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Published on:
February 23, 2023
By
Paramita

GST on transfers between related persons : Scope for Tax Planning

GST on transfers between related persons is a major concern for businesses in India. The Goods and Services Tax (GST) is a comprehensive, multi-stage, destination-based indirect tax that is levied on every value addition. The tax liability can be significant when businesses transfer goods or services between related persons. However, there are various tax planning opportunities available to minimize the impact of GST on transfers between related persons.

What is GST on transfers between related persons?

When a business transfers goods or services to its related person, it is considered as a deemed supply under GST. A transfer between related persons can be either of the following:

  • A supply of goods or services.
  • A supply of goods or services in the course or furtherance of business.

The definition of related persons under GST is quite broad and includes:

  • Individuals who are related by blood or marriage.
  • Individuals who are related by adoption or through a legal guardian.
  • Companies which are part of the same group.
  • Companies which have a common director.
  • Companies which are controlled by a third party in common.

How does GST on transfers between related persons impact businesses?

GST on transfers between related persons can significantly impact the tax liability of businesses. When a transfer between related persons is considered as a supply under GST, the value of the transaction is considered as the open market value (OMV). The OMV is the price that the goods or services would fetch if they were sold in the open market. This value is used to compute the GST liability on the transaction. The GST liability can be significant when the OMV is higher than the cost of production or acquisition of the goods or services.

For example, suppose company A transfers goods worth Rs. 1,00,000 to its related person company B. The cost of production of the goods is Rs. 80,000. The OMV of the goods is Rs. 1,20,000. The GST rate is 18%. The GST liability on the transaction would be calculated as follows:

  • Value of the transaction = OMV = Rs. 1,20,000
  • GST liability = 18% of value of transaction = 0.18 x Rs. 1,20,000 = Rs. 21,600

The GST liability of Rs. 21,600 would be applicable even though the cost of production of the goods is only Rs. 80,000. This can significantly impact the profitability of the business.

Tax planning opportunities for GST on transfers between related persons

There are various tax planning opportunities available to minimize the impact of GST on transfers between related persons. Some of the strategies that businesses can adopt are:

  • Transfer of goods or services at cost: Businesses can transfer goods or services to their related persons at cost to avoid the impact of GST on the transaction. This can significantly reduce the GST liability on the transaction as the value of the transaction would be equal to the cost of production or acquisition of the goods or services.
  • Adopting an arm's length principle: Businesses can adopt an arm's length principle while transferring goods or services to their related persons. The arm's length principle requires the transaction between related persons to be at a price that would have been charged if the transaction was between unrelated persons. This can help businesses to avoid the impact of GST on the transaction.
  • Opting for the reverse charge mechanism: Under the reverse charge mechanism, the liability to pay GST is shifted from the supplier to the recipient of the goods or services. Businesses can opt for the reverse charge mechanism for transactions between related persons to minimize the impact of GST on the transaction.

Conclusion

GST on transfers between related persons can significantly impact the tax liability of businesses. However, there are various tax planning opportunities available to minimize the impact. Businesses can adopt strategies like transferring goods or services at cost, adopting an arm's length principle, or opting for the reverse charge mechanism to minimize the impact of GST on transfers between related persons.

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Updated on:
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