Our country is going to have the biggest tax reforms in Indirect tax regime as GST since independence. This will be a single unified Indirect Tax System. GST will replace number of existing Indirect taxes.
All the business organization need to register their business for each location of business for supply of goods or service under GST unlike existing law. Currently there is Excise Duty for manufacture, Sales tax for Sales, Service tax for services and so on. While under GST there will be only single tax. This will help for seamless flow of input tax credit across the business across in India.
Meaning and scope of supply as per Draft GST Law:
(1) Supply includes -
(a) all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business,
(b) importation of services, for a consideration whether or not in the course or furtherance of business, and
(c) a supply specified in Schedule I, made or agreed to be made without a consideration.
Impact of Supply:
As per GST draft law- location of Supply of service and goods will play a major role for billing and taxation point of view. So let’s have a look at the impact of this.
The term supply includes Transfers with or without consideration. So under GST all the transfers with or without consideration will be taxable. Its impact and implications is very much important to make the business decision.
Stock Transfer under Central Excise
As per existing Central Excise, a registered manufacturer should pay excise duty on the transaction value for stock transfer i.e. excise duty on 110% of cost of production
Stock Transfer under VAT
As per existing VAT laws, on furnishing Form F, stock transfers are not taxable. However, input VAT on purchase of goods should be reversed at certain percentage which differs from state to state.
Stock Transfer under Proposed GST
Under GST, all the location of business for supply of service of goods will come under tax purview. All the location need to be registered as per the requirement. All the levy of tax is depending on Supply which includes transfers in between branches also.
Intrastate stock transfer:
When an entity has more than one location of business inside the same state, for supply of service or goods and they need to register under that state. Any stock transfer between these locations will be treated as Intra state Stock transfer
Inter State Stock transfer:
When an entity has more than one location of business for supply of goods or services in more than one state, they need to register under the respective state. Any transfer of stock between these locations will be treated as Interstate Stock Transfer.
Transfer between two entities located in different states is taxable.
Stock Transfer and Impact on Working Capital
All the stock transfer will lead to taxability under GST laws. The time gap in between the stock transfer and sale of stock will have a huge impact on the cash flow i.e. working capital. During each stock transfer the business needs to pay the tax under GST, while the input tax credit is effectively used when those stocks will be sold by the receiving branch location. It will lead to blockage of working capital for the time period from Stock transfer to stock sales by the receiving branch or from the point of sale. This will impact a lot while managing the working capital.
Take an example where they produce the goods whole year and make stock transfer to the respective location as on when the manufacture completes, while the sale at the receiving branch will be in a particular period like seasonal sales. In this case every time the business needs to pay the Tax amount for each stock transfer while he can utilize the credit against the output liabilities at the time of sale only.
Declaration under Stock Transfer
Under GST there will be no forms of declaration for stock transfer unlike in VAT to avail the exemption on stock transfer. The receiving branch has to issue form F to the source branch which sends the goods. This has to be produced to the assessing authority to prove that the goods are sent to another branch and not for sale.
Stock Transfer Management
The Input VAT on goods or inputs used in manufacturing of finished goods which are transferred, will be available at reduced rate. However, under GST, tax paid on stock transfer will be fully available as input tax credit.
While stock transfer, all the business entity mostly doesn’t keep any consideration. The transaction value computation will may have some practical difficulties.
If there will be seamless flow of input tax credit across all location, then the need of opening branches at multiple location will add more cost and following up with the tax matter for stock transfer is another point to consider.
All the normal stock transfer to be taken for tax purpose under GST. We need to consider the exact requirement and based on this we need to do the stock transfer to the respective location. We need to make sales immediately to take the input credit. If the goods can be sold quickly after transfer, then it will be good else this will lead to blocking of working capital. Business can transfer the goods to the branches with high demand for sales. This way goods will be liquidated quickly and there will be lesser impact on the working capital needs of the business.
Effective planning of stock transfer and use of working capital is required in each business as their practice.