GST Impact when Indian company collects payments from Indian clients of Foreign Holding company

Introduction

Goods and Services Tax (“GST”) is a Consumption based tax, whereby the tax is levied on the taxable event SUPPLY,

As per the Article 366 (12A) of the Constitution of India “GST means any tax on SUPPLY of goods or services or both except taxes on supply of the alcoholic liquor for human consumption”, Supply (under the provisions of Section 7) is in itself a BROAD TERM, which has taken everything under its purview

Section 7, i.e. Scope of Supply, defines what comes under supply; the definition is inclusive, thus making it more vast,

Summary Diagram of Supply

·       Sections 7(1)(a), 7(1)(b), and 7(1)(c) are for Determination of Supply, and

·       7(1)(d) and 7(3) are for the Classification of Supply i.e. what constitutes Supply of Goods and what constitutes as Supply of Services , whereas

·       The Section 7(2) determines the negative list of GST

Analysis of Section 7 (1) (a)

This is a general definition of Supply, which states that all forms of supply shall be treated as “SUPPLY” and shall be subject to GST, only when

·       Consideration is involved and

·       It is for the purpose and furtherance of business

If the above stated conditions are not satisfied then, the same will not be regarded as supply under this sub clause,

If we are doing something for personal motive then the same can be subject to GST under section 7 (1) (b), which states that

Analysis of Section 7 (1) (b)

Thus not all cases , but only Import of Service if done for Personal purpose or Business purpose, and for consideration shall be treated as supply under section 7 (1) (b)

Query: XYZ Private Limited is a company registered under Companies Act 2013. XYZ Pte Ltd is a Singapore based company. The ultimate beneficiary in XYZ Private Limited and XYZ Pte Ltd is ABC (Foreign Individual). Now, XYZ Pte Ltd provides consulting services to Individuals in India. However, just for ease of transaction, the clients of XYZ Pte Ltd made the payment against those services in Indian Bank Account of XYZ Private Limited. XYZ Private Limited has GSTIN in Delhi. Now, question is mere deposit from Indian Subsidiary company calls for payment of GST by XYZ Private Limited. However, we keep in mind that XYZ Private Limited never discharge/ supply services to those clients.

Answer: Under 7(1)(b), we are required to check the “SUPPLY” from the recipient point of view and not from Suppliers Point of view

In the query, the Supplier is the XYZ Pte Ltd., and the Recipient is the Clients of XYZ Pte Ltd, and this is the case of reverse charge mechanism (“RCM”)

Our Conditions to qualify the case as supply and Implication of GST on the receipient, are present, i.e.,

·       Presence of Consideration,

·       Import of service for Business Purpose

Thus in this case, GST, will be paid by the Clients of XYZ Pte Ltd. on reverse charge basis.

The Client depositing the Consideration in the bank account of XYZ Private Limited (Indian Subsidiary), which is the related party XYZ Pte Ltd, will make no change to the above implication

Thus, the Client (service receiver) is required to Pay GST on reverse charge basis to the Govt.

Now the question arises, whether anything done without consideration , shall be treated as supply or not??

Answer to this is – Section 7 (1) (c), read with Schedule I of the Act, which states the matters, if done without consideration shall be treated as SUPPLY under GST

Analysis of Section 7 (1) (c) read with Schedule I

This section/schedule clearly states the activities that shall be treated as Supply even after absence of Consideration

There are 4 transactions stated below;

1.    Permanent transfer or disposal of business assets where input tax credit has been availed on such assets

2.    Supply of goods or services or both between

Ø Related persons or

Ø Distinct persons, made in the course or furtherance of business

3.    Supply of goods by

Ø Principal to Agent (Selling Agent) and

Ø Agent to Principal (Buying Agent)

4.    Import of services by a taxable person from

Ø A related person or

Ø Any of his other establishment outside India in the course or furtherance of business

Once the Activities are covered under the SUPPLY under section 7 (1) (a)/(b)/(c), its time to decide whether the activity is Supply of Goods or Supply of Services,

We need to classify them as Goods and Services are taxed under different rates and the rules for valuation, are different as well.

