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GST GUIDANCE NOTE

ON
REAL ESTATE SECTOR

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INDEX

1. Overview

2. Existing Taxation

2.1 Existing definitions

2.2 Taxability

2.3 Exemptions

2.4 Place of Provision of Service

2.5 Point of Taxation

2.6 Cenvat Credit

3 Taxability in GST Regime

3.1 Taxability

3.2. Whether supply of goods or service

3.3. Time of supply

3.4. Place of Supply

3.5. Input tax credits

4. Frequently Asked Questions

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1. Overview

The real estate sector is the largest employer in the economy after agriculture and is
set to grow at a compounded annual growth rate (CAGR) of 30 per cent over the
next 10 years. By one account, the sector will be worth a staggering $180 billion in
revenues by 2020.

Policy decisions taken in recent years, particularly in 2016, have laid the
foundation for a stronger real estate sector. These include the Smart City concept,
Housing for All by 2022, tax reforms such as the Goods and Services Tax (GST),
and

The real estate sector looks upon the Goods and Services Tax (GST) to be an
indication of change as the sector is currently plagued with a myriad of indirect tax
issues both at the Centre and state level.

2. Existing Taxation

2.1 Existing definitions:

Construction Service
After the negative list of services was introduced service-specific definitions were
done away with.
However a special class of service was declared as Construction service
additionally under clause (b) of section 66E as under:
Construction of complex , building civil structure or a part thereof including
complex or building intended for sale to a buyer wholly or partly except where the
entire consideration is received after issuance of completion certificate by the
competent Authority.
The above clause also provides that the expression construction includes additions,
alterations, replacements or remodeling of existing structures.
As per the above definition, if the entire consideration is received after issuance of
completion certificate by the competent authority it will amount to sale of
immovable property.
Works Contract Service
Works contract is defined in section 65B (54) as a contract when transfer of
property in goods involved in the execution of such contract is leviable to tax as
sale of goods and such contract is for the purpose of carrying out construction,
erection, commissioning installation, completion fitting out repair, maintenance,
renovation alteration of any moveable or immovable property or for carrying out
any other similar activities or a part thereof in relation to such property.

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2.2. Taxability
Construction service
Typically, service tax is not charged on the entire value of the under-construction
property. It is instead levied on a certain percentage of the total value as the tax is
charged only on the service portion of the total value, which includes often the
value of materials and in certain situations even land.
For an under-construction property, a uniform abatement @ 70% is prescribed for
services of construction of complex, building, civil structure, or a part thereof,
subject to fulfilment of certain conditions. For claiming the said abatement scheme
the value of land is also required to be included.
Service tax on works contract service is charged based on the value of the service
portion of the works contract. The manner of determining the value of service
portion of the works contract from the total works contract is given in Rule 2A of
the Service Tax (Determination of Value) Rules 2006.
As per sub rule (i) of the said rule the value of the service portion in the execution
of a works contract is the gross amount charges for the works contract less the
value of transfer of property involved in the execution of the said works contract.
Simplified scheme for determining the value of service portion in the works
contract.
The simplified scheme is contained in clause (ii) of rule 2A of the service tax
(determination of value) rules 2006.
As per the scheme the value of the service portion, where value has not been
determined in the manner as provided in clause (i) of Rule 2A shall be determined
in the manner explained in the table below
Where works contract is for ... Value of the service portion shall be..
execution of original work 40% of the total amount charged
other cases 70% of the total amount charged

As per explanation (II) to clause (ii) of Rule 2A of the said rules, total amount
referred in the second column of the table would be the sum total of gross amount
charged for the works contract and the fair market value of all goods and services
supplied in or in relation to the execution of works contract less (i) the amount
charged for such goods or services provided by the service receiver and (ii) the
value added tax or sale tax if any to the extent they form part of the gross amount
or the total amount as the case may be.
What are original works?
As per explanation (I) to clause (ii) of Rule 2A of the valuation Rules Original
Works means:

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All new constructions;
All types of additions and alterations to abandoned or damaged structures on
land that are required to make them workable; and
Erection, commissioning or installation of plant, machinery or equipment or
structure whether pre-fabricated or otherwise.

2.3 Exemptions

The service tax law provides for following exemptions:

2.3.1. Services provided to the Government, a local authority or a governmental


authority by way of construction, erection, commissioning, installation,
completion, fitting out, repair, maintenance, renovation, or alteration of (S.
No. 12 of Notification 25/2012 ST dated 20.06.2012 as amended )

a. a civil structure or any other original works meant predominantly for use other
than for commerce, industry, or any other business or profession; ( Omitted
since 01.03.2015 )

b. historical monument, archaeological site or remains of national importance,


archaeological excavation, or antiquity specified under the Ancient
Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958

c. a structure meant predominantly for use as (i) an educational, (ii) a clinical, or


(iii) an art or cultural establishment; ( Omitted since 01.03.2015)

d. canal, dam or other irrigation works;

e. pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii)
sewerage treatment or disposal; or

f. a residential complex predominantly meant for self-use or the use of their


employees or other persons specified in the Explanation 1 to clause 44 of
section 65 B of the said Act; ( Omitted since 01.03.2015)

( In entry 12, items (a), (c) and (f) has been omitted vide NTF. NO.
06/2015-ST, DT. 01/03/2015)

2.3.2. Services provided to the Government, a local authority or a governmental


authority by way of construction, erection, commissioning, installation,
completion, fitting out, repair, maintenance, renovation, or alteration of -(Sr
no 12 A of Notification 25/2012 ST dated 20.06.2012 as amended ) :

a. a civil structure or any other original works meant predominantly for use other
than for commerce, industry, or any other business or profession;
b. a structure meant predominantly for use as (i) an educational, (ii) a clinical,
or(iii) an art or cultural establishment; or

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c. a residential complex predominantly meant for self-use or the use of their
employees or other persons specified in the Explanation 1 to clause (44) of
section 65 B of the said Act;
under a contract which had been entered into prior to the 1st March, 2015 and on
which appropriate stamp duty, where applicable, had been paid prior to such date:
provided that nothing contained in this entry shall apply on or after the 1st April,
2020;

2.3.3. Services provided by way of construction, erection, commissioning,


installation, completion, fitting out, repair, maintenance, renovation, or
alteration of,- -(Sr no 13 of Notification 25/2012 ST dated 20.06.2012 as
amended )

a. a road, bridge, tunnel, or terminal for road transportation for use by general
public;
b. civil structure or any other original works pertaining to a scheme under
Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana;

ba. civil structure or any other original works pertaining to the In-siture habilitation
of existing slum dwellers using land as a resource through private participation
under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana,
only for existing slum dwellers.

bb. a civil structure or any other original works pertaining to the "Beneficiaryled
individual house construction / enhancement under the Housing for All (Urban)
Mission/Pradhan Mantri Awas Yojana;

(Above item (ba) & (bb) has been inserted vide NTF. NO. 09/2016-ST, DT.
01/03/2016 wef 01.03.2016)

c. a building owned by an entity registered under section 12 AA of the Income


tax Act, 1961(43 of 1961) and meant predominantly for religious use by
general public;
d. a pollution control or effluent treatment plant, except located as a part of a
factory; or a structure meant for funeral, burial or cremation of deceased;

2.3.4. Services by way of construction, erection, commissioning, or installation of


original works pertaining to,- -(Sr no 14 of Notification 25/2012 ST dated
20.06.2012 as amended ).

a. railways, excluding monorail and metro;

Explanation.-The services by way of construction, erection, commissioning or


installation of original works pertaining to monorail or metro, where contracts
were entered into before 1st March, 2016, on which appropriate stamp duty,
was paid, shall remain exempt.

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(Above item (a) has been substituted vide NTF. NO. 09/2016-ST, DT.
01/03/2016 wef 01.03.2016)

[OLD- (a) [Omitted - an airport, port or] railways, including monorail or


metro;]
(In entry 14, in items (a) the words "an airport, port or" has been omitted vide
NTF. NO. 06/2015-ST, DT. 01/03/2015)

b. a single residential unit otherwise than as a part of a residential complex;


c low- cost houses up to a carpet area of 60 square metres per house in a housing
project approved by competent authority empowered under the Scheme of
Affordable Housing in Partnership framed by the Ministry of Housing and
Urban Poverty Alleviation, Government of India;

ca. low cost houses up to a carpet area of 60 square metres per house in a housing
project approved by the competent authority under
(i) the "Affordable Housing in Partnership" component of the Housing for All
(Urban) Mission/Pradhan Mantri Awas Yojana;
(ii) any housing scheme of a State Government.

(Above item (ca) has been inserted vide NTF. NO. 09/2016-ST, DT.
01/03/2016 w.e.f 01.03.2016.

d post- harvest storage infrastructure for agricultural produce including a cold


storages for such purposes; or

e. mechanised food grain handling system, machinery or equipment for units


processing agricultural produce as food stuff excluding alcoholic beverages;

2.3.5. Services by way of construction, erection, commissioning, or installation of


original works pertaining to an airport or port provided under a contract which had
been entered into prior to 1st March, 2015 and on which appropriate stamp duty,
where applicable, had been paid prior to such date:
provided that Ministry of Civil Aviation or the Ministry of Shipping in the
Government of India, as the case may be, certifies that the contract had been
entered into before the 1st March, 2015:
provided further that nothing contained in this entry shall apply on or after the 1st
April, 2020;

(Above entry 14A has been inserted vide NTF. NO. 09/2016-ST, DT. 01/03/2016
w.e.f 01.03.2016)

(Sr no 14A of Notification 25/2012 ST dated 20.06.2012 as amended ).

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2.4 Place of provision of Service
a. Construction service / works contract service relating construction of
immovable property is a service relating to immovable property. As per Rule
5 of the Place of Provision of Services Rules 2012 (POP), if any services
provided directly in relation to immovable property including some of the
specified services would be deemed to be rendered at a place where
immovable property is located or intended to be located.
b. In case the services are partially in taxable territory and partially in non-
taxable territory, then the place of provision shall be the location in the
taxable territory where the greatest proportion of service is provided as
per Rule 7.
c. In case where the service provider and service receiver is located in the
taxable territory and the immovable property is located or tend to be located in
non-taxable territory then As per Rule 8, place of provision shall be location
of the recipient of service.

2.5 Point of Taxation


In real estate / infrastructure sector generally service is provided under a contract
for a period exceeding 3 months. Moreover Notification 28/2011 ST dated
01.04.2011 specifies service portion in execution of works contract as continuous
supply of service. Therefore construction service / works contract service that are
provided for a period more than three mounts will be considered as continuous
supply of service.
Clause (a) of the first proviso to Rule 3 of Point of Taxation Rules 2011 provides
that in case of continuous supply of service where the provision of whole of the
whole or part of the service is determined periodically on the completion of an
event in terms of a contract, which requires the receiver of service to make any
payment to the service provider , the date of completion of each such event as
specified in the contract shall be deemed to be the date of completion of each such
event as specified in the contract shall be the date of completion of provision of
service.

2.6. Cenvat Credits:


Availment of Cenvat by a builder
Notification 26/2012 ST dated 20.06.2012 (for construction service) and
notification 24/2012- ST dated 06.06.2012(for Works Contract service) provides
abatement of gross amount charged to the buyer for determining the value of
taxable service. The said Notification however prohibits availment of credit of
excise duty paid on inputs used in providing taxable service. Thus the service
provider is entitled to avail credit on excise duty paid on capital goods and
service tax paid on input services used for providing taxable service where the

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consideration is received by builder before issuance of completion certificate by the
competent Authority.
If the entire consideration is received after issuance of completion certificate by the
competent authority it will not be considered as rendering of service by the
builder to a buyer but it will be a transaction of sale of immovable property and
this no credit will be available in the hands of the builder.

Availment of credits by contractor:


For rendering various services, the contractor engaged by the builder uses his own
material for providing construction service .this services are considered as works
contract service. the value of such service is required to be determined in terms of
Rule 2A of the Service tax ( determination of value) rules 2016.In this case also the
contractor is not entitled to take credit on inputs., however he will be entitled to
the credit of excise duty paid on capital goods and service tax paid on input
service.
Availment of credits by the end user
Sometimes the end users engage various contractors for construction of various
commercial properties (like shopping mall etc.). The end users are not eligible for
availing credit on inputs and construction service / works contract service used
in construction or execution of works contract of a building or civil structure.
This is for the reason that the Input and input service as defined under Rule
2(k) and 2(l) of CCR respectively restrict credit in respect of Construction
Service/Works Contract Service.

3. Taxability in GST regime

3.1. Taxability
In terms of Schedule III of CGST/SGST/UTGST laws sale of land will be treated
neither as supply of goods nor a supply of services.
However, all construction service/ works contract service undertaken in India will
be subject to GST, (unless otherwise exempted as may be specified in the
notification).
For purchase of under-construction property, developer will have to charge GST
where the space is sold before obtaining completion certificate wherever required
or before first occupation (clause (b) of paragraph 5 of schedule II).

However supply of any property other than above (i.e., ready-t o-move-in property
after obtaining completion certificate) will be not be GST.

In terms of Schedule III of the GST law, sale of land (and subject to clause (b) of
paragraph 5 of schedule II) sale of building shall be treated neither as a supply of
goods nor a supply of service.

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3.2. Whether supply of Goods or Service?

As per Schedule II of CGST/ SGST/UTGST Act, following shall be treated as


supply of service:

Land and Building

(a) Any lease, tenancy, easement, license to occupy land is a supply of services;

(b) Any lease or letting out of the building including a commercial, Industrial or
residential complex for business or commerce, either wholly or partly, is a
supply of services.

Renting & Construction of immovable property


a) Renting of immovable property;

b) Construction of a complex, building, civil structure or a part thereof, including


a complex or building intended for sale to a buyer, wholly or partly, except
where the entire consideration has been received after issuance of completion
certificate, where required, by the competent authority or after its first
occupation, whichever is earlier.

Works Contract

Works Contract including transfer of property in goods (whether as goods or in


some other form) involved in the execution of works contract.

3.3. Time of Supply:


For supply of service, Time of supply of service prescribed under Section 13 of the
GGST / SGST Act 2016 the basic time of supply of services will be earlier of the
following dates:
a. The date of issue of invoice by the supplier or the last date on which he
is required under section 28 to issue the invoice;

b. The date of receipt of payment;

c. However, in case of continuous supply of service the time of supply


should be:
the due date of payment as ascertainable from the contract.
If the due date is not ascertainable from the contract, the time of
supply should be the time when supplier of service receipts the
payment.

Where the payment is linked to the completion of an event, the time


of supply should be date of completion of that event.

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In a case where supply of services ceases under a contract before
the completion of the supply the Time of supply shall be the time
when supply ceases and invoices shall be issued to the extent the
supply effected before such cessation.

3.4. Place of Supply :

3.4.1. Service directly relating to immovable property

This rule applies only to services which relate directly relating to immovable
property. It doesnt apply if a supply of services has only an indirect connection
with the immovable property or if the immovable property related service is only
an incidental component of a more comprehensive supply of services.

For example, the services of an interior designer contracted to redesign the decor of
a particular hotel would be immovable property related. However, if the same
supplier was contracted to create a corporate colour scheme or style for a hotel
chain to use in their own properties, those design services wouldnt be immovable
property related.

If a immovable property related service is provided alongside other services that


dont relate to immovable property you will need to consider whether there are
separate supplies or a single supply to which other services are ancillary. If there is
a single supply directly related to land this treatment covers all the elements that
make up the supply. If there are multiple supplies each will need to be considered
on its own.

3.4.2. Examples of services directly related to immovable property


The service consists of lease or a right of use occupation, enjoyment or
exploitation of an immovable property.
The service is physically performed or agreed to be performed on an
immovable property i.e. maintenance or property to come into existence i.e.
construction :
Service provided by architects, interior decorators, surveyors, engineers and
other related experts relating to immovable property
Service provided by estate agents relating to immovable property
Service by way of lodging accommodation by a hotel, inn, guest house,
homestay, club or campsite, house boat or any other vessel; and by way of
accommodation in any immovable property for organizing any marriage or
reception or matters related therewith, official, social, cultural, religious or
business function

3.4.3. Illustrations of immoveable property related services from other tax


jurisdictions

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In EU VAT, the following services are commonly considered not related to land
(immovable property):

construction or demolition of a building or permanent structure (such as


pipelines for gas, water or sewage)

surveying and assessing property


valuing property, including for insurance or loan purposes, even if carried
out remotely
providing accommodation in hotels, holiday camps, camping sites or
timeshare accommodation
maintenance, renovation and repair of a building (including work such as
cleaning and decorating) or permanent structure
property management services carried out on behalf of the owner (but not
the management of a property investment portfolio)
arranging the sale or lease of land or property
drawing up of plans for a building or part of a building designated for a
particular site
services relating to the obtaining of planning consent for a specific site
on-site security services, even if provided remotely
agricultural work on land (including tillage, sowing, watering and
fertilization)
installation and assembly of machines which, when installed, will form a
fixture of the property that cant be easily dismantled or moved
the granting of rights to use all or part of a property (such as fishing or
hunting rights and access to airport lounges)
legal services such as conveyancing and drawing up of contracts of sale or
leases, including title searches and other due diligence on a specific
property
bridge or tunnel toll fees
the supply of space for the use of advertising bill boards - for example the
leasing of a plot of land or the side of a building to allow a billboard to be
erected
the supply of plant and equipment together with an operator, where the
supplier has responsibility for the execution of the work to the land or
property
the supply of specific stand space at an exhibition or fair without any
related services

3.4.4. Illustrations of services not considered related to immovable properties from


other tax jurisdictions

In EU VAT, the following services are commonly considered not related to land
(immovable property) :

The drawing up of plans for a building or parts of a building if not designated for
a particular plot of land
the storage of goods in an immovable property if no specific part of the
immovable property is assigned for the exclusive use of the customer

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the provision of advertising, even if it involves the use of immovable property
intermediation in the provision of hotel accommodation ,or accommodation in
similar sectors with a similar function, such as holiday camps
the provision of a stand location at a fair or exhibition site together with other
related services
the installation or assembly, the maintenance and repair, the inspection or the
supervision of machines or equipment which is not, or does not become, part of
the immovable property
portfolio management of investment in real estate

3.4.5. General rule for determining place of supply of services directly in relation to
an immovable property where both the service provider and the service
recipient are located in India

Place of supply of services in respect of immovable property where both the


supplier and the recipient are located in India shall be as follows in the
circumstances as described:
S. No. Nature of Service Place of Supply
Directly relating to immovable property
(a) if property is located in Place where immovable
India property is located.
(b) if property is located Location of recipient.
outside India

Example: I If Mr. A of Chennai has property in Delhi and avails architect


services from B of Bengaluru, then place of supply would be Delhi as the
property is located in India. However, if such property is located in Japan,
then place of supply will be Chennai that is to say location of service recipient.

Determining place of cross border supply of services ( where location of


supplier or the location of the recipient is outside India).
The place of supply of service in relation to an immovable property shall be the
place where immovable property is located . However, if the services is
supplied at more than one location, including a location in taxable territory its
place of supply shall be the location in the taxable territory where the greatest
proportion of service is provided
Example :
A contractor located in London is asked by a registered person in Kolkata
to build three houses for him: one each in Mumbai, Paris and London
for a total amount of Rs 20 cr. Each house is different from the other in
area, design and use of materials. What will be the POS ?

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In this case the service provider is located in London and service
recipient is located in Kolkata. In view of this, this transaction will be
governed by section 10 of the IGST Act. In terms of section 10(4) of the
IGST Act the place of supply of service directly in relation to immovable
property shall be the place where immovable property is located. Further
10(6) of the IGST Act provides that where service relating to immovable
property is supplied more than one location including a location in the
taxable territory the POS will be the location in the Taxable territory
where greatest proportion of service is provided . In this case, IGST is
payable on Rs 20 Crore at Mumbai location

3.5. Input Tax Credits


Treatment under GST:
Input Tax credit shall not be available in respect of the following:
Works Contract services when supplied for construction of immovable
property, other than plant and machinery, except where it is an input
service for further supply of works contract service.
Goods or services received by a taxable person for construction of an
immovable property on his own account, other than plant and machinery,
even when used in course or furtherance of business.
Therefore, under GST scenario, a taxable person would not be entitled to the
credit of any services used for construction of an immovable property when
such immovable property for his own use even for furtherance of business.

Example :

Mr ABC LTD is currently engaged in providing Club membership to open public


wherein amenities ranging from indoor sports to outdoor sports, conference
halls, restaurant, etc, are provided against a fees. Mr ABC LTD are currently
constructing our Club Building. Whether Cenvat credit in respect of Inputs and
Input Services paid for construction of the club building is allowable?

