The Goods and Services Tax (GST) would be a remarkable step in the indirect taxation reform of India. Subsuming several Central and State taxes into a single tax, GST will lead to easier administration and enforcement of taxes. On the consumer front, the biggest advantage would be in the terms of a reduction in the overall tax burden on goods, which is currently estimated at 25%-30%, and seamless flow of input tax credit across the supply chain.
The term ‘supply’ under GST is a taxable event, and it includes transfers of good. According to this new law of taxation, stock transfer under GST, from one state to another will be taxable.
Currently there is Excise Duty for manufacture, Sales tax for Sales, Service tax for services and so on. While under GST there will only be a single tax reform, and all stock transfers with or without consideration will be taxable. This will help for seamless flow of input tax credit across the business across in India. In this post, we will explain how the stock transferring in GST will have an impact on small and medium businesses:-
Stock Transfer under Central Excise and VAT
As per existing Central Excise, a registered manufacturer should pay excise duty on the transaction value for stock transfer i.e. excise duty on 110% (100% + 10%) of cost of production. As per existing VAT laws, on furnishing Form F, stock transfers are not taxable. However, input VAT on purchase of goods should be reversed at certain percentage which differs from state to state.
Stock Transfer under Proposed GST
Under GST, all locations of a business that deal with supply of goods will be liable to pay tax. Hence, GST registration of each business unit will be mandatory. Tax Levy on each business unit will depend on the Supply which includes transfers in between two or more branches.
Intra State stock transfer
When an entity has more than one location of business within the same state, for supply of services and/or goods, such business needs to register under that state. Any stock transfer between these locations will be treated as Intra State Stock transfer.
Inter State Stock transfer
When an entity has more than one location of business for supply of goods and/or services in more than one state, they need to register under the respective state. Any transfer of stock between these locations will be treated as Inter State Stock Transfer. Transfer of stock between two business entities located in different states is taxable.
Stock Transfer and Impact on Working Capital
As mentioned earlier, all stock transfer from one state to another will be taxable. The tax levied will be considering the cost of production plus profit. When the stock is transferred from the manufacturing business unit to the point of sale business unit, the former business unit will pay tax on transferring the stock, but can utilize the credit against the output liabilities only at the time the stock is sold. This time gap in between the stock transfer and sale of stock will have a huge impact on the cash flow i.e. working capital.
Declaration under Stock Transfer
Unlike VAT, GST has no forms of declaration foravailing the exemption on stock transfer. The receiving branch has to issue Form F to the source branch which sends the goods. This has to be produced to the assessing authority to prove that the goods sent to another branch are not for sale.
Understanding the impact of cross branch transfer
Many-a-time due to high demand of goods, or inventory available in abundance, a branch may choose to transfer stock to multiple business units. While in today’s tax system theses transfers are exempted from tax. However, under GST India, each transfer will be levied with tax, causing huge impact on cash flow at each branch. It is advisable to avoid such situations, and transfer goods directly from the primary warehouse or branch.
In conclusion, businesses with multiple branches should consider the below mentioned points to be GST ready with respect to stock transfer:-
- Based on the exact requirement manufacturing business units should transfer stock to the respective location.
- The Point of Sale business unit needs to engage into selling goods soon after they are transferred, so the input credit is a quick and seamless procedure.
- If the goods can be sold quickly after transfer, then it will be good else this will lead to blocking of working capital.
- Business can transfer the goods to the branches with high demand for sales. This way goods will be liquidated quickly and there will be lesser impact on the working capital needs of the business.
- Effective planning of stock transfer and use of working capital is required in each business as their practice.