INTRODUCTION
Major of the assets of the companies covered by current assets and in that Receivables are performs a major part in the organization and also there is a risk of bad debts and hence it is necessary to have proper control over receivables and therefore in India transfer of receivables arising out of sale or loan transactions takes place quite frequently. In such a case, a firm may avail the services of specialized institutions engaged in receivables management, called factoring firms.
Factoring is very popular and necessary to enhance working capital by quick conversion of book debt into liquid form.
FACTORING
Basically, factoring is a kind of Financial Service in which a business organization sells its Account Receivables to another person, called a Factor, at a discount in order to raise money. However, factoring is completely different from the concept of bill discounting. In bill discounting, invoices are discounted at a certain rate to get the instant funds whereas in factoring services, trade receivables are sold to an outside factoring agency or company. Once the receivables are sold, the factoring company carried out all the activities that the seller should have done.
PROCESS
- First Seller Sale the goods to Customer or Provide the loan to customer.
- Seller sale the receivable to Factoring Company.
- Factoring company paid to seller receivable at a discounted rate.
- Factoring company carried out some statutory requirements.
- Customer finally paid outstanding to factoring company.
GST IMPLICATION
GST is levied on the taxable supply of goods or services or both and hence we have to determine whether factoring transaction is goods or service and is taxable or exempt.
Factoring transactions covered several components and we have to analysed each component separately for GST perspective.
Sale of Receivable
First, there is a sale of receivables from the seller to the factoring company, for which the seller receives a consideration. The consideration is arrived at after discounting the receivables at a discounting rate.
Receivables are actionable claims and we have to determine whether an actionable claim is goods or service.
As per Section 2(52) of CGST Act, 2017 "goods" means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.
From the above, it is clear that the Actionable claim is Goods.
Now we have to determine whether it is a taxable supply or exempt supply.
Schedule III of CGST Act, 2017 states that transactions in actionable claims shall neither be treated as a supply of service nor as a supply of goods.
Further, the law also provides the definition of "actionable claims" under section 2(1) of the CGST Act in the following manner:
"Actionable claim" shall have the same meaning as assigned to it in section 3 of the Transfer of Property Act, 1882;
Section 3 of the Transfer of Property Act, 1882 defines the term "actionable claims" in the following manner,
"Actionable claim" means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the civil courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent.
On reading of the above-impugned provision of law, it can be concluded that only such claims to debt that are not secured by mortgage, hypothecation or pledge shall be considered as actionable claims.
Therefore, transactions in only unsecured debts shall be exempted from GST and the transaction in secured receivables will still be covered under the GST law.
Further on close eye on the definition of "goods" we understand that goods exclude money; a secured debt is primarily nothing but a claim for money, the collateral is just an additional cushion for the lender which can be utilized to recover the money in case there is a default. Therefore, even secured debts should be considered as nothing more than money-to-money transactions.
Therefore, it can be concluded that the transfer of receivables shall not be taxable under GST.
Processing of Transaction
There is some nominal fee that is normally charged by the factoring company for processing the transaction.
As per Section 2(102) of CGST Act, 2017 provides as "services" means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.
As per the above provision, services exclude any money-to-money transaction but include activities relating to the use of money. In a factoring transaction, the processing fee is charged by a factoring company for processing the transaction, which falls within the meaning of activities relating to the use of money. Therefore, processing fees charged will be charged to GST as a supply of service.
FAQs on Financial Services as released by CBIC also says that, any charges collected in the course of transfer or assignment of debt would be chargeable to GST, being in the nature of consideration for the supply of services.
Registration Charges
The factoring company charged some amount to the borrower towards the charges incurred for registration of factoring transactions with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI).
As provided in the definition of services, anything other than supply of goods, money and securities shall be treated as services and this represents nothing among the three, therefore, the transaction would qualify to be a supply of services and shall be subject to GST accordingly.
Finance or Discount Charges
Once the receivables are sold to the factoring company, the servicing and collections are carried out by the factoring company only.
These charges are normally computed on a periodic basis towards providing advance finance to the seller. These charges are similar in nature of interest levied by banks on cash credit facilities.
The factoring company remits advance against receivables to the extent of 75% to 80% to the seller and the rest of payment is made after realization from the customer. This act of factoring company will be treated as supplies of services because of activities in relation to the use of money is treated as a supply of services. However, we find an exemption for such a supply of services and excluded from taxability under GST.
S.No-27 of Notification No.12/2017-CGST (Rate) dated 28.06.2017 provides an exemption to services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services). Therefore, it can be concluded that discount or interest charges recovered by the factoring company will not be taxable under GST.
Sometimes factoring arrangement may not contain separate charges for collection and servicing of receivables but adjusted with the discounting rate and therefore, the discounting rate has two components attached to it, first, compensation towards the credit risk and next towards the servicing and collection, while the former one is exempted from GST and the latter one is subject to GST, therefore, making the transaction a mixed supply.
In a mixed supply, GST is charged on the transaction at rate at which the supply carrying the highest rate is charged.
Therefore, in the present case, the discount charged by the factoring company shall be chargeable to GST at the rate which is applicable to the supply of collection services.
DISCLAIMER: This is strictly my personal opinion. The above discussion cannot be considered as our professional or legal advice. Users shall consider legal provisions or take advice from experts before taking action on it.
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