All about Stock Transfer in GST

TAXABILITY OF STOCK TRANSFER

Under existing VAT/CST Laws, practically every company that makes inter-state stock transfers, does so under Form F and thus, no tax liability arises. In case of intra-state stock transfer, as such no VAT liability arises. However, assessee is required to reverse input tax credit on purchases if such goods are stock transferred.

In GST, every taxability is based upon supply concept. Does that mean Stock Transfers are taxable in GST? Let's find out.

Since the point of taxation in GST is supply, it is important to understand what constitutes supply, which is explained in section 7 of the CGST Act, 2017. 

Section 7 states that:

(1) For the purposes of this Act, the expression “supply” includes–– 

(a) all forms of supply of goods or services or both 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) import of services for a consideration whether or not in the course or furtherance of business;

 (c) the activities specified in Schedule I, made or agreed to be made without a consideration; and 

(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.

Schedule I narrates the situation where activities are to treated as supply even without . They are:

1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets. 

2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business

Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.

 3. Supply of goods— 

(a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or

(b) by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal. 

4. Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business

Thus, Schedule I states that only when supply is made between two related or distinct persons, that would constitute a taxable supply otherwise not. 

"Related Person" is defined explanation to section 15 as:

a persons shall be deemed to be “related persons” if––

 (i) such persons are officers or directors of one another’s businesses;

 (ii) such persons are legally recognised partners in business; 

(iii) such persons are employer and employee; 

(iv) 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; 

(v) one of them directly or indirectly controls the other; 

(vi) both of them are directly or indirectly controlled by a third person; 

(vii) together they directly or indirectly control a third person; or (viii) they are members of the same family;

"Distinct Person" is defined in sub section 4 of section 25 as:

A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.

Thus, a harmonious reading of all the sections together would lead us to derive the following conclusions:

• A branch operating in different state would be treated as a "distinct person".
• If a person has two separate registration within the same state (as per section 25 of CGST Act read with registration rules), both the registration would constitute a "distinct person".
• If a person has an "additional place of business" within the same state, under one registration only, that would not constitute as "distinct person".
• Only a transfer between two distinct person constitute a supply and hence taxability would arise.
• Both intra-state and inter-state transfer constitute supply.
• Inter - state transfer is  always taxable as separate registration is required in each state.
• Intra - State transfer is taxable only when the person is transferring to an establishment having a different registration. If the intra- state transfer has been made to an additional place of business, warehouse, godown or depot, having same registration as of the supplier, such transfer is not taxable

VALUATION OF STOCK TRANSFER

Rules for valuation in case of stock transfer has been provided in  rule 2, 4 and 5 of valuation rules (dated 17/05/2017). They are as follows:

 Rule 2: Value of supply of goods or services or both between distinct or related persons, other than through an agent  

The value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 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 open market value is not available, be the value of supply of goods or services of like kind and quality; 

(c) if value is not determinable under clause (a) or (b), be the value as determined by application of rule 4 or rule 5, in that order 

Provided that where 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 percent (90%) 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 goods or services

It Implies that:

• Value of taxable inter-state branch transfer would be calculated using this rule. 
• If the branch makes further sale of goods,without any addition or modification to the received goods, the value of stock transfer would be 90% of the value of goods at which they are sold to unrelated customers. However, it is at the option of the supplier.

Rule 4: Value of supply of goods or services or both based on cost   

Where the value of a supply of goods or services or both is not determinable by any of the preceding rules, the value shall be one hundred and ten percent of the cost of production or manufacture or cost of acquisition of such goods or cost of provision of such services. 

• The above rule is same as provided under the existing Excise Laws.

Rule 5: Residual method for determination of value of supply of goods or services or both    

Where the value of supply of goods or services or both cannot be determined under rules 1 to 4, the same shall be determined using reasonable means consistent with the principles and general provisions of section 15 and these rules

Provided that in case of supply of services, the supplier may opt for this rule, disregarding rule 4. 

INVOICE/CHALLAN FOR STOCK TRANSFER

• For inter - state transfer of goods and intra state transfer of goods between distinct persons, invoice has to be issued. Please refer to invoice rules for further details.
• For intra - state transfer of goods, to a warehouse or depot or branch of the same person, rule 10 of the invoice rules provide generation of delivery challan. 

Rule 10 of Invoice Rules: Transportation of goods without issue of invoice   

(1) For the purposes of :

(a) supply of liquid gas where the quantity at the time of removal from the place  of business of the supplier is not known,  

(b) transportation of goods for job work,  

(c) transportation of goods for reasons other than by way of supply, or   

(d) such other supplies as may be notified by the Board,  

the consigner may issue a delivery challan, serially numbered not exceeding sixteen characters, in one or multiple series, in lieu of invoice at the time of removal of goods for transportation, containing the following details:   

(i) date and number of the delivery challan,  

(ii) name, address and GSTIN of the consigner, if registered,  

(iii) name, address and GSTIN or UIN of the consignee, if registered, 

(iv) HSN code and description of goods,  (v) quantity (provisional, where the exact quantity being supplied is not known),  

(vi) taxable value,  

(vii) tax rate and tax amount – central tax, State tax, integrated tax, Union territory tax or cess, where the transportation is for supply to the consignee,  

(viii)  place of supply, in case of inter-State movement, and  

(ix)  signature.  

(2) The delivery challan shall be prepared in triplicate, in case of supply of goods, in the following manner:–  

 

(a) the original copy being marked as ORIGINAL FOR CONSIGNEE; 

(b)  the duplicate copy being marked as DUPLICATE FOR TRANSPORTER; and  

(c)  the triplicate copy being marked as TRIPLICATE FOR CONSIGNOR.  

(3) Where goods are being transported on a delivery challan in lieu of invoice, the same shall be declared in FORM [WAYBILL].  

(4) Where the goods being transported are for the purpose of supply to the recipient but the tax invoice could not be issued at the time of removal of goods for the purpose of supply, the supplier shall issue a tax invoice after delivery of goods.   

(5) Where the goods are being transported in a semi knocked down or completely knocked down  condition,  

(a) the supplier shall issue the complete invoice before dispatch of the first consignment;  

(b) the supplier shall issue a delivery challan for each of the subsequent consignments, giving reference of the invoice; 

 (c) each consignment shall be accompanied by copies of the corresponding delivery challan along with a duly certified copy of the invoice; and  

(d) the original copy of the invoice shall be sent along with the last consignment.   

I have tried to catch all the rules related to treatment of stock transfer, either to branch, depot, godown or warehouse both inter-state and intra-state in my blog. However, please feel free to point me out if I have missed out anything and also shoot any question which may come up in your mind. 

THANK YOU