In terms of Section Section 17 (4) (d) of CGST/ SGST Act, goods or services
received by a taxable person for construction of immovable property on his own
account other than plant and Machinery even when used in the course of
furtherance of business :

Therefore, credit in respect of goods and services used for construction of club
building will not be allowed under GST, .

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4. Frequently asked questions

1. To what extent is real estate sector included in GST?

A1. As services have been defined to mean anything other than goods, money
and securities, real estate will primarily classify as service.

In terms of Schedule II of the CGST / SGST / UT GST laws, construction


of a complex, building, civil structure or a part thereof is considered as a
service except where the entire consideration has been received after the
issuance of completion certificate, wherever required, or after its first
occupation.

Sale of land and all buildings other than specified above have been
specified as non-supply under Schedule III of the said Acts.

2. Is the value of land excludable when a taxable supply is made for


sale of an of an apartment or office space in a complex provided
such space is being sold before completion certificate / first
occupation ?

A2. Such a supply will be called a mixed supply as the land is a non-supply
whereas the building comprises a service.

Technically the whole value should be liable to GST at the rate applicable
to construction of building service. However this will result in levying
tax on land also. It is hoped that government will provide a suitable
method of valuation of such supplies.

3. Whether interest or demurrage for late payment is liable to GST?

A3. Yes. In terms of Section 15(2)(d) interest or late fee or penalty of delayed
payment for any consideration for any supply is liable to be included in
taxable value.

4. Are discounts on the sale of property eligible for deduction from


value?

A4. Yes. In terms of Section 15 (3) of the CGST & SGST Act , value of
supply shall not include any discount which is given before or at the
time or after the supply subject to certain conditions.

5. Are the monthly charges payments for the upkeep of the residential /
commercial complex liable to GST?

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A5. Unless otherwise exempted, monthly charges for upkeep of residential /
commercial complex are liable to GST.

6. Is the sale of car parking whether covered or open liable to GST?

A6. Once car parking is sold by the builder to the purchaser of a flat/ office
with a separate consideration, then GST is payable if consideration is
received before issuance of completion certificate.

7. A building is leased for 99 years. Will it be liable to GST?

A7. In various judgments, CESTAT has taken a view that long term lease is
akin to sale. However there are contra decisions as well. Unless otherwise
exempted, long term lease should be considered as service as leasing of
building is specifically covered under Schedule II.

8. What will be the treatment of construction of commercial property


on a land belonging to government under BOT contracts whereby
such land has been given for a period of 30 years?

A8. As discussed in the 6.2.5 of the CBEC Education Guide of 2012 (which
seems to apply with equal force in GST), generally under BOT model,
Government, Developer / builder and the users are parties. Transaction
involving supply of service take place in three different level. Firstly
between Government and the developer, secondly between developer and
the contractor and thirdly between developer and the users.
At first level Govt. transfer the right to use and /or develop the land to the
developer for a specific period for construction of building. Consideration
received for this may be in the nature of upfront lease or certain annual
charges, This will be subject to GST and tax will require to be paid
either by Government or by the developer depending upon whether
RCM is applicable in this case or not.. The government should come out
with suitable provision specifying the cases where RCM is applicable.

For construction of building, if various contractor is engaged by the


developer for undertaking construction activity then GST is payable on
the construction service provided by the contractor to the developer.

At the third level, the developers enter into agreement with several users.
The users may be paying rent or premium on the sub lease for temporary

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use of immovable property to the developer . At this level developer is a
service provider and the user of the building is the service receiver. GST
will be leviable on the service provided by the developer to the users,

9. Is the repair and maintenance of old buildings liable to GST?

A9. Yes it will be liable to GST.

10. What will be the treatment of reconstruction of dilapidated building


wherein land is owned by the society comprising members of the
society with each member entitled to his share by way of an
apartment.

A10. Under this category, the builder / developer receives consideration for the
construction service provided by him from two categories of service
receivers. First category is the society/ members of the society who
transfer development rights over the land ( including the permission for
additional number of flats) to the builder / developer. The second
category of service receivers consist of buyers of flats other than the
society members. GST is payable in case any part of the payment or
development rights of the land is received by the builder/ developer
before issuance of completion certificate. GST is also payable even for
the flats given to the society member. .

11. A supplier staying in Mumbai bills a recipient also staying in


Mumbai for a hotel stay in Goa. What will be the place of supply for
such services ? Will the recipient by entitled to tax credits assuming
that the hotel stay is meant for the furtherance of business activities?

A11. In terms of Section 12 (3) (b) of the proposed IGST Act, place of supply
by way of lodging accommodation by a hotel shall be the location of
such hotel. Therefore the supplier of hotel has to take registration in Goa
and shall raise invoice to the recipient charging CGST and SGST
applicable for the said state. The recipient will not be entitled for tax
credit unless he has registered in the state of Goa and providing output
service from Goa.

12. A allows the use of his land for installation of the hoarding to B. B
allows the hoarding space to C. Please describe the place of supply of
the two services ?

17
A12. In the first case, where A allows his land for installation of hoarding to B,
the place of supply will be the location of the land. (directly relating to
immovable property) In second case, where B allows hoarding space to
C it will be covered under default provision and place of supply will be
the location of the service recipient i.e. location of C.

13. If I am registered in India and provide construction services outside


India , is the supply subject to GST ?

A13. If the construction service is provided for a service recipient located in


India, then GST is payable and place of supply will be the location of the
service recipient. However if the service recipient is located abroad, then
there will be no GST as the place of supply will be the location of
immovable property which is in non-taxable territory.

14. Whether booking fee is subject to GST for a commercial space. ?

A14 : If the booking fees ( for purchase of flats or office) is paid to the builder /
developer for buying a flat or office , it will be subject to GST if such
amount is received by the builder / developer before issuance of
completion certificate from the competent authority .

15. Are tender and contract deposits subjected to GST?

A15. The deposit for payment of contract documents is subject to GST because
it involves supply of goods.

However no GST is payable if the deposit serves as a security and meant to


be refunded.

If a deposit is intended to be used to offset the future payments once the


supply has been made GST is chargeable on such deposit

16. When and how do I pay GST for progressive payment contracts
spanning more than 3 months?

A16. This contract will be considered as continuous supply of service and GST
has to be paid after the end of each successive progressive payment
schedule.

17. Can I claim input tax for services related to construction of building
(professional services of architect, consulting engineers service etc.) on
my own account wherein such immovable property is meant to be
used for furtherance of my business.

18
A17. No. Goods or services or both received by a taxable person for construction
of an immovable property(other than plant or machinery) on his own
account including when such goods or services or both are used in the
course or furtherance of business.

18. A contractor provides construction services to a landowner who in


return (after completion) leases the land and building to him for a
period of 5 years. Can the contractor contra the payment of the
construction services with the lease payment? When do I have to
account for GST?

A18. No, there are two supplies involved, the supply of construction services
from the contractor to the landowner and second supply is leasing services
made by the landowner to the contractor. The contractor has to pay GST
on his construction service based on the consideration he received and the
landowner has to pay GST for leasing services on the consideration he
received.

19. A contractor provides construction services to a landowner who in


return gives to the 20 units of commercial building. What will be the
GST treatment ?

A19. The land owner (if GST registered) would need to pay GST on the value of
the construction service equal to the open market value of 20 units. The
contractor also has to pay GST on the open market value of the commercial
buildings if the same are sold before obtaining completion certificate.

20. The client purchased and supplied the contractor with all the
infrastructure. Can the contractor deduct the value charges for these
supplies from the value of progressive payments due to him?

A 20 No, there are two separate supplies. Supply of building materials and
workers from the client to the contractor and second supply made by the
contractor to the client for the construction service. Both client and
contractor should pay GST.

21. What will be the GST treatment for the followings :

a. Preference Location Charges (PLC):


b. Amount retained on surrender / cancellation of booking
c. Re-selling of surrender /cancelled/bought back unit
d. Administration charges

A21 a. Preferential location charges are subjected to GST.

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b & c.Sometimes, buyer at his own will, surrender his flat booking to the builder
and builder refunds either full amount or deduct some surrender charges and
refund the balance amount. Such deduction is income of the builder. Such
surrender/ cancellation charges should attract GST. Where builder resells
such unit before obtaining the completion certificate then builder has to
discharge the GST. .
d. Administration charges/ Transfer charges/restoration charges are subject to
GST.

22. Are contracts signed for sale of commercial space before the GST
implementation date liable for GST?

A22. In terms of section 142 (10) of the CGST & SGST act, goods and services or
both supplied on or after the appointed date in pursuance to the contract entered
into prior to the appointed date is liable to GST, however No tax is payable on
goods or services or both to the extent the tax was paid in the current regime.
23. I owned a commercial property and leased it to a tenant. The tenancy
agreement takes effect from the date of implementation of GST. However, I
have given him 3 months grace period for him to set up his business without
charging any rental. What is the GST treatment for the first 3 months free
rental charges?
A23. Leasing of commercial property is a supply of service and subject to GST. If the
rental service is given for free, it is not subject to GST. However, if the
commercial property is rented out to the related person without any
consideration, you will have to account for GST based on open market value.

20
GST Guidance Note
On
Transportation
INDEX

1 Introduction
2 Passenger Transport Service
2.1 Who is a passenger?
2.2 What is passenger transportation?
2.3 Key Stakeholders
2.4 Present Tax Structure
2.5 Determination of tax under GST
2.6 How to determine Place of supply?
2.7 What will be the value for service on which GST will be applicable?
2.8 What will be the document on which customer can avail the credit?
2.9 Eligibility of input tax credit to passenger transporters
2.10 On board supplies and its taxability
3 Freight Transport Service
3.1 What is freight?
3.2 What is freight transportation?
3.3 Key Stakeholders
3.4 Present Tax Structure
3.5 Determination of tax under GST
3.6 How to determine Place of supply?
3.7 What will be the value for service on which GST will be applicable?
3.8 What will be the document on which customer can avail the credit?
3.9 Eligibility of input tax credit to goods transporters
3.10 Freight Forwarders
3.11 Charter of vessel and aircraft
4 Frequently Asked Questions

2
1. Introduction
a. Transport or transportation is the movement of people, animals and goods from one location
to another. Modes of transport include air, rail, road, water, cable, pipeline etc. which can be
privately owned, privately hired or in the nature of public transportation.

b. Public transport is the primary mode of transport for most of the people in India. As per
report of World Bank, India's public transport systems are among the most heavily used in
the world.

c. Indias transport network is vast and diverse comprising an extensive road network of 3
million km and 65,808 route km of rail network geographically connecting the country along
its length as well as breadth. India also has an established aviation industry with
international and domestic airline services currently being provided through 11 international
airports and 89 domestic airports.

d. Indias huge coastline of 7,517 km also provides significant opportunities for water based
transportation services through a total of 12 major and 200 non major ports and 14,500 km
of navigable inland waterways set up along the coastline.

e. This Guidance Note mainly covers passenger and goods transportation service. In addition
we have also touched upon incidental and ancillary services in the form of intermediate
services and on board services associated with passenger and goods transportation service.

2. Passenger transport service


2.1 Who is a passenger?

A passenger is one who is traveling in a car, bus, train, airplane, ship or other
conveyance, but does not include the driver, pilot, or conductor or crew or likewise.

2.2 What is passenger transportation?

Passenger transportation is service of carriage of a person from one place to another by


using any mode of transportation. But it does not include service of carriage of a person
in specified areas for recreational and pleasure purpose such as park, lake, zoo etc.

2.3 Key stakeholders

Apart from the government agencies operating public transport services other key
stakeholders include airline companies both domestic and international, private bus
operators, taxi/cab operators etc. Various intermediary service providers providing
service of ticket booking, tour operators and travel agents also form part of this value
chain.

3
2.4 Present tax structure

In the current tax structure passenger transportation is subject to service tax. For
taxability purpose under the Negative List regime all services which are neither specified
under negative list nor exemption list are subject to Service tax. General rate of service
tax applicable is 15% (incl. 0.5% each of Swach Bharat Cess (SBC) and Krishi Kalyan
Cess (KKC). Certain transportation services are also subject to abatement i.e. exemption
from a certain portion of value in recognition of the amount of fuel and other inputs used,
for which input tax credit is not admissible. Apart from the following services, all other
transportation services are subject to full rate -

Negative List Exemption List Abatement


i. Railways other than i. Transportation of i. Transport of passengers
first class or an air- student faculty or staff with or without
conditioned coach of educational accompanied belongings
ii. Metro, monorail or institution by RAIL (other than first
tramway ii. Services of transport of class & air conditioned
iii. Inland waterways passengers:- Coach) 70% abatement.
iv. Public transport, other - By air embarking or ii. Transport of passengers
than "predominantly for terminating in with or without
tourism purpose" in a Specified Eastern accompanied belongings
vessel, between places States* of India by AIR.
located in India iii. Stage carriage other - For economy class: 60%
v. Metered cabs, auto than air conditioned abatement
rickshaws. stage carriage - Other than economy
vi. Transportation of iv. Transport of passengers class: 40% abatement
deceased (excl. tourism, iii. Transportation of
conducted tour , charter passengers by contract
or hire ) by an non air carriage other than radio
conditioned contract taxi: 60% abatement
carriage other than radio iv. Radio taxi : 60% abatement
taxi v. Stage carriage : 60%
v. Transportation of abatement
patient

2.5 Determination of tax under GST

Chargeability of GST will depend on various aspects including customer registration


status, place of supply, time of supply, nature of supply - interstate or interstate supply.
Briefly put if the location of the service provider and the place of supply are in same
State, it would be an interstate supply chargeable to Central Tax and State Tax. If they
are in different States, it will be an interstate supply chargeable to Integrated Tax. The
time of supply will determine the time when the tax has to be paid. For detailed
understanding please refer detailed Guidance Note on Chargeability on JIOGST website.

4
2.6 How to determine place of supply under GST?

Place of supply plays a key role in determining whether the transaction is an interstate or
intrastate transaction. First step in determination of place of supply of any service is to
check whether both location of provider and location of recipient are situated within India
or any of one them is outside India.

i. If provider & recipient are within India, place of supply will be as follows:

Unregistered
Registered

When place of
When place of
embarkation is not
embarkation is known
known

Address of customer Address of customer


is known is not known

Place where
Location of passenger embarks Such address Location of provider
service recipient for continuous
journey

ii. If provider or recipient is situated outside India, place of supply will be as follows:

When either of the location of the supplier or location of recipient is outside India the
place of supply shall be where passenger embarks on the conveyance for a continuous
journey.

iii. What do you mean by continuous journey?

Continuous journey means a journey for which a single or more than one ticket or
invoice is issued at the same time, either by a single provider of service or through
an agent acting on behalf of more than one provider of service, and which involves no
stopover between any of the legs of the journey for which one or more separate
tickets or invoices are issued.

5
Check for Continuous Journey
Not a continuous
No
Journey
Whether a single
provider or
Continuous
through an agent Single Invoice
Journey
Yes
Continuous
Multiple Invoice Journey if no stop
over is involved

iv. Return journey:

Both inward and outward journey shall be treated as separate transactions i.e. a separate
journey even if the invoice or ticket are issued at the same time for both inward and
outward journey. Thus, all service providers will have to now book invoices for return
journey separately and charge tax accordingly.

Journey Customer POS Rationale


Status
Mr. A from Delhi books a ticket for Registered Delhi Place of location of the
Mumbai to New York, from a service recipient if
service provider in Delhi. registered
Mr. A from Mumbai books a ticket Non- New York Recipient unregistered so
for New York to Delhi from an registered place where passenger he
agent in Mumbai. embarks for continuous
journey
Mr. A from Delhi books a ticket for Registered Delhi Place of location of the
New York to Dubai, from a service service recipient if
provider in Dubai. registered
Mr. Xen from China books a ticket Non- Delhi Recipient is outside India,
from Delhi to Chennai from a registered so the POS is where
service provider in Kolkata passenger embarks for a
continuous journey.
Mr. A from Delhi books a ticket for Non- Mumbai Recipient unregistered so
Mumbai to Jaipur Via Ahmedabad, registered place where passenger he
from a service provider in Delhi embarks for continuous
who issued a single invoice. journey
Mr. A from Delhi books a ticket for Non- a. Mumbai Recipient unregistered so
a. Mumbai to Kolkata (travel by registered b. Kolkata place where passenger he
flight) and embarks for continuous
b. Kolkata to Bhubaneswar (travel journey but two separate
by bus), from a service provider in journey with a stopover
Delhi who issued a multiple with multiple invoices.
invoice.

6
2.7 What will be the value for service on which GST will be applicable?

- General Rule:

The value for services for the purpose of GST shall include the price actually paid or
payable, any taxes paid other than GST (incl. cess paid under Compensation Act), any
incidental expenses, any interest, late fees or penalty. Discounts if any shall be
reduced to derive the value of services.

- Exceptions:

Value of services by an air travel agent, in relation to booking of tickets:


According to valuation rule value of such services shall be deemed to be 5% of basic
fare in the case of domestic bookings, and 10% of the basic fare in the case of
international bookings of passage for travel by air.

- Abatements:
Abatements from the gross value charged for various categories of passenger
transportation services would also be provided in GST law by way of exemption
notifications that will be issued subsequently. These abatements are essentially
towards the input components like fuels etc. on which input tax credits are not
available. Alternately, the Government may also consider charging lower tax rate on
such services rather than granting abatements. The net impact will remain the same.

2.8 What will be the document on which customer can avail the credit?

Under GST, all service providers including airlines are required to issue an invoice
showing tax amount separately. Details of such invoices needs to be uploaded in the
returns by service providers and same will be available for service recipients to avail
credit.
Under the provisions of the Tax Invoice Rules, for a person supplying passenger
transportation service, a tax invoice shall include ticket in any form, by whatever name
called, Whether or not serially numbered, and whether or not containing the address of
the recipient. However other particulars as prescribed for an invoice need to be captured.

2.9 Eligibility of input tax credit to persons providing passenger transportation service

- Every registered taxable person shall, subject to such conditions and restrictions, be
entitled to take credit of input tax charged on any supply of goods or services which
are used or intended to be used in the course or furtherance of his business. There are
some goods and services on which input tax credit is not available (for details please
refer to Guidance Note on Input Tax Credits)For persons providing passenger
transportation services important specific implications are-
a. Input tax credit of tax paid on motor vehicles and other conveyances shall only be
allowed when used for making some specified supplies including taxable supply of
transportation of passengers.
b. No credit would be available on hydrocarbon fuels like MS, HSD and ATF since
these petroleum products are at present out of GST. Therefore credit of Excise Duties

7
and VAT paid on these products would not be available as credit to suppliers of
passenger transportation service.

2.10 On-board supplies and their taxability

i. What are on-board supplies?

Any supply in the form of goods or services provided on a vessel, ship, aircraft or
train to the passengers are considered as goods or services provided on board. For
e.g. sky meal on demand provided by an airline or goods sold on a train by a hawker
shall be considered as supply of goods or services on board.

ii. What is place of supply for such supplies?

- For supply of goods: Where the goods are supplied on board a conveyance, such as
a vessel, an aircraft, a train or a motor vehicle, the place of supply shall be the
location at which such goods are taken on board.

- For supply of services: The place of supply of services on board a conveyance such
as vessel, aircraft, train or motor vehicle, shall be the location of the first scheduled
point of departure of that conveyance for the journey.

Journey POS
Mr. A while traveling from Mumbai to Delhi booked a bed
1 Mumbai
roll service which will be provided on board at Jaipur.
Mr. A purchased a pack of ready to eat noodles while on a
train journey from Mumbai to Delhi. The noodles were
2a Mumbai
purchased when the train was crossing state of Madhya
Pradesh. The noodles were loaded on train in Mumbai.
2b What if such noodles were loaded at Kota in Rajasthan? Kota

3. Freight Transport Service


3.1 What is freight?

Freight is the consideration charged for transportation of-


- Goods/cargo
- Mail
- Documents
- Unaccompanied vehicles

3.2 What is freight transportation?

Fright transportation is a service of carriage of freight from one place to another by using
any mode of transportation. But it does not include service of carriage of accompanied
baggage where in a passenger is also transported with the baggage.

8
3.3 Key stakeholders

Major stakeholders are:


- Goods transport agencies or GTAs who provide service in relation to transport of
goods by road and issues consignment note.
- Airline companies who issue airway bills
- Railway who issue railway receipts
- Shipping lines who are major participants in export and import of goods who issues
B/L.
- Various intermediary services like freight agents who do not provide the main service
are also part of this value chain.

