Impact on Stock Transfer under GST

Businesses are charged GST on stock transfer. It is crucial to have strategy in place to reduce tax burgen as it is quite common in any business to transfer its stock to its other branches, units, depots, warehouses to cater to timely delivery orders from different geographical locations. 

What is stock transfer?

Stock transfer means moving goods from one place to another place of business of the registered taxpayer entity, usually without consideration. For instance, if the factory attached to the head office moves inventory to its branch or warehouse, it is called stock transfer. There must be supporting purchase order that branch has raised for the stock transfer.

GST on stock transfer

Before GST regime

Under the pre-GST scenario, inter-state or intra-state stock transfers were subjected to a levy of excise duty on the removal of goods. The same was not subject to VAT/ CST. Under the GST regime, tax is collected on the supply of goods with or without consideration being paid or agreed to be paid.

GST regime

Under the GST Law, stock transfer is taxable and covered in the scope of supply. The term ‘supply’ under GST includes transactions between a principal and an agent. As per the schedule I of GST law, a supply of goods by a taxable person to another taxable person or non-taxable person during furtherance of a business without consideration is also included within the ambit of ‘supply’. 

However, GST is chargeable if transactions take place between two persons with different GSTINs. That means, intrastate stock transfers are not subject to GST whereas interstate stock transfers and stock transfers to distinct persons within the state are chargeable to tax under GST. The applicability of GST on stock transfer is quickly summarised in the below infographic-

Further, it is pertinent to understand the correct valuation of the stocks being transferred, tax to be paid on stock transfer and the availability of Input Tax Credit (ITC) to the entity.

Value of stock transfer under GST

Valuation is the substance for levy, collection and administration of taxes under any tax law since its origin. Valuation has always impacted indirect tax laws over the past years which was barefaced for generating tax revenues for Central as well as state governments. Same have not been dispensed with under GST regime as well. The valuation rules continue to tax invariably every corner of the business episode. The impact on stock transfer under GST would even not be spared.

As per Section 15 of CGST Act, the value of supply of goods shall be the price paid or agreed to be paid during supply subject to supplier and recipient not being related and price being sole consideration. As per rule 3(4) of CGST Rules even in the case of supplier and recipient being related, the value would be accepted to be the price paid or agreed to be paid where the price is not influenced by the relation.

Transaction value is the price paid or payable for the supply of goods. As a stock transfer, do not compass a consideration, this provision cannot be implemented. Valuation Rules provides that if the transaction value is not available, then the transaction value of goods of like kind and quality should be considered.

Further, if goods of like kind and quality are not available, then the computed value, i.e., the cost of production, general expenses and profit, should be adopted. Where a supply for consideration of goods of like kind and quality is available, such value is to be adopted, in absence of same, the cost of sales considered

Availability of ITC for Stock Transfer

Under GST, the input tax credit is available on the basis of tax paid on value of the stock transfer used for business purpose to sell taxable supplies alone.

e-Way bill on Stock Transfer

Both inter-state and intra-state stock transfers require an e-way bill if the value exceeds the specified threshold. For intra-state transfers between distinct persons with different GSTINs, GST is applicable, necessitating an e-way bill.

Impact on free supplies

Under the pre-GST scenario, free supplies were subjected to excise only. However, under GST, the supply of goods between persons without consideration is deemed to be a “supply”. Hence, the stock transfer of promotion materials/ free samples will be subject to GST. The transaction value would be the value of goods of like kind and quality or the cost of sales. So, the promotion expenses of companies like FMCG, Pharma will increase.

The overall impact of GST on stock transfer

With the shift of taxable events from sales to supply consequentially stock transfers under GST would be taxed and this scenario would certainly impact key industries such as FMCG, Pharma, etc. The impact would be to the extent of costs savings in procurement, review procurement contracts, free supplies, discount schemes, product pricing and the overall financial impact of GST.

In the case of seasonal industries where the sale happens in specific periods (fertilizer, woollen, clothes etc) entrepreneur would need to pay in cash (or through accumulated credit) in the month/quarter of dispatch resulting in blockage of working capital. e-way bills and check-post related compliance would affect removal, optimisation of delivery schedules, operating cost and competitive pricing.

Further, due to huge volume transfers, detailed scrutiny by tax authorities would be a matter of entanglement. To pass the motive of GST and its transparency it would be well-suited to set an alternate method for valuation based on cost plus a certain percentage to lower related cost to taxpayers and administration cost for government.