Issues & solutions: Valuation, Classification, Exemption under GST

Valuation:

Deposit vs advances:

Issue: Levy of GST on the deposits and advances liable?

• When amount is collected as deposit, then it is not taxable to GST until time that it is appropriated towards the taxable supply.
• The agreement should clearly spell out the nature of receipt i.e advance or deposit.
• The implication under other laws, such as Companies Law may also be considered while collecting deposit.

Supplies of service by the employer to the employee:

Issues: What would be the valuation where the employer recovers Rs 10 towards the supply of canteen service to the employees where the cost incurred by the employer is Rs 100?

• Supply of canteen service by the employer to its employees is considered as supply of service and liable to GST.
• Employer and employee are related person under GST.
• Value of supply would be done based on the CGST Rules, 2017 as the transaction is between the related persons and transaction value cannot be adopted.
• Valuation in such case could be at Open market value / value of like kind and quality / 110% of the cost. Where Open market value / value of like kind and quality is not determinable due to the fact that it is practically difficult to arrive at the Open market value / value of like kind and quality on the services provided by the employer to its employees, cost + 10% would be the basis for valuation.
• Therefore, in the above example, the value of the supply would be 100 + 10% i.e Rs 110 and GST is payable at the applicable rate though only Rs 10 is recovered by the employees.

Discount:

Issue: Whether post sale price drop scheme given by the distributor of goods for which distributor compensates the retailer, would be considered as value of goods supplied by retailer and taxed to GST?

• The price drop is passed on by giving a reduction in future payments.
• The reduction of price which is compensated by the distributers to the retailers could qualify as subsidy which is directly linked to the price and includible in the value of the supply i.e. transaction value in respect of supplies made by the retailers who ultimately receive the subsidy. This is so if the scheme is known at the time of the supply.

Quantity discount and disclosure in the invoice:

Issue: Would quantity discount be considered as free supplies under GST and how to reflect the quantity discount in the invoice?

• Quantity discounts are not free supplies. Free supplies are supplies without any consideration either in monetary or non-monetary form. Quantity discounts are usually given on achievement of specific target.
• Disclosure in invoice: Option 1- Give a credit note only for the value without impacting the GST.
• Option 2- Give credit note with GST invoice wise. Recipient to reverse duty credit and pay in return.

Branch supplies:

Issue: Supply of goods or services to other the branches / units having different GST registration would be levied to tax.

Solution:

• GST has to be paid on the taxable supplies of goods/services done by branch in one State to branch of same entity located in another state. IGST has to be charged on such taxable supplies.
• The valuation of interstate branch supplies, is done in accordance with valuation rules i.e open market value / transaction value of like kind and quality / cost + 10% .
• Value ( reasonable) declared on invoice to be acceptable where recipient unit is eligible
  to take ITC.
• Tax invoice has to be raised by the branch providing the goods/services to the branch receiving the goods/services.
• The receiving branch can avail input tax credit based on the invoice raised by supplying branch.

Valuation - Individual supply vs composite supply under GST:

Issue: Servicing of cars involving both supply of goods (spare parts) and services (labour). In case the parts are supplied separately, what would be the treatment under GST?

• The taxability of the supply would be determined on the basis of the facts of the case.
• Where it is maintenance service contract, whereby labour and parts are naturally bundled and cannot be separated or supplied independently, it would be treated as composite supply and valued as a service @18%.
• When parts are supplied separately, GST to be paid on value of such parts at applicable rates.
• In case of repairs labour under services and parts at their rates.

Value of free of cost supplies:

Issue: Whether moulds and dies owned by Original Equipment Manufacturers (OEM) that are sent free of cost (FOC) to a component manufacturer is leviable to tax?

• Where there is a contract between OEM and component manufacturer for supply of components made by using the moulds/dies belonging to the component manufacturer, but the same have been supplied by the OEM to the component manufacturer on FOC basis, the amortised cost of such moulds / dies would be added to the value of the components.
• What covered in plant and machinery

Issue: Plant & machinery WCT - what is covered?

