In this article, an endeavour has been made to explain the various terms and expressions used in the annual return as well as audit report/reconciliation statement prescribed under the GST law. The relevant provisions thrusting these obligations on the registered persons under GST law are contained in sections 35(5) and 44. Certain terms employed therein require more explanation/clarification so that compliance is done correctly. The provisions of CGST Act are referred to, for the purpose of explaining the meanings and wherever necessary, IGST Act is referred.
1. Turnover-Section 35(5) uses the expression “turnover”as opposed to the terms defined under the Act. Section 2 of the CGST Act which defines various terms employed in the said Act, has provided definitions of the terms “aggregate turnover” under clause (6) and “turnover in State” or “turnover in Union territory” under clause (112) thereof. There is a marked difference in the two types of turnover. “Aggregate turnover” covers the supplies to be computed all over India basiswhereas “turnover in State” or “turnover in Union territory” covers such supplies made from the specific State or UT, as the case may be. However, section 35(5) refers to only “turnover”. At the same time, rule 80(3) which prescribes such turnover limit refers to aggregate turnover and therefore, one can infer that section 35(5) considers aggregate turnover for all over India. The limit prescribed is ₹ 2 crores.
Take a case of a supplier who has multi state activities. The supplier has his principal place of business in the state of Gujarat. He usually supplies goods from the State of Gujarat. Therefore, the major turnover is effected from the State of Gujarat. However, as one of stray transactions, he imports goods in the State of Maharashtra and sells them to the customers in Maharashtra. The question here is whether he is required to obtain a registration in the State of Maharashtra. As per the provisions relating to place of supply as also the principles laid down by sections of IGST Act as regards interstate and intra-state supplies of goods/services, the above supplier can treat his supplies in the State of Maharashtra as inter-state supplies so that he does not have to obtain registration in Maharashtra. The location of the supplier of goods, in this case, is in Gujarat whereas the place of supply is in Maharashtra. Therefore, such supplier can continue supplying the goods based on his registration in Gujarat. However, section 22 clearly states that every supplier shall be liable to get registered in the State or Union Territory from where he makes taxable supply of goods or services of both. The expression used here is “from where he makes taxable supply”. Therefore, the supplier in this case is obliged to take a registration in the State of Maharashtra since he is making the supplies from that State. By virtue of his being registered in the State of Maharashtra, he also has to comply with the provisions, inter-alia, of section 35(5) and 44 i.e., file annual return and GST audit report in the State of Maharashtra as well.
Stretching the example further, a person may be registered in various states and his aggregate turnover considering all states exceeds ₹ 2 crore which is the limit of TO prescribed by rule 80. However, in one of the states, he has TO much below ₹ 2 crores. Still, he will have to file audit report u/s. 35(5) in that state as well.
2. Registered person-Section 35(5) uses the term “registered person” which is defined u/s. 2(94) to mean a person who is registered u/s. 25 but does not include a person having a unique identity number (UIN). Thus, any specialized agency of the United Nations organisation or any multilateral financial institution and organisation notified under the United Nations (Privileges and Immunities) Act, 1947, Consulate or Embassy of foreign countries are not required to get their accounts audited under section 35(5) or file audit report and reconciliation statement under section 44.
Similarly, persons not liable for registration under section 23 also are not required to comply with section 35(5) and 44. They include the persons engaged exclusively in the business of supplying goods or services or both that are not liable to tax or wholly exempt from tax under CGST Act or under IGST Act. They also include an agriculturist to the extent of supply of produce out of cultivation of land.
If as per the proviso under sub-section (2) of section 25, separate registration have been obtained for business verticals, separate annual returns and GST audit reports will have to be filed.
Person who gets registered himself voluntarily also has to comply with the said provisions provided of course, his TO exceeds the prescribed limit.
The next question comes of the persons who, though liable to get registered have not obtained registration. The other consequences under the Act will certainly follow but can they be made to file annual return and audit report as well? Section 25(8) empowers the proper officer to get such person registered and, in my view, the obligations cast upon a registered person including that of annual return and audit report etc. will have to be complied as a consequence.
