GST in India – Impact on Trading Company – A Case Study

Published on: Mar 2017

[Note:  This Article discusses the impact based on Revised Model GST Law introduced in Nov 2016 just to give the reader a conceptual understanding.  The analysis may have to be updated for subsequent changes in the draft / actual law, if any.]

Facts of the case:

  1. ABC Ltd is a Private Limited Company based in Chennai and engaged in business of trading of Computers, Accessories and Anti-virus software doing annual turnover of around 5 Crores.
  2. The Company purchases computers / laptops from its Chinese suppliers and also from OEM based in Bangalore and sell it to various dealers in TN. It pays import duties / CST on its purchases.
  3. Accessories like mouse-pads etc are purchased locally from Registered Dealers in Chennai.
  4. Cleaning liquids are purchased locally but from Unregistered Dealers and sold to retail customers.
  5. The anti-virus software licenses keys are purchased in Paper form from Master Distributor in Chennai and inturn sold by the Company to other dealers in Chennai. The Company charges both VAT and Service tax to its customers on the sale of licenses.
  6. The Company operates from an office in Mount Road where it pays a rent of Rs 1,00,000 p.m. In addition, it has a 1,500 sq ft showroom in prime commercial area for display of laptops where it pays a rent of Rs 1,25,000 per month. Both the landlords levy Service tax @ 15% (including cess).

Implications on ABC Limited under the Revised Model GST Law:

  1. Import purchases will continue to attract Customs duty under GST regime. CVD and SAD would be replaced by IGST and full credit of IGST would be available as against present regime wherein CVD paid forms part of cost and only SAD paid is eligible for refund for a trader.
  2. Inter-state purchase of computers / laptops directly from OEM will now attract only IGST instead of excise duty and CST. Intra state purchase of accessories (Mouse pads) will now attract SGST and CGST.
  3. Sales to dealers in TN will now attract both SGST and CGST instead of TN VAT.
  4. CST paid on purchases was not eligible for offset against TN VAT output liability. However, under GST regime, credit of IGST can be availed. IGST credit will be used to offset first CGST liability and then SGST liability.
  5. Excise Duty paid on purchase from OEMs etc was not eligible for credit for a trader. However under GST regime such purchase would attract only IGST (inter-state) or CGST and SGST (intra-state) which are all creditable and can be utilised against output IGST/CGST/SGST liabilities.
  6. Though Cleaning Liquids were purchased from Unregistered Dealers in TN, it would not suffer Purchase Tax since it was sold as such by ABC Ltd to retail customers after levy of TN VAT on sale price. However, under GST, liability under reverse charge will have to be paid if such category of supply is notified under Section 8(3) of the Revised Model GST Law. Taxes paid under reverse charge would, however, also be eligible for credits.
  7. Whether sale of software is a ‘good’ or ‘service’ was a subject matter of intense litigation under VAT laws and vendors used to levy both VAT as well as Service tax on sale of computer software licenses. Under Revised Model GST Law, this has been put to rest since Schedule II clarifies that ‘temporary transfer or permitting the use or enjoyment of any intellectual property right’ will be classified as a Service.
  8. Hitherto ABC Ltd was not able to avail Input Credit of Service tax paid on rent for the showroom since the showroom is used exclusively for trading purposes. However, with introduction of GST, seamless credits are permissible and Sec 16 of the revised model GST Law permits ABC Ltd to take credit of ‘input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business’.
  9. ABC Ltd had to reverse input credit of service tax on rental for the Head office as per Rule 6(3A) of Service tax Rules since it was used commonly both for services (anti-virus software) as well as for trading purpose. However, under GST, such reversal is now not required.