Solution: Composite works contract of P&M to value capitalized as service - ITC available in full.

Consideration received partly in cash and partly in kind

Issue: How to value the supply where the consideration is not received wholly in money eg: on sale of mobile phone, the consideration would be given in the form of money and exchange of old mobile phone.

• Valuation of the supply would be the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money, if such amount is known at the time of supply;
• In our example, the value of supply would be aggregate of value of the old mobile given and the consideration received in the form of money.

Transfer of money from one branch to another branch

Issue: Whether the money advances from one branch to another branch is taxable under GST?

• Transaction in money is outside the ambit of both goods and services. Therefore, GST is not leviable on the inter-branch transfer of money.

Valuation in case of sale of capital goods

Issue: How to compute the tax to be paid under GST on sale of the Capital asset?

• On sale of capital goods, GST has to be paid at the higher of the following:
  1. GST on the transaction value of the supply or
  2. Input tax credit availed less 5% for every quarter or part therefore from the date of issue of the invoice for such goods.
• However, in case of where the capital assets is sold to a distinct / related persons, the transaction value cannot be determined in accordance with section 15 of the CGST Act, 2017. In such case, only the second option would be considered.

Levy of GST on services provided and consumed outside India:

Issue: Where GST is leviable on the value of the following services provided by a service provider outside India and consumed outside India?

1. Accommodation Services
2. Seminars conducted outside India
3. Training services done outside India

• GST would be levied on recipient of service on the import of services under reverse charge mechanism. One of the condition for import of service is the place of supply of service should be in India. The place of supply of service is determined by applying Section 13 of IGST Act when supplier or recipient is outside India.
• Accommodation services at Paris: The place of supply of accommodation services would be the location of the immovable property. Where accommodation services are availed abroad, the place of supply would be location of such immoveable property outside India. Hence GST is not leviable under RCM on the import of service.
• Training conducted at Japan for employees of ABC Ltd, India: The place of supply of Seminars would be the location of the event where it is held. Where the seminars are conducted abroad, the place of supply would be location where training is done in physical presence of trainees outside India and hence GST is not leviable under RCM on the import of service.
• Training services done outside India: Where the trainee is required to be present in location with the trainer, the place of supply would be the location where the services are actually performed. Where training is done outside India, the place of supply would be location of performance outside India and hence GST is not leviable under RCM on the import of service.

Motor vehicles - The use of “in respect of”

Issue: Is leasing, repair, insurance of Motor Vehicles - classified as service in respect of ( not in relation to) MV- 9971?

Solution:

• Yes it would be classified as service in respect of the motor vehicle. The words used in the act are “In respect of” which may have a narrow meaning-
• However, there are Contrary judgements. Disputable.

Exemption vs Reduction in the value of supply:

Issue: Whether the exclusion of expenses from GST levy under pure agent concept would be considered as an exemption?

• The expenses incurred by the pure agent are not exempted by way of notification.
• The expenses incurred by the pure agent are basically an exclusion from the value of supply.
• Where all the conditions of the pure agent are fulfilled, the same cannot be included in the value of supply.
• The credit related to such expenses excluded citing pure agent cannot be availed.

Valuation of barter transaction:

Issue: New Flat with additional area is provided to the tenant against old flat.  How to value the transaction in GST as the transaction is not wholly in money?

• Where Transfer of flats has happened after the completion certificate is issued for both the flats: In accordance with Schedule III of the CGST / SGST Act, 2017, the barter transaction is neither supply of goods nor supply of service under GST. Therefore, GST is not payable.
• Where Transfer of flats has happened after the completion certificate is issued for old flat but before issue of completion certificate for the new flat: In such case, the valuation has to be done based on the valuation rules i.e as follows-

Value of supply of goods or services where the consideration is not wholly in money: The value of supplies would 

1. Be the open market value
2. Be the sum total of consideration in money and such further amount in money as is equivalent to the consideration not in money, where such amount is known at the time of supply, where open market value is not determinable
3. Be the value of supply of goods or services of like kind and quality, where valuation cannot be made in (a) and (b) above.
4. Be 110% of Cost, where a to c are not determinable.

