With 1st July nearing, everyone is preparing for new pan India Indirect tax – Goods and Service Tax (GST). Suddenly, Experts are seen on TV channels explaining effects of GST on Indian Economics and its benefits in long run. Also, several seminars and workshops are being held each day to assist transitioning from current tax regimes to new GST regime. Tax department as well as Professional bodies are conducting awareness events to explain technicalities involved under GST compliances. After all it’s an indirect tax law that will subsume 17 other indirect tax laws to create a nationwide uniform indirect tax regime. It is in this context that the slogan of GST has been – “one nation, one tax“.
Before we discuss any technicalities under GST regime, we first need to know it’s applicability. The Framework of legislation covering GST is GST Model Law. Further, States need to pass GST laws based on this Model Law for their states.
As per Section 1 of GST Model law, it applies to whole of India/States. Further Section 7, identifies all intra-state supplies of goods and/or services as taxable event for Central/State GST (Also called CGST & SGST). It casts the liability of Tax on the seller or supplier of such goods and services. However, sub-section (3) creates an exception for which Central Government may notify and the liability to pay duty shall lie with the recipient of such goods/services. (This mechanism of collecting tax from recipient is known as collection of duty on reverse charge basis).
Section 9 defines Taxable Person as someone who carries business at any place in India and is required to be registered under Schedule III, except –
- Person who is required to be registered under Para 1 of Sch. III but doesn’t have his aggregate turnover in a financial year exceeding ₹ 10 lakhs. (It was later notified as ₹ 20 lakhs.)
- A person who is required to be registered under Para 1 of Sch. III but doesn’t have his aggregate turnover in a financial year exceeding ₹ 5 lakhs for business in any of the North East State including Sikkim. (At present turnover limit notified by Government is of ₹ 10 Lakhs.)
Further Sub-section (2) of Section 9 defines even the Central Government and State Government or any other local authorities to be regarded as a taxable person in respect of activities or transactions in which they are engaged as public authorities other than the activities specified under Schedule IV. In short, for functions and services other than those regarded as government’s duty, all other services are taxable even for governmental entities.
While it is clear as to who can be regarded as taxable person, there are certain situations which may create confusion. Therefore, to remove such confusions, Sub-Section 3 of Section 9 specifically provides three types of engagements under which the person will not be treated as taxable person under GST. Those situations are –
- Where the term of engagement is such that it is to be treated as employment of employee with employer. In short, services provided by employees to employer are not treated as service covered under GST.
- Person who is exclusively supplying goods and/or services that are not liable to tax under this Act will not be taxable person.
- Any person liable to pay tax under sub-section (3) of section 7 i.e. on reverse charge basis, will not be called as taxable person if such services are for personal use only and below specified amount. The essence of this clarification is that receiving of service for non-business i.e. personal use shouldn’t make such person liable under GST just because of the fact that such person has liability to pay tax on reverse charge basis. As regards to the specified limit, such limit shall be notified by Central Government.
So we can now understand easily when GST is applicable. In Short we can say that it is applicable whenever any goods is manufactured or sold or service is provided if such goods/service is not exempt and such supplier of goods/service is required to be registered under GST.
Examples to Understand it
Example 1 – M/s XYZ manufacturers a Facial Cream at a factory in Lucknow. His total turnover in previous year was ₹ 50 lakhs.
Here M/s XYZ has to pay GST because –
- He produces goods that are taxable and
- His annual turnover is above ₹ 20 lakhs (i.e. above exemption limit)
So he will have to get registered under GST if the registration was not obtained earlier when provisional registration were allowed by Central Government.
Example 2 – Alokit Services Pvt. Ltd., which is a well-known company sells customers’ financial data to a company located in USA. All such data sold by Alokit are collected by its employees with whom it has an agreement. Such Agreement requires its employees to be termed as contractors although they would be paid fixed salary and office timings will be fixed. Also location of collection of data is at the premises of the company. However, contracts for sale to foreign company are signed by the employees referred as contractors but payment for the same is received by the Company. Assess applicability of GST on services offered by such contractors to Alokit and sale of customer data to Foreign Company. Also answer what would have been the effect had such contractors been paid increased payment based on the efficiency in collection of data.
