GST related issues to consider when finalising books of accounts

Issue 1: Related Party Transactions

The entity shall identify related persons’ transactions deemed to be undertaken even without consideration as prescribed under Schedule I, which is reproduced hereunder:

'2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:

Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.'

The term 'related persons' is defined in explanation to Sec 15, which is as follows:

Explanation. 'For the purposes of this Act,''

(a) persons shall be deemed to be 'related persons' if''

(i) such persons are officers or directors of one another's businesses;
(ii) such persons are legally recognised partners in business;
(iii) such persons are employer and employee;
(iv) any person directly or indirectly owns, controls or holds twenty-five per cent or more of the outstanding voting stock or shares of both of them;
(v) one of them directly or indirectly controls the other;
(vi) both of them are directly or indirectly controlled by a third person;
(vii) together they directly or indirectly control a third person; or
(viii) they are members of the same family;

After identification of the transaction(s), the entity shall ensure that proper invoice(s) for the said transaction(s) have been issued based on valuation principles as provided in Sec 15 of CGST Act read with Rule 28 of CGST Rules the summary of which is as follows:

• Recipient is eligible for full ITC: Then the value declared in the invoice shall be deemed to be the transaction value of supply.
• Recipient undertakes further supply of same goods: If goods are further supplied by the recipient to an unrelated party, then the value of supply shall be taken to be 90% of the price charged by recipient from such unrelated party.
• Other provisions: In case the above two are not possible, then open market value of such supply shall be considered and if open market value is not available the value of supply of goods or services of like kind and quality shall be assessed and if even that is not possible, the value shall be determined based on cost plus method or residual methods prescribed in Rule 30 and Rule 31 of the CGST Rules.

Issue 2: Checking Eligibilities of Input Tax Credit Along With Reversal of Common Input Tax Credits Used for Exempt Supplies

The entity shall re-check the eligibility of input tax credit availed during the period July 2017 to March 2018 giving special attention to Sec 17(5) which lists certain inward supplies the credit of which is ineligible. For example:

• motor vehicle
• food and beverages
• outdoor catering
• construction of immovable property
• personal consumption etc.

Further, if the entity has used any inward supplies only for the purposes of exempted supplies then the credit of same shall not be available and if certain inward supplies have been used for both taxable and exempt supplies including for non-business purposes then the proportionate input tax credit shall be added back to the output tax liability on the basis of mechanism as provided in Rule 42 and 43 of the CGST Rules.

Issue 3: Reversal of Input Tax Credits for Non-Payment of Consideration

The entity shall make sure that the credit relating to inward supplies whose payment has not been made within 180 days from the date of issue of invoice, the amount of input tax credit shall be added back to the output tax liability along with interest in terms of second proviso to Sec 16(2) read with Rule 37. Also:

• In case where part payments have been made the reversal shall be made proportionately.
• On payment of consideration, the credit shall be re-eligible for claim irrespective of the time when the payment is made.

Issue 4: Ensuring Proper Records and Documents are Maintained

The entity shall ensure that all records and documents as applicable to the company [as per Sec 35 of the CGST Act read with Rule 56 to 58 of the CGST Rules] are properly maintained and kept at the respective places of businesses. An illustrative list of documents are:

• Tax Invoices - Sec 31 read with Rule 46
• Bill of supply - Sec 31(3)(c) read with Rule 49
• Debit notes/credit notes - Sec 34 read with Rule 53
• Self-Invoice - Sec 31(2)(f) read with Rule 46
• Payment Voucher - Sec 31(2)(g) read with Rule 52
• Receipt voucher - Sec 31(3)(d) read with Rule 50
• Refund voucher - Sec 31(3)(e) read with Rule 51
• Delivery challans - Rule 55

Issue 5: Transactions Relating to Fixed Assets

The entity needs to ensure that all transactions related to sales and purchase of fixed assets have been recorded in detail and properly dealt with, especially the following issues:

Credit of GST paid on purchase of capital goods has been taken except in the case of:

• motor vehicles and other conveyances and
• goods and/or services procured for construction of immovable property

In case of supply of fixed assets, the company has paid appropriate output tax and has also complied with the provisions of Sec 18(6) according to which in case of supply of capital goods on which credit has been taken the tax payer is required to pay an amount which is higher of:

• Tax on transaction value; or
• Credit relating to unexpired life of the asset which is to be to be calculated in terms of percentage points as provided rule Rule 44(6) of the CGST Rules.

For the purpose of GST, the total life of any asset has been deemed to be 60 years.