Be determined using reasonable means consistent with section 15 of the CGST Act, 2017, where (a) to (d) are not determinable.

Supply of taxable and supplies-not leviable to GST by issue of a single invoice:

Issue: Where a single invoice is issued for taxable & non-leviable supplies, whether GST has to be paid on the non-leviable supplies?

Solution: Though a single invoice is issued, GST is not applicable on the value of the goods which are non-leviable under GST.

Compensation cess on by dealer in margin scheme

Issue: Whether compensation cess would be payable on sale of second hand vehicle by a automobile dealer, who is paying tax on margin in accordance with the valuation rules, where input tax credit was availed?

Solution: Cess is payable on the outward supply of the second hand vehicles too. No specific exemption for second hand vehicle.

Valuation in case of high sea sales:

Issue: Should the valued addition in high sea sale form part of value of the supplies on which IGST has to be charged?

• IGST on high sea sales transaction of imported goods, whether one or multiple, would be levied and collected only at the time of importation on the value which includes the value addition accruing in such high sea sale.
• Therefore, IGST would be levied on the value at the time of clearance in accordance with circular no 33/2017-Cus.

Classification:

Goods vs Services

Issue: Whether transaction is a supply of goods or services?

• If neither a supply of goods or services- Sch-III (employee, land, completed building) - confirm; In 10% cases doubt- see Sch-II (Tr of property, deemed service - Right to use, Temporary tr., WCT-turnkey, TDR) - confirm.

Old tariff classification relevant under GST

Issue: Use of Customs Tariff whether required?

Yes and old case laws in Customs + CE would be relevant.

Other clarificatory releases by CBIC

Issue: Reliance on Tweets, FAQ’s, Guidance note, Comm clarification, Circulars, Advance Ruling?

Solution: Majority in line with law - Some contradictory - Some not valid- Courts will rule independently. Penalty can be avoided if followed. Tata melting wires- SC.

Burden of proof

Issue: On whom is the burden of proof in case of reclassification?

Solution: If revenue wants to change - then on them.; For classification or if exemption claimed then on tax payer.

Amendments - Prospective or retrospective

Issue: Changes in classification or rate - retrospective?

Solution: No. Only prospective.

Classification of thousands of items

Issue: The biggest uncertainty would be the problem of classification of thousands of items manufactured by the trade and industry.

Solution: Buy a good commentary on classification a user friendly tariff. Upgrade the software for maintenance of details of each inward and outward supplies so as to keep track and upload all the details in the GST returns.

Goods vs Service

Issue: Whether sale of software is supply of goods or supply of service?

• Development, design, programming, customization, adaptation, upgradation, enhancement, implementation of Information Technology software shall be treated as supply of service in accordance with Schedule II of the CGST /SGST Act, 2017.
• The supply of software in physical form such as on CD/disk is considered as supply of goods.
• When software is given by a license it could be covered as service, the entry which needs to be seen is “Temporary transfer or permitting the use or enjoyment of any Intellectual Property (IP).
•  This view is also supported by the various court of laws. In the case of Tata Consultancy Services v. State of Andhra Pradesh (2004 (178) ELT 0022 (S.C.), it has been held that the canned software which are sold in packages or CDs or DVDs or USB Drivers are supply of goods.

Sale of ticket - Goods vs Services

Issue: Whether purchase and sale of tickets in an event is supply of goods or services?

Though the ticket may be in physical form, it still represents right of entry and not a supply of goods. Payment made to the organizer of event and payment received by reseller of tickets remain supply of services.

Classification in case of composite supply:

Issue: Whether GST can be paid at applicable rate for each element of composite supply Example, AC and installation charged as separate line items in single invoice.

Solution: In GST, the taxation of composite supplies is based on the principal supply. Therefore, the ancillary supplies forming part of the composite supplies would be classified as that of the principal supply and classification of each element of composite supply is not required.