Here Alokit will be covered under GST as it sells customer’s data. However, for the second part whether contractors would also have to pay GST or not we have to see it through sub-section (3) of the Section 9 of Model GST law. Accordingly, Clause (a) clarifies that services rendered by employees would not be covered under GST. As regards to the term used as contractors, it further clarifies that if any agreement exists, it should be termed as employment if such legal ties create the relationship of employer and employee as regards working conditions, remunerations and employer’s liability. In this case such contractors can be considered as employees as
- They work on fixed payment and office timing at the location of the company.
It would not effect the applicability of GST had they been paid increased payment based on efficiency in collection of data. Such increased payment can safely be considered as incentives offered during employment.
Condition for Registration under GST
Sch. III of Model GST Law provides for conditions for registration under GST. All persons who provide taxable goods/service above the exemption limit should be registered under Para 1 as discussed above in reference to section 9. Apart from those in para 1, following should also be registered –
- Those who were registered under earlier law should be liable to registration under this law when it comes into effect, subject para 1.
- Where a business carried by a taxable person is transferred or succeeded by another person as a going concern, such successor shall be registered with effect from the date of such transfer or succession.
- Companies that are merged or demerged by the order of a High Court should compulsorily be registered under GST after such amalgamation or demerger with effect from the date of issuance of incorporation giving effect to such order of the High Court is issued.
However, apart from those mentioned above, following person should be registered compulsorily even though their threshold limit under para 1 is not crossed –
- Person making any inter-state taxable supply
- Casual taxable persons
- Person who is required to pay tax under reverse charge
- Non-resident taxable person
- Person who are required to deduct tax under section 37
- Person who supply goods and/or services on behalf of other registered taxable persons whether as an agent or otherwise, irrespective of the threshold limit
- Input service distributor
- Person who supply goods and/or services other than branded services through electronic commerce operator, irrespective of the threshold limit
- Any electronic commerce operator
- An aggregator who supplies services under his brand name or his trade name
- Such other person or class or persons as may be notified by CG or SG on recommendation of Council.
Lets’ understand it with examples.
Example 1 – Mr. XYZ has a small business of selling sarees in Varanasi. He collects sarees from other families in business of weaving unbranded sarees. He sell such Sarees on Snapdeal and Amazon. His annual turnover is below ₹ 10 lakh. Assess whether he is required to be registered under GST or not.
Yes, he is required to be registered under GST as he sells goods through electronic commerce operator (here Jasper Infotech and Amazon India), even though his annual turnover is below threshold limit as defined under Para 1 of Sch. III or Section 9 of the Model GST Law. His registration is compulsory due to clause (viii) of Point No. 5 under Sch. III.
Example 1 – Farji Naukri Service collects ₹ 1,000 from jobseekers to assist them in getting jobs. It claims to provide branded service for jobs and calls the fees collected as “Guaranteed Farji Naukri Job Service Fee”. Further, such collection is made via PayTM. Whenever, a jobseeker enters information into online website of Farji Naukri Service, CEO of Farji Company calls the jobseeker and persuade him/her to pay the amount. Assess whether Farji Naukri Service is liable to be registered under GST if total annual turnover is below ₹ 10 lakhs. Also assess applicability of GST if such company is a fraud company.
Here, no matter whether the company is fraudulent or not, doesn’t affect the applicability of registration under GST. Further, in this case, under section 43B of Model GST Law, clause No. b, c & d, such services termed as a branded service by Farji Naukri Service can be assumed to be qualified to be called as branded services, although they may not have been registered. Therefore it is not required to be registered under GST unless its turnover crosses the threshold limit under Para 1 of Sch. III.
- Services provided via online mode except the branded services are required to be registered under GST without giving effect to the threshold limit. Such registration is compulsory under clause (viii) of Point No. 5 of Sch. III.
I hope above examples and references to the sections of Model GST law is helpful in accessing applicability of GST. If you have any doubt or suggestion, feel free to post via comment.