In case of supply of old motor vehicles the taxability shall be determined as follows:

• 1st Jul, 17 to 12th Oct, 17: Taxable Value= Amount Received; Tax Rate =28% + cess
• 13th Oct, 17 to 24th Jan, 18: Taxable Value = 65% of Amount Received; Tax Rate =28% + cess [Notification no 37/2017 Central Tax Rate]
• 25th Jan, 18 onwards: Taxable Value= (Sale Price- WDV), Tax Rate =18% or 12% as the case may be [Notification no 08/2018 Central Tax Rate]

Issue 6: Taxability of Advances

The entity is advised to cross verify their ledgers relating to advances from customers in order to ensure that appropriate taxes on advances have been paid by the entity. The taxability of advances is to be determined as follows:

A. Advances in relation to supply of services: No exemption or relief has been provided for advances relating to supply of services. Further, as per Sec 13 of the CGST Act, the time of supply in case of advance is the date of receipt of money.

B. Advances in relation to supply of goods: The government vide notification no. 40/2017 CGST Non Rate dated 13.10.2017 for suppliers having aggregate turnover less than Rs. 1.5 cr and notification 66/2017 CGST Non Rate, dated 15.11.2017, has exempted all suppliers of goods irrespective of turnover, from payment of taxes in case of receipt of advances. In other words, for the supplier of goods the time of supply shall be earlier of the date of issue of invoice or the last date on which invoice was required to be issued.

Issue 7: Reverse Charge Liability

The entity is also advised to make sure that all liabilities relating to reverse charge are paid and if not paid, they must be paid at the earliest along with interest. The taxability under reverse charge is governed as follows:

Specified cases as per Sec 9(3) of the CGST Act and 5(3) of the IGST Act: The government vide notification no 13/2017 CGST Rate (as amended by 22/2017, 33/2017 and 3/2018) and 10/2017 IGST Rate (as amended by 22/2017 and 34/2017) has specified cases wherein the recipient is liable to pay tax under reverse charge. The specified cases include but are not restricted to:

Inward supplies from Unregistered person Sec 9(4) of the CGST Act and 5(3) of the IGST Act:

• 1st July, 2017 to 12th Oct, 2017: Liability under RCM only if total inward supply from unregistered person exceeds Rs. 5,000/- per day.
• w.e.f 13th Oct, 2017: The liability under RCM has been deferred initially up to 31st March, 2018 vide notification no 38/2017 CGST Rate and thereafter up to 30th June, 2018 vide notification no 10/2018 CGST Rate.

Issue 8: Issue of Credit and debit notes

The entity shall also identify the cases where it is required to issue debit or credit notes relating to its outward supply for the year 2017-18 since as per Sec 34 any reversal of output tax or date for issue of credit note has been restricted up to filing of return for the period ended Sep, 2018 or date of filing of annual return, whichever is earlier.

Issue 9: Revisiting Exemptions/Beneficial Rates Being Availed by the Entity

The entity which is claiming beneficial rate notification shall make sure that all the conditions as specified in the said notification are complied with. Some examples of such notifications are as below:

• 40/2017 Central Tax Rate: For supply of goods to exporters at the rate of 0.1%
• 45/2017 Central Tax Rate: For supply of goods to specified institutes for specified purposes at the rate of 5%

Issue 10. Filing of ITC-04

If the entity is dealing with job-worker as a principle or is acting as job-worker itself, it is required to file Form ITC 04 which contains details of inputs and/or capital goods sent by principal to the job-worker as well as inputs and/or capital goods returned by the job worker to the principal. The Form ITC 04 is to be filed quarterly, the due date of which is 25th of the month succeeding the quarter. Further, filing of Form ITC 04 is deemed intimation as required under Sec 143 of the CGST Act.

Issue 11: Reporting of Unreported Supplies

The entity shall also make a reconciliation statement between various outward and inward supplies as recorded in the books of accounts, and those filed in Form GSTR 3B and GSTR 1. In case there are certain supplies which have not yet been reported, it is advisable that the same be reported in GSTR 3B for the month of March, 2018. Also, in case there is additional tax payable the same must be paid with interest.

Issue 12: Appointment of GST Auditors

The entity is also advised to appoint a GST Auditor in terms of Sec 35(5) read with Rule 80, well in time in order to ensure that all the deficiencies as pointed out by the auditor can be rectified, especially those wrt:

• claim of additional credit; and
• reduction in output tax liability for the year 2017-18.

Both these can be given effect to only up to the due date of filing of return for the period ended Sep, 2018 or filing of annual return whichever is earlier.

The draft of audit report format is in public domain and a careful analysis of draft report, along with the annexures, suggests that GST Audit will entail extensive investigation and reporting and not be restricted to a mere expression of opinion.

DISCLAIMER

The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. The presentation is made with utmost professional caution but in no manner guarantees the content for use by any person.  It is suggested to go through original statute / notification / circular / pronouncements before relying on the matter given.  The presentation is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this presentation will be accepted by us.  Professional advice recommended to be sought before any action or refrainment.

The authors can also be reached at tarun@tsarora.com  and carahul@andros.tax