Previously, I wrote a brief introduction to the new Goods and Services Tax (“GST”). As a Chartered Accountant, I have received many questions about this tax and I am going to answer some of the most common ones here.
How does the concept of matching of invoices work under GST?
The entire law of GST works on the premise that “input tax credit” would be available across the entire value chain. Take the example of a manufacturer using a good or service (let’s call it A) for the manufacture of a product B. The manufacturer has to pay GST on purchase of A. The manufacturer also has to collect GST on sale of product B. The manufacturer can adjust the taxes paid at the time of purchase of A with the tax on sale of B and balance the liability owed to the government.
“Invoice matching” is a mechanism under which all the taxable supplies made under GST will be matched against all the taxable supplies received by the buyer. This credit on the purchase of goods or services will only be available if the details of inward supply filed in the GSTR-2 return of the buyer matches the details of outward supply filed in the GSTR-1 return of the supplier. This interlinking has been done by automatically populating the the GSTR-2 return of the buyer with the data filed in the GSTR-1 return of the supplier. In case there is a mismatch in the invoices, it can be rectified in the return filed for the subsequent month. For instance, a mismatch that is identified in the returns filed for the month of September 2017 will have to be adjusted in the return that is to be filed for the month of November 2017.
Unless this matching reconciles, the buyer will not be able to claim input tax credit on taxes paid on purchase of input goods or services or both. It is critical that businesses are highly compliant under the GST regime. Though there are no specific rules that have been prescribed as yet, the GST law contemplates giving a “compliance rating” to every tax payer. This rating would depend on how a particular taxpayer has complied with the GST laws and rules.
Practically, businesses can ensure that their high-value invoices every month are matched by corresponding with the supplier. This would ensure that their working capital is not blocked due to denial of input tax credit.
We have heard that GST has to be paid on “reverse charge” on all expenses. What does that mean?
“Reverse charge” is a system where the receiver of a good or service pays the tax, whereas normally, it is the supplier who pays the tax. Section 9(4) of the Central Goods and Services Act, 2017 (“the CGST Act”) states that the central tax on the supply of taxable goods or services by an “unregistered supplier” to a “registered person” shall be paid by the recipient on “reverse charge” basis. All the provisions of the CGST Act shall also apply to these recipients as if they are liable for paying the tax in relation to the supply of such goods or services or both.
This means that if a person with a GSTIN number purchases goods or services from a person without a GSTIN number, the purchaser would need to pay tax at the rate applicable for those goods or services.
To answer some questions that arose from this provision, the Ministry of Finance issued Notification No. 8/2017 – Central Tax on June 28, 2017. It exempted the intra-state supply of goods or services received by a registered person from any supplier who is not registered, from the whole of the central tax liability that would otherwise have arisen under Sub-section (4) of Section 9 of the CGST Act. A proviso added that this exemption shall not be applicable where the aggregate value of such supplies of goods or services or both received by a registered person from any or all the suppliers, who is or are not registered, exceeds Rs 5,000 in a day.
Hence, in case a registered person purchases goods or receives services from an unregistered person, the registered person would have to pay tax on “reverse charge”. The recipient can claim credit on these taxes. However, the payment on reverse charge would not be applicable to goods and services that are exempt from GST. For instance, services rendered by an employee to an employer are exempt from GST. Consequently, the employer would not be obliged to pay tax on reverse charge.
My company is located in a SEZ zone. Is GST applicable to my company? Do the suppliers who supply goods and services to me have to charge me GST?
Notification No 18/2017- Integrated Tax (Rate) exempts all services imported by SEZ units from the levy of IGST.
Under Section 8(1) of the Integrated Goods and Services Tax Act, 2017 (“IGST Act”), the supply of goods where the location of the supplier and the place of supply of goods are in the same state or the same Union territory, have to be treated as “intra-state supply”. But the supply of goods to or by a Special Economic Zone developer or a Special Economic Zone unit are not to be treated as “intra-state supply”. It would be treated as “inter-state supply” and GST would apply.
Under the GST laws, units located in software export processing (“SEZ”) zones have two options –
(1) Charge Integrated GST (IGST) on their invoices and claim a refund of all the GST they pay on their inputs of goods and services, or
(2) Not charge GST on their invoices and claim an exemption either by providing a letter of undertaking or executing a bond. Notification No. 16/2017 – Central Tax lists those who are eligible for submission of a letter of undertaking in place of a bond. Everyone else has to execute a bond for the payment of GST. Executing a bond would involve taking a bank guarantee to the extent of 15% of the IGST payable.
I’ll answer a few more questions soon.
Mohan Lavi is a Chartered Accountant with over 28 years of post-qualification experience. He is a partner with K.P Rao & Co, Chartered Accountants, Bengaluru and heads their IFRS and GST practices.
Featured image: The President (as he then was), Pranab Mukherjee, the Vice President (as he then was), M. Hamid Ansari, the Prime Minister, Narendra Modi and other dignitaries at the ceremony to launch the GST, in the Central Hall of Parliament, on June 30, 2017. Source: PIB