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Corporate Tax Planning and Management

[ACCT801]

Assignment
Goods and Services Tax (GST)

GST is an indirect tax that will be levied on goods as well as services. All the existing state and
central indirect taxes will be subsumed under these apart from Customs Duties. It will be applicable
in throughout the country (except JAMMU and KASHMIR). Under this system, a single product
will be taxed at the same rate in every corner of the country meaning that an air conditioner will
be taxed the same in Himachal Pradesh as well as Tamil Nadu thus we also refer GST as ONE
NATION ONE TAX. However, it does not mean that every item will be charged at the same rate
as we cannot charge the same price for AC and salt, food powder. Apparently, the necessities will
be levied at a lower rate than the luxuries, but a single luxury product or an individual necessity
good will be charged the same rate throughout the country.

The Meaning and Scope of Supply-

The taxable event in GST is supply of goods or services or both. Various taxable events like
manufacture, sale, rendering of service, purchase, entry into a territory of state etc. have been
done away with in favour of just one event i.e. supply. The constitution defines “Goods and
Services Tax” as any taxon supply of goods, or services or both, except for taxes on the supply of
the alcoholic liquor for human consumption.

The term, “supply” has been inclusively defined in the Act. The meaning and scope of supply
under GST can be understood in terms of following six parameters, which can be adopted to
characterize a transaction as supply:

1. Supply of goods or services. Supply of anything other than goods or services does not
attract GST
2. Supply should be made for a consideration
3. Supply should be made in the course or furtherance of business
4. Supply should be made by a taxable person
5. Supply should be a taxable supply
6. Supply should be made within the taxable territory

Types of Supply
1. Based on location

A) Intra-State supply
Intra-State is a type of supply of goods or services where the location of the supplier and the
place of supply of goods are in the same State or same Union Territory.
Exceptions –
 Supply of goods to or by a Special Economic Zone developer or a SEZ unit; or
 Goods imported into the territory of India; or
 Supplies made to a tourist (section 15)

B) Territorial waters
 Where the location of the supplier is in the territorial waters; or
 Where the place of supply is in the territorial waters;
The place of supply will be in the nearest Coastal State or Union Territory.

C) Inter-State supply
It is a supply of goods or services, where the location of the supplier and place of supply are in-
 Two different States;
 Two different Union territories; or
 A State and a Union territory
It also includes import of goods or services into the territory of India.
Further, the following shall be treated as an inter-state supply of goods or services:
 When the supplier is located in India and the place of supply is outside India;
 To or by a Special Economic Zone (SEZ) developer or a SEZ unit; or
 In the taxable territory, not being an intra-state supply and not covered elsewhere.

2. Based on combination

a) Composite Supply
It means a supply made by a taxable person to a recipient consisting of two or more taxable supplies
of goods or services or both, or any combination thereof, which are naturally bundled and supplied
in conjunction with each other in the ordinary course of business, one of which is a principal
supply.

b) Mixed Supply
It means two or more individual supplies of goods or services, made in conjunction with each other
by a taxable person for a single price where such supply does not constitute a composite supply.

c) Continuous Supply
Continuous supply is of two types viz., continuous supply of goods and continuous supply of
services.

Continuous supply of goods


It means a
 supply of goods which is provided or will be provided
 continuously or on recurrent basis,
 under a contract.
 It may be through means of a wire, cable, pipeline or other conduit.
 The supplier sends invoice to the recipient on a periodic basis.

Continuous supply of services


It means a
 supply of services which is provided or will be provided
 continuously or on recurrent basis
 under a contract
 for a period exceeding three months
 with periodic payment obligations

3. Based on Recipient
a) Inward Supply
It means receipt of goods or services or both whether by purchase, acquisition or any other means
with or without consideration.

b) Outward Supply
It means a supply of goods or services or both, whether by sale, transfer, barter, exchange, license,
rental, lease or disposal or any other mode, made or agreed to be made by such person in the course
or furtherance of business.

4. Based on Tax treatment


A) Exempt Supply
Exempt Supply of any goods or services is one which attracts nil rate of tax or which may be
wholly exempt from tax. It includes non-taxable supply. In the case of exempt supply in respect
of any goods and/or services, the taxable person shall not be required to pay tax.

B) Zero-Rated Supply
It means export or supply of goods or services to a Special Economic Zone developer or a
Special Economic Zone unit.

C) Non-Taxable Supply
Non-taxable supply is the sale of any good or service which attracts nil rate of tax and is
similar to exempt supply.

D) Taxable Supply
Supply on which tax shall be paid under GST.
Why are time place and value of supply important?

Time of supply means the point in time when goods/services are considered supplied’. When the
seller knows the ‘time’, it helps him identify due date for payment of taxes.

