Ee UA (2017] 1 GSTPT (IA) 43 FG6T: impact on Working Capital WiAvealutel CA Rajesh Saluja* Reading the Model GST Law, one gets an impression that many of the sections are either exact replicas or carry an impression of the existing laws which would be replaced by GST, but there are many provisions which are new and would impact the way business is currently conducted. Some of the GST provisions would directly impact the working capital requirement of many businesses. A point-wise analysis is given in this article. Stock Transfers - Now They are Taxable 1. Clause (a) of sub-section (1) of section 3 of the Model GST Law (‘MGL’) defines ‘supply’ to include — (a) all forms of supply of goods and/or services such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business, (b) importation of services, for a consideration whether or not in the course or furtherance of business, and (c) a supply specified in Schedule I, made or agreed to be made without a consideration L.1 Section 23 mandates every person, who is liable to be registered under Schedule V of the MGL, to apply for registration in every State in which he is so liable. 1.2 Sub-section (1) of section 10 of the MGL defines ‘taxable person’ as a person who is registered or liable to be registered under Schedule V. Sub- section (2) states that a person who has obtained or is required to obtain more than one registration, whether in one State or more than one State, shall, in respect of each such registration, be treated as distinct person for the purposes of the Act. Sub-scction (3) an establishment of a person who has obtained or is required to obtain registration in a State, and any of his other establishments in * You can reach the author at rajeshsaluja9@yahoo.com 37 PART GSTPT ~ APR 2017another State shall be treated as establishments of distinct persons for the purposes of this Act. Interpretation 1.3 The clause (a) of sub-section (1) of section 3 is a departure from the existing laws, in the sense that existing laws talk about sale from “one person to another” and the above clause only mentions “by one person”. It implies that now even sale/transfer of goods and services to self could be considered a supply. Section 10, identifies separate registrations taken in different States by one person/entity as distinct persons, 1.3.1 Based on above Explanation, it can be said that in the GST regime, the transactions like stock transfers from one branch in one State to another branch of the same entity in another State would be treated as taxable supply. This would mean that even for stock transfers/branch transfers, GST would be charged and paid. Even though the tax so paid by the receiving entity would be treated as input credit in its return, the recovery/adjustment of this tax credit would depend upon the subsequent sale of the stock so transferred. Till the time the stock so transferred is sold, money would stay invested in the system, which means that the working capital needs of such registered taxable person(s) would increase. In the case of entities whose sale is seasonal, but the stock is transferred to them much before the sale season starts, would be the one suffering maximum working capital impact. 1.3.2 Now stock transfers would be done considering the following : @ Minimum quantity to be transferred @ Minimise carry forward of input credit to succeeding month(s) Sales strategy to match stock transfers Tt may be noted that due to above mentioned challenges and the fact that under the GST regime input tax credit would seamlessly flow for inter-State transactions, the very existence of sale depots in different States would be challenged. It is possible that many of such sales depots may be closed because of their unviability in the GST regime. : Advance Paid for Goods and Services - Now GST is Payable 2. Section 12 of the MGL deals with time of supply of goods as follows : (J) The liability 10 pay CGST/SGST on the goods shall arise at the time of supply as determined in terms of the provisions of this section. GSTPT ~ Vol. 1he Sa (2) The time of supply of goods shall be the 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 with respect to the supply ; or (b) the date on which the supplier receives the payment with respect to the supply. 2.1 Sub-section (2) of section 16 of MGL deals with input tax credit and states as under : “(2) Notwithstanding anything contained in this section, but subject to the provisions of section 36, no registered taxable person shall be entitled to the credit of any input tax in respect of any supply of goods and/or services to him unless, — (a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other taxpaying document(s) as may be prescribed ; (b) he has received the goods and/or services ; (c) the tax charged in respect of such supply has been actually paid to the account of the appropriate Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply ; and (d) he has furnished the return under section 34 : Provided that where the goods against an invoice are received in lots or instalments, the registered taxable person shall be entitled to take credit upon receipt of the last lot or instalment : Provided further that where a recipient fails to pay to the supplier of services, the amount towards the value of supply of services along with tax payable thereon within a period of three months from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in the manner as may be prescribed. Interpretation 2.2 In terms of section 12 and section 13 of the MGL, time of supply of goods or services shall be earliest of — (i) a date of issue of invoice or GSTPT - APR 2017ACURA bent Asessna | (ii) receipt of payment. Thus, in situations where the recipient of goods/services makes an advance payment as per payment terms to the supplier, the tax is liable to be paid on such advance payment, Similarly, the service provider should remit the applicable taxes on such advances in the month in which the money is received even where the services are not supplied/provided. 2.2.1 Now given the fact that GST is to be charged on all advances paid for purchase of goods and services, but till the time the goods/services are received, the buyer/receiver cannot claim the input tax credit [section 16(2(4)], it would result in money being blocked till the time goods/services are actually received by the buyer/receiver, 2.2.2 Another important issue which needs to be addressed while preparing procurement/sale agreements in the GST regime is to fix the liability of payment of GST on advances. Until the liability to pay GST on advance payments is fixed in the agreement, it could lead to disputes, as the GST payments on advances would have a major impact on working capital of either party. 2.2.3 The first proviso to sub-section (2) of section 16 mentions that where against an invoice goods are received in lots, the input credit would be available upon receipt of last lot. This again could lead to blocked working capital in terms of GST paid. Therefore, going forward due care should be taken so that separate invoices are raised/received for multiple supplies (lots). Multiple Registrations for Service Providers upon Abolition of Centralised Registration 3. Section 10 of the MGL has stated that all registrations of a taxable person in different States would be considered as distinct entities for the purpose of GST. Also, the concept of centralised registration, as it currently exists under the Service Tax Act, has not been carried over in the MGL. Therefore, all those who have taken centralised registration under service tax, would now be required to take separate registrations in every State they operate from. This would result in manifold increase in cost of running and maintaining multiple branches, which in turn would impact the working capital. As a result, entities like banks, insurance companies and all service sector industries that have multiple branches all across taxable territory of India but are operating under centralised registration, have to bear a huge working capital impact due to this change. It may be noted that the GST council has received many recommendations from various stakeholders requesting them for allowing centralised registration, at least for service sector, GSTPT ~ Vol. 1bc on tome com noe, Monthly Return and Payment of Tax 4, As per sections 32, 33 and 34 of the MGL, now every registered taxable person is required to file monthly returns, which in turn require payment of monthly tax and in all those cases where the requirement is to deposit quarterly tax under previous indirect tax regime, it would impact working capital requirement. Conclusion 5. From the foregoing discussion it can be said that while appreciating the benefits of GST, one must not forget the financial challenges it would bring along. It is important that every organisation does a GST impact study to measure the impact on all major business functions and prepare a robust strategy to optimise business in the GST regime.