In our example, the classification of both the supply of AC and installation services would be the HSN / Tariff item applicable to the principal supply of AC.

Classification in case of mixed supply:

Issue: Whether GST can be paid at applicable rate for each element of mixed supply Example, fruits and chocolates charged as separate line items in single invoice.

Solution: In GST, the taxation of mixed supplies is based on the supply which is leviable to higher rate of tax. Therefore, the ancillary supplies forming part of the mixed supplies would be classified as that of the supply which is leviable to higher rate of tax and classification of each element of mixed supply is not required.

In our example, the classification of both the supply of fruits and chocolates would be the HSN / Tariff item applicable to the product which is taxed at the higher rate i.e chocolates.

Classification in case of individual supply:

Issue: Whether GST can be paid at applicable rate for each element in the independent supplies which are separate line items in single invoice. Eg: Sale in shops of different items

Solution:

• In case of independent supplies, the rate of tax applicable to each element of the supply has to be applied. Where there are different line items in the invoice, the rate of tax applicable to each supply of goods & or service would be determined and levied.
• No single rate of tax for all the goods & or services supplied in the single invoice in case of independent supplies.
• In our example, the classification of both the supply of fruits and chocolates would be the HSN / Tariff item applicable to each such supply of goods or services.

Issues and solutions under Exemption:

Basic exemption from registration under GST

Issue: Whether a person has to comply with the provisions of GST even if the aggregate turnover in the previous year does not exceed Rs 20 / 10 lakh, once registered under GST?

Solution: Yes, once registered under GST, the registered persons has to comply with all the provisions like invoicing, filing returns, collecting and paying applicable taxes to the Government even if the aggregate turnover does not exceed Rs 20 / 10 lakh in the previous year. There is no SSP / SSI exemptions given under GST.

Exemptions - Mandatory or Optional under GST?

Issue: Whether availing exemptions is mandatory under GST?

Solution:

• An absolute exemption is required to be followed mandatorily. Example: Services by Reserve Bank of India, Transmission or distribution of electricity by an electricity transmission or distribution utility.
• Claiming the conditional exemptions is not mandatory but subject to fulfillment of conditions, it is mandatory in nature. Example: Services by a hotel, inn, guest house, club or campsite, by whatever name called, for residential or lodging purposes, having declared tariff of a unit of accommodation less than Rs. 1000/- per day.

ITC on the taxes paid on the exempted supplies wrongly

Issue: Where taxes are collected and paid on the exempted supplies, could the recipient of the exempted goods or services avail ITC?

• Where the taxes are paid on the exempted inward supplies, and ITC availed, then the dept could demand back the wrongly availed taxes with interest.

Exemption to GTA.

Issue: Transportation services exempt except GTA. What is not GTA?

• No consignment note only trip sheet( negotiable instrument- can be transferred) - Individual transporter, kilometer wise billing, daily lumpsum, fixed for movement form a point to B).

Other exemptions to GTA

Issue:  Exempt Transportation by GTA?

Solution: 750/ 1500 per consignment/ consignee, Agri+ specified.

Applicability of the Exemption:

Issues: Whether the exemption is applicable to all the goods and services covered in the HSN code mentioned in the exemption notification?

Solution: Exemption issued vide notification would have specific reference to the description of the goods or services along with the HSN code to be exempted. Exemption entries to be jointly read with the HSN code to interpret the exemption entry. Other goods that may also be classified in the same HSN but not matching the description will not enjoy the exemption.

Exempt supplies vs exclusions under GST:

Issue: Whether exempt supplies and supplies which are excluded under GST are one and the same?

• Exempted goods and services means the tax is leviable under GST but exempted vide notification from the payment of the tax.
• Exclusion means the supplies which are specifically excluded from GST.
• It is important to note that exempt supplies includes supplies which are not leviable to tax under GST vide the definition of non-taxable supply example alcohol which is excluded from GST levy.

