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Branch Transfers – How to Calculate the Taxable Value?

Updated on :  

08 min read.

It’s common in business parlance to transfer stock from one business unit to other units, warehouses, depots, etc., within the same or different state. Under the GST regime, GST is levied on such stock transfers. 

What is Branch transfer?

Branch transfer implies transferring materials from one location to another in the same organisation. It is also referred to as a Stock Transfer. These kinds of transfers are usually done for several reasons like:

  • For manufacturers transferring their semi-finished goods from their production unit to their other unit for further processing
  • Transferring goods to warehouses for further supply
  • For trader transferring their goods to their other branch due to excessive demand
  • From a compliance perspective, the sale is affected to allow the customers (B2B) to avail of input tax credit (ITC) after branch transfers.

Scope of taxation of branch transfers under GST

Under the GST regime, GST is levied on supply, including transfers to distinct persons. Such transfers are taxable under the cases listed below:

  • Stock transfer between states (Interstate): Stock transfer of an organisation under the same PAN between two branches or units located in different states will be liable to GST.
  • Stock transfer within the same state (Intrastate): The transfer is liable to GST only when the organisation has been registered more than once in one state. Such organisations would be considered as ‘distinct persons’ for GST.

Valuation of branch transfers under GST

Now, as we are through with the understanding of how stock transfers. Let us discuss calculating the value of stock transfers on which GST is levied.

Generally, GST is levied on the transaction value of the goods when the price is the only consideration received for supply and when such supply isn’t between distinct or related persons. Consequently, on stock transfer, the value of the transaction cannot be applied as it’s a supply between the same entity’s branches, which is considered a distinct person under the GST law. Hence, for branch transfers, the value of supply needs to be computed by applying the metrics below:


Sl.No





Valuation Type

Explanation
1
Open Market Value

Open market value is the full value in monetary terms, excluding the tax payable by a taxpayer for a transaction.
If the recipient of such goods or services is eligible for a full ITC, then the value of such goods or services declared in the invoice would be considered the open market value.
2




Value of supply of similar goods and services of similar quality





When the open market value isn’t available this method is applied to arrive at the value of such transaction.
3
90% of the price charged for the supply of similar goods and services of similar quality by the recipient of such goods or services to the customer who isn’t a related person

This metric is available to the supplier at its discretion and is applicable solely in the cases where the recipient further supplies such goods.

For a better understanding, let’s use some scenarios:


Sl. No.

Particulars

Case

Valuation

Scenario 1

When finished products are transferred from a production location to a depot, from where such products will be subsequently sold

XYZ Ltd., a registered manufacturer in Mumbai, transferred its finished goods to its depot located in Kolkata, WB.
While transferring the goods, the open market value of such finished goods was Rs.50,000. Also, the depot subsequently supplied goods of similar type and quality for Rs.52,000.

Here, the stock transfer would be valued at the open market value of Rs.50,000. However, XYZ Ltd. could also opt to value the transaction at 90% of the price charged for such supply, i.e. Rs.45,000. As the finished products are intended for further supply.






Scenario 2

When semi-finished products are transferred from the manufacturing location to another location for further processing.

XYZ Ltd., a registered manufacturer in Mumbai, transferred its semi-finished products to its other manufacturing location, registered in Kolkata, WB, to process further. The invoice value of such a product was Rs.20,000.

As the manufacturing plant is registered in Mumbai and fully eligible for the ITC, the invoice value of Rs.20,000 would be the open market value and XYZ Ltd. will be required to pay tax on Rs.20,000.

Scenario 3

When finished products are transferred from a manufacturing plant to another location which is engaged in manufacturing and supply of exempted goods.

XYZ Ltd., a registered manufacturer in Mumbai, transferred its finished product to its other manufacturing unit, registered in WB. The unit in WB manufactures exempted goods.
Let’s assume the open market value of such product isn’t available when the product was transferred, and the value of similar kind and similar quality of goods was at Rs.50,000

In arriving at the taxable value of such stock transfers, XYZ Ltd. has to value the supply of products of similar nature and similar quality. Therefore, the stock transfer would be valued at Rs.50,000, and tax would be levied on the same.
In this case, the invoice value will not be considered as the open market value as the manufacturing unit registered in WB is engaged in manufacturing and supply of exempted goods and isn’t eligible to avail ITC.

In case, due to any reason, the methods described above cannot be applied to determine the transaction value of supply; it would be then determined by applying the cost of the goods +10% or by applying the residual method. For instance, ABC ltd., a registered manufacturer in Ahemadabad (Gujrat), transferred its semi-finished goods to its other manufacturing unit located in Lucknow, UP, for further processing. The production cost of such semi-finished goods was INR 30,000.

The value of such transferred goods will be INR 33,000 (30,000*110/100).