3.4 Present tax structure

i. Transportation by vessel or aircraft :

- Transportation of Goods within India

Transportation of goods by inland water ways is covered under negative list.


Transportation of some specified goods of national importance is exempt from
service tax if transported.by vessel. All other goods when transported by vessel or
aircraft within India is subject to service tax levy.
- Abatement:
For transport of goods by vessel, abatement from gross amount charged for the
purpose of determining the value is 70% of such amount. Thus service tax is
payable on 30% of the gross amount. This abatement is available subject to certain
specified conditions.

- Transportation of Goods from outside India (Inward transportation):


Inward transportation of goods by vessel and aircrafts from place outside India to
India (first custom port) was earlier in the negative list which has now been
removed with effect from 01.06.2016. However, exemption is provided to
transportation of goods by an aircraft from outside India to India (entry no 53 of
notification No 9/25/2012). Thus service tax is payable on the value of
transportation of goods by vessel from outside India, whereas when goods are
transported through air from outside India, no service tax is payable. In case
services of transportation of goods through vessel are availed from a domestic
entity, service tax needs to be charged by the Indian shipping company. Similarly
for foreign flag vessels service tax liability is to be discharged under Reverse
Charge Mechanism (RCM).
When both service receiver (Exporter) and service provider (Shipping line) are
outside India, w.e.f 23.04.2017 the tax shall be payable by the importer of goods, if
goods are transported thru vessel and dispatched in India. The input tax credit of
such service tax paid shall be eligible to importer.

- Transportation of goods from India to outside India

Outbound international freight (both through vessel and through aircraft) is zero
rated.

9
ii. Transportation by Rail:

- Exemption:
Transportation of goods by rail within India is chargeable to Service Tax.
However, transportation of some specified goods of national importance is exempt
from service tax if transported by rail
- Abatements
The percentage of gross amount on which tax is payable for goods
transportation service by rail is as follows-
Transport of goods by rail - 30%
Transport of goods in containers by rail by any person other than Indian railways -
40% (this is applicable to licensee who have been provided license for
transportation of goods in container by rail under Indian Railways Act).

iii. Transportation by Road (Goods transport agency):

Services by way of transportation of goods by road are taxable, only if the same is
provided either by a goods transportation agency or a courier agency. Goods
Transport Agency means any commercial concern which provides service in relation
to transport of goods by road and issues a consignment note, by whatever name called.
- Exemptions:
o Service provided by GTA of certain products like agricultural products,
specified food staff, fertilizer etc.
o Goods where gross amount charged on consignments transported in a goods
carriage does not exceed Rs.1500.
o Goods where gross amount charged on an individual consignment,
transported in a goods carriage does not exceed Rs.750
o Hiring of vehicle by GTA for transportation of goods.

3.5 Determination of tax under GST

Chargeability of GST will depend on various aspects including customer registration


status, place of supply, time of supply, nature of supply - interstate or interstate supply.
Briefly put if the location of the service provider and the place of supply are in same
State, it would be an interstate supply chargeable to Central Tax and State Tax. If they
are in different States, it will be an interstate supply chargeable to Integrated Tax. The
time of supply will determine the time when the tax has to be paid. For detailed
understanding please refer detailed Guidance Note on Chargeability on JIOGST website.

10
3.6 How to determine place of supply?

i. If point of origin and the point of destination are within India then place of
supply will be as follows:

Place of supply

Registered Location of customer

Whether Customer is
registered?
Location at which
such goods are
Unregistered
handed over for
transportation

ii. If provider or recipient is situated outside India place of supply will be as


follows:

When either the location of the supplier or location of recipient is outside India the
place of supply of services of transportation of goods, other than by way of mail or
courier, shall be the place of destination of the goods.

iii. What is the location at which goods are handed over?

Such place shall be the place where transfer of the possession of goods happens from
the consignor i.e. one who sends the goods, to the transporter to be delivered to the
consignee.

iv. What is the meaning of destination?

Destination is the farthest specified place to which the goods are consigned. It is the
ultimate place stated on the consignment note. The destination is also determined
based on the delivery terms for example ex-works or eost, insurance and freight (CIF)
to the port of arrival. When such place is unknown, the place of import shall be the
destination.

11
Illustration Place of Supply
Journey Customer Status POS
XYZ Ltd, a registered person in Delhi sold the
goods to Mr. A, who lives in Mumbai. The
company took the service of ABC transporter to Registered Delhi
deliver the goods. The goods were transported
from companys warehouse in Delhi.
XYZ Ltd, a registered person in Delhi sold the
goods to Mr. A, who lives in Mumbai. The
company took the service of ABC transporter to Registered Delhi
deliver the goods. The goods were transported
from companys warehouse in Mumbai.
XYZ Ltd, an unregistered person from Delhi sold
the goods to Mr. A, who lives in Mumbai. The
company took the service of ABC transporter to Un-Registered Mumbai
deliver the goods. The goods were transported
from companys warehouse in Mumbai.
XYZ Ltd imported goods from China. The
JNPT,
company took the service of ABC transporter who
NA Maharash
will ship the goods from Chinese port to JNPT
tra
port in Maharashtra.
XYZ Ltd imported goods from China. The
company took the service of ABC transporter who
will ship the goods from the Chinese port to
NA Delhi
companys warehouse in Delhi. The goods are
imported and cleared from JNPT, Maharashtra
and then moved to Delhi.

3.7 What will be the value for service on which GST will be applicable?

The value for services for the purpose of GST shall include the price actually paid or
payable, any taxes paid other than GST (incl. cess paid under Compensation Act), any
incidental expenses, any interest, late fees or penalty. Discounts if any shall be reduced to
derive the value of services.

3.8 What will be the document on which customer can avail the credit?

Under the earlier service tax law, GTA were subject to reverse charge, hence the
consignment note with the challan proving payment of necessary service tax to the
Government was the document for availing credit. But under GST, credits would be
available based on the invoice uploaded in the returns. As to whether services provided
by GTAs are charged to GST under reverse charge is not clear as of now. If the reverse
charge is retained then the service recipient would need to issue an invoice under
section 31(3) (f) of CGST law and take credit. If it is under forward charge then a
detailed invoice would need to be issued by the service provider and uploaded on GSTN
as part of his GSTR 1, on which service recipient can avail credit.
12
Certain additional information has been prescribed that needs to be captured on the
invoice issued by a GTA under the Invoice Rules which includes gross weight of the
consignment, name of the consigner and the consignee, registration number of the goods
carriage, details of place of origin and destination etc.

3.9 Eligibility of input tax credit to goods transporters

- General rule:
- Every registered taxable person shall, subject to such conditions and restrictions, be
entitled to take credit of input tax charged on any supply of goods or services which
are used or intended to be used in the course or furtherance of his business.
- There are some goods and services on which input tax credit is not available (for
details please refer to Guidance Note on Input Tax Credits). For persons providing
goods transportation services important specific implications are-
a. Input tax credit of tax paid on motor vehicles and other conveyances shall only be
allowed when used for making some specified supplies including taxable supply of
transportation of passengers.
b. No credit would be available on hydrocarbon fuels like MS, HSD and ATF since
these petroleum products are at present out of GST. Therefore credit of Excise Duties
and VAT paid on these products would not be available as credit to suppliers of
passenger transportation service.

3.10 Freight Forwarder

i. Who is a freight forwarder (FF)?

A freight forwarder is a person or company that organizes shipments for individuals or


corporations to obtain goods from the manufacturer or producer to a market, customer
or final point of distribution. FFs enter into contract/s with a carrier or often multiple
carriers to move the goods. A FF does not move the goods but acts as an expert in the
logistics network. These carriers can use a variety of shipping modes, including ships,
airplanes, trucks, and railroads, and often use multiple modes for a single shipment.

ii. Freight forwarder acting as an agent or principal:

- The FF merely acts as an 'agent' of the airline/ shipping line/cargo / ocean liners
when it does not bear any actual liability towards transportation. He acts as an
agent and charges the rate as prescribed by the transport authorities. In such a
situation, he provides an intermediary service.
- When FF acts as a principal, he himself provides the services of transportation.
Generally in such an agreement he buys a certain amount of space in bulk and
then trades the space on a price fixed, independent of the transporter.

3.11 Charter of vessel and aircraft

i. What is charter?

The term charter is sometimes used loosely in transport industry. It can be used to
describe the lease of a ship or aircraft i.e. a hire with or without captain, pilot or

13
crew freight transport services, or passenger transport services, or some other
service. But for the purpose of this guidance note the word charter means Hiring
of a means of transportation (vessel or aircraft).

ii. Dry Charter V/S Wet Charter

- Dry Charter or a bareboat charter, is a leasing arrangement of vessel or aircraft


where normally the lessee takes possession and has the exclusive use of the
ship or aircraft for definite periods with obligation on the lessee to return the
leased article on the expiry of the term.

- Wet Charter or time charter where normally the lessee exercises direction over
the operation and movement of the vessel or aircraft and additionally lessor also
sometimes provides the crew or bears maintenance and insurance while the
lessee bears other operating expenses.

iii. Taxability a challenge

- In the present scenario the taxability of the charter agreement were an area of
dispute under Vat and Service tax laws. Where in Vat laws the transfer of right
to use was taxed and under service tax law hiring, leasing etc., without transfer
of right to use was taxed.

- Under GST scenario when both shall be subject to single type of levy and shall
be treated as Supply the above issue may stand resolved. But still the
classification under correct category of supply shall still remain an area of
concern.

4. Frequently Asked Questions:


4.1 An airline operates flights to all the domestic airports of India. Presently they are
centrally registered under Service Tax Law. What will be the scenario under GST?

As per GST law, once a person crosses the limit of aggregate turnover (PAN based all
India basis) he should get registered in all the States/UTs from where they provide any
outward taxable service. Hence the airline needs to get themselves registered in all States
from where they are providing taxable services.

4.2 If an airline issues a ticket/ pass for Anywhere Travel in India to a person, who is
unregistered. What will be the place of supply?

As in the above case, the place of embarkation cannot be determined at the time of issue
of invoice as the right is granted for future use. Accordingly, place of supply cannot be
the place of embarkation. In such cases, if the airline has any address on record for such
customer, such place would be the place of supply. If no address is available, location of
the airline will be the place of supply for this transaction.

4.3 Whether charges for extra baggage will be considered as service for transport of
goods or transport of passengers?

14
There is lack of definitive clarity on this. Extra baggage along with a passenger is
commonly treated as transportation of passenger only event though the charge is reflected
for the baggage.

4.4 Whether various charges like user development fees, passenger service fee, fuel
surcharge etc. will be subject to GST?

Yes. Such expenses are generally shown in an airline invoice and for the purpose of GST,
such expenses will be treated as incidental expenses and will be added in the value of
taxable service.

4.5 A bus operator provides a free return ticket to Mumbai under the travel promotion
program. Whether it will be liable to GST?

No. Services which are provided without consideration are not subject to GST except in
some cases specified in Schedule I of the CGST law. Therefore the bus operator is not
supposed to charge any GST on the air ticket given free of cost.

4.6 A tourist booked a car on hire and drive basis to travel across Mumbai. Whether it
is a passenger transport service?

No. This is not a passenger transport service. A hire and drive is a supply of means of
transport which provides the right to use goods. GST will be applicable accordingly.

4.7 XYZ Ltd registered in Delhi, imported goods from a foreign vendor situated in USA
on DDP basis i.e. delivered duty paid. To execute this trade vendor hired an
Overseas Agent (OA) in USA to transport the goods to Delhi. OA in turn entered
into the contract with Indian FF to execute the Indian leg of the shipment. Whether
contract between OA and Indian FF taxable under GST?

Yes. The service is provided by the FF located in India to OA which a non-resident entity
and unregistered in India. Hence POS will be the place where goods are handed over to
FF i.e., in India.

4.8 M/S ABC is a manufacturer of chemicals. In order to have a cost efficient


transportation they decided to purchase 4 trucks (motor vehicles) which will be used
in the transportation of raw material from vendor location to manufacturing
location. If GST will be applicable on purchase of such trucks whether M/S ABC
will be eligible to get Input Tax Credit?

No. The general rule says that motor vehicles are under negative list i.e. no tax credit for
GST paid on purchase of motor vehicles. But as an exception to this rule such tax credit
shall be eligible, if motor vehicles are used for providing a taxable supply of
transportation of goods. In this case M/s ABC do not use the trucks to provide a taxable
goods transport service but use them on captive use basis. Hence such usage will not be
covered in the exception.

15
4.9 Effect of Trans-shipment:

Parties involved Contract GST applicability


ABC transport agency Transport of goods from CGST and SGST (for UP)
(registered in UP) and UP to Rajasthan. shall be applicable.
customer (unregistered)
ABC transport agency To execute the Rajasthan IGST shall be applicable.
(registered in UP) and leg of the shipment.
XYZ transport agency
(registered in Rajasthan)
ABC transport agency will be eligible to take input tax credit with respect to
IGST paid to XYZ transport agency.

16
GST GUIDANCE NOTE

ON

GOVERNMENT TRANSACTIONS

1
Index

1. Overview
1.1 Background
1.2 Meaning of Government and Local Authority
1.3 Meaning of Governmental Authority
1.4 Various entities like statutory body, corporation and authority
constituted under an Act are not termed as Government
1.5 Services by the Government

2. Existing Taxation
2.1 Taxability prior to Negative List regime
2.2 Taxability under Negative List regime
2.3 Registration
2.4 Exemptions
2.5 Clarifications by CBEC
2.6 Place of Provision of Service
2.7 Point of Taxation

3. Taxability in GST Regime


3.1 Taxability
3.2 Registration
3.3 Exemptions
3.4 Place of supply of Service
3.5 Time of supply of Service

4. Frequently Asked Questions

2
1. Overview

1.1 Background

Government has some important functions to be performed. Some of the functions to


be performed by the Government are general public services, defense and security of
public, environmental protection, housing and public amenities, health, education,
law and order and public transport etc.

There is a lot of ambiguity and apprehension with regard to taxability of services


provided by the Government and its related authorities. This guide is prepared to
explain the taxability of various services provided by Government under current tax
regime and GST scenario.

1.2 Meaning of Government and Local Authority

In terms of section 2(53) of GST law, Government means the Central Government.

Central Government and State Government are not defined in the Finance Act, 1994
as well as in GST laws but local authority has been defined in GST Law.

In terms of clause (26A) of Section 65B of Finance Act, 1994, Government means
the Departments of the Central Government, a State Government and its Departments
and a Union territory and its Departments, but shall not include any entity, whether
created by a statute or otherwise, the accounts of which are not required to be kept in
accordance with article 150 of the Constitution or the rules made thereunder.

Central Government: - In terms of section 3(8) of The General Clauses Act, 1897,
Central Government means the President and include officers subordinate to him
while exercising the executive powers of the Union vested in the President and in the
name of the President.

Example- Ministry of Finance , Ministry of Home affairs, Ministry of Mines, Central


Industrial Security Force (CISF), Directorate General of Foreign Trade (DGFT),
Director General of Civil Aviation, Bureau of Indian Standers and Food Safety &
Standard Authority of India etc.

State Government: - In terms of section 3(60) of The General Clauses Act, 1897,
State Government means in a State, the Governor and in a Union territory, the
Central Government. Further, State Government includes the officers subordinate to
him who exercising the executive power of the State vested in the Governor and in
the name of Governor.

3
Example- Public Health Department, Water Supply and Sanitation Department,
Maharashtra State Police etc.

Local Authority: - In terms of provisions of Section 2(69) of the GST Laws, local
authority means

a) a Panchayat as defined in clause (d) of article 243 of the Constitution;


b) a Municipality as defined in clause (e) of article 243P of the Constitution;
c) a Municipal Committee, a Zilla Parishad, a District Board, and any other authority
legally entitled to, or entrusted by the Central Government or any State
Government with the control or management of a municipal or local fund;
d) a Cantonment Board as defined in section 3 of the Cantonments Act 2006;
e) a Regional Council or a District Council constituted under the Sixth Schedule to
the Constitution;
f) a Development Board constituted under article 371 of the Constitution; or
g) a Regional Council constituted under article 371A of the Constitution;

Example- Brihanmumbai Municipal Corporation, Kolkata Municipal Corporation,


Ahmednagar Zilla Parishad, Pune Cantonment Board etc.

1.3 Meaning of Governmental Authority

Under GST Laws the terms Governmental Authority is not defined. However, in
terms of clause 2(s) of the Notification no. 25/2012-ST, governmental authorities
means authority or a board or any other body (i) setup by an Act of Parliament or a
State Legislature or (ii) establish by government, with 90% or more participation by
way of equity or control, to carry out any function entrusted to a municipality under
article 243W of the Constitution.
Example: - The Mumbai Metropolitan Region Development Authority (MMRDA),
Mumbai Fire Brigade, Maharashtra State Road Development Corporation (MSRDC)
etc.

1.4 Various entities like statutory body, corporation and authority constituted under
an Act are not termed as Government

From the definitions of the Government, one can say that a statutory body,
corporation or an authority constituted under an Act passed by the Parliament or
any of the State Legislatures will not be covered under the definition of
Government as they are normally created by the Parliament or a State
Legislature in exercise of the powers conferred under article 53(3) (b) and article
154(2) (b) of the Constitution respectively.
Further, it is a settled position of law Government (Agarwal Vs. Hindustan Steel
AIR 1970 Supreme Court 1150) that the manpower of such statutory authorities
or bodies do not become officers subordinate to the President under article 53(1)
of the Constitution and similarly to the Governor under article 154(1). Such a
statutory body, corporation or an authority as a juristic entity is separate from the

4
state and cannot be regarded as Central or State Government and also do not fall
in the definition of local authority.
Thus regulatory bodies and other autonomous entities which constituted under an
act would not comprise either government or local authority.

Example:- Gujarat Pollution Control Board, City and Industrial Development


Corporation of Maharashtra Ltd (CIDCO) and Gujarat Energy development
agency, Gujarat Maritime Board etc.

1.5 Services by the Government

Historically, supplies made by Government have been exempted from tax on the
grounds that government is not engaged in a business and its activities are not
commercial in nature. But this is often, and increasingly, not the case. Government
also provide services which are in competition with private firms.

A number of sovereign/public authorities constituted by government to perform


certain functions/ duties, which are statutory in nature. These functions are
performed in terms of specific responsibility assigned to them under the law in
force. Services which are provided by government in terms of their sovereign
right and which are not substituted in any manner by the private entities. For
example - grant of passport, visa, driving license, birth or death certificates,
protection and safety of people, verification, approval and calibration of
weighing and measuring instruments, grant of patent and copyrights, allocation
of natural resources, assignment of the right to use the radio-frequency
spectrum etc.

Government provide such services in competition with private firms. For


example- renting of immovable property, security service, testing and
analysis, advertisement and promotion, construction or works contract, public
transportation.

2 Existing Taxation

2.1 Taxability prior to Negative List regime

Prior to 1st July 2012 CBEC vide Circular no. 89/7/2006 ST dated 18.12.2006 and
Circular No. 96/7/2007-ST dated 23.08.2007 (reference code 999.01/23.08.07)
clarified that an activity performed by a sovereign/public authority under the
provisions of law does not constitute provision of taxable service to a person. The fee
collected by them for performing such activities is in the nature of statutory fee as per
the provision of the relevant statute. Such activity is purely in public interest and it is
undertaken as mandatory and statutory function. Accordingly any activity carried out
by any Government under sovereign function does not considered as service and
therefore, no Service tax was payable on such activities.

5
However, if Government performs a service, which is not in the nature of statutory
activity and the same is undertaken for a consideration not in the nature of statutory
fee/levy, then in such cases, service tax was payable, if the activity undertaken falls
within the ambit of a taxable service. Example: - security services, renting of
immovable property service, testing and analysis services etc.

2.2 Taxability under Negative List regime

For the period from 01.07.2012 to 31.03.2016

In terms clause (a) of section 66D of Finance Act, 1994, all services by
Government or a local authority were covered under negative list except
(i) services by the Department of Posts, life insurance and agency services
provided to person other than Government,
(ii) services in relation to an aircraft or a vessel,
(iii) Transport of goods or passengers;
(iv) Support services provided to business entities.

Support services has been defined as infrastructural, operational, administrative,


logistic, marketing or any other support of any kind comprising functions that entities
carry out in ordinary course of operations themselves but may obtain as services by
outsourcing from others for any reason whatsoever and shall include advertisement
and promotion, construction or works contract, renting of immovable property,
security, testing and analysis.