Exemption from IGST / CGST / SGST:

Issue: Whether exemption from IGST automatically operate as exemption from CGST / SGST?

Solution: There is no such co-related sections in CGST / IGST Acts. However, the notification issued under section 11(1) or 11(2) of the CGST Act will be deemed to be issued under the SGST Act / UTGST Act, reference can be taken from section 11(4) of SGST Act and section 8(4) of UTGST Act.

Registered brand name vs brand name:

Issue: Whether GST is leviable on all the goods which are branded?

• No, Goods with registered brand name and goods without registered brand name would merit the different tax treatment under GST.
• Goods with brand name but not registered have to be treated as the goods without brand name.
• The application for withdrawal of brand name does not mean that one is not having a registered brand name as the registered brand name definition given in the explanation to notification is linked to the registration as on 15th May 2017 whether or not the brand is subsequently deregistered.
• Therefore, where the braded goods which were not registered as on 15th May 2017 would be treated as goods without a brand name. Eg: Chenna or paneer having a brand name but not registered as on 15th May 2017 would be exempted under GST.

Restaurants - Exemption and availing credit:

Issue: Whether a restaurant could opt to pay GST at the rate of 18% and avail ITC on the taxes paid on the inwards supplies where the declared tariff is below 7500 or where the restaurant / eating joint does not have accommodation facility?

• The condition to entry no. 7 & the explanation to the notification no. 11/2017 - CT (Rate) make it mandatory to charge 5% GST and not avail ITC relating to restaurant services where the declared tariff is below 7500 or where the restaurant / eating joint does not have accommodation facility.

Different exemptions for goods or services in different States

Is it possible to have different exemptions in different States for the same goods and services?

Solution: Yes, theoretically it is possible but only after it is recommended by the GST council. Presently no such exemption is there. Where such mechanism is implemented State-wise it would dilute the claim of one nation - one market - one tax and hence it should be avoided unless it is to meet some emergency situations.

Exemption on the services relating to cultivation of plants or agricultural produce: 

Issue: Whether all the services relating to cultivation of plants or agricultural are exempted?

Solution:

• No, only the agricultural operations directly related to production of any agricultural produce and the operations which do not alter the essential characteristics of agricultural produce to make it marketable for the primary market are exempted under GST.
• Where the services provided in relation to the agricultural produce purchased in the primary market to make it further saleable / supply, in other than the primary market cannot be said to covered under the exemption entry.

Complete withdrawal of area-based exemption under GST:

Issue: Is there any concept of area-based exemption under GST? If not, then what would be the impact on such units already located in these areas?

• There is no area-based exemptions in GST. These units would be severely disadvantaged in future even after the compensation and would be required to compete with units elsewhere in India.
• However, a relief is provided by the Government to provide a compensation to the extent of 58% of CGST portion of the GST paid.

Exemption for high sea sales:

Issues: Whether high sea sale is exempted under GST?

• High sea sales are not exempted vide a notification under GST.
• In GST, IGST has to be paid in accordance with the proviso which takes imported goods into the Customs Act for determination of the liability.
• The point at which customs duties are levied is when bill of entry for home consumption is filed.
• In case of high sea sales, such a bill of entry is filed only by the final recipient (high sea buyer) and IGST liability would arise at the time of filing of bill of entry.

Disclaimer: The above should be considered as broad guidance and not a considered opinion as fact and circumstances could be different and change in the law is ongoing.

Acknowledgements to CA Radhika V for preparation of this collation.

Books Referred:

Compendium of Issues & Solution - April 2018 - CA Madhukar N Hiregange & Adv. Naveen Kumar K S- published Wolter Kluwr
Classification & Exemption - December 2017 - CA Madhukar N Hiregange, CA Vasant K Bhat & CA Nagendra Hegde
GST Ready Reckoner - May 2018 CA Sanjay Dhariwal, CA Rajesh Kumar TR, CA Srikanth Acharya - Published by Puliani & Puliani
Background Material on GST - ICAI - May 2018