Place of supply is required for determining the right tax to be charged on the invoice, whether
IGST or CGST/SGST will apply.

Value of supply is important because GST is calculated on the value of the sale. If the value is
calculated incorrectly, then the amount of GST charged is also incorrect.

1. Time of Supply

Time of supply means the point in time when goods/services are considered supplied’. When the
seller knows the ‘time’, it helps him identify due date for payment of taxes.

CGST/SGST or IGST must be paid at the time of supply. Goods and services have a separate basis
to identify their time of supply. Let’s understand them in detail.

A. Time of Supply of Goods


Time of supply of goods is earliest of:
1. Date of issue of invoice
2. Last date on which invoice should have been issued
3. Date of receipt of advance/ payment*.
B. Time of Supply for Services
Time of supply of services is earliest of:
1. Date of issue of invoice
2. Date of receipt of advance/ payment.
3. Date of provision of services (if invoice is not issued within prescribed period)
C. Time of Supply under Reverse Charge
In case of reverse charge, the time of supply for service receiver is earliest of:
1. Date of payment*
2. 30 days from date of issue of invoice for goods (60 days for services)

2. Place of supply
It is very important to understand the term ‘place of supply’ for determining the right tax to be
charged on the invoice.

Here is an example:
Location of Service Receiver Place of supply Nature of Supply GST Applicable

Maharashtra Maharashtra Intra-state CGST + SGST


Maharashtra Kerala Inter-state IGST

A. Place of Supply of Goods


Usually, in case of goods, the place of supply is where the goods are delivered.
So, the place of supply of goods is the place where the ownership of goods changes.
What if there is no movement of goods. In this case, the place of supply is the location of goods at
the time of delivery to the recipient.

B. Place of Supply for Services


Generally, the place of supply of services is the location of the service recipient.
In cases where the services are provided to an unregistered dealer and their location is not available
the location of service provider will be the place of provision of service.

Special provisions have been made to determine the place of supply for the following services:

 Services related to immovable property


 Restaurant services
 Admission to events
 Transportation of goods and passengers
 Telecom services
 Banking, Financial and Insurance services.

In case of services related to immovable property, the location of the property is the place of
provision of services.

3. Value of Supply of Goods or Services

Value of supply means the money that a seller would want to collect the goods and services
supplied.
The amount collected by the seller from the buyer is the value of supply.

But where parties are related and a reasonable value may not be charged, or transaction may take
place as a barter or exchange; the GST law prescribes that the value on which GST is charged
must be its ‘transactional value’.
This is the value at which unrelated parties would transact in the normal course of business. It
makes sure GST is charged and collected properly, even though the full value may not have been
paid.
Input Tax Credit
Input Tax Credit or ITC is the tax that a business pays on a purchase and that it can use to reduce
its tax liability when it makes a sale. In other words, businesses can reduce their tax liability by
claiming credit to the extent of GST paid on purchases.

Goods and Services Tax (GST) is an integrated tax system where every purchase by a business
should be matched with a sale by another business. This makes flow of credit across an entire
supply chain a seamless process

Who can claim ITC?

ITC can be claimed by a person registered under GST only if he fulfils ALL the conditions as
prescribed.

a. The dealer should be in possession of tax invoice

b. The said goods/services have been received

c. Returns have been filed.

d. The tax charged has been paid to the government by the supplier.

e. When goods are received in instalments ITC can be claimed only when the last lot is received.

f. No ITC will be allowed if depreciation has been claimed on tax component of a capital good

What can be claimed as ITC?


ITC can be claimed only for business purposes. ITC will not be available for goods or services
exclusively used for: a. Personal use b. Exempt supplies c. Supplies for which ITC is specifically
not available

What is the Time limit to avail GST ITC?

ITC can be availed by a registered taxable person in a specific manner and within a specified
time frame. The table below shows the different situations wherein the inputs can be claimed for
semi-finished goods or stock or finished goods.

ITC claims day for semi-furnished


Situation goods/stock/finished goods (held on immediately
preceding day)
If a person has applied for registration or is liable to
Day from when he is liable to pay taxes
register or is granted registration

When a person takes voluntary registration Registration day

When a taxable registered person stops paying taxes


Day from when he is liable to pay tax normally u/s 7.
in composition levy scheme

Input tax credit for the above-mentioned situations can be claimed only if it does not exceed one
year from the tax invoice date of issue related to supply.

For any other cases, ITC must be claimed earlier of the following-
a) Furnishing of annual return or
b) Due date of filing the monthly return (GSTR-3) for the next financial year’s September
month.