In case of support service except renting of immovable property, the recipient of the
service was liable to pay Service tax under reverse charge mechanism.

From 1st April 2016 onwards

All the services provided by the Government or local authority to a business entity,
except the services that are specifically exempted or are covered by any entry of
negative list, are liable to service tax.
The recipient of the service is liable to pay Service tax under reverse charge
mechanism on all services except on renting of immovable property and services
specified under sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the
Finance, Act, 1994 as mentioned above.

2.3 Registration

Central Government, State Government and Local authority are required to get
registered because service tax is payable by them under forward charge in respect
of certain specified services.

6
2.4 Exemptions

In terms of Mega Exemption Notification No 25/2012 dated 20.06.2012, following


services provided by Government or Local authority are exempted:-

Services by way of any activity in relation to any function entrusted to a


Municipality under article 243W of the Constitution,
Services provided to another Government or local authority
Services provided by Government or a local authority by way of issuance of
passport, visa, driving license, birth certificate or death certificate
Services where the gross amount charged for such services does not exceed INR
5000/-
Services by way of tolerating non-performance of a contract for which
consideration in the form of fines or liquidated damages is payable to the
Government or the local authority under such contract
Services by way of registration required under any law for the time being in
force and testing, calibration, safety check or certification relating to protection
or safety of workers, consumers or public at large, required under any law for
the time being in force.
Services by way of assignment of right to use natural resources to an individual
farmer for the purposes of agriculture
Services by way of any activity in relation to any function entrusted to a
Panchayat under article 243G of the Constitution
Services by way of assignment of right to use any natural resource where such
right to use was assigned by the Government or the local authority before the
April 01, 2016
Services by way of allowing a business entity to operate as a telecom service
provider or use radiofrequency spectrum during the financial year 2015-16 on
payment of license fee or spectrum user charges, as the case may be,
Services by way of deputing officers after office hours or on holidays for
inspection or container stuffing or such other duties in relation to import export
cargo on payment of Merchant Overtime charges (MOT).

Similarly, certain services provided to Government or Local authority or


Governmental authority, are exempted in terms of Mega Exemption Notification No
25/2012 dated 20.06.2012. , which are as follow:-

Services provided to the Government, a local authority or a governmental


authority by way of construction, erection, commissioning, installation,
completion, fitting out, repair, maintenance, renovation, or alteration of
specified projects
Services provided to Government, a local authority or a governmental authority
by way of water supply, public health, sanitation conservancy, solid waste
management or slum improvement and up-gradation or repair or maintenance of
a vessel

7
Services received from a provider of service located in a non-taxable territory
by Government, local authority, a government authority or an individual in
relation to any purpose other than commerce, industry or any other business or
profession.

2.5 Clarifications by CBEC vide Circular no. 192/02/2016-ST dated 13.04.2016

The Circular offers clarification on various aspects some of which have been set-out
hereunder:
Activity undertaken by Government or a local authority against a consideration
constitutes a service. It is immaterial whether such activities are undertaken as a
statutory or mandatory requirement under the law. As long as the payment is
made for getting a service in return (i.e., as a quid pro quo for the service
received), it has to be regarded as a consideration for that service.
Service Tax is leviable on any payment, in lieu of any permission or license
granted by the Government or a local authority.
Taxes, cesses or duties levied are not consideration for any particular service as
such and hence not leviable to Service Tax.
Fines and penalty chargeable by Government or a local authority imposed for
violation of a statute, bye-laws, rules or regulations are not leviable to Service
Tax.

2.6 Place of Provision of Service

The place of provision of service will depend upon nature of services provided by
service provider. The place of provision of service will be the location of the service
recipient except for specific services for which provision are made in rule 4 to 12 of
Place of Provision of Services Rules. Example in case of renting of immovable
property place of provision will be determined as per rule 5 of Place of Provision of
Services Rules.

2.7 Point of Taxation

For forward charge- the point of taxation (POT) will be earlier of, (a) issuance of
invoice or (b) completion of service if invoice is not issued within prescribed time
or (c) receipt of advance.

For RCM where Service tax is payable by business entity, POT will be earlier of
(a) any payment becomes due as specified in the invoice, bill, challan or any
other document issued by the Government or local authority demanding such
payment; or (b) payment for such services is made.

8
3 Taxability in GST Regime

3.1 Taxability

In terms of Section 7 (1)(a) of GST Law, supply includes all forms of supply of
goods or services or both 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.

In terms of Section 7 (2) of GST Law, such activities or transactions undertaken by the
Central Government, a State Government or any local authority in which they are
engaged as public authorities, as may be notified by the Government on the
recommendations of the Council will be treated neither as a supply of goods nor a
supply of services.

By this it is clear that Government will notify the activities or transactions carried out
by the Government as public authorities will be treated neither as a supply of goods
nor a supply of services and accordingly GST will not be applicable on them.
Further, in terms of Section 2(17)(i), business includes any activity or transaction
undertaken by the Central Government, a State Government or any local authority in
which they are engaged as public authorities.

This has been added to make it amply clear that the functions and activities
undertaken by the government even as public authorities shall be treated as business
activities.

In view of the above, it is clear that apart from the activity or transaction notified by
the Government, all other activities or transactions will be termed as business
transactions and will be covered under GST.

In the present system of service tax, there is reverse charge mechanism on all services
provided by Government to business entities with certain exception. It is expected
that the same system will continue in the proposed GST.

3.2 Registration

In terms of Section 2(84) of GST law, person includes (j) local authority (k)
Central Government or State Government.

Wherever Government, will require to pay GST as supplier of taxable services, will
be liable to register under GST.

Further, in term of Section 24(vi) of GST law, person who are required to deduct
tax under section 51 shall be required to be registered compulsorily under GST
Law. In terms of section 51 of GST law, Government may mandate (a) a

9
department or establishment of the Central Government or State Government (b)
local authority, to deduct tax.

In the above mentioned situations, Central Government, State Government and


Local authority are liable to register under GST Act.

3.3 Exemptions

Exemptions are yet to be notified under the GST Law. However, when the GST
law was in draft stage, certain activities or transactions were specified in schedule
IV of Model GST law to exempt the same from GST levy. But schedule IV is
omitted in final GST law. One can assume that most of the said activities or
transactions will be covered under exemption notification to be issued by the
Government. Activities which were specified under schedule IV are as under:-

1. Services provided by a Government or local authority to another Government or


local authority excluding the following services:

(i) services by the Department of Posts by way of speed post, express parcel
post, life insurance and agency services;
(ii) services in relation to an aircraft or a vessel , inside or outside the
precincts of a port or an aircraft; or
(iii) transport of goods or passengers.

2. Services provided by a Government or local authority to individuals in discharge


of its statutory powers or functions such as-

(i) issuance of passport, visa, driving licence, birth certificate or death


certificate; and
(ii) assignment of right to use natural resources to an individual farmer for
the purpose of agriculture.

3. Services provided by a Government or local authority or a governmental authority


by way of:
(i) any activity in relation to any function entrusted to a municipality under
article 243 W of the Constitution;
(ii) any activity in relation to any function entrusted to a Panchayat under
article 243 G of the Constitution;
(iii) health care; and
(iv) education.

4. Services provided by Government towards-

(i) diplomatic or consular activities;


(ii) citizenship, naturalization and aliens;
(iii) admission into , and emigration and expulsion from India;
(iv) currency , coinage and legal tender , foreign exchange;

10
(v) trade and commerce with foreign countries , import and export across
customs frontiers , interstate trade and commerce; or
(vi) maintainance of public order.

5. Any services provided by a Government or a local authority in the course of


discharging any liability on account of any tax levied by such Government or
authority.

6. Services provided by a Government or a local authority by way of

(i) tolerating non-performance of a contract for which consideration in the


form of fines or liquidated damages is payable to the Government or the
local authority under such contract; or
(ii) assignment of right to use any natural resource where such right to use was
assigned by the Government or the local authority before the 1st April,
2016.

Provided that the exemption shall apply only to service tax payable on one time
charge payable, in full upfront or in installments, for assignment of right to use
such natural resource.

7. Services provided by Government by way of deputing officers after office hours


or on holidays for inspection or container stuffing or such other duties in relation
to import or export of cargo on payment of Merchant Overtime Charges (MOT).

8. Services provided by Government or a local authority by way of-

(i) registration required under any law for the time being in force; or
(ii) testing, calibration, safety check or certification relating to protection or
safety of workers, consumers or public at large, required under any law for
the time being in force.

3.4 Place of Supply of Services

There is no separate treatment prescribed under the GST law for determining the place
of supply of service provided by the Central Government, State Government and
Local authority. Therefore, the place of supply of service will depend upon nature of
services provided as per the general provision of Place of supply of services.

3.5 Time of supply of Service

In GST, there is no specific provision related to time of supply of service provided by


the Government or local authority. Hence, it is presumed that general provisions of
time of supply service shall be applicable for all the services provided by the Central
Government, State Government and Local authority as the case may be.

11
4 Frequently Asked Questions
Q 1. Whether Central Government, State Government and Local authority are
treated as person or only natural personal are covered under GST Law?

Ans. Yes, Person is not restricted to natural person. Central Government, State
Government and Local authority are covered under definition of person given in
Section 2(84) of GST law.

Q 2. Are various corporations formed under Central Acts or State Acts or


autonomous institutions set up by a special Acts such as MMRDA, Cloth
Markets & Shop Board, Maharashtra Pollution Control Board, and Society
for Innovation and Development etc. covered under the definition of Central
Government, State Government and Local authority?

Ans. No, it is pertinent to note that normally statutory body or authority are created
under Article 53(3)(b) and article 154(2)(b) by the Parliament or State legislature
and not covered under Central Government, State Government and Local
authority. These regulatory bodies and other autonomous entities which
constituted under an act would not comprise either government or local authority.

Q 3. XYZ Ltd. is paying fee to Foreign Government (United States Patent and
Trademark Office, US Department of Commerce) for registration of Patent /
Trademarks outside India. Whether Foreign Government will be covered
under the definition of Government?

Ans. No, Government means Central Government, State Government and Local
authority. Central Government and State Government have been defined in The
General Clauses Act, 1897 and Local authority defined in Section 2(69) of GST
Law and accordingly Government means Government of India only, therefore,
Foreign Governments will not be covered under the definition of Government.
Payments made to the foreign government will be treated at par as payment made
to the other foreign supplier.

Q4 Who will be liable to pay GST on the supplies made by the Government,
whether government or recipient of service?

Ans. In case government is making taxable supplies, government will be liable to pay
GST on said supplies under forward charge.

However, in terms of Section 9(3) of GST law, Government may specify categories
of supply of goods or services or both, the tax on which shall be paid on reverse
charge basis by the recipient of such goods or services. It is expected that majority
of the supplies made by the government will be covered under reverse charge
mechanism.

12
Q5 ABC & Co. has supplied the product X to Mr. Y at subsidized rate. Central
Government has given the subsidy to ABC & Co. to compensate for the price
difference. Whether GST will be payable on Governments subsidies given to
ABC & Co?

Ans. No, As per Section 15(2) (e) of GST Law subsidies directly linked to the price will
be included in the value of the supply of supplier who receives the subsidy
excluding subsidies provided by the Central Government and State Governments.
GST is not payable on the subsidy given by the Central Government to ABC & Co.

Q6 XYZ Ltd. has paid Rs. 2,10,000/- towards renewal of Factory License to a
State Government for a period of five years. Further, XYZ Ltd. also paid Rs.
2133/- towards penalty for delay in renewal of license. Whether XYZ Ltd. is
required to pay GST on renewal of factory license and penalty?

Ans. In terms of Section 7(1) (a) of GST law, supply inter alia includes license.
Accordingly GST will be applicable on payment made to State Government
towards renewal of factory license.

Factory license needs to be renewed within the prescribed time limit as per The
Factories Act, 1948. XYZ Ltd has to pay Rs. 2133 towards penalty for violation of
law. Penalty is not in the nature of consideration for an activity which is the
essence of the supply under GST law. By virtue of this, GST should not be payable
on said penalty for violation of law.

Q7 PQR limited requires registration certificate and import license under Drugs
& Cosmetic Act & Rules to import certain medical devises in India. For this,
importer of the medical devices has to pay fees to obtain registration
certificate and import license to Government. Whether fee paid for getting
registration certificate and import license will treated as consideration and
GST will be payable on said fee even it is statutory requirement.

Ans. Yes, fees collected by the government for issuance of the registration certificate
and import license will be treated as consideration and covered under the definition
of the supply given under section 7(1) of GST law. It is immaterial whether said
activity is undertaken as a statutory or mandatory requirement under the law.
Government may exempt the said service from payment of GST, exemption list yet
to be notified by the Government under GST Law.

Q8 Whether GST will be payable on the various taxes, cesses or duties such as
custom duty, income tax, stamp duty and property tax etc. collected by the
government?

Ans. Taxes, cesses or duties levied under any statue by the government are not
consideration for any particular supply made by the government and hence GST
should not be payable on said taxes, cesses or duties.

13
Q9 Sate government has granted (transfer) the irrevocable development rights of
industrial plot to PQR Limited. Whether GST will be payable on the payment
to be made towards development rights by the PQR Limited to the State
Government?

Ans. Transfer for a consideration has been included in the definition of supply under
Section 7(1) (a) of GST law. As per clause 1 of Schedule II of the GST Law, (a)
any transfer of the title in goods is a supply of goods, (b) any transfer of right in
goods or of undivided share in goods without the transfer of title thereof, is a
supply of services.

Development right is fundamentally a right to develop the land for agricultural,


industrial, commercial, residential or for any other purpose. Essentially, land like
any other asset is a bundle of several rights that accrues to it. Several rights one
may identify with land are development rights, possession right, easement rights,
cultivation right etc.

Transfer of development right is transfer of title in immoveable property:-

In Canbank Financial Services v. Custodian, 2004 (8) SCC 355, it was held by the
apex court that the word Title generally used in the context to the property means
a right in the property. Title in a property connotes a bundle of rights.

In Union of India v. Vasavi Co-operative Housing Society 2002 (5) ALD 532 AP
100. The word Title includes a right, but is the more general word. Every right is
a title though every title is not such a right for which an action lies. Blackstone
defines it to be The means whereby the owner of lands has the just possession of
his property. TITLE is the means whereby a persons right to property is
established. (See: P.Ramanatha Aiyars the Law Lexicon 1997 Edition).

From these case laws, it is clear that the word title in immovable property does
not necessarily infer to the ownership but to any of the right(s) vested in the
property.

As per Section 54 of Transfer of Property Act, 1882, Sale is defined as transfer of


ownership in exchange for a price paid or promised or part paid or part promised.
Therefore, with respect to an agreement for transfer of development rights whereby
such rights are transferred permanently on an irrevocable basis, a view may be
taken that the transfer of development rights under such agreement constitutes a
sale of immovable property.

Immovable property has not been defined under GST Law. Therefore the definition
of immovable property in the General Clauses Act, 1897 will be applicable which
defines immovable property to include land, benefits to arise out of land, and
things attached to the earth, or permanently fastened to anything attached to the
earth.

14
The Honble Bombay High Court in Chheda Housing Development Corporation v.
Bibijan Shaikh Farid, observed that Transferable Development Rights (TDR) being
a benefit arising from the land must be held to be an immovable property.

In the instant case, Stamp Duty to be paid as per Article 5(9-a) of Schedule I of the
The Bombay Stamp Act, 1958 on market value. As per Article 5(g-a) of Schedule
I of the said Act, stamp duty is to be paid on Instruments if relating to giving
authority or power to a promoter or a developer, by whatever name called for
construction on, development of or, sale or transfer (in any manner whatsoever) of ,
any immovable property.

In view of above, granting /transfer of development right of industrial plot


(immovable property) will be treated transfer of the title and therefore will not be
treated as supply of service under GST law.

Further, immovable property is not covered under the definition of the goods given
in Section 2(53) of GST and accordingly transfer of the title in immovable property
will also not be treated as supply of goods under GST Law.

Thus, transfer of development right will be treated as neither supply of goods not
supply of service and accordingly GST will not be applicable on amount to be paid
towards development right by PQR Limited to State Government.

Q 10 XYZ Ltd. is planning to open a restaurant in Mumbai. For this, XYZ Ltd. has
to pay various fee to government/local authorities for obtaining the permission
to open the restaurant. Such permission includes food license under FSS
(Licensing & Registration of Food Businesses) Regulations 2011, health and
trade license from municipality, liquor license etc. Whether GST will be
payable on fees paid for getting the various licenses.

Ans. Yes, license fees to be paid to the government/local authority will be covered under
the definition of the supply under GST unless it is specifically exempted by the
government by way of notification.

Q 11 Company A in Gujarat has imported some goods from the USA and arrived in
India through sea route. Company A has to pay wharf age charges at port of
import in Gujarat to Government of Gujarat. Whether GST will be payable
on said wharf age charges.

Ans. Yes, wharf age charges will be treated as consideration for providing services at
port by the government of Gujarat and accordingly GST will be payable on said
wharf age charges.

15
Q 12 What are the functions carried out by the Governmental Authority?

Ans. Governmental Authority carry out the functions entrusted to a municipality under
article 243W of the Constitutions such as urban planning including town planning,
regulation of land use and construction of building, planning for economics and
social developments, road and bridges, water supply for domestic, industrial and
commercial purposes, public health, sanitation conservancy and solid waste
management etc.

Q 13 Whether GST will be applicable on the services provided by the


Governmental Authority?

Ans. Under current tax regime, services of Governmental Authority are exempted by
way of notification. Under GST law, exemptions are yet to be notified. In view of
this, service of Governmental Authority will be subjected to GST unless it is
specifically exempted by the government by way of notification.

16
GST GUIDANCE NOTE
ON
CLUB AND ASSSOCIATION

1
Index

1. Overview

2. Existing Taxation
2.1 Taxability prior to Negative List Regime
2.2 Legal Challenge
2.3 Taxability post Negative List Regime
2.4 Exemptions
2.5 Place of Provision of service

3. Taxability under GST Regime


3.1 Taxability as Supply of Service or Supply of Goods
3.2 Exemptions
3.3 Place of Supply of Service
3.4 Input Tax Credit

4. Frequently Asked Questions

2
1. Overview

1.1 Club or Association commonly means any person or body of persons


providing services, facilities or advantages, for a subscription or any amount
to its members. Clubs may be registered as a society under Societies
Registration Act or as a trust or as a company under Section 25 of the
companies Act or may even by unregistered. The most common form of
organisation of club or association is registration as a society.

1.2 Following types of facilities are provided by clubs and association to its members:

Sports facilities viz. cricket, tennis, badminton, swimming pool,


billiard room etc.
Organising various tournaments: Various sports tournaments are
organised by club or association for the members. The entry fee may
be charged from participants.
Facilities like; library, conference hall for holding meeting etc.
Accommodation facility; Most of the clubs have rooms which are
provided to members or guest of members for short term
accommodation on payment of charges.

1.3 Mainly club and associations are generating revenue from the following
sources;

Membership fee (Annual or Life time)


Annual subscription from members.
Providing banquet hall, Mandap, open ground or rent to the
members for holding functions.
Subscription for use of special facility like gymnasium, billiard
rooms etc.
Rent income for providing accommodation in rooms.
Entry fee for functions organised by the club or association.

2. Existing Taxation

2.1 Taxability prior to Negative List regime

3
Services provided by club and association to its members become liable to
service tax with effect from 16.06.2005. The scope of the service tax applicability
for the services provided by club and association was extended to non-members
with effect from 28.02.2011.

2.2 Legal Challenge

Club and association is normally formed on the concept of mutuality. The


association and members are not considered as two different persons when the
club and association is not registered as a separate entity.

This was challenged in the High Courts of Jharkhand and Gujarat. The Gujarat
High Court in the case of Sports Club of Gujarat Ltd. V UOI following the ratio
of the judgment in the case of Ranchi Club Ltd. Vs. CCCE&ST has held that
provisions of levy of service tax on the service provided by unincorporated
association to members is ultra vires.

The department has filed appeal against the judgment of High Court in the case
of Ranchi Club Ltd. v CC CE & ST and all subsequent judgments which relies
upon this case. The departments appeal to Supreme Court against Ranchi Club
has been admitted as reported in 2013. All subsequent appeals accordingly, has
also been admitted by Honble Supreme Court.

