concern to another person; or
    • The business is carried on by a personal representative who is deemed to be a taxable person.
The following shall be treated as “supply of service.”

 
  • Renting of immovable property;
  • Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or before its first occupation, whichever is earlier.
  • As per clause (h) of the explanation, supply will exclude alcoholic liquor for human consumption.
The following shall be treated as supply of goods Supply of goods by any unincorporated association or body of persons to a member thereof for cash deferred payment or other valuable consideration.

According to 3(2A) a person acting as an agent who, for an agreed commission or brokerage, either supplies or receives any goods and services on behalf of any principal, such transaction shall be deemed to be a supply.

3(3) provides that Subject to sub-section (2), the Central or a State Government may, upon recommendation of the Council, specify, by notification, the transactions that are to be treated as—

  • a supply of goods and not as a supply of services; or
  • a supply of services and not as a supply of goods; or
  • neither a supply of goods nor a supply of services.

3(4)provides that not contrary to anything contained in sub-section (1), the supply of any branded service by an aggregator, as defined in section 43B, under a brand name or trade name owned by him shall be deemed to be a supply of the said service by the said aggregator.

 

Levy of, and Exemption from, Tax:
tax-cut

Section 7 of the Act provides for levy and Collection of Central/State Goods and Services Tax on all intra-State supplies of goods and services at the rate to be specified later, and 7(2) provides that every taxable person shall pay the tax as per the provisions of the Act.

7(3) provides for the provision of reverse charge on certain categories of goods and services to be specified, where the tax shall be payable by the person receiving such mentioned goods and services.

Section 8 of the Act Provides for compounded Levy. Under which the Central or State government may permit a registered taxable person whose turnover in a financial year does not exceed 50 lacs of rupees, to pay, in lieu of the tax payable by him, an amount calculated at such rate, not less than 1%, of the turnover during the year.

  • Provided that no such permission shall be granted to a taxable person who effects any inter-state supplies of goods and services or to a person who is liable to pay tax under sub-section (3) of section 7 of the Act.

Section 9 of the Act defines a taxable person as a person who carries on any business at any place in India and who is registered or required to be registered under Schedule III of this Act for payment of tax.

  • Agriculturist has not been regarded as a taxable person under this Act.
  • A person who is required to be registered under paragraph 1 of Schedule III of this Act shall not be considered as a taxable person until his aggregate turnover in a financial year exceeds [Rs. 10 lakh]
  • A a person who is required to be registered under paragraph 1 of Schedule III of this Act shall not be considered as a taxable person until his aggregate turnover in a financial year exceeds [Rs. 5 lakh], this provision is only valid when the taxable person conducts his business in any of the North-Eastern States.
SCHEDULE III
Person to be registered under paragraph 1.

Every supplier is to be registered in the State from where he makes the supply of goods and services. Where the aggregate turnover in a financial year of the supplier does exceed Rs. 9 lakh.
*If the supplier is from the North-Eastern States then he shall register where the aggregate turnover in a financial year does exceed Rs. 4 lakh.

 

9(3) provides for the persons who are not to be considered as taxable persons under the act being-

  • any person who provides services as an employee of his employer in the course of, or about his employment, or by any other legal ties creating the relationship of employer and employee as regards working conditions, remunerations and employer’s liability.
  • any person engaged in the business of exclusively supplying goods and services that are not liable to tax under this Act.
  • any person, liable to pay tax under sub-section (3) of section 7, receiving services of not exceeding a value (to be mentioned later) in a year for personal use, other than for use in the course or furtherance of his business.

Under the provisions of Section 10 if the Central or a State Government is satisfied that it is necessary for the public interest, have the power to grant exemption from tax following certain recommendations and procedures. Section 11 provides for remission of tax on supplies found deficient in quantity.

 

Time and Value of Supply:

Section 12 provides for time of supply of goods. The main provisions of this section are explained in the table below-

12(2) The time of supply of goods shall be the earliest of  

  • In a case where the goods are required to be removed the date on which the supplier for supply removes the goods to the recipient, or
  • In a case where the goods are not required to be removed the date on which the goods are made available to the recipient, or
  • The date on which the supplier issues the invoice with respect to the supply or
  • The date on which the supplier receives the payment with respect to the supply or
  • The date on which the recipient shows the receipt of the goods in his books of account.
12(3) In case of continuous supply of goods
  • where successive statements of accounts or successive payments are involved
  • The time of supply shall be the date of expiry of the period to which such successive statements of accounts or successive payments relate
  • If there are no successive statements of account
  • The date of issue of the invoice (or any other document) or

The date of receipt of payment, whichever is earlier, shall be the time of supply. 12(5)

In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earliest of:

  • The date of the receipt of goods, or
  • The date on which the payment is made, or
  • The date of receipt of invoice, or
  • The date of debit in the books of accounts.12(6)

If the goods (being sent or taken on approval or sale or return or similar terms) are removed before it is known whether supply will take place, the time of supply shall be

  • At the time when it becomes known that the supply has taken place or
  • Six months from the date of removal, whichever is earlier.