The classification can be made under Section 7 (1) (d), under Section 8 of the CGST Act (Composite Supply and Mixed Supply), and if still the classification is not found, the same will be notified by the GSTC under Section 7 (3)

Analysis of Section 7 (1) (d) read with Schedule II

Here we will discuss about the transactions to be treated as Supply of Goods or Supply of Services

ü There are total 18 Entries discussed under this sub clause

ü Out of which 13 Entries are for Supply of Services , and

ü The remaining 5 Entries are for Supply of Goods

Supply of Services

      I.          Transfer of RIGHT IN GOODS or of Undivided Share in goods without transfer of title

    II.          Lease, tenancy, easement, license to occupy Land

  III.          Lease, or letting of Building, including commercial, industrial or residential complex

 IV.          Any treatment or process applied to another person goods like Job work

   V.          Transfer of business asset where the goods are used for personal purpose or are made available to any other person for personal use

 VI.          Renting of Immovable property (other than Land and Building)

VII.          Construction of a complex, building, civil structure or part thereof, except where entire consideration is received after issuance of Completion Certificate or after its first Occupation

VIII.          Temporary transfer of Intellectual Property Right

 IX.          Development, designing, programming, implementation of Information Technology Software

   X.          Agreeing to Do, not to Do, or tolerate the act

 XI.          Transfer of RIGHT TO USE any goods for any purpose

XII.          Work Contract

XIII.          Restaurant Services

The difference between the two highlighted above i.e. Right in Goods and Right to Use can be well understood with the following example

Suppose you provide your class notes to your friend, with a condition to not overwrite it, i.e. he is only allowed to read your notes, then the situation is called Right in Goods (i.e. Possession only).

And further if he is allowed to write on the notes, then we are giving him the Right to Use (i.e. Possession + Control) such notes.

This the only difference between the two is w.r.t. the Control

Supply of Goods

XIV.          Transfer of Title in Goods

XV.          Transfer of Title in Goods at a FUTURE DATE

XVI.          Transfer of Business Asset by way of disposal or transfer under the direction of the persons carrying on the business

XVII.          Transfer of Business Asset where person ceases to be a taxable person, unless the business transferred as a going concern or the business is carried on by a personal representative shall be treated as supply of goods

XVIII.          Supply of goods by unincorporated association or body of person to a member for cash, deferred payment or other valuable considerations

This is how transactions can be classified as Supply of Goods or Supply of Services,

Lets have quick look to Section 8 of the CGST Act, 2017 i.e. Composite Supply and Mixed Supply

Composite Supply in simple words is the Combination of Goods, Services or Both which are naturally bundled, like

v Laptop + Laptop Bag

v AC + AC installation

Here GST is levied on the basis of rate of Principal Supply i.e. Laptop and AC

Mixed Supply, however is the Combination of Goods, Services or Both which are not naturally bundled, like

v A gift pack consisting of Chocolates, Drinks, Fruits, etc which is not commonly seen

Here GST shall be levied on the Highest rated Good/Service example if Chocolate is taxed @ 28% and other all items are taxed @ 5%, then the whole gift pack shall be taxed @ 28% only

Now moving forward to the last schedule of the GST ACT, i.e. Schedule III (Negative List) under section 7(2), lets see what all is not covered under GST.

Section 7(2) i.e. Schedule III :- Negative List of GST

The below mentioned transaction are out of the purview of GST, i.e. no GST levied

      I.          Services provided by the Employee to Employer

    II.          Services provided by Court or Tribunal established under law to General Public

  III.          The functions performed by MP/MLA/MC/IAS/CAG etc

 IV.          Services of Funeral, Burial, Crematorium, Mortuary including Transportation of the Deceased

   V.          Sale of Land and Building

 VI.          Actionable claim other than betting, gambling, and lottery.

This is how we can check if the transaction done comes under supply and subject to GST,

If it comes under the purview of SUPPLY, GST shall be levied subject to that the same is not covered under Negative list or 100% Exemption list.

This article has been prepared to brief you up regarding the GST’s most important part “SUPPLY”
To know more, please contact CS Neha Seth at 9540074449