After 01-07-2012 (after introduction of Negative List), the following


explanation was inserted in the Section 65B (44) of the Finance Act,

Explanation 3 for the purpose of this chapter,

(a) an unincorporated association or a body of person, as the case may be,


and a member thereof shall be treated as distinct persons;

(b) an establishment of person in the taxable territory and any of his other
establishment in a non-taxable territory shall be treated as
establishments of distinct persons.

The issue of mutuality between club or association and its members thus
seems to have been settled post negative list.

2.3 Taxability post Negative List Regime

After introduction of Negative List, the definition of service given under


Finance Act is very wide to cover services provided by club or association.
Therefore all the services provided by club or association are taxable service.

4
2.4 Exemptions

In terms of Mega Exemption Notification No 25/2012 dated 20.06.2012 (Sr. No


28), Services by an unincorporated body or a non-profit entity registered under
any law for the time being in force, to its own members by way of
reimbursement of charges or share of contribution-

i. As a trade union;

ii. for the provision of carrying out any activity which is exempt from
the levy of service tax; or

If the member has given contribution to the club for receiving


specific service from the third person which is exempted from
service tax, the amount so received by club from the members will
also become exempted from service tax.

iii. upto an amount of Rs. 5000/member (per month) for sourcing of


goods or services from a third person for the common use of its
members in a housing society or a residential complex.

It means that amount received by these bodies as reimbursement of charges or


share of contribution from the members to meet the expenses required for
functioning of these bodies will not be taxable. The exemption is limited to the
receipt of amount as reimbursement or share of contribution. If the member has
received any other service for which the amount is paid separately, the same
will not be exempt.

Illustration: ABC club is registered as a Society which has facility of banquet


hall. X being a Member of such club takes the banquet hall on hire for the
purpose of celebrating his anniversary. X is required to pay rent for the
banquet hall to ABC club which is neither reimbursement nor share of
contribution. Accordingly, the amount paid by X for using such banquet hall
will not be exempted from service tax.

Illustration: Ashapura society (unincorporated) has 15 members and 10 of


them pay Rs 5000/ month and 5 of them pay Rs. 5500/month. The amount
received from 5 members is in excess of Rs. 5000 (the exemption is for an
amount of Rs. 5000) hence, service tax will be applicable on the same.

2.5 Place of Provision of Service

The Place of provision of Service in case of services provided by the club or


association will be the location of the service receiver.

5
3. Taxability under GST regime
3.1 Taxability as Supply of Service or Supply of Goods

In terms of Section 7 (1)(a) of GST Bill, 2017, supply includes all forms of
supply of goods or services or both 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.

Further, in terms of Section 2(17)(e), business includes provisions by club,


association, society, or any such body (for a subscription or any other
consideration) of the facilities or benefits to its members.

Based on the above provision of law, an association (whether incorporated or


not) engaged in supplying any facilities or benefits to its members for a
consideration will be considered as Supply.

Further, in terms of Schedule II of the GST Bill, 2017, goods supplied by any
unincorporated association or body of persons to a member thereof for cash,
deferred payment or other valuable consideration will be considered as Supply
of Goods.

3.2 Liability to Register

Any Club and Association whose taxable supplies exceeds Rs.20 lakh in a
financial year is liable to be registered under GST and pay tax. However,
for the Clubs and associations located in - North Eastern States, Himachal
Pradesh, Uttarakhand and Jammu & Kashmir, this threshold limit is Rs.10
lakh.
The Club and association engaged in supply of services (except restaurant) may
not opt for the Composition Levy Scheme.

3.2 Exemptions

Exemptions are yet to be notified under the GST Law.

3.3 Place of Supply of Services:

(a) Service provider and the Service recipient are located in the taxable,

In this case, place of supply of service will be the location of the service
recipient, if registered or his address available on record. However, if the

6
recipient is not registered or his address is also not available, in such cases,
the place of supply will be the location of the service provider.

(b) Service provider or the service recipient is located outside India,

In such case, place of supply will be the location of the service recipient.

3.3 Input Tax Credit

In terms of Section 17(5) (ii) of the GST Bill, Input Tax Credit of
membership of a club, health and fitness centre will not be eligible.

4. Frequently Asked Questions

Q1 Whether provision of service or goods by a club or association or society to its


members will be treated as supply or not?

Ans. Yes. Provision of facilities by a club, association, society or any such body to its
members shall be treated as supply. This is included in the definition of
business in section 2(17) of CGST/SGST Act.

Q2 ABC association provides library or resource centre services (photocopying


service, printing service, fax service etc.) for members and non-members,
and impose a charge/fee on these services. What is the GST treatment on this
charge/fee. Whether deposits received from members will also be subjected
to GST?

Ans: Charges recovered by clubs form its members or non-members are subject to
GST.

So far as the taxability of deposits are concerned, if such deposit is in the nature
of refundable deposit, the same will not be subjected to GST. Any other deposit
(non-refundable nature) will be subjected to GST.

Q3 A club engaged in supplying restaurant service to its members and non-


members. The turnover of such club is Rs. 45 Lakhs including restaurant
sales. Whether such club can go for Composition Levy Scheme?

Ans: Yes, in terms of section 10(2)(a) of the GST Bill, clubs engaged in providing
restaurant service are eligible to go for Composition levy scheme.

7
Q4 Whether Food items taken from a vending machine is located at an
association or clubs premises by members will be subjected to GST? Who
has to discharge the GST liability?

Ans: Supply of food items from a vending machine are subject to GST. The owner of
the vending machine who is supplying such food items are liable to discharge the
GST liability.

So far the space where the vending machine is placed, club or association has to
discharge the GST liability on the rental amount received from the vending
machine operator.

Q5 Mr. X a director of company PQR Ltd. obtains a membership of a club


located outside India. Mr. X is there for the business promotion activity of
his company. PQR Ltd. pays 5000 USD/annum to such club for the
membership of Mr. X in such club. Whether GST will be applicable in such
case? If yes, whether M/s PQR Ltd. will be eligible for the input tax credit of
such tax.

Ans: Yes, PQR Ltd. has to pay IGST on the membership amount payable to the club.
However, the input tax credit of the same will not be eligible to PQR Ltd. in
terms of Section 17(5) of the GST Bill.

Q6 A club is taking deposit of Rs. 1,00,000 from all of its members in addition to
the annual membership fee of Rs. 10000. The said deposit amount will be
refunded to its members after 10 years.

(a) What would be the taxable value for discharging GST liability? Whether
GST will be applicable on such deposit amount?

(b) Whether there would be any change in the taxability, if such deposit will
not be refunded to the members and adjusted against the annual
membership fee.

Ans:

(a) the taxable value will be Rs. 10000. The refundable deposit amount will not
be considered as consideration towards supply of service.

(b) if such deposit will not be refunded and adjusted against the annual
membership fee the same will be considered as advance against the services to
be supplied and thus liable to GST.

Q7 A Club (registered under GST) has engaged Mr. X (an unregistered person)
for gardening the green areas of the club, landscaping activities etc. for a

8
consideration of Rs. 50000/-. Whether GST will be applicable on such
activity? If yes, who is liable to discharge the GST ? Whether ABC club will
be eligible for the credit of the same?

Ans: In terms of Section 23(1)(b) of the GST bill, GST registration is not required to
be obtained by an agriculturist, to the extent of supply of produce out of
cultivation of land.
The activity of Mr. X of gardening the green areas of the club, landscaping
activities will not considered as the activity of an agriculturist for supply of
produce out of cultivation of land, accordingly, GST will be applicable.

Since Mr. X is an unregistered supplier of taxable supply, ABC club has to


discharge the GST liability under reverse charge.

Input tax credit of the same will be eligible in the hands be ABC ltd. being used
or intended to be used in the course or furtherance of his business.

Q8 A Club (unincorporated) is arranging a dinner as part of its annual general


body meeting where Club is arranged the live music performance and games.
The members have to choose any of the following options to get the privilege
passes:

1. Get access, unlimited foods & Non-Alcoholic Drinks and access to games
centre.
2. Get access, unlimited foods & Non-Alcoholic Drinks, unlimited alcoholic
liquor and also access to games centre.

Ans: From the GST point of view, it is treated as different types of supply with different
Tax treatment.

1. This shall be treated as composite supply comprising two or more supplies. In this
case it can be seen that, the principal supply is supply of foods or any drink other
than alcoholic drink.

Entry 6 (b) of Schedule II clarifies as supply, by way of or as part of any service


or in any other manner whatsoever, of goods, being food or any other article for
human consumption or any drink (other than alcoholic liquor for human
consumption), where such supply or service is for cash, deferred payment or other
valuable consideration shall be treated a supply service.
Further in terms of entry 7 of Schedule II, goods supplied by any unincorporated
association or body of persons to a member thereof for cash, deferred payment or
other valuable consideration will be considered as supply of goods.

Accordingly, in terms of the above provision, the supply made by the club to its
members will be considered as supply of goods as entry 6(b)of Schedule II will not
be applicable in this case.

9
2. Since in this case liquor (a non-GST product) is supplied along with GST supply,
the same cannot be treated as composite supply as composite supply involves only
two or more taxable supplies. In such case there is no other option other than
treating such supply as mixed supply.

In case of mixed supply, GST shall be paid on supply of that taxable item which
has the highest rate of tax. Accordingly, club has to pay GST on the full amount at
highest rate of various taxable components of such mixed supply.

Q9 A member of a Club has given voluntary payment / donation to the club.


Whether such voluntary payment will be subjected to GST?

Ans: The voluntary payment / donations if given by the members without reciprocity
will not be subjected to GST.

Q10 Whether life time membership fee taken by a club will be subjected to GST?

Ans: Yes, similar to the annual subscription fee, life time membership fee will also be
subjected to GST.

Q11 If a club is taking compulsory interest free loans from its members in addition
to the subscription payment. What will be the GST treatment? Whether there
would be any change in the GST implication if such loan is taken from the
member a significant lower interest rate than the Bank?

Ans: In this case club has to calculate the notional interest of such loan amount and the
said interest component will be subjected to GST.
If club is taking loan from members at a lower interest rate, club has to calculate
the notional interest amount as per prevailing bank rate and compare the same with
the interest payable to the members. The differential amount of interest element
will be subjected to GST.
Q12 In case if a club reduce or wave membership subscription in return for an
interest free loan, whether any GST is payable for waiver of membership
subscription?

Ans: GST will be payable on the membership subscription which is waived or reduced
by the club.

Q13 A club has given a car as a prize money to a member on winning of a game
completion organised by the club. Whether GST will be applicable on the
same?

Ans: There will not be any GST implication in the hands of club except, the credit of
such prize, if availed by the club, has to be reversed.

10
Further, an award received in consideration for achievement carried out
independently or without reciprocity to the amount to be received will not comprise
an activity for consideration. Accordingly, such prize money will not be taxable in
the hands of members.

Q14 A club is organizing an event wherein a renowned player (un-registered) is


invited to take part in the event for which an appearance money is paid to the
player. What will be the GST treatment on such appearance money?

Ans: Appearance fee paid to the players are subjected to GST in the hands of the player.
Since the player is un-registered, the Club is required to pay GST under reverse
charge on such amount paid to the player.

11
GST GUIDANCE NOTE
ON
PRINCIPAL-AGENT
TRANSACTIONS

1
Index

1. Overview
1.1 Background
1.2 Meaning of Principal and Agent
1.3 Essence of Principal and Agent Transactions
1.4 Typical Agents in businesses
1.5 What is an Intermediary?
1.6 How is an intermediary different from an agent?

2. Existing Taxation
2.1 Taxability
2.2 Exemptions
2.3 Place of Provision of Service
2.4 Concept of Pure Agent

3. Taxability in GST Regime


3.1 Registration
3.2 Taxability
3.3 Exemptions
3.4 Place of Supply
3.5 Valuation
3.6 Concept of Pure Agent
3.7 Input Tax Credit
3.8 Open Issues

4. Frequently Asked Questions

2
1. Overview

1.1 Background

An Agent plays a very important role in facilitation of supply of goods or of provision of


services between two persons. This guide is prepared to cover the nature of services
provided by various types of agents, tax provisions related to agents under current tax
regime and under GST scenario.

1.2 Meaning of Principal and Agent

In terms of provisions of Section 2(88) of the GST Laws, Principal means a person on
whose behalf an agent carries on the business of supply or receipt of goods or services or
both.

In terms of provisions of Section 2(5) of the GST Laws, Agent means a person, including a
factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other
mercantile agent, by whatever name called, who carries on the business of supply or receipt
of goods or services or both on behalf of another.

As per the Indian Contract Act, 1872, an "agent" is a person employed to do any act for
another or to represent another in dealings with third persons. The person for whom such
act is done, or who is so represented, is called the "principal".

To summarize we can say that, principal is one who uses the services of an agent and agent
is one who arranges supplies of goods and / or services on behalf of the principal.

The terms referred in above definition are described below:

Factors: The basic feature of this agent is that the agent has possession of the
goods before sale. In this case, such an agent can sell in his/her own name.

Brokers: An individual or firm employed by others to plan and organize sales or


negotiate contracts for a commission. A broker's function is to arrange contracts for
property in which he or she has no personal interest, possession, or concern. The
broker is an intermediary or negotiator in the contracting of any type of bargain,
acting as an agent for parties who wish to buy or sell stocks, bonds, real or personal
property, commodities, or services. A distinguishing feature between an agent and a
broker is that a broker acts as a middleperson. When a broker arranges a sale, he or
she is an agent of both parties

3
Commission Agent: Agent who solicits and procures business from potential
customers on behalf of one or more principals, usually against payment of a
percentage of the realized sales revenue as commission.

Del Credere Agent: This agent undertakes to guarantee the goods or indemnify the
principal for any losses arising from the agency transaction. In return for this
assurance, the agent receives an extra remuneration from the principal.

Auctioneer: A person authorised by law to sell land or goods of other persons at


the public auction: one who sells at an auction.

1.3 Essence of Principal and Agent Transactions

Determination of correct relationship between two parties is relevant under both direct taxes
and indirect taxes. Section 194H of the Income Tax Act, 1961 requires deduction of tax at
source by the payer if such income is in the nature of commission or brokerage.

It is often difficult to decide whether a transaction is being held in the capacity of principal
or agent. An agent primarily represents either the supplier or the recipient. He has normally
no control over the prices or the title to the goods. He acts merely as per the orders of the
principal.

There are numerous judgments on this issue where the transactions between Telecom
Operator and the distributors has been considered as Principal to Principal (POP). Some of
the said judgments have been listed below;

Bharti Airtel Ltd. Vs. DCIT [TS-722-HC-2014(KAR)]


M/s Idea Cellular Ltd. Vs. Income Tax Officer[2015-TIOL-901-ITAT(JAIPUR)]

In these rulings, the HC / ITAT has ruled that withholding obligation is not attracted since
there is a sale of SIM cards to the Distributors, which are liable to the risk of loss or damage
to such products, and the Distributors are not authorized to bind the telecom company to the
ultimate customer. The HC also held that, although the SIM card, by itself, does not have
any value and is integral to the provision of telecom service, nevertheless, it constitutes a
right to service which can be sold.

There are also some other cases where it was held that Telephone Operators / SIM card
distributors are liable to deduct tax at source under Section 194H of Income Tax Act, 1961
on the discount / incentive payments to the distributors / retailers, being in the nature of
commission like

ITO vs. Jai Shree Enterprises [TS-222-ITAT-2015(DEL)]


Bharti Cellular Limited vs. Assistant Commissioner of Income tax [2011-TIOL-
396-HC-KOL-IT]

4
Whether a transaction will comes within the purview of sale or contract of agency is a
mixed question of fact and law which can be answered only from the terms of the
agreement entered into by the parties or appointment letter issued by the Principal in favour
of the Agent.

An agent should agree with the principal to act on their behalf in relation to the particular
transaction concerned. This may be a written or oral agreement, or merely inferred from the
way they conduct their business affairs. Following are the key aspects between agent and
Principal transactions:

it must always be clearly established from the agreement between agent and
principal, that the agent is arranging the transactions for the principal, rather than
trading on his own account
the agent will not be the owner of any of the goods or services which he buys or sells
for his principal
the agent will not alter the nature or value of any of the supplies made between the
principal and third parties

Agents acting on their own behalf, not meeting the above referred conditions would not be
qualified as agents acting for their Principals. They would be merely called as Agents for
the name sake. The nature of such transactions will be Principal to Principal.

1.4 Typical Agents in businesses

As per general industry practice, following are some of the types of agents engaged in
providing various services:

Air Travel Agent: Air Travel Agent means any person engaged in providing
any service connected with the booking of passage for travel by air

Customs Broker: Customs broker means a person licensed under the Customs
Brokers Licensing Regulations,2013 to act as an agent for the transaction of any
business relating to the entry or departure of conveyances or the import or
export of goods at any Customs Station

Clearing and Forwarding Agent: Clearing and Forwarding Agent means any
person who is engaged in providing any service, either, directly or indirectly,
connected with the clearing and forwarding operations in any manner to any
other person and includes a consignment agent.

Manpower Recruitment and Supply Agency: Manpower Recruitment and


Supply Agency means any commercial concern, engaged in providing any
service, directly or indirectly, in any manner, for recruitment of manpower to a
client.

5
Stock Broker: Stock Broker means a sub broker who has either made an
application for registration or is registered as sub broker in accordance with the
rules and regulations made under SEBI Act, 1992.

Buying / Purchasing Agent: People or companies who offer to buy goods or


property on behalf of another party. These are agents for all kinds of products,
from raw materials, commodities to specialized customized equipments.

Selling Agent: An agent who sells for a commission, the output of his
Principals on a contractual basis and provides them with market information.

Types of Stakeholders involved in an Agency transaction


A has engaged B to search prospective buyers, assist in finalizing agreements for
sale of goods belonging to A. B has identified C and facilitated the agreement
between A and C. The goods have moved from A to C directly and B has received
commission for such sale.
The stakeholders in the above illustration are:
A Principal (Seller of Goods)
B Selling Agent
C Buyer

Engaged for sale of goods


A B

Commission

Supply of Goods
Consideration

1.5 What is an intermediary?


In terms of provisions of Section 2(13) of the IGST Law, Intermediary means a broker, an
agent or any other person, by whatever name called, who arranges or facilitates the supply
of goods or services or both or securities, between two or more persons, but does not
include a person who supplies such goods or services or both or securities on his own
account.

As per the above definition, the person who arranges or facilitates transactions in securities
will also be considered as an Intermediary. To cover the services provided by an agent who
are engaged in dealing with securities under GST scenario, the word securities has been

6
specifically included in the above definition as the same is excluded from the definition of
goods as well as services.

Currently, in service tax regime, services provided by agents who are dealing in securities
are exempt from service tax. In GST, whether this transaction will be exempted or not will
be decided based on the exemption list which is yet to be notified.

1.6 How is an Intermediary different from an Agent?

Accordingly, scope of agents are wider than intermediary. Agent may provide main
services on his own account however, an intermediary only arranges or facilitates the
supply of main services / goods.

Illustration: Persons such as call centers who provide services to their clients by
dealing with the customers of the client on clients behalf, but actually provide these
services on their own account, will not be categorized as an intermediary

2 Existing Taxation

2.1 Taxability:
Currently, the transactions between the Principal and Agent, whether for supply of goods or
services, are subjected to Service Tax.

2.2 Exemptions:
In terms of Mega Exemption Notification No 25/2012 dated 20.06.2012 (Sr. No 29), services
provided by following persons, mainly acting as an agent, in respective capacities, are
exempt from service tax:

i. Sub broker or an authorized person to a stock broker,


ii. Authorized person to a member of a commodity exchange,
iii. Selling agent or a distributor of SIM cards or recharge vouchers

2.3 Place of Provision of Service:


In terms of Rule 9 of the Place of Provision of Service Rules, 2012, the place of provision of
service in case of services provided by an intermediary is the location of the service
provider. Thus services by travel agents, tour operators, stock brokers and the likes even to
persons located outside India are taxable in India. On the contrary selling agents located
abroad for exporters are outside the tax net at present.

7
2.3 Concept of Pure Agent:
Pure agent is defined in Rule 5 of the Service Tax (Determination of Value) Rules 2006
and means a person who
a) enters into a contractual agreement with the recipient of service to act as his pure agent
to incur expenditure or costs in the course of providing taxable service;
b) neither intends to hold nor holds any title to the goods or services so procured or
provided as pure agent of the recipient of service;
c) does not use such goods or services so procured; and
d) receives only the actual amount incurred to procure such goods or services.