Section 13 provides for time of supply of services. The main provisions of this section are explained in the table below-

13(2) The time of supply of services shall be
  • If the invoice is issued within the prescribed period, the date of issue of invoice or the date of receipt of payment, whichever is earlier, or
  • If the invoice is not issued within the prescribed period, the date of completion of the provision of service or the date of receipt of payment, whichever is earlier, or
  • In a case where the provisions mentioned above do not apply. The date on which the recipient shows the receipt of services in his books of account.
13(3) In case of continuous supply of services, the time of supply shall be
  • The date on which the payment is liable to be made by the recipient of service, where the due date of payment is ascertainable from the contract, whether or not any invoice has been issued or the supplier of service has received any payment;
  • Each such time when the supplier of service receives the payment or issues an invoice, whichever is earlier, where the due date of payment is not ascertainable from the contract;
  • The time of completion of that event, where the payment is linked to the completion of an event.
13(5) In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earliest of
  • The date of receipt of services, or
  • The date on which the payment is made, or
  • The date of receipt of invoice, or
  • The date of debit in the books of accounts.
13(6)
  • In a case where the supply of services ceases under a contract before the completion of the supply, such services shall be deemed to have been provided at the time when the supply ceases.

 

Section 14 provides for Change in rate of tax in respect of the supply of services. The main provisions of this section are explained in the table below-

14(1) Not contrary to anything contained in section 13 The time of supply, in cases where there is a change in the effective rate of tax in respect of services, shall be determined in the following manner, namely-
In case the taxable service has been provided before the change in effective rate of tax –

  • The time of supply shall be the date of receipt of payment or the date of issue of invoice, whichever is earlier. Where the invoice for the same has been issued, and the payment is also received after the change in effective rate of tax; or
  • The time of supply shall be the date of issue of the invoice. Where the payment is received after the change in effective rate of tax but the invoice has been issued prior to change in effective rate of tax; or
  • The time of supply shall be the date of receipt of payment. Where the payment is received before the change in effective rate of tax, but the invoice for the same has been issued after the change in effective rate of tax; or
  • The time of supply shall be the date of receipt of payment. Where the payment is received before the change in effective rate of tax, but the invoice for the same has been issued after the change in effective rate of tax;

In case the taxable service has been provided after the change in effective rate of tax-

  • The time of supply shall be the date of receipt of payment. Where the invoice has been issued prior to the change in effective rate of tax but the payment is received after the change in effective rate of tax; or;
  • The time of supply shall be the date of receipt of payment or date of issue of invoice, whichever is earlier. Where the invoice has been issued, and the payment is received before the change in effective rate of tax; or
  • The time of supply shall be the date of issue of the invoice. Where the invoice has been issued after the change in effective rate of tax but the payment is received before the change in effective rate of tax.

 

For the purpose of this section, “the date of receipt of payment” shall be the date on which the payment is entered in the books of accounts of the supplier or the date on which the payment is credited to his bank account, whichever is earlier:

Provided that the date of receipt of payment shall be the date of credit in the bank account when such credit in the bank account is after 4 working days from the date of change in the effective rate of tax.

 Section 15 provides for the Value of taxable supply. Under the provisions of this Section-

15(1) The value of a supply of goods and/or services shall be the transaction value that

“Is the payable or price paid for the said supply of services and/or goods where the price is the sole consideration for the supply and the supplier, and the recipient of the supply is not related.”
15(2) The transaction value under sub-section (1) shall include §  “Any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods and/or services”;
§  “The value, apportioned as appropriate, of such goods and/or services as are supplied directly or indirectly by the recipient of the supply free of charge or at reduced cost for use in connection with the supply of goods and/or services being valued, to the extent that such value has not been included in the price actually paid or payable”;
§  “Royalties and license fees related to the supply of goods and/or services being valued that the recipient of supply must pay, either directly or indirectly, as a condition of the said supply, to the extent that such royalties and fees are not included in the price paid or payable”;
§  “Any taxes, duties, fees and charges levied under any statute other than the SGST Act or the CGST Act or the IGST Act”;
§  “Incidental expenses, such as, commission and packing, charged by the supplier to the recipient of a supply, including any amount charged for anything done by the supplier in respect of the supply of goods and/or services at the time of, or before delivery of the goods or, as the case may be, supply of the services”;
§  “Subsidies provided in any form or manner, linked to the supply”;
§  “Any reimbursable expenditure or cost incurred by or on behalf of the supplier and charged in relation to the supply of goods and/or services”;
§  “Any discount or incentive that may be allowed after the supply has been affected:
Provided that such post-supply discount which is established as per the agreement and is known at or before the time of supply and specifically linked to relevant invoices shall not be included in the transaction value.”
15(3) The transaction value under sub-section (1) shall not include “Any discount allowed before or at the time of supply provided such discount is allowed in the course of normal trade practice and has been duly recorded in the invoice issued in respect of the supply.”
15(4) The value of the supply of goods and/or services in the following situations which cannot be valued under sub-section (1) “Shall be determined in such manner as may be prescribed in the rules.

