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It is quite common in a business having PAN India transactions to transfer its stock to its other units, depots, warehouses to cater to timely delivery orders from different geographical locations. Under the pre-GST scenario, inter-state or intra-state stock transfers are subjected to a levy of excise duty on the removal of goods. The same is not subject to VAT/ CST. Under the model of GST, tax is collected on the supply of goods with or without consideration being paid or agreed to be paid.
Under Model GST Law, the term ‘supply’ includes transactions between a principal and an agent. As per clause 3 read with 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’. Further, the subject matter of concern would be the valuation of the stocks being transferred and the availability of Input Tax Credit under the brain wave of CGST, SGST and IGST.
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 clause 15 of GST Law, 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 GST Valuation 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
Under the pre-GST scenario, free supplies are 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.
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, optimization 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.