The expenditure or costs incurred by the service provider as a pure agent of the recipient
of service, shall be excluded from the value of the taxable service, if all the following
conditions are satisfied, namely:-

i) the service provider acts as a pure agent of the recipient of service when he makes
payment to third party for the goods or services procured
ii) the recipient of service receives and uses the goods or services so procured by the
service provider in his capacity as a pure agent of the recipient of services;
iii) the recipient of services is liable to make payment to the third party;
iv) the recipient of services authorises the service provider to make payment on his
behalf;
v) the recipient of services knows that the goods and services for which payment has
been made by the service provider shall be provided by the third party;
vi) the payment made by the service provider on behalf of the recipient of services has
been separately indicated in the invoice issued by the service provider to the
recipient of services;
vii) the service provider recovers from the recipient of services only such amount as
has been paid by him to the third party; and
viii)the goods or services procured by the service provider from the third
party as a pure agent of the recipient of services are in addition to the
services he provides on his own account.

3. Taxability in GST Regime

3.1 Registration:
Agents shall be required to be registered compulsorily irrespective of the threshold limit
in terms of Section 24(vii) of the CGST Act. (As per the current tax regime, the threshold
exemption limit is applicable for agents)

8
3.2 Taxability:
Supply of Goods:
The transaction between a Principal and an Agent towards supply of goods made without
consideration will be considered as supply of goods in terms of Schedule I of the CGST Act.
(Such transactions are not taxable under current VAT regime)

In a case where the goods are transferred from principal to agent for sale to customer and the
consideration for such sale is flowing directly from the customer to the principal who will be
the supplier of goods?

Based on the above provision there would be four supplies:

a) transfer of goods between principal to agent without consideration


In this case principal will be the supplier of goods and accordingly he has to discharge
the GST liability in terms of Schedule I of the GST Law;

b) the transaction between agent and principal


Supply of services by the agent as a facilitator of the sale against a commission will be
taxable;

c) the sale transaction between principal to customer -


Principal can be considered as supplier of goods as the ownership of goods is being
transferred to the customer against a consideration. However it is in conflict with (a)
above as can the supply of goods be taxed twice: once against consideration and once as
per the deeming fiction without consideration?

d) The transaction between agent and the customer


GST law does not prescribe anything here and thus results in breaking the chain
established in terms of a) above

It appears that there is some anomaly in the current law as to how can the principal again be
a supplier in this case? It seems that the intention of the law is to tax a), b) and d) and not c)

Supply of Services:

Services provided by agent to the principal would be considered as supply of services


(Similar to the current tax provisions)

3.3 Exemptions:
Exemptions are yet to be notified under the GST Law.

9
3.4 Place of Supply:
Place of Supply of Goods:
The place of supply of goods in case of agents (other than import or export transactions) will
be the principal place of business of the agent on whose direction the goods are actually
delivered by the supplier to the recipient.
Illustration: A located in Maharashtra has supplied goods to B located in Gujarat on
the direction of C located in Rajasthan.
From GST point of view, there will be two supplies;
between A (principal) and C (agent) for which the POS will be the location
of C i.e., Rajasthan and
between C (agent) and B (customer) for which POS will be location of B i.e.,
Gujarat where the goods are delivered.

The Place of supply of goods in case of import transactions will be the location of the
importer of goods. Similarly, in case of export transactions, the place of supply of goods will
be the location outside India.

Place of Supply of Services:


Location Status of Principal Place of supply
Agent and Registered Location of the
Principal both Principal
are located in Not Address available Location of the
India registered on record Principal
Address not Location of the
available on Agent
record
Either Agent or Location of the
Principal is Agent
located out of
India

3.5 Valuation:
In terms of Rule 3 of the Valuation Rules, the value of supply of goods between the
principal and his agent shall:
a) be the open market value of the goods being supplied, or at the option of the
supplier, be ninety percent of the price charged for the supply of goods of the like
kind and quality by the recipient to his customer not being a related person, where
the goods are intended for further supply by the said recipient;

Illustration: A Principal supplies goods to a customer through an agent at Rs.925 per


unit. Another Principal is supplying goods of like kind and quality through the same
agent at Rs.950 per unit. The agent is supplying such goods to customers (who are not
related) at a price of Rs.1000 per unit. The value of supply made by the principal shall
be Rs. 950 per unit or where he exercises the option the value shall be 90% of Rs. 1000
i.e., Rs. 900/- per unit.

10
b) where the value of the supply is not determinable under clause (a), the same shall be
determined by application of rule 4 (i.e., based on cost) or rule 5 (i.e., residual method)
in that order.

3.6 Concept of Pure Agent:


Concept of pure agent as prevalent earlier has been largely retained.
Pure agent means a person who
a) enters into a contractual agreement with the recipient of supply to act as his pure agent to
incur expenditure or costs in the course of supply of goods or services or both;
b) neither intends to hold nor holds any title to the goods or services or both so procured or
provided as pure agent of the recipient of supply;
c) does not use for his own interest such goods or services so procured; and
d) receives only the actual amount incurred to procure such goods or services.

As per Rule 7 of the Valuation Rules, notwithstanding anything contained in these rules, the
expenditure or costs incurred by the supplier as a pure agent of the recipient of supply of
services shall be excluded from the value of supply, if all the following conditions are
satisfied, namely:-
i. the supplier acts as a pure agent of the recipient of the supply, when he makes
payment to third party for the services procured as the contract for supply made by
third party is between third party and the recipient of supply
ii. the recipient of supply uses the services so procured by the supplier service provider in
his capacity as pure agent of the recipient of supply;
iii. the recipient of supply is liable to make payment to the third party;
iv. the recipient of supply authorises the supplier to make payment on his behalf;
v. the recipient of supply knows that the services for which payment has been made by
the supplier shall be provided by the third party;
vi. the payment made by the supplier on behalf of the recipient of supply has been
separately indicated in the invoice issued by the service provider to the recipient of
service;
vii. the supplier recovers from the recipient of supply only such amount as has been paid
by him to the third party; and
viii. the services procured by the supplier from the third party as a pure agent of the
recipient of supply are in addition to the supply he provides on his own account.

Difference between the existing provision as per Service Tax Law and GST Law
Description Service Tax GST Remarks
Definition A service A supplier of goods There is a
of Pure provider can act or services or both contradiction in
Agent as a pure agent can act as a pure the definition of
for the recipient agent for the pure agent and
of services. recipient of supply. the scope of
pure agent in
terms of Rule 7

11
However in terms of of Valuation
Rule 7 of Valuation Rules.
Rules, a supplier of
service can only act
as a pure agent.
Conditions A service A supplier can act as The scope of
of valuation provider can act a pure agent only for pure agent has
rules as a pure agent the procurement of been limited to
for the services. the extent of
procurement of procurement of
goods as well as services in GST.
services.

Illustration: Company ABC Limited has engaged Mr. X, a legal firm to provide legal
services in relation to register a patent in the name of Company ABC Limited for a fee
of Rs.1,00,000/-. Mr. X has paid the registration fee of Rs.20,000/- to the Government
on behalf of ABC Limited which is to be recovered from the Company as a
reimbursement. Such recovery of registration fees will not be treated as consideration
towards the legal services provided by Mr. X as the same is in the capacity of a pure
agent.
Government

Registration fees on
behalf of ABC Ltd.

Service Fee
ABC Ltd Mr. X

Legal Services

Reimbursement of registration fees

3.7 Input Tax Credits:

Input Tax Credit of the services supplied by the agent to the principal will be eligible in the
hands of the principal so long as the said services are used or intended to be used by the
principal in the course or furtherance of his business for the taxable supplies made by him.

Further, input tax credit of the supplies made by the principal to the agents (for supplies as
per Schedule I of the CGST Law) will be eligible in the hands of agents for the taxable
supplies made by the agent.

12
4 Frequently Asked Questions

Q 1. Mr. X, a freight forwarder provides domestic transportation within a taxable


territory (say, from the exporters factory located in Pune to Mumbai port) as well
as international freight service (say, from Mumbai port to the international
destination), under a single contract, on his own account (i.e. he buys-in and sells
freight transport as a principal), and charges a consolidated amount to the exporter.
Whether services provided by Mr X would be covered as an intermediary service?

Ans. No. In this case, since the freight forwarder provides the main service of
transportation, he will not be treated as an intermediary. This is a service of transportation
of goods for which the place of supply is the destination of goods. Since the destination of
goods is outside taxable territory, this service will not attract GST.

Q 2. One of the conditions to claim tax credit is that the receiver has received the
goods and or services. How will an agent who plays a role of introducing a potential
customer to the principal and directs the supply to the customer be able to take the
credit when he is not receiving such goods?

Ans. The agent will be eligible to take credit in relation to the supply of goods in terms of
the Explanation to Section 16(2), where it is deemed that the taxable person has received
the goods where the goods are delivered by a supplier to the recipient or any other person
on the direction of the agent, before or during the movement of goods either by way of
transfer of documents of title to goods or otherwise.

Q 3. A person located in India appointed a foreign agent for sale of goods outside
India. For facilitating sales in the foreign market, the foreign agent charges
commission to the principal located in India. Whether GST will be applicable on the
commission amount?

Ans. In terms of Section 2(13) of the IGST Act, intermediary means a broker, an agent or any
other person, by whatever name called, who arranges or facilitates the supply of goods or
services or both, or securities, between two or more persons, but does not include a person
who supplies such goods or services or both or securities on his own account.

Accordingly, in this case the foreign agent is an intermediary and hence GST will not be
applicable on the commission amount charged by the foreign agent to his principal located in
India being the place of supply of services will be the location of the supplier of services i.e.,
the foreign agents location in terms of Section 13(8) of the IGST Act

Q4. Whether agent is liable for tax in case of transaction made by him on behalf of
the principal in case the principal fails to discharge his tax liability?

Ans. Yes. As per provisions of Section 86 of the CGST Act, when an agent supplies or
receives any goods on behalf of the principal, both agent and principal are jointly and
severally liable in respect of tax payable on such goods.

13
Q5. Whether the provisions of a casual taxable person are applicable to agents?

Ans. Yes. An agent is included in the definition of casual taxable person. As per Section
2(20) of the CGST Act, casual taxable person means a person who occasionally undertakes
transactions involving supply of goods or services or both in the course or furtherance of
business, whether as principal, or agent or in any other capacity, in a State or a Union
territory where he has no fixed place of business.

Q6. XYZ located in USA engaged a call centre PQR Ltd in Mumbai who provides
services by dealing with the customers of XYZ Ltd on his behalf. For these activities,
PQR Ltd is charging certain consideration from XYZ Ltd. What will be the Place of
Supply in this transaction? Whether GST would be applicable?

Ans. In terms of Section 2(13) of the IGST Act, intermediary means a broker, an agent or
any other person, by whatever name called, who arranges or facilitates the supply of
goods or services or both, or securities, between two or more persons, but does not
include a person who supplies such goods or services or both or securities on his own
account.

Accordingly, in the given case, PQR Ltd. who provides services to XYZ Ltd. by dealing with
the customers of XYZ Ltd on clients behalf, but actually provided these services on their
own account, will not be categorized as intermediaries. Hence, the place of supply of
services will be the location of service recipient i.e., USA in terms of Section 13(2) of the
IGST Act. No GST will be applicable on this transaction.

Q7. A Shipping Company has appointed a steamer agent to book a space for cargo
for export out of India. The shipping Company made a total payment of Rs 10000 to
the steamer agent as commission (Rs.1000/-) and the cost of booking the cargo space
(Rs.9000/-). What will be the value on which GST is payable by the steamer agent.

Ans. There will be two situations in the above mentioned case:


a) Where the steamer agent raises 2 invoices on the shipping company one for Rs.
1000 as his commission and Rs. 9000 as reimbursements of booking charges.
b) Where the steamer agent raises an invoice of total amount of Rs.10000 on the
shipping Company

In case of option a) GST will be payable on the commission amount of Rs. 1000 by the
steamer agent. The amount claimed as reimbursements through a separate invoice will not
be subjected to GST in the hands of steamer agent in terms of Rule 7 of the Valuation
Rules. (Also, as per the provisions of Income Tax Act, TDS will be deducted only on the
commission income and not on the reimbursements amount as the same is not an income
of the steamer agent).

In case of option b) GST will be payable on Rs. 10000 as the agent is raising an invoice
of the total amount and booking the same as income in his books of accounts. Here, the

14
steamer agent is not acting as an agent and the transaction qualifies as a P to P
transaction.

Q8. ABC Ltd located in Singapore hires a courier agent in India for delivery of the
goods to its client in New Delhi. Whether GST is payable on the services provided by
courier agent?

Ans. In terms of provisions of Section 13(2), the place of supply for transportation of
goods by way of courier will be the location of service recipient and accordingly, no
GST will be payable as the service recipient i.e., ABC Ltd is located in Singapore.

Q9. Whether the representation service provided by Indian bank to foreign MTSO
in relation to money transfer to a beneficiary in India falls in the category of
Intermediary Service? Whether GST is leviable on service provided by Indian bank
to MTSO located outside India?

Ans. In terms of provisions of Section 2(13) of the IGST Law, Intermediary means a
broker, an agent or any other person, by whatever name called, who arranges or
facilitates the supply of goods or services or both or securities, between two or more
persons, but does not include a person who supplies such goods or services or both or
securities on his own account.

An Indian bank acting as an agent to foreign MTSO facilitates provision of money


transfer service by foreign MTSO to beneficiary in India and receives commission in
return. Hence, the Indian Bank falls in the category of Intermediary and representation
service provided by Indian bank is an intermediary service.

In terms of Section 13(8) of the IGST Act, the place of supply in case of intermediary is
the location of service provider and hence GST is leviable on representation service
provided by Indian bank to MTSO located outside India

15
GST GUIDANCE NOTE
ON
RETAIL SECTOR

1
Index

1. Overview

2. Existing Taxation

3. Taxability under GST Regime


3.1 Levy of Taxes
3.2 Liability to Register
3.3 Composition Scheme
3.4 Sale of products by retailer through E-Commerce Operator
3.5 Benefit to Retail Sector
3.6 Likely GST Rates
3.7 Compliance challenges

4. Frequently Asked Questions

2
1. Overview

1.1 Indian retail sector, which has been growing at an annual compounded rate of 10 percent with a
market size of USD 700 Billion (Rs.48 lakh Crores) in 2016, has caught global attention.
1.2 Indian retail sector has emerged as one of the most dynamic and fast-paced industries, due to
the entry of several new organised players. Market size is expected to touch USD 1.20 Trillion
by the year 2020 as a result of income growth, urbanisation and consumer attitudinal shifts.
1.3 India is the worlds fifth-largest global destination in the retail space and it accounts for:
- 10 % of the countrys Gross Domestic Product (GDP)
- 8 % of the employment.

1.4 Indian retail sector has come up with various innovative formats to provide an edge to their
products and services. The popular retail formats are as follows:
Supermarket
Hypermarkets/Shopping Malls
Speciality Stores
Fashion Stores
E-Commerce
1.5 While organized players target the urban population, Kirana Stores take care of household
needs in hinterland areas. There are approximately 12 million Kirana Stores in India translating
into an average of 10 stores per 1,000 Indians [Source: Business standard article dated
September 16, 2015]. Share of Kirana Stores Sales is about 85% of total Retail Sales in India.
1.6 Share of E-Commerce Sales to the total Retail Sales is about 4%, amounting to USD 28 Billion
(Rs.1.92 Lakh Crores).
1.7 FDI Policy for Retail Sector is summarized hereunder:

% of FDI
S.No. Sector Entry Route
Allowed
Automatic up to 49%; Government
1 Single Brand Retail Trading 100%
Route beyond 49%
Multi Brand Retail Trading 51% Government Route; Minimum FDI
2
should be US$ 100 million; 30% of
the value of procurement should be
from domestic micro, small and
medium industries which have total
investment in Plant and Machinery
not exceeding US$ 2.00 Million.
E-Commerce Sector (B2C) -
3 100% Automatic
Market Place Model
E-Commerce Sector (B2C)
4 FDI not permitted
Inventory Model

3
2. Existing Taxation :
2.1. Presently the retailer charges the consumer VAT or CST, depending upon whether the sale is
intra or inter-state.
Value Added Tax (VAT) is a multi-stage tax on goods that is levied across every
stage of sale within a particular State (Intra-State Sale), with credit given for tax paid
at each stage of Value Addition. VAT rates vary product to product and from State to
State.

Central Sales Tax (CST) is payable on the sale of goods by a dealer in the course of
inter-state trade or commerce. CST is levied under the Central Sales Tax Act, 1956.
However the tax is collected by the goods originating State. Currently, the applicable
CST rate is 2% against Form C. If C Form can not be issued by the buying dealer,
CST rate applicable would be equal to the VAT rate leviable in the State from which
the goods are sold.

2.2. Taxes and duties payable in the current regime by the Retailer on procurement of goods and
services and CENVAT / input credit eligibility thereof have been summarised below:

S. Taxable event Tax/duty Eligibility of


charged CENVAT / Input tax
No.
Credit
1 Intra-State Purchase of merchandise goods Excise Duty Not Available
from Manufacturer
VAT Available

2 Inter-State Purchase of merchandise goods Excise Duty Not available


from Manufacturer
CST Not available

3 Intra-State Purchase of merchandise goods VAT Available


from trader (excise duty / CVD embedded
in the product would be cost for the trader,
which he would factor in his sale price to
Retailer)

4 Inter-State Purchase of merchandise goods CST Not available


from trader (excise duty / CVD embedded
in the product would be cost for the trader,
which he would factor in his sale price to
Retailer)

5 Import of merchandise goods Customs Duty Not available


and CVD
SAD (Special Either upfront
Additional Duty) exemption or refund
available

4
6 Capital Goods domestic procurement Excise Duty Not available

VAT Not available (except


in Maharashtra)
7 Capital Goods Imports Basic Customs Not available
Duty, CVD and
SAD
8 Entry of merchandise goods into the State Entry Tax Available, except in
Orissa, M.P,
Chhattisgarh and West
Bengal
9 Entry of capital goods into the State Entry Tax Not available

10 Entry of goods in to a Municipality or Octroi / LBT Not available


Local Body
Domestic procurement / import of mobile
11 NCCD Not available
handsets

12 Various input services received by Retailer Service Tax, Not available


for carrying out trading activity (Example: SBC, KKC
Lease Rentals, Warehousing and Logistics
Services, Security Services, Housekeeping
& Cleaning Services, Maintenance
Services, etc.)

2.3. Cascading of Taxes:

As most of the taxes paid by the retailers are not eligible for input tax credit in the current
regime as stated above, cascading of taxes results in cost going up for the retailer. Ultimately
the consumer bears the tax burden by paying higher price for the product.

3. Taxability under GST regime

3.1 Levy of Taxes by the Central and State Governments

In GST regime retailer will pay tax to both State Government (SGST or UTGST) and Central
Government (CGST) on each transaction involving supply of goods or services to consumers
within a State. In the case of inter-State supply tax (IGST) would be payable to the Central
Government

3.2. Liability to Register

Any retailer whose taxable supplies exceeds Rs.20 lakh in a financial year is liable to be
registered under GST and pay tax. In the case of retailers located in - North Eastern States,
Himachal Pradesh, Uttarakhand and Jammu & Kashmir, this threshold limit is Rs.10 lakh.
However, any retailer may voluntarily opt to take GST registration, even though his turnover
does not exceed threshold limit of Rs.20 lakh or Rs.10 lakh, as the case may be.

5
3.3. Composition Scheme
GST provides that a registered person, whose aggregate turnover in the preceding financial
year did not exceed Rs.50 lakhs, may opt to pay in lieu of tax an amount calculated at such
rate as may be prescribed. In the case of traders, such composition levy is payable at 0.50 %
+ 0.50% of the turnover to State and Central Government. The rate will apply on his entire
sales including exempt sales. A person opting for composition levy:
a. shall not be engaged in the business of supply of service, except restaurant service
b. shall not make any inter-state supply of goods; or
c. shall not make any supply of goods through an electronic commerce operator
Kirana Stores having taxable turnover not exceeding Rs.50 lakhs may thus opt for
composition scheme. However, they cannot collect any tax from the consumers nor shall he
be entitled to any credit of input tax and the burden of taxes has to be borne by the trader.
Composition Scheme may not be really beneficial in certain situations, as can be seen from
the illustration given below:
S. Composition Regular Taxable
No Particulars
Dealer Person
(Rs.) (Rs.)

