GST: How a recent CBIC clarification makes life easy for businesses

Taxability of moulds and dies

Issue 

There was a general apprehension in the automobile sector (in specific) on the GST implications of moulds and dies transferred free of cost by a vehicle manufacturer (OEM) to an auto component manufacturer. 

To recap, under the erstwhile excise law, there was an explicit requirement of adding the amortized value of such moulds and dies, jigs and fixtures to the value of the component manufactured by the component manufacturer for payment of excise duty. Unlike the Central Excise Law, the GST law does not specifically provide for such treatment.

There were divergent views in the industry on whether the value of moulds, dies, etc was to be included in the value of supply of components for payment of GST purposes; the variations being based on the historical inclusion of the amortized value of moulds, dies and others in the value of goods for excise purposes and the newness of the GST law.

Clarification

For scenarios where the moulds, dies, etc are provided by the OEM to the component manufacturer with the responsibility to supply the same being that of the OEM itself, the Circular clarifies that the value of moulds and dies shall not be added to the value of components supplied by the component manufacturer. 

Separately, the Circular addresses a related apprehension of the requirement of ITC reversal for such free supply by the OEM to the component manufacturer. The Circular in this reference clarifies that as the said goods are supplied by the OEM’s in the course or furtherance of its business, no credit reversal is required.

Implications

Typically, in a conventional component manufacturing situation, the liability to supply the moulds, dies, etc to the component manufacturer is that of the OEM itself and hence, the Circular does resolve the anxiety for most industry players.

This clarification would act as a guide for this vexed issue and also aid in bringing uniformity in the tax position adopted by various industry players. The Circular would also be a reference for industry players who’ve adopted a tax position of non-inclusion of the value of moulds, dies, etc in the value of supply for GST payment purposes. This would help them rebut any additional tax demand raised by revenue authorities on the premise of there being a requirement to include the value of moulds, dies, etc in the value of supply for GST payment purposes. With the Circular clarifying on there being no requirement for input tax credit reversal on such supply of moulds, dies, etc to the OEM, any litigation around the same by revenue authorities would also be brought to rest.

Servicing charges

Issue 

Classically, a car servicing activity would entail supply of goods as well as services. There was a general apprehension in the industry on whether a car servicing activity is a composite supply or supply of individual goods and services. To note, in the case where it was a composite supply of goods, the entire servicing charge would be taxable at 28 per cent and where it was a composite supply of services, the entire servicing charge would be taxable at 18 per cent. Alternatively, where the said was not a composite supply, GST at 28 per cent or the applicable rate would apply to the goods portion and 18 per cent on the services
portion.

Given the considerable tax rate difference basis, the tax position adopted, the industry was in general anxious of the appropriate taxability of servicing charge.

Clarification

The Circular has made clear that where the servicing activity involves the supply of both goods and services and the value of such goods and services supplied are shown separately, the goods and services would be liable to tax at the rates as applicable to such goods and services, respectively. 

Implications

In a service contract, prices for goods and services are usually cited separately. Hence, the clarification should address the anxiety for most players. 

The said clarification should help bring to rest possible multifold litigation as an incorrect/ different tax position could entail discharging taxes at a lower/higher rate. To illustrate, for industry players who had classified these servicing charges as a composite supply of goods and accordingly were discharging a 28 per cent GST on the entire servicing charge could now pay taxes at 18 per cent on the labour charges component. Similarly, industry players who had classified these servicing charges as a composite supply of services and accordingly were discharging 18 per cent GST on the entire servicing charge could revisit their position to avoid additional tax and interest implications. Also, while the clarification has in specific been issued in the context of car servicing, the principles so contemplated should aid in unravelling similar apprehensions of other industries having similar transactions as well.

An analysis by EY