GST provision may lead to closure of branches & formation of shell firms

Deficiency in GST law to make firms transfer goods to branches outside state to pay interstate GST

The introduction of the goods and services tax (GST) in July will pose a challenge for the enforcement authorities due to a provision in the GST law that mandates companies transferring goods to a branch outside the state to pay the interstate goods and services tax (IGST). However, if the same company sells goods to customers on approval basis outside the state, it gets six months to pay the IGST.

Surendra Mehta, secretary, Indian Bullion and Jewellers Association (IBJA), said: “This provision will lead to branches closing down, and start shell companies at branch locations to defer the payment.”

Customers in India and their advisors look for ways to find loopholes to reduce, delay, or avoid tax payments. Jewellery, textiles, and other industries in which the tax burden is likely to be higher than the ones prevailing now, or those in the chain not paying tax currently will come in the tax net once the GST comes into force. In all these industries unorganised trade and the grey market had always operated.

Many jewellers are growing beyond state boundaries and opening shops across the country while in textiles the grey market is huge and there is no excise on fabric now. The provision of tax on transferring goods to branches outside the state and sale outside state in approval bases could cause compliance issues.

Rahul Mehta, chairman, Indian Clothing Manufacturers Association, said: “The Indian evil genius usually succeeds over government policies and regulations. Under the GST, a single trail found in a chain will be noticed and hence it will not be easy to skip tax sleuths eyes.”

Asher O, managing director (Indian Operations), Malabar Group said, “For companies doing business on a pan-Indian basis, under the model GST law, the matter of concern would be the valuation of stocks being transferred and the availing of input tax credit. The taxability of stock transfers under GST will exert a considerable impact on the cash flow, due to the fact that the tax will be paid on the date of stock transfer and input tax credit will be effectively used when stocks will be liquidated by the receiving branch. Hence, under the GST, for businesses engaged in stock transfers, particularly the jewellery industry, tax instances will necessitate the need for additional working capital."