1 Price at which goods are sold to consumer


(MRP) 100.00 100.00

2 Composition Levy payable at 0.5% + 0.5% 1.00 NA

3 SGST+CGST (assuming 6% + 6%) NA 10.71

4 Net Sales Realisation 99.00 89.29

5 Purchase Price 70.00 70.00

6 SGST (6%) + CGST (6%) on purchases 8.40 8.40

7 Overhead expenses (input services) 10.00 10.00

8 SGST (9%) + CGST (9%) on overhead expenses 1.80 1.80

9 Product Margin 8.80 9.29

It needs to be noted that in GST, the regular taxable person can take credit of tax paid on capital
goods / storage racks etc. used at his store premises and also tax paid on rental charges for the
store premises / insurance taken to cover the inventory, which means that not opting
composition scheme may be more beneficial in many situations.
Further, the Kirana Store opting for Composition Scheme has to pay 1% levy on sale of
exempted goods.
Therefore, the Kirana Stores need to do a cost benefit analysis taking into account of the
categories of products that he would be selling from his stores and GST rate applicable on the
products and then he may accordingly decide whether opting Composition Scheme is really
beneficial to him

6
3.4. Sale of products by Retailers through E-Commerce Operators:

Retailers selling their products through E-Commerce Operators have to raise tax invoice on e-
commerce customers and pay SGST/UTGST and CGST or IGST, as the case may be.
E-Commerce Operators shall collect an amount calculated @ 2% of the taxable supplies made
through them where the consideration with respect to such supplies is collected by the
operators from customers. The retailers can take credit of the 2% amount paid by the
operators and adjust such credit against their output liability.
A separate Guidance Note is being published covering E-Commerce Sector.

3.5 Benefits to Retail Sector in GST Regime:

Introduction of GST will bring significant benefits to Retail Business through various
avenues.
Firstly, the Country as a whole will become one common national market and procurement &
movement of goods from one State to another State would be less cumbersome. Organised
Retailers can create supply chain models based on transportation efficiency rather than tax
implications, since CST, Entry Tax and Octroi/LBT will be abolished in GST Regime.
Besides there will not be any material loss of input credit on account of stock transfer of
goods from one State to another. GST will also eliminate collection and submission of various
forms such as C Forms, F Forms, etc., thus reducing compliance costs.

Retailers pay huge amount of Service Tax on many services which are net cost for the retail
business presently. In GST, taxes paid for renting of premises as well as to other service
providers would be available for set off against taxes payable on outward supply of
goods/services.

In summary, the following taxes which are cost for the business presently, would be available
for set off under GST:

a. Taxes paid on purchase of capital goods;


b. Taxes paid on purchase of non-merchandise goods such as printing and stationery,
packing materials and several other consumable items used in retail stores,
warehouses and office premises;
c. Taxes on freight amount paid for transportation of goods;
d. Taxes paid on various services used for operation and maintenance of retail stores,
warehouses and office premises;
e. Taxes paid on services used for marketing and sales promotion of goods
f. Taxes paid any other services which are used for conducting retail business.

3.6 Likely GST Rates for retail products

Four-tier GST rate structure of 5%, 12%, 18% and 28% is being considered by the Goods and
Service Tax (GST) Council. Precious Metals and Jewellery may have a special rate. On
essential goods and services, NIL rate of GST would be applicable.

The likely basket into which any goods may fall in the GST regime is summarised as under:

7
S.
Product Classification (Likely) Tax rate
No.
Fresh fruits and vegetables, pulses, food grains, milk and other such
1 Nil
basic raw materials
Processed foods like breakfast cereals, processed spices, edible oil,
2 5% or 12%
essential FMCG items, etc.

3 Precious metals and Jewellery 2.00 % to 5%

4 Standard rate 18%

5 Luxury goods, Aerated Drinks, Tobacco Products, other demerit items 28%*

* Additionally, Cess up to 15% would be leviable on luxury/demerit items.

3.7 Compliance challenges in GST

a. Conditions imposed for entitlement of input credit: As per clause 16(2)(c) of GST
Bill, 2017, unless the tax charged by the supplier in his tax invoice is actually paid by him
to the Government, the buyer of the goods shall not be eligible for the input tax credit.
Retail Sector deals with large number of consumer items, which would be purchased from
several vendors. Retailer keeping track of which vendors have paid or not paid the tax
amount to the Government is practically not possible. If any vendor has not paid tax, the
Government should take appropriate action against such vendor, but the buyer of the goods
(Retailer) should not be deprived of availing input tax credit.

b. Additional document to be prepared (over and above tax invoice) for verification
by proper officer during movement of goods: Retailers issue sale invoice to customers,
using different Point of Sale (POS) System. They make home delivery of goods to
customers. Also, Retailers stock transfer the goods from their warehouse in one State to
Retail Stores located in the same State as well as in different States.
Rule 2(4) of draft Goods and Service Tax Invoice Rules prescribes that a registered taxable
person may obtain Invoice Reference Number from the GSTN Portal by uploading a taxable
invoice issued by him in Form GST INV-1 and produce the same for verification by the
authorities during movement of goods, as required under clause 68 of GST Bill, 2017.
Retailers will find difficult to comply with this provision, especially in the case of vehicle
carrying multiple home deliveries in the same vehicle. Besides there is a concern in the
Industry, whether the Government is planning to continue with road permit system in this
form in GST Regime as well.

c. GST is leviable at the time of receipt of advance payment from customers: Retail
customers may do advance booking by making partial or full payment in advance for
purchase of new products being launched in the market by reputed brands {Examples :
Apple I Phones, Samsung Galaxy Phones booked by customers in advance}. GST is
leviable at the time of receipt of such advance payments, though the actual sale of goods
will happen subsequently. In the GSTR1 Return, we need to declare each advance payment
received and tax liability thereof. Transaction ID generated in the GSTN portal against
each such advance payment needs to be kept track and in the month, when the goods are
actually sold/delivered to the customer and final invoice is prepared, we need to upload the
final invoice in the GSTN Portal along with the advance Transaction ID and claim deduction

8
of tax liability for the tax already paid in the month in which advance was received. As there
will be large number of retail customers who will do such advance bookings, keeping track
of so many transaction IDs for the taxes paid on advances and adjusting against the final
invoice will be a herculean task. Retailers would prefer the present system of paying tax at
the time of actual supply of goods under a sale invoice.

4. Frequently Asked Questions

Q 1 How will the tax liability be determined on a Composite Supply?

Ans: In respect of Composite Supply comprising two or more taxable supplies, which are naturally
bundled and one of which is a principal supply, GST will be leviable at the rate applicable for
the principal supply.

Q 2 Give three examples of Composite Supply?

Ans: (i) Sale of Laptop along with Charger


(ii) Supply of Washing Machine with two years free warranty service
(iii) Transportation of passenger by air, which includes meal/snacks during journey.
(There is no option for the passenger to seek reduction in air fare on the pretext that
he
will not have meal / snacks during journey)

Q 3 How will the tax liability be determined on a Mixed Supply?

Ans: In respect of Mixed Supply comprising two or more supplies (whether or not taxable) which
are not naturally bundled and not dependent on each other, GST would be leviable at the rate
applicable for the supply which attracts the highest rate of tax.

Q 4 Give three examples of Mixed Supply?

Ans: (i) Supply of toiletry set viz. Tooth Paste, Tooth Brush, Shaving Blade / Cream, Soap,
Shampoo, Face Cream, Hair Oil and Comb bundled and sold at a combined price
(ii) Optional Tariff quoted by Hotel covering both room stay and food expenses
(iii) Detergent and Bucket sold at a one price

Q 5 Why the goods supplied on hire purchase basis be treated as supply of goods and not as
supply of service?

Ans: When title and possession have been transferred in a transaction, it shall be considered as
supply of goods. In the case of goods supplied on hire purchase basis, the possession is
transferred immediately while the title is transferred at a future date. Therefore, it will be
treated as supply of goods.

Q 6 Whether the leasing of goods for a short term is to be treated as service? Why?

Ans: In a transaction involving leasing of goods, since there is no transfer of title to the lessee, it
shall be treated as supply of service.

9
Q 7 What is the treatment of bundled supply comprising one non-GST item and one GST
item e.g. a Bottle of liquor sold with a silver flask

Ans: Such a supply will be mixed supply and charged to the highest rate. However since the higher
rate could be of a non-GST item it will not be correct to charge that rate for GST goods. In
the case of liquor bottle sold along with a silver flask, it is difficult to decide what rate will be
chargeable. It appears that govt may come with a method of separating the two values.

Q 8 For determining inter-state or intra-state supply, whether the location from which tax
invoice is prepared is relevant or the location from which the goods are despatched and
place of supply (delivery) are relevant ? For example, the e-commerce operator from
his IT Server located in Bangalore may raise tax invoice on behalf of seller of goods
(located in Kerala) to a customer in Maharashtra.

Ans: GST is a levy on supply. Location of the supplier and the place of supply are relevant for
determining inter-state or intra-state supply. The location of IT platform, from which tax
invoice is prepared, is not relevant. In the above example, as the supply originates from
Kerala and delivered to a customer in Maharashtra, it is an inter-state supply. The tax invoice
will mention the Kerala address as location of the supplier and the customer address in
Maharashtra as the place of supply.

Q 9 A retailer has a scheme of issuing loyalty card to its customers. For every Rs.100 worth
goods purchased by a customer, he/she gets Rs.2 as loyalty reward. Such rewards are
credited to customers loyalty card. Customer can use the loyalty amount credited in
his/her card for making payment towards subsequent purchases made from the retailer.
In GST Regime, whether such reward amount credited to customers loyalty card need
to be treated as advance payment against customer future purchases and whether GST
liability need to be discharged by the retailer at the time of crediting reward amount to
customers loyalty card?

Ans: The reward points credited by the retailer to customers loyalty card cannot be treated as
advance amount received from customer. Therefore, no GST is leviable at the time of
crediting reward points to customers loyalty card.

Q 10 If the product is sold to a customer on EMI payment basis, whether interest component
in the EMI is includable in the value of the product for the purpose of levy of GST?
Why?

Ans: As per the provisions contained in clause 15(2) of GST Bill, 2017, interest for
delayed/deferred payment of any consideration is includable in the value of supply. Therefore,
GST is leviable on interest component in the EMI payments.

Q 11 A retailer selling washing machine takes the old washing machine from a customer. An
amount (say Rs.1000/-) is fixed for the old machine and customer makes payment for the
new machine after adjusting the amount agreed for the old machine. Sale price of new
washing machine is Rs. 25,000/-. What is the value on which the retailer need to
discharge GST liability for sale of new washing machine?

Ans: Retailer need to discharge the GST liability on Rs.25,000/-

10
Q 12 Whether the individual customer whose old washing machine valued at Rs.1000/- is
liable to pay GST? Give Reason!

Ans: Since supply of old washing machine by the individual customer cannot be treated as a
Supply in the course or furtherance of his business, GST is not leviable on the value of old
washing machine.

Q 13 A retailer sells a television set to a customer along with free warranty for 2 years period.
Whether separate value need to be determined for free warranty services and GST is
payable on the same?

Ans: Supply of television along with the free warranty for 2 years period is a composite supply, in
which television is the principal supply. On the total consideration received from customer,
GST is payable at the rate applicable for the television.

Q 14 A customer who purchased a mobile handset from a retailer asks for special packaging
for gifting to someone. Retailer has not collected any amount from the customer for such
gift wrapping. Is cost of packaging material includable to the value of handset for the
purpose of levy of GST?

Ans: Since, this is a composite supply in which mobile handset is the principal supply, GST is
leviable on the total consideration received at the rate applicable to mobile handset.

Q 15 On what value GST is payable on promotional offer "Buy 2 Shirts Get 1 free Shirt",
when all the three shirts are having individual MRP?

Ans: For the two shirts purchased, GST is payable on sale price of each item. In respect of one
shirt given free, no GST is applicable, since it is a supply without consideration.

Q 16 What is the time of supply applicable with regard to addition in the value by way of
interest charged for late payment?

Ans: Time of supply is the date on which the supplier has received the interest payment

Q 17 Whether GST is leviable at the time of advances received from customers for pre-
booking of purchases like mobile handsets, cars?

Ans: Yes. GST is leviable at the time of advances received, since supply deemed to have been
completed to the extent of advance payment received.

Q 18 Is Input tax credit available to a retailer on goods and/or services received for
construction of store buildings?

Ans: On goods and/or services received for construction of store buildings, input tax credit is not
allowed. However, input tax credit is allowed on plant and machinery used in the store
premises, even if it is fixed to earth by foundation or structural support.

Q 19 Whether Input Tax Credit is available to Retailer on the following inward supplies:
(a) Office furniture
(b) Electrical fittings, electrical cables and electrical installation work
(c) DG Set
(d) Lift / elevators
(e) Insurance taken to cover Building, Plant & Machinery, Inventories
(f) Employee medical insurance/Life insurance
(g) Transportation of goods

11
(h) Sponsorship services

Ans: (a) Yes


(b) Yes
(c) Yes
(d) Yes
(e) Yes
(f) Yes ((when notified by Govt)
(g) Yes
(h) Yes

Q 20 Whether a retailer can avail credit of excise duty contained in the inputs stock held as on
the appointed date?

Ans: Yes. As per the provisions contained in Sub-clause (3) of Clause 140 of CGST Bill 2017,
retailer can avail credit of excise duty contained in the inputs stock held as on the appointed
day, subject to the conditions specified therein: e.g. invoice should be less than a year old.

Q 21 A retailer has purchased capital goods under existing law on payment of excise duty.
Vendor has prepared the supply invoice and despatched the goods on 25th June 2017,
but the retailer has received the goods on 3rd July 2017. GST has come into effect from
1st July 2017. Can the retailer avail input credit of excise duty paid on such capital
goods in GST Regime?

Ans: No. Since the vendor has prepared the supply invoice and credit of excise duty paid on capital
goods is not admissible to retailer in the existing law, credit cannot be availed in the GST
Regime.

Q 22 What is the meaning of voucher and how supply of voucher is leviable to GST?

Ans: As per Clause 2(118) of the CGST Bill, 2017, Voucher means an instrument where there is
an obligation to accept it as consideration or part consideration for a supply of goods or
services or both and where the goods or services or both to be supplied or the identities of
their potential suppliers are either indicated on the instrument itself or in related
documentation, including the terms and conditions of use of such instrument.

If the supply of goods or service is identifiable at the time of issue of voucher, GST is leviable
at that time. In other cases, GST is leviable at the time of redemption of voucher.

Q 24 In GST Regime, how the goods returned by retail customer and replacements can be
handled? What is the procedure to be followed?

Ans: Credit Note can be issued for the goods returned by the Customer and replacement supply can
be made under a fresh invoice.

Q 25 A retailer receives goods from his supplier on 'consignment sale' basis. To the extent of
goods sold by him from his shop to customers, retailer will make payment to his
principal and return the unsold goods to principal within 3 months period. Whether the
onward and return movement of goods between principal and retailer need to be treated
as distinct supplies?

12
Ans: In the case of Consignment Sales, the goods are dispatched by a taxable person to
consignment sales person, who is another taxable person. The consignment sales person sell
the goods to customer under his sale invoice mentioning his GST Registration Number. After
the goods are sold by him, he makes payment to his principal. He returns the unsold goods to
the principal as per the agreed terms.

In the above example, both the onward and return movement of goods between principal and
the retailer can be treated as distinct supplies. Alternatively, the principal can issue a credit
note in respect of goods returned by the retailer, as per the provisions contained in clause
34(1) of CGST Bill, 2017.

Q 26 What is the purpose of 'anti-profiteering' measure introduced by the Government and


how a retailer can comply with this provision?

Ans: As per Clause 171 of the Goods and Service Tax Bill 2017, any reduction in rate of tax on
supply of goods or services or the benefit of input tax credit granted by the Government shall
be passed on to the recipient by way of commensurate reduction in prices.
For Example, when a retailer purchases an item by paying GST at 18% and the Government
subsequently reduce the GST rate to 12%, if that item is lying in stock of the retailer on the
date of change in rate, he needs to reduce his selling price to customer to the extent of 6% of
his purchase price.

13
GST GUIDANCE NOTE
ON
TEXTILES
Index

1. Overview

2. Existing Taxation

3. Key Changes in GST

3.1 Taxability
3.2 Tax rates and exemptions
3.3 Impact of sectors outside GST
3.4 Compliance challenges
3.5 Toll Manufacturing
3.6 Input Tax Credits
3.7 Supply through e-Commerce
3.8 Transitional provisions
3.9 Implications on textile industries
3.10 GST implications on exports & imports

4. Frequently Asked Questions


1. Overview

1.1 Textile industries play a very important role in the development of the Indian economy.
100% FDI is allowed by the Government under the Automatic Route.

1.2 The Indian textiles and apparel industry contributes nearly 10% to manufacturing, 2% to
India's Gross Domestic Product (GDP) and 15% of country's export earnings. The
industry, currently estimated at around $ 108 billion, is expected to reach $ 223 billion
by 2021. It employs 45 Million people directly, making it one of the largest source of
employment generation in the country.
Source: Annual Report 2015-16, Ministry of Textiles, Government of India

1.3 The Industry is extremely diverse from hand woven sector at one end to sophisticated
capital-intensive sector at the other manufacturing yarns, fabrics and apparels. It
includes decentralized power looms, hosiery and knitting sectors, the handlooms and
handicrafts sector and also a wide range of fibres, which include man-made fibres and
natural fibres like cotton, silk, jute and wool. The organized sector comprises more than
3400 textile mills both in small, medium and large sectors which collectively produce
nearly 2500 million square meters of cloth of various fabrics.

The key processes and the output of the industry:

Garment/
Raw Weaving/
GInning Processing Apparel
Material Knitting
Spinning production

Cotton, Final
Processed
Jute, Silk, Fibre Yarn Fabric garment/
Fabric
Wool apparel

Woollen textiles
Yarn and Fibre segment Silk textiles Jute
textiles
Technical textiles
The key segments of the industry are:

Industry Segment Market Segment End use


Casual Wear Knitted Apparel, Shirting, Bottom
Apparel Weights,
Formal Wear DenimWear (Including wool)
Formal
Active Wear Outwear, Sportswear
Home & Institutional Bedding, Towels, Tablecloths,
Home and Napkins, Curtains
Institutional Upholstery Upholstery
Carpet Carpet
Functional fabrics Protective(Military, Work
wear) Outdoor (Awnings,
Technical Transportation Auto, Rail, Air
Technical fabrics Medical, Filtration, Construction,
non- woven, Geo/ Agro, Packaging

1.4 Textile industry has been enjoying various tax/duty exemptions / concessions under
indirect taxes read with FTP.

The various benefits announced for promoting exports of textiles & apparels are:

a) MEIS (Merchandise Exports from India Scheme) The rewards for exports
payable as percentage of the realized FOB value

b) Duty Drawback Drawback for textiles and apparels


Cotton Yarn 2.5% to 4.5%
Cotton Fabrics 4.3% to 7.3%
Apparels 7.2% to 10.5%

1.5 GST is the much-needed reform in the taxation structure. It is expected to be a big
element in the growth of the economy as well as the textile sector. The Textile Industry
is characterized by large inter-state movements across the value chain both in respect of
inputs and finished products. It also draws inputs from many other sectors consisting
of both goods and services including dyes and chemicals, petroleum products and
transport services. There is a large inter-face between organised and unorganised
sectors. Given the inter-state and inter-industry movement of goods and services and
inter dependence of organised and unorganised sectors in the textile industry, the GST
will have significant effects on the growth and productivity of the textile sector.

4
2. Existing taxation

2.1 Central Excise duty

Central excise duty was first introduced on woven garments in the year 2001 which
was subsequently extended to the entire textile industry in 2003. The excise duty
exemption option was also provided vide notification no.30/2004 with condition of
non-availment of Cenvat credit. There was also an option to pay concessional rate of
excise duty with Cenvat credit benefit. However, almost all assesses opted for
exemption. In 2011, mandatory excise duty was reintroduced on branded garments
with Cenvat credit benefit and an abatement of 55% for duty payment. This
mandatory levy was again removed in 2013 and optional scheme of paying duty with
Cenvat credit benefit was continued. In 2016, mandatory excise duty has been
introduced again on branded readymade garments made up of textiles falling under
central excise tariff heading 61, 62 and 63. The levy is attracted only when retail sale
price (RSP) is Rs.1000/- or more and levy is only on 60% value after a standard
abatement of 40%. For payment of duty, rate of 2% without Cenvat credit or 12.5%
with Cenvat credit option is applicable. Non-branded goods continue with Nil levy
without Cenvat credit benefit. Otherwise, option of paying 6% with Cenvat credit in
case of garments / articles of cotton, not containing any other textile material is
available. For garments of other composition, Nil rate without Cenvat credit or
12.5% with Cenvat credit is available.