Advanced Pricing Agreement (APA)


An APA is a contract, usually for multiple years, between a taxpayer and at least one tax authority
specifying the pricing method that the taxpayer will apply to its related-company transactions.
These programmes are designed to help taxpayers voluntarily resolve actual or potential transfer
pricing disputes in a proactive, cooperative manner, as an alternative to the traditional examination
process.

For example, suppose that Maruti Suzuki India has higher profit and has to pay higher tax to the
Government of India. In this case, if Suzuki Japan charges a high price for a component it sold to
Maruti, profit of Maruti will come down and the tax payment of the company to GoI will also
come down. On the other hand, the revenue of Suzuki Japan will go up. Altogether, the Suzuki
Motor Corporation (SMC) who owns India’s Maruti improves is position; but GoI’s tax revenue
affected.

To avoid such a manipulation, tax department of India presets the price charged for different
components between Maruti and SMC. At the beginning of a year, the price charged for intra
company transactions will be determined in advance and will be kept for the coming five years or
so. This price arrangement between Maruti and India’s tax department is called advance price
agreement.

The Advance Pricing Agreement (APA) program allows the taxpayer and the tax authority to
avoid future transfer pricing disputes by entering into a prospective agreement, generally
covering at least five tax years, regarding the taxpayer's transfer prices. APAs specify:

 Transactions covered by the APA


 Transfer pricing method (TPM)
 APA term
 Operational and compliance provisions
 Appropriate adjustments
 Critical assumptions regarding future events
 Required APA records
 Annual compliance reporting responsibility

Transfer Prising Method


Traditional transaction methods:

Traditional transaction methods measure terms and conditions of actual transactions between
independent enterprises and compares these with those of a controlled transaction.

This comparison can be made on the basis of direct measures such as the price of a transaction
but also on the basis of indirect measures such as gross margins realized on a particular
transaction.

1. CUP method
2. Resale price method
3. Cost plus method

Transactional profit methods:

The transactional profit methods don’t measure the terms and conditions of actual transactions.
In fact, these methods measure the net operating profits realized from controlled transactions and
compare that profit level to the profit level realized by independent enterprises that are engaged
in comparable transactions.

The transactional profit methods are less precise than the traditional transaction methods, but
much more often applied. The reason is that application of the traditional transaction methods,
which is preferred, requires detailed information and in practice this information is not easy to
find.

In short:

 Traditional transaction methods rely on actual transactions.


 Traditional profits method relies on profit levels.

4. Transactional net margin method (TNMM)


5. Transactional profit split method.
1. Comparable uncontrolled price (CUP) method

It compares the price of goods or services and conditions of a controlled transaction (between
related entities) with those of an uncontrolled transaction (between unrelated entities). To do so,
the CUP method requires comparable data from commercial databases.

If the two transactions result in different prices, then this suggests that the arm’s length principle
may not be implemented in the commercial and financial conditions of the associated enterprises.
In such circumstances, the price in the transaction between unrelated parties may need to be
substituted for the price in the controlled transaction.

2. Resale price method

This method starts by looking at the resale price of a product that has been bought from an
associated enterprise and then sold onto an independent party. The price of the transaction where
the item is resold to the independent enterprise is called the resale price. The method then
requires the resale price margin to be identified, which is the amount of money the party
reselling the product would require to cover the costs of the associated selling and operating
expenses. The resale price margin also includes the amount the reseller would need to make a
fair profit, taking into account the functions it performed (including assets used and risks
assumed).

3. Cost plus method

The cost plus method is a traditional transaction method that analyzes a controlled transaction
between an associated supplier and purchaser. It is often used when semi-finished goods are
transacted between associated parties or when related entities have long-term arrangements for
‘buy and supply’. The supplier’s costs are added to a markup for the product or service so that
the supplier makes an appropriate profit that takes into account the functions they performed and
the current conditions of the market. The combined price is the arm’s length price for the
transaction.

4. Transactional net margin method (TNMM)

These types of methods assess the profits from particular controlled transactions. The TNMM involves
assessing net profit against an “appropriate base”, such as sales or assets, that results from a controlled
transaction. in order to be accurate, the taxpayer should use the same net profit indicator that they would
apply in comparable uncontrolled transactions. Taxpayer can use comparable data to find the net margin
that would have been earned by independent enterprises in comparable transactions. The taxpayer also
needs to carry out a functional analysis of the transactions to assess their comparability.
5. Transactional profit split method

It focuses on highlighting how profits (and indeed losses) would have been divided within independent
enterprises in comparable transactions. By doing so, it removes any influence from “special conditions
made or imposed in a controlled transaction”. It starts by determining the profits from the controlled
transactions that are to be split. The profits are then split between the associated enterprises according to
how they would have been divided between independent enterprises in a comparable uncontrolled
transaction. This method results in an appropriate arm’s length price of controlled transactions.