Negotiating the transitory pangs

Illustration: Binay Sinha
How to avoid GST-related litigation


The expectation is that tax litigation will reduce significantly under GST. This is because the credit chain is seamless and the tax will ultimately be borne by the final consumer. However, India is implementing a fairly complex GST regime and if businesses are not careful, there can be adverse litigation consequences. Registration is the key to the proposed GST regime.  So decisions regarding taking registration and updating the registration with new offices and establishments is key to avoiding unnecessary litigation in GST.


The other area that is likely see high rate of litigation is supplies made by unregistered persons. Under the GST regime, registered persons are required to pay tax on reverse charge on supplies received from unregistered persons. In most companies there are many supplies received where expenses are booked but with no corresponding tax invoices.  Tax officers are likely to review these expenses during audits.

One more complex area of litigation where company personnel require  guidance is the place of supply of goods and services.  In many cases, place of supply provisions are unintuitive and can lead to wrong payment of tax. Classification is also another potential area of disputes.


Keep in mind
  • Update registration of offices and establishments
  • Pay tax on reverse charge basis for supplies by unregistered person
  • Get a fix on place of supply

Registering for GST the right way


Registration is the first step to be initiated for migrating to the GST regime. While one may be legally liable to be registered if the goods or service falls above the threshold limits, registration otherwise gives the opportunity to avail of the credits and pass on the same to the customers by charging output tax. Though the GST registration rules are finalised, few fundamental aspects are still open for discussion/debate. The provisions require registration from where the services are provided. In case of renting of immovable property, if the landlord and the property which has been let out are in different states, whether one registers in the state where the premises are located or the state where the landlord resides?  Similar issues are also encountered in other sectors like IT/ITes, banks and NBFCs wherein the services are rendered from multiple locations.


(Along with inputs from Pankit Shah)


Keep in mind
  • GST registration is the first step to migrate to the new regime
  • Registration becomes effective from the date of application if applied within 30 days when the person becomes liable for registration
  • Every person holding registration under existing law shall be liable to be registered under GST
  • Businesses having multiple units in a SEZ in one state or Union territory can obtain a single registration for all the units

How to sidestep the valuation minefield


Principally, GST is meant to apply on transaction/ invoice value.  However, the proposed valuation rules provide for few exceptions, particularly in cases of intra-company/ related-party transactions.  In such cases, declared invoice value would be accepted only where the recipient is eligible to claim credit of GST charged.  In cases where credit is not available, GST would be applicable on Open Market Value (OMV).  OMV is defined to mean full value of money payable by the recipient to obtain such goods/ services, where the supplier is not related and price is the sole consideration.  While in case of goods, OMV can be generally ascertained, it is relatively much difficult to find a comparable value in case of services. 


Further, it is not clear as to whether the value declared in such transactions shall be accepted as such where the recipient is subsequently required to reverse credit. For example, cases where goods are lost / destroyed or used as free samples/ gifts, for which credit is specifically denied.  At the time of supply, generally such goods cannot be identified and hence it would be a challenge if the authorities were to question the declared value in such cases. 


The other major challenge arises in case of intra-company cross charges (from one office to another) as they are deemed to be ‘distinct persons’.  It is not clear as to whether the expenses such as salary of employees, depreciation etc need to be mandatorily included or only third-party costs need to be considered. 


Also, where the ‘consideration is not wholly in money’, the value shall be OMV of such supplies.  Few years ago, the Supreme Court a Fiat India case, had held that even extraneous factors such as ‘desire to penetrate the market’ could also be a consideration for excise duty purposes.  In absence of any clarification to the contrary, the possibility of dispute on this account cannot be ruled out.


Keep in mind
  • Valuation rules provide for exceptions in cases of intra-company and related-party transactions
  • There could be difficulties in arriving at Open Market Value in case of services
  • There could be valuation challenges in cases of intra-company cross charges

Preparing for roll-out hiccups


Transitory pangs and anxiety are being experienced since there is uncertainty over various matters and there may not be sufficient time to be ready for the new regime.  While it has been said time and again that GST would be beneficial for businesses, timely planning and preparation would help manage the change optimally. Businesses that have not yet completed the enrolment for migration to GST must complete the enrolment process when the GST common portal reopens on June 1. Businesses must make necessary technology upgradation, such as revising the particulars of invoice, updating vendor master list with GST registration number of suppliers, GST return formats, registers etc to facilitate state-wise compliances.


Keep in mind 
  • Timely planning would help manage the change optimally
  • Revise the particulars of invoice, update the vendor master list with GST registration number of suppliers, GST return formats, registers to facilitate state-wise compliances
  • Testing of the new systems would also be crucial prior to going live

Claiming input credit where due


The success of GST is dependent on ensuring that seamless input credit is available to recipients of supplies. Those who do not file timely returns in the specified formats will have to forgo input tax credits.  For any delinquency on part of suppliers with respect to payment of taxes and filing of returns can lead to denial of credit to recipients of such supplies. No input tax credits are available for payments made in advance and businesses may have to match timing of delivery of goods and services with payments for the same to balance their books. Even though input credit will be reversed for those who do not make payments within three months, this does not prevent the eventual upheaval of cash flows for many.


Since input credits will be available only for goods and services used “in the furtherance of business”, establishments will have to take pains to bifurcate input services received for business purposes and those received otherwise. Similarly, where input supplies are utilised for both taxable as well as exempt supplies, credit will be available only for services utilised in taxable supplies. Input credits on capital goods shall not be provided where depreciation has been claimed on the tax components.


With the set-off of input credit being a pivotal element under GST, it will be in the best interest of businesses to understand these provisions in detail.


Keep in mind
  • Those who do not file timely returns in specified formats will have to forgo input tax credits
  • No input tax credits are available for payments made in advance of supplies
  • Input credits are available only for goods and services used “in the furtherance of business” establishments

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