Planning to buy TV or fridge in exchange offer? GST will make you pay more

Business Standard By Indivjal Dhasmana April 3, 2017. 12:36 IST

CBEC issued draft rules on composition, valuation, transition and input tax credit for comments

Those buying goods at prices lower than prevalent market rates in exchange offers for older items, a practice popular in the consumer durables and electronics sectors, might have to shell out more in the goods and services tax (GST) regime.

For instance, a new phone handset is sold for Rs 20,000 in exchange for an older one. But, the price of the new handset, without the exchange offer, is Rs 24,000. Then, the GST would be levied on the higher amount; at present, value-added tax (VAT) is applicable on the cash component.

Also, traders, dealers and distributors who have transition stock when the GST is rolled out might not get the full refund for central taxes already paid. This is likely to affect dealers of aerated drinks, luxury cars, cigarettes, and pan masala. These goods will be taxed at the peak rate of 28 per cent.

The rules became clear after the Central Board of Excise and Customs (CBEC) on Sunday issued draft rules on composition, valuation, transition and input tax credit for comments.

These were tentatively approved by the GST Council on Friday, and will be taken up at its next meeting on May 18 and 19. The last date for providing feedback is April 10.

The CBEC also issued final rules on invoice, payment, refunds and registration with minor tweaks. The final rule on returns is yet to be issued.

The rules on valuation said the value of the supply of goods or services, where the consideration was not wholly in cash, would typically be at the market value. If the market value was not available, an alternative mechanism has been provided.

“This would impact consumer durables and electronics. At present, VAT is payable only on the cash component,” said Pratik Jain of PwC-India.

Another set of rules on transition provides that dealers, suppliers or traders who have stock at the time of the GST roll-out would get 40 per cent of central GST as the input tax credit.

This would affect those who deal in goods attracting the peak rate of 28 per cent. Though exact fitment of items in the five GST rates — zero, five, 12, 18 and 28 — is yet to be decided, it is clear that “sin” and demerit goods would attract the highest one.

Explaining the rule, Jain said if a dealer traded in goods attracting 18 per cent GST, this meant he would pay nine per cent central GST and nine per cent state GST.

The trader would get an input tax credit at the rate of 40 per cent of 9 per cent (CGST) — or, 3.6 per cent.

So after paying 18 per cent tax, he gets 3.6 per cent, drawing a net tax liability of 14.4 per cent. In the current taxation regime also, he pays 12.5-14 per cent VAT. So, the new tax liability would be close to the current one.

For dealers in goods that will attract the highest rate of 28 per cent tax, however, there would be a considerable hike. In the GST regime, they would get input tax credit of 40 per cent of 14 per cent — or, 5.6 per cent. So, his net tax liability would be 22.4 per cent. “This is much higher than the current 12.5-14 per cent,” said Jain. “There is a need to reconsider this; at least for a few segments.”

There is also the issue of treatment of inter-company transfers between states for the purpose of taxation. It is mentioned that declared invoice value would be accepted by the authorities concerned. It should put at rest all apprehensions, but it is not clear whether or not the authorities would accept any invoice value, or whether the companies concerned would need to follow the cost-plus method for this.

Experts said it was important that stock transfers were not valued at market rates as this could lead to blocking of credit at the receiving locations.

Rajat Mohan, director, indirect taxation, Nangia & Co, said there was an indication that insurance companies, banks, and telecom operators would get some relief in case of self-supplies, as they can issue invoices on a quarterly basis.

Rules on valuation also provide clarity on second hand sale of goods, booking of tickets for travel by air, or insurance premium.

While principles for taxation on airlines and the insurance sector is similar to existing service tax laws, specific provision for valuation of trading in second-hand goods provide much needed clarity for industry, particularly for used car sales.

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