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