GST on transfers between related persons : Scope for Tax Planning

In the era of decentralisation, nearly every business operates with subsidiaries, associates and branches across the cities, states and countries. Decentralisation and collaboration has helped business to grow multifold and has assisted in optimising the efficiency of the processes. Along with this, businesses need to maintain separate books of accounts, GST registration and make separate profitability analysis for subsidiaries and associates. With an increasing chunk of transaction branch level book-keeping and separate GST registrations have become a business need.

The business needs many a times demand a transfer of assets between related parties, whether they are tangible or intangible, whether they are capital assets or inventories. Goods and Services tax is a transaction based tax applicable on supply of goods or services and such supply includes transfer. Therefore GST is applicable whenever any goods or services are transferred from one related party to another. Examples could be branch transfers, transfer of assets to subsidiaries etc.

In this article we will try to highlight some less known points on GST implications of transfers of fixed assets (also identified as capital assets) between related persons. We will try to ponder upon the ambiguous concepts of value of supply, tax planning and transfer of cash ledger balances among related persons.

Meaning of Related Persons

Definition of related persons as given in explanation to the section 15 of CGST Act is very wides and considers the following persons as related to the person in consideration –

1. such persons are officers or directors of one another’s businesses;
2. such persons are legally recognised partners in business;
3. such persons are employer and employee;
4. any person directly or indirectly owns, controls or holds twenty-five per cent or more of the outstanding voting stock or shares of both of them;
5. one of them directly or indirectly controls the other;
6. both of them are directly or indirectly controlled by a third person;
7. together they directly or indirectly control a third person; or
8. they are members of the same family

Also, it is mentioned that the term person includes legal person and sole agents and sole distributors shall also be considered as related persons.

Therefore, holdings, subsidiaries, co-subsidiaries, branches having separate registration will all be covered under the definition of related persons.

GST chargeability on transactions with related persons

GST is chargeable on supply of goods or services or both for consideration and in the course and furtherance of business as discussed in section 7 of the CGST Act, 2017 and it includes transfer.

Further, as per schedule 1 of the Act, transfer of goods or services to distinct persons shall be considered as supply even when it is made without any consideration. Distinct person in a very general sense means GST registrations under one legal entity (same PAN). Therefore, goods transferred to branches as a token of bonus and appreciation without charging any amount from the branches shall be considered as supply of goods and therefore would be taxable under GST, where branches have obtained different GST registrations.

Value of supply on transactions with related persons

The amount of GST is determined on the basis of rate specified by the notifications issued by CBIC and the rate is applied on the taxable value of supplies determined in accordance with the GST Act. In the GST law there is a special mention of the value of supply made to related persons. Rule 28 provides that the value of the supply of goods or services or both between distinct persons or where the supplier and recipient are related, other than where the supply is made through an agent, shall-

A. be the open market value of such supply;

B. if the open market value is not available, be the value of supply of goods or services of like kind and quality;

Provided that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety per cent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person:

Provided further that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services.

The reasonable conclusion on value of supply based on the above rule could be that open market value shall be charged by the related person who is transferring the goods or providing the services on the invoice.

However, the 2nd proviso to rule 28 provides that in case recipient is eligible for full ITC, any value can be declared by the supplier and that would be considered as the open market value.

Hence it can be concluded that in most cases where full ITC is available to the recipient that is the transferee, any amount could be charged by the supplier. This proviso makes good sense and can be used for tax planning as discussed further in this article.

However, for the goods on which ITC is not available like cars(not used for trading), usable items for personal consumption like T-shirts and other goodies for employees, open market value shall be charged basis the fair valuation of the goods.

Mostly the capital assets which are transferred from one branch to another would be movable and thus except certain assets ITC would be available based on the nature of the business.

Tax Planning on inter branch transfer of assets

The freedom offered by the rule 28 in case there is a transfer of asset from one related or distinct person to another where ITC is available in full to the transferee can be used as a tool for tax planning with being legally correct at the same time.

Let us take one illustration to understand this concept –

Let us take a situation where an entity named ABC enterprises operates with 2 branches in India, one in Delhi and other in Mumbai having different GST registration. Therefore, the two branches are distinct persons under the GST law. Let us assume that in the Delhi branch of the entity there is an accumulated ITC of INR 2 crores on account of luxurious furniture and monitors installed by it in the office premises and which it is unable to utilise the since months as the average difference of GST on outward and inward supplies each month comes out to INR 1 lakh.

On the other hand , the Mumbai branch has on an average GST payable amounting to INR 5 lakhs each month as it has good margin on products and no accumulated ITC is there.

In the very practical case as mentioned above, rule 28 can be used to provide an effective solution so that there is less accumulation of credit at Delhi location and more utilisable credit at Mumbai location. As rule 28 states that in case full ITC is eligible to the recipient any invoice value declared by the supplier can be considered as value of supply (open market value), it gives a freedom to Delhi location to transfer at any hypothetical amount any single monitor or a cell phone or any other asset on which the company can claim full ITC to the Mumbai location and thus charging GST on it. Now let us suppose a monitor having scrap value as zero is transferred and transported from Delhi location to Mumbai location by ABC Enterprises at INR 1 Crores, on which GST @18% is INR 18 lakhs and thus out of INR 2 Crores, INR 18 lakhs of credit accumulated with the Delhi location can be used for payment of liability towards the supply to Mumbai branch and further Mumbai branch will be able to utilise the ITC of INR 18 lakhs.

The above way of transferring the ITC from one related entity to another is also justifiable to the government as it is within the ambit of law and also no loss accrues to the government in the instant case because of the fact that the accumulated credit is always the asset of the registered person and transferring the GST asset from one location to another cannot be termed as any undue benefit taken.

This method of transfer of ITC from one location to another can also be used by charging for managerial services provided by one branch to another, however such charging is subject to justification that actual services are provided.

Atlast, it could be concluded that the method of ITC transfer among branches mentioned in the above paras could be considered as a full proof option by the organisations who have analysed their position of credit ledger and its utilisation pattern. Department disputes are also not majorly seen in such cases and if in case department disputes such valuation of transfers, the same can be strongly defended based on prescribed rules.