  • The consideration, whether paid or payable, is not money, wholly or partly;
  • The supplier and the recipient of the supply are related;
  • There is reason to doubt the truth or accuracy of the transaction value declared by the supplier;
  • Business transactions are undertaken by a pure agent, money changer, insurer, air travel agent and distributor or selling agent of lottery;
  • Such other supplies as may be notified by the Central or a State Government in this behalf on the recommendation of the Council

 

GST Valuation (Determination of the Value of Supply of Goods and Services) Rules, 2016[5]

 

Important definitions under Rule 2-

goods of like kind and quality “Means goods which are identical or similar in physical characteristics, quality and reputation as the goods being valued, and perform the same functions or are commercially interchangeable with the goods being valued and supplied by the same person or by a different person.”
services of like kind and quality “Means services which are identical or similar in nature, quality and reputation as the services being valued and supplied by the same person or by a different person.”
transaction value “Means the value of goods and/or services within the meaning of section 15 of the CGST Act.”

 

Rule 3 Provides for methods of determination of value. Under this Rule-

  • Subject to rule 7, the value of goods and/or services shall be the transaction value.
  • The “transaction value” shall be the value determined in monetary terms.
  • Where the supply consists of both taxable and non-taxable supply, the taxable supply shall be deemed to be for such part of the monetary consideration as is attributable to it.
  • The transaction value shall be accepted even where the supplier and recipient of supply are related, provided that the relationship has not influenced the price.
  • Where goods are transferred from—
  • One place of business to another place of the same business
  • the principal to an agent or from an agent to the principal, whether or not situated in the same State, the value of such supply shall be the transaction value.
  • The value of supplies specified in sub-section (4) of section 15 of the Act shall be determined by proceeding sequentially through rules 4 to 6.

Rule 4 provides for determination of the value of supply by comparison. Under this rule-

  • Where the value of a supply cannot be determined under Rule 3, the value shall be determined on the basis of the transaction value of goods and/or services of like kind and quality supplied at or about the same time to other customers, adjusted in accordance with the provisions of sub-rule mentioned below.
  • In determining the value of goods and/or services under sub-rule mentioned above, the proper officer shall make such adjustments as appear to him reasonable, taking into consideration the relevant factors, including-
    • the difference in the dates of supply
    • the difference in commercial levels and quantity levels
    • the difference in composition, quality and design between the goods and/or services being valued and the goods and/or services with which they are compared
    • the difference in freight and insurance charges depending on the place of supply.

Rule 5 provides for computed value method. Under this rule-

  • If the value cannot be determined under Rule 4, it shall be based on a computed value which shall include the following-
  • the cost of production, manufacture or processing of the goods or, the cost of provision of the services
  • charges, if any, for the design or brand
  • an amount towards profit and general expenses equal to that usually reflected in the supply of goods and/or services of the same class or kind as the goods and/or services being valued which are made by other suppliers.

Rule 6 provides for the residual method. Under this rule-

  • When the value of the services and/or goods is not able to be determined as per the provisions of rule 5, the value shall be determined using reasonable methods consistent with the principles and general provisions of these rules.

Rule 7 provides for rejection of declared value and Rule 8 provides for valuation in certain cases.

gst Conclusion

The provisions discussed in this post are covering the main aspects of the model law relating to definitions, taxability, and supply. The model law apart from these subjects provides for the procedures relating to assessment, audit, registration and various other guidelines. Along with provisions relating to input credit available to the taxpayers, offenses under the Act and transitional provisions provide for a smooth and hassle free implementation of this new tax regime.

Footnotes:
[1]http://www.prsindia.org/uploads/media/Constitution%20122nd/Brief–%20GST,%202014.pdf

[2]http://finmin.nic.in/workingpaper/gst%20reforms%20and%20intergovernmental%20considerations%20in%20india.pdf

[3]http://www.cbec.gov.in/htdocs-cbec/gst

[4]http://www.cbec.gov.in/resources//htdocs-cbec/deptt_offcr/model-gst-law.pdf

[5]http://www.cbec.gov.in/resources//htdocs-cbec/deptt_offcr/model-gst-law.pdf

 

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