India is on the verge of GST, a unified tax regime for indirect taxes. This is perhaps the biggest tax reform in the regime of indirect taxes as it succeeds a number of indirect taxes that are applicable under the current regime. GST has introduced us to the idea of the seamless flow of input tax credit in the process of the supply chain; right from the point of manufacturing till the time it reaches the final consumer and across multiple state borders. In addition to this, emphasis needs to be laid on the fact that supply of goods is a taxable event under GST, the sheer idea of manufacture and trade across varied borders becomes irrelevant.
There is no denying the fact that the term supply comprises of transfer of goods from one place to another. The taxes applicable for some specific supplies of goods and services implies that stock transfer under the filing of GST return is taxable. It becomes all the more vital for business entities to understand its implication.
Let us discuss in detail about the impact of GST on stock transfers for various business enterprises.
Taxes applicable on stock transfers
Under the current regime that includes Central Excise, a registered manufacturer transferring a stock of excisable goods, needs to pay an excise duty 10% over and above the cost of production and under VAT, it is applicable only after furnishing Form F. However, input VAT on purchase of goods need to be reversed at a certain percentage that actually varies from one state to another.
Under the GST regime, taxes are levied on the supply that includes transfers and with a definition of a distinct individual, branches need to be considered altogether as a separate entity. Accordingly, any stock transfers are classified under the following two cases:
Intrastate stock transfer
This situation is generally applicable only when a business entity has more than a single registration in one state
Inter-state stock transfer
This scenario is generally applicable when there is a transfer among two entities that are located in different state geographical boundaries is taxable.
The taxability of stock transfers under the GST exemption is bound to have an impact on the cash-flow. This is primarily because of the fact that tax is levied on the date of stock transfer, and it is used in an effective manner once the stock is liquidated by the branch that receives the consignment. Thus, under the GST regime, business entities that are engaged in stock transfers, especially the ones in case of pharmaceutical and FMCG goods, the need for additional working capital will arise due to tax instances. This is a huge challenge for various small and medium business enterprises that are operating with a relatively thin working capital.
In the case of a seasonal business in which production happens throughout the course of a year, but the sale is finalised only during a particular season. In such a scenario, funds might get intertwined for a long duration of time. This is because of the fact that business entities need to fulfill their GST needs in the very month, the branch transfers are done, but credit would be utilized in an effective manner in the month in which the sale culminates.
Evaluating the need for branches
In the present scenario, in order to leverage tax benefits, many business conglomerates have a number of well-established branches solely out of statutory needs. This will be an enabler of business houses to do billing activities with local VAT that will play a role in getting a credit for the buyers. It is also important to note that stock transfers are not taxable and the sheer volume of branch transfers is very high.
Business entities are no longer required to open multiple branches across various states as GST exemption up to a certain extent will bring about a seamless flow of input tax credit across various state borders. They may have to rethink the strategy solely from the point of view of business operations. An effective planning of branches would be instrumental in scaling down the number of branches, thereby reducing the volume of branch transfer.
Despite the fact that stock transfers are taxable in times of GST return, it is allowed to have the whole tax as credit. This will be useful in the elimination of the cascading effect that exists under the current tax regime. This surely results in making the products more cost-effective. Even though this will create a crunch in working capital, effective planning of branches and leveraging cross-branch transfers can certainly help in reducing its impact on the working capital.