2.2 Service Tax

Textile sector avails various input services for manufacturing its finished products.
The service tax so paid on such input services cannot be set off since presently this
sector is largely under duty exemption. Hence such service tax paid on input services
becomes a cost and puts extra burden on the consumers. Carrying out an intermediate
production process (not amounting to manufacture) as job work in relation to textile
processing is presently also exempt from service tax.

2.3 VAT/ Central Sales Tax

Most of the States in India have exempted textiles and fabrics from the levy of VAT /
Central Sales tax. Garments including textiles are being subject to lower rate of VAT
/ Central Sales tax in most of the States. It is in the range of 5%- 6%. For small
players, the option of paying taxes at concessional rates is also provided under
composition scheme in many States.
2.4 Entry tax
In many States, entry tax is levied on specified goods when goods enter local area.
Even textiles such as cotton, woolen or silk or artificial silks are liable to entry tax in
States like Karnataka, at the rate of 1% which adds to the purchase cost.
(Space intentionally left blank)

5
2.5 Current Tax exemptions are tabulated below:

Description Excise Rate Vat Rate Exemption Notification/Date


Silk
Raw Silk NIL NIL Tariff Rate Nil
Silk Yarn NIL 5% 30/2004 C.E dated 09.07.2004
Silk Fabrics NIL NIL 30/2004 C.E dated 09.07.2004
Wool
Raw Wool/Fibre NIL NIL Tariff Rate Nil
Wool
Tops/Woollen Yarn NIL 5% 30/2004 C.E dated 09.07.2004
Woollen Fabrics NIL NIL 30/2004 C.E dated 09.07.2004
Cotton
Cotton Fibre NIL 5% Tariff Rate Nil
Cotton Yarn 6% 5% 7/2012CE dated 17.03.2012
Cotton Fabrics 6% NIL 7/2012CE dated 17.03.2012
Fabrics of
Manmade
Filaments
POY 12.50% 5% No exemption
Textured
Yarn/Twisted Yarn 12.50% 5% No exemption
Fabrics NIL NIL 30/2004 C.E dated 09.07.2004
Fabrics of Man
Made Fibre
Fibre 12.50% 5% No exemption
Yarn NIL 5% 30/2004 C.E dated 09.07.2004
Fabrics NIL NIL 30/2004 C.E dated 09.07.2004
Non Oven Fabrics NIL 5% 30/2004 C.E dated 09.07.2004
Laminated Fabrics NIL 5% 30/2004 C.E dated 09.07.2004
Knitted Fabrics NIL Nil 30/2004 C.E dated 09.07.2004
Knitted Garments
100% Cotton 6% of 60%
Garments of RSP 5% 7/2012CE dated 17.03.2012
12.5% of
Other than Cotton 60% of RSP 5% Tariff Rate
Garments other
than Knitted
100% Cotton 6% of 60%
Garments of RSP 5% 7/2012CE dated 17.03.2012
12.5% of
Other than Cotton 60% of RSP 5% Tariff Rate

6
Thus the textile fabrics of Wool and Silk, are exempted from Excise duty albeit
without any cenvat benefit, as well as from VAT, except that yarns attract 5% VAT.
Cotton fiber attracts NIL rate of duty whereas Cotton yarn and Fabrics attract 6% duty
but with cenvat credit benefit. Man Made Fibers and readymade garments attract full
rate of duty but knitted fabrics attract 6% duty. Due to such complex tariff structure,
there is a disparity between the natural fabrics like Silk, Wool and Cotton and Man
Made Fabrics.

3. Key Changes in GST

3.1 Taxability

3.1.1 GST will be a concurrent GST, where the Central and State governments will
share a common tax base consisting of the value addition of goods and
services in the supply of goods and services.

3.1.2 The GST will have two components: one levied by the Centre (CGST) and
the other to be levied by the States (SGST). The basic features of law such as
chargeability, definition of taxable event and taxable person, measure of levy
including valuation provisions, basis of classification etc. should be uniform
across these statutes as far as possible.

3.1.3 The CGST and SGST would be applicable to all supply of goods and services
made for a consideration except for the exempted goods and services, goods
which are outside the purview of GST and the transactions which are below
the prescribed threshold limits.

3.1.4 The CGST and SGST are to be paid to the accounts of the Centre and the
States separately. Taxes paid against the CGST and SGST will get input tax
credit (ITC) within the CGST and SGST chains respectively but cross
utilization of credits between CGST and SGST would not be allowed. The
administration of the CGST will be with the centre and that of SGST with the
respective states. Both will be supported by a common portal (managed by the
GSTN, a special purpose entity already incorporated) for the front-end
compliance functions of registration, return filing and processing and tax
payments / refunds.

3.1.5 The following Central Taxes which are normally levied on the inputs or
outputs of Textile Sector are to be subsumed under the GST: (i) Central
Excise Duty, (ii) Additional Excise Duties, (iii) Service Tax, (iv) Additional
Customs Duty, commonly known as Countervailing Duty (CVD), (iv) Special
Additional Duty of Customs (SAD), (vi) Surcharges, and (vii) Cesses.

3.1.6 The following State taxes and levies should be, to begin with, subsumed
under GST: (i) VAT / central sales tax, (ii) State cesses and surcharges in so
far as they relate to supply of goods and services, and (iii) entry tax not in lieu
of Octroi. (iv) Octroi/LBT

7
3.2 Tax rates and exemptions

3.2.1 Since GST would be levied on supply of goods, Inter-State stock transfers
between the different units of an entity would be subject to GST. However,
transfers between units within same state may not be liable unless different
GST registrations are obtained. This would have an impact on cash flow.

3.2.2 Impact of GST on textile industry could be determined only after final rates
are declared for the goods. In GST regime, most of the indirect taxes such as
central excise duty, service tax, VAT / Central Sales tax and entry tax would
get subsumed.. This will allow in the establishment of a seamless chain of tax
credits that will allow full refund of tax credits on exports that were otherwise
being borne as embedded cost by the industry in many segments.

3.2.3 Exemptions would be phased out in GST regime and there may not be any
product/end-use-specific or area-specific advantage for textile industry which
could create a competitive environment.

3.3 Impact of sectors outside GST

3.3.1 The individual States will continue to levy Electricity duty on Power, but the
same being outside GST, the incidence of such electricity duty will be an
additional cost to the Textile Industry.

Similarly the Central and State taxes paid on HSD that is used for running
generators and machinery, will remain a cost as ITC of such taxes will not be
available in GST.

3.4 Compliance challenges in GST

3.4.1 All compliances, including documentation, would be automated in GST


regime. Input tax credit eligibility would be subject to tax payment and return
filing by supplier of inputs or services. Credits and liabilities would be
matched online on a monthly basis w.r.t. the various returns to be filed. As
provided in GST return related reports, there are 3 monthly regular returns to
be filed in addition to one annual return followed by audit report. For
distributing the credit of GST paid on common input services relating to units
in multiple states, there is a separate return prescribed (ISD return). Increase
in number of returns could increase compliance cost in the form of additional
time and staff recruitment. Invoice-matching concept may cause the smaller
unorganized sector to face the challenges of survival itself as many buyers
may not be interested in spending too much time on sorting out issues of
credit denials. Shift to GST regime from present indirect tax regime would
have huge impact on the business.

3.4.2 There is a need to analyze the impact on the entire business including main
functions which would be helpful to ensure preparedness for smooth
transition to GST regime. ERP systems would need customization for
compliance under GST. Key vendors should be trained to understand the
concept, impact and compliance requirement under GST. Textile industry
needs to be ready to meet this additional expenditure. Multiple registrations
8
and returns would prove to be a heavy burden for the industry as it would
consume time, effort and resources. GST is a technology driven law, which
would pose difficulties to small players, who may find it difficult to adapt.

3.5 Toll (Job) Manufacturing under Textile

3.5.1 Toll manufacturing is an arrangement in which a company which has a


specialized equipment, processes raw materials or semi-finished goods of
other companies. This is a very common arrangement in the Textile industry.
Here a person sending the fabric (grey) to another textile company for further
processing, will be the Principal and the company doing the processing on
such raw material or semi-finished goods, will be the Job worker.

3.5.2 Even in GST regime, the principal would get the option of sending inputs or
capital goods for job work (Section 143 of the GST laws). Raw materials sent
should be received back within 1 year and capital goods should be received
back within 3 years. If the goods are not received within this time limit, then
supply of such goods would be treated as supply for levy of GST. The
processed goods could also be sent directly to customers of principal,
provided job workers are registered or in case job worker is not registered, the
details of job workers place are added as an additional place of business in
principal's registration certificate.

3.5.3 In view of the above, under GST there is no visualization similar to what is
there today under Central Excise, wherein principal manufacturers instead of
paying excise duty on goods manufactured on job work basis can authorize
the job workers to pay excise duty on the said goods.

3.5.4 It may be noted that the processing of goods sent by the principal would be
treated as a service for the purpose of GST. Job workers need not register as
taxable person (there is no GST exemption) if the value of such services does
not exceed Rs.20 lakh threshold limit per annum. However, such option may
not be desirable as it would break the input tax credit chain. GST payment
option could be a better choice as GST would provide seamless credit on
goods and services. This would be beneficial even for the principal
manufacturers. The job workers should be made aware of such an option and
its impact.

3.6 Input Tax Credits (ITC)

3.6.1 Input Tax Credits (ITC) is the backbone of the GST regime. GST is nothing
but a value added tax on goods & services combined. It is these provisions of
Input Tax Credit that make GST a value added tax i.e., collection of tax at all
points after allowing credit for the inputs/input services & capital goods. The
procedures and restrictions laid down in these provisions are important to
make sure that there is seamless flow of credit in the whole scheme of
transition without any misuse. Thus, the clarity of rules of availment and
utilization will have significant impact on making GST a taxpayer-friendly
tax.

3.6.2 One of the biggest advantages expected from the implementation of GST Act
is that it would remove cascading effect by facilitating seamless flow of
9
credit. This would be given effect by providing for the availment of ITC to
the purchasing dealer in respect of the GST paid by the supplying dealer and
thus by removing the restrictions placed in the present Cenvat credit rules on
availment of credit which lead to a break in the credit chain and consequent
cascading effect which further leads to increase in cost of goods and services.
Thus linking of invoice to invoice would eliminate possibility of revenue
leakage.

3.6.3 The assesses who have plans for large investments in capital goods could plan
for the same in GST regime which would enable them to take credit of taxes
paid on capital goods procurement for utilization against payment of output
GST. Today, Assesses who are engaged in export of goods could opt for
Export Promotion Capital Goods (EPCG) scheme to procure the goods
without payment of any duties. It is expected that in the GST regime, the
EPCG scheme may not continue or it may be limited to exemption from Basic
Customs Duty only and Importer may have to pay IGST and avail ITC.
3.7 Supply through an e-Commerce platform:
A person can supply his goods through an e-commerce operator i.e. through an online
portal - owned or managed by a third party. However, while doing so, he will not be
allowed the benefit of threshold limit of Rs 20 lakhs, that means, even a small retailer
of textiles having a turnover of less than 20 Lakhs, will still have to get registered
under GST and undergo all the compliance that will be prescribed under the law.
Moreover, such e-commerce operator will deduct an amount @ 1% of the net value of
taxable supply that is made through him. The 1% amount so deducted will be remitted
by such e-commerce operator to the Government.. The retailer will avail such 1% tax
in his electronic cash register and discharge the remaining tax as his output tax to the
Government.
For provisions under e-commerce, please visit http://www.jiogst.com/images/
Guidance
3.8 Transitional Provisions
90% of the Textile Fabric and Textile Garments are under exemption today. Hence
the manufacturers or dealers of such goods have not availed credit of excise
duty/service tax on inputs and input services used in the said goods. However,
inventory lying unsold on the appointed day i.e. when GST is rolled out on 1st July,
2017 will be liable for GST for the supplies made on and after 1st July, 2017. To
extend the benefit of ITC on such inputs, a provision is made in GSTL subject to
availability of duty paying documents. In most of the cases duty paying document
will be available. The scheme of allowing deemed ITC will be notified later.
For Transition provisions, please visit http://www.jiogst.com/images/GuidanceNote11.pdf
3.9 Implications of GST on Textile sector
After the application of GST, the increase in the effective tax rate will have a negative
impact on the textile sector as compared to current taxation.

3.9.1 As CGST and SGST rates are likely to be higher than the current textile
sector rate, this will result in the higher revenue to the Central and State
Government and Textile Prices may marginally increase depending on the
duty rate (unless the rate is barely enough to meet the extsing cascading).
10
3.9.2 In the current taxation system, taxes which are being paid on inputs are
being added to cost as the finished product are exempt from Taxes/duties. In
GST, textile output will be taxed and Input Tax will be a credit whether in
the case of export or for domestic use, making taxation system transparent.

3.9.3 Taxes paid on purchase and installation of capital asset and equipment can
be claimed as ITC. This will encourage up-gradation and expansion of the
Textile Industries with latest Improve technologies.

3.9.4 Compliance cost in the GST regime will be generally lower due to fewer
taxes. However textile sector being outside GST at present will face
compliance burden.

3.9.5 Fiscal barriers will be removed for the movement of Textile inputs and
outputs from one State to another.

3.9.6 Under GST, all kinds of Fibre will be treated in the same way. There is no
discrimination likely between cotton fibre and man-made fibre in the GST
Structure.

3.9.7 Since the job work activity is deemed to be a service, composition scheme
would not be available and tedious procedural aspects need to be complied
with.

3.9.8 Credit would be available subject to matching/verification with returns filed


and payments made by the supplier of goods or services.

3.10 GST Impact on Exports & Imports on Textile industry

3.10.1 Since exports under GST would be zero rated, this would give a competitive
edge to textile exports from India which is facing a strong competition from
Bangladesh, Pakistan etc. Hence, integrated textile companies should see
this as an opportunity, as the advent of GST will spur the textile sector with
major capital investments bringing the cost of capital down.

3.10.2 Drawback facility may become redundant - With Input tax credit chain
becoming more transparent and integrated, the tax credit for exporters will
become easier and full credit of taxes can be claimed; and the duty
drawback scheme, which aims to provide credit of taxes will lose relevance
under GST. For the exporters, where the current duty drawback rates are
lower than the incidence of taxes on inputs, they will benefit under GST due
to improved transparency on the level of taxes under GST. Conversely, the
sectors, where the drawback rates are higher than the actual incidence of
taxes on inputs will face challenge on profitability.

3.10.3 The imported goods are levied with a Basic Customs Duty (BCD) on the
assessable value. On the value thus arrived (after adding the BCD) an
additional duty or Countervailing Duty (CVD), equivalent to the excise duty
on like products (to countervail the same) is levied. Further an Additional
SAD of 4% is charged to countervail the VAT in India. A cess of 3% is
charged on BCD & CVD. In addition, other duties like anti-dumping,

11
safeguard duties are applicable in specific cases. The duties normally are ad-
valorem, but in some cases even specific duties are applicable. In GST,
except BCD, other duties like CVD, SAD will be replaced by IGST and
Input tax credit of such IGST will be available to the importer, effectively
lowering the tax burden on the ultimate customer.

4 Frequently Asked Questions

4.1 What are the 9 categories of goods that form the basis of current day
classification?

- Khadi and handlooms

- Cotton textiles

- Woollen textiles

- Silk textiles

- Artificial silk and synthetic fibre textiles

- Jute, hemp, and mesta textiles

- Carpet weaving

- Ready-made garments

- Miscellaneous textile products

4.2 What are the key concerns of the Textile Industry?

- Cascading of input tax credit leading to blocked input taxes

- Exemption to Cotton Fabrics whereas dutiable in respect of Man Made Fabrics,


leading to market imbalance

- High compliance cost, especially for small units as input tax credit is not available

- Lack of uniformity in Central and States taxes: e.g., presently Job Workers are treated
differentially under CENVAT and State VAT

- Continuing blockage of input taxes under GST relating to Petroleum products,


Electricity, Real estate

4.3 What is Toll manufacturing?

- It is an arrangement in which a company which has specialized equipment, processes


the raw material or semi-finished goods of other companies. Such arrangement is
very common in the textile industry

12
4.4 Whether a Toll manufacturer is required to take registration under GST?

- Prima facie, the Toll manufacturer is not required to obtain registration as the
responsibility of discharging the tax on the finished goods lies on the Principal
Manufacturer. However, the toll manufacturer will be required to pay tax on job
charges if it crosses the threshold limit.

4.5 Can a Principal Manufacturer clear the goods from the premises of such Toll
manufacturer?

- Yes, provided the Principal has declared such premises of the Toll manufacturer as
his additional place of business in his registration certificate.

4.6 When is a textile manufacturer/dealer required to take registration?

- Whenever the aggregate turnover of the person exceeds Rs 20 lakhs, (10 Lakhs in
case of North Eastern States), he is required to take registration

4.7 Can a person avail threshold benefit even while supplying his goods out of State?

- No. A person making any inter-State taxable supply will not get the benefit of the
threshold limit of Rs 20 lakhs and will be required to obtain registration from the
beginning and pay IGST.

4.8 Can a person opting for composition levy avail input tax credit?

- A person whose turnover is between Rs 20 lakhs (10 lakhs in case of North Eastern
States) and Rs 50 Lakhs, can opt for composition levy i.e. pay GST @ 1% if trader
and @ 2% if manufacturer of the gross turnover (including exempt supplies),
provided he neither avails input tax credit nor the recipient of the goods will be
eligible for availing the ITC.

4.9 Other than the turnover limit of Rs. 50 lakhs, what other conditions are to be
satisfied to operate under composition levy?

- Such person should not make inter-State supplies, or collect tax from the recipient of
his goods.

4.10 Whether GST is payable while Transfer of goods from one factory to another
factory or Depot situated in the same state? If yes, which tax will be applicable?

- Transfer of goods or stock transfer from one factory to another factory or Depot,
within the same State will not be taxable. However, if such other factory or depot is
having a separate registration as a different vertical, CGST plus SGST will be payable.

4.11 If goods are exported out of India, whether goods can be supplied without
payment of GST?

- Yes, such goods can be supplied for export under Bond, without payment of GST or
alternatively he can export the goods on payment of IGST and thereafter claim refund
of the IGST so paid, subject to the provisions laid therein.

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4.12 In case of retailers/dealers, will ITC be allowed on the excise duty paid on the
capital goods and furniture used in the shop?

- Yes. ITC will be available on such goods on which duty was paid under the earlier
law but are used in relation to furtherance of business, subject to availability of
prescribed duty paying document.

4.13 A gift hamper constituting a shirt, pant, belt, wallet and perfume is made. What
will be the tax in GST when such gift hamper is sold in market?

- Such gift hamper when sold under a single price, it will be covered under mixed
supply and will attract highest GST rate, in case the different items are placed in
different tax rates.

4.14 Can a Textile Dealer having turnover of less than 20 lacs, sell his merchandise
through an online portal, without charging of GST?

- No. GST exemption based on turnover, is not applicable when goods are sold via
the internet i.e. through an E-Commerce operator. Such E-commerce operator
will deduct 2% tax at source (TCS) and pay to the Government, and the textile
Dealer will be required to obtain registration and discharge the balance liability of
GST after adjusting the TCS.
4.15 Whether Fabrics worth Rs. 10,000/- supplied without consideration (free) to the
employees will be liable to GST ?

- Free fabric given to the employees will be considered as Gift from the
employer to the employee and same will not be taxable if total gifts from
employer to employee has not exceeded Rs. 50,000/- annually in a financial year.
Exceeding this value such free fabrics will be taxable at the hands of the
Employer.

4.16 Will Input Tax Credit be available on the stocks lying with the suppliers
against the supply of fabrics post GST?

- Most of the suppliers, traders, dealers were exempted from paying duty on the
textile goods. However, as the textile items will attract GST, during the transition
period, the input tax contained in the stocks lying as inputs, work in progress or
in the finished goods will be allowed as Input Tax Credit, subject to certain
conditions and restrictions as prescribed in the relevant transitional provisions.

4.17 Whether the incentive provided by the Textile Ministry under the Textile Up-
gradation Fund Scheme (TUFS) will be taxable under GST?

- The incentive given by the Textile Ministry under the Technology Up-gradation
Fund Scheme is towards higher capital investments that leads to higher
production volume and create more employment. Such incentive will not be
liable to tax payment as such incentive is not towards any price reduction.
Further, any subsidy provided by the Central and State Government are
specifically excluded from the ambit of consideration for taxation.

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