GST (Goods & service tax) was introduced in India on 1st July 2017 and has been a major tax reform implemented in the field of Indirect Taxation. It has subsumed 17 indirect taxes of both central and state level. GST is considered as tax reform because it has ended the prevailing cascading effects of the taxation which was one of the main reasons of the unnecessary inflation and bring in seamless flow of credit. The objective of GST is to entitle every registered dealer to avail input tax credit which is charged on supply of goods or services or both, used or intended to be used in business. The GST is basically divided into 3 categories: – CGST (Central Goods & Service Tax), SGST (State Goods & Service Tax) and IGST (Integrated Goods & Service Tax). When the sales is made intra state, CGST & SGST is applicable and when the sales is made interstate, IGST is applicable.
What is a taxable entity according to GST?
Any entity or organisation whose total turnover exceeds Rs 20 Lakh threshold limit in a year (10 lakh in case of north eastern states), is liable to get registered under GST and is required to file various returns on monthly and quarterly basis, as applicable. If the supplier is engaged only in the supply of goods, the threshold limit is Rs 40 lakhs instead of 20 lakhs. So, it can be said that a person or entity is not required to get registered under GST if his total sales/turnover is less than Rs 20 lakhs/ 40 lakhs, as applicable.
Compulsory Registration in GST
For certain businesses, GST registration is mandatory. If the entity carries on business without taking GST registration in such cases, it is considered as an offence and heavy penalties will apply on the taxpayer in such cases. Following taxpayers are required to get registered under GST irrespective of their turnover:
- Casual taxable person/ Non-Resident taxable person
- Agent of a supplier & Input service distributor
- Taxpayers paying tax under reverse charge mechanism
- Taxpayers who supply their goods through e-commerce operator
- Every e-commerce operator
Impact on sales and marketing
The basic rules is that as per GST law, the input tax credit on goods stolen, destroyed, written off or disposed of by way of gifts or free sample is not allowed. Since no credit is available on above, pharma, FMCG (fast moving consumer goods) and other companies are today reversing the credit in relation to free samples provided. In today’s world, almost every company in its business operations is engaged in incurring various marketing and distribution expenses. All these expenses are incurred by companies to promote their brands and products and enhance their sales. The companies distribute different products as promotional items such as key chains, pens, notepad, etc with their name written on it. Similarly, various companies offer sales promotion schemes such as watches, trips, etc. to the distributors to increase the sales volume.
The uncertainty in above cases revolves around the argument that whether such sales and promotional expenses can be termed as an expense in the furtherance of business and the input tax credit of the same shall be allowed or the said expenses will be considered as gift/free samples and the credit on the same be denied. The recent advance rulings in this regard are in favour of revenue stating that the brand reminders and goods given to distributors for achieving sales targets as a part of sales promotional and marketing activities as not eligible. The ITC on goods or services or both, procured for giving as incentive to the dealers shall not be available considering the same as gift/free samples.
The above advance rulings have ignored the fact that these sales-linked schemes are purely enhancing the business of the entity. The fact that goods provided as incentive is consideration for fulfilment of contractual obligation of achieving the given target is completely ignored. The same view has been taken by CBIC (Central Board of Direct Taxes) and circular has been issued in this regard.
In the view of above rulings and circulars issued, some companies have reduced distribution of goods as gifts or free samples which was a very important part of sales and marketing strategy for them because of the loss of input on the same. Let us understand with the help of an example: A company is engaged in pharma business and distributes medicines as free samples worth Rs 5 lakhs. The GST rate applicable is 18%. This means that the input tax credit of Rs 90,000/- which was earlier allowable is not reversed and is a loss for the company. There was no restriction on availment of credit on such schemes.
Mixed Supply and Composite Supply
There is a specific rate for goods and services defined by the GST council depending on the type of goods or services. So, it is easy to identify the rate of goods or services provided. However, sometimes the supply is of such a nature that two or more goods/services, naturally bundled in with each other in the ordinary course of business, one of which is a principal supply. It is known as composite supply. It means that items are generally sold as a combination and in such a scenario the rate of service, which is a principal supply, shall be applicable on the whole composite supply. For example: Goods are packed and transported with insurance. The supply of goods, packing material, insurance and transport is a composite supply. In this case supply of goods is a principal supply as transportation and insurance can not be done without supply of goods. However if such goods/services are not naturally provided together in a normal course of business, it is known as mixed supply and in such scenario, the goods and services will be taxed at the rate of tax which is taxed at highest rate among those goods/services.
Other Important issues
There is no doubt that GST has created a lot of issues in the recent period. Many industries are affected on a large scale. Although, the government is equally trying to increase compliance in order to provide relief to the companies.
All the taxpayers registered under GST must ensure compliance of some very common issues faced in GST regime such as the sellers must ensure that the purchaser is registered within the GST or not, as it will impact the overall Input Tax Credit of the business.
Secondly, the reverse charge mechanism must also be ensured that there is no reverse charge liability on the taxpayer in the transactions made and in case there is any liability of such nature, the same has been correctly dealt with.