3. Non-GST supply: The Act defines “non-taxable supply”, not “non-GST” supply. However, in the context of the form of Annual return (Table 4-row F), it will have to be allotted same meaning. Clause (78) of section 2 defines “non-taxable supply” which means supply of goods and services on which no tax is leviable under CGST or IGST Act. In short, no GST is leviable thereon. This could happen when the transactions of such goods or services do not constitute supply or the goods/services or are completely out of the purview of GST law. The term is definitely referring to supplies other than the exempt or nil rated supplies.
The first category falling into non-GST supply that strikes our mind is that of the goods covered under the definition of “goods” but levy of tax thereon is deferred for the time being. They are 5 types of motor spirits (crude oil, petrol, diesel, aviation turbine fuel, natural gas). Section 9 categorically excludes levy on alcoholic liquor for human consumption. Thus, these are 6 types of goods which are outside the ambit of levy of GST. Therefore, they can be considered as “non-GST” supply. The oil companies dealing in these products have to file returns both under State VAT law and GST law. They are required to disclose the motor spirit TO in the GST returns as well though no tax is payable. Similarly, subsequent dealers in these products such as petrol pumps, bunker oil agents etc. also have to disclose this TO in their GST returns under the same category.
The transactions in Schedule III are the ones which are considered as neither supply of goods nor of services. Sale of land or building, subject to clause (b) of paragraph 5 of schedule II, is one of such transactions which is required to be disclosed here. However, the same cannot be treated as non-GST supply and hence, need not be disclosed in the returns or annual return.
Another such example would be high sea sales. Notification No. 3/1/2018 dated 25-5-2018 has now clarified that the high sea sales effected prior to the transaction on which customs duty is paid u/s 12 of the Customs Act, 1962, shall not be subject to tax. However, section 7(2) of the IGST Act postulates that supply of goods imported into India, till they cross the customs frontiers of India, shall be treated to be a supply of goods in the course of interstate trade or commerce. Thus, under the law, these transactions of high sea sales are not exempted from tax but the point of levy of tax is merely deferred till the goods are cleared from customs as per the proviso to section 5(1) of the IGST Act. Therefore, the question arises whether such sales are to be shown as exempt sales, which strictly speaking, they are not, or non-GST sales, where again they do not fall. In absence of any clarification, it is advisable to disclose them in either of the two columns in annual return. Further, a moot question that arises here is whether the TO of high sea sales should be considered for the purpose of calculating the limit of ₹ 2 crores as per rule 80. Keeping in view the above legal position, in my view, such sales have to be considered in the TO limit. However, the impending amendment in CGST Act proposes to include such sales in Schedule III which will mean that such transactions will neither be treated as supply of goods or as supply of services. In that case, there is no need to consider them for computing the TO limit of ₹ 2 crore.
Capital Goods: Table 6 of form 9 mandates separate details of inward supplies of inputs, input services and capital goods which are not readily available in form GSTR-3B. This is a challenge before the RPs to segregate these details form the total turnover of inward supplies. These terms are defined under the CGST Act. Let us examine the definition of “capital goods” u/s 2(19) which states that capital goods mean goods, the value of which is capitalized in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.
The said definition is not linked to any Act such as Income-tax Act. All that needs to be seen is whether the said goods are capitalized in the books of account or not. If yes, then those are to be considered as capital goods. The decision to capitalize particular goods may be influenced by the provisions of Income Tax Act. It may so happen that the decision regards capitalization of assets/goods may have to be reversed based on the statutory/tax auditors. In that case, the GST auditor will have to reconsider the issue and classify such goods accordingly.
Normally, the assets in a business are built by way of a composite contract of work and labour which ultimately result into immovable properties. The term “works contract” is defined u/s. 2(119) to mean all such contracts giving rise to immovable properties including plant and machinery. By virtue of clause 6(a) of schedule II, the activity of works contract is treated as service. Here the question arises whether such services which are capitalized should be considered as capital goods. Especially in view of clause (c) of section 17(5) which allows set off in respect of works contract services resulting into immovable property being plant & machinery, it is more necessary to ascertain these services.
There is no definition provided for “capital services”. However, it is a common phenomenon that services utilized in building up a capital asset also go into the value of the capital asset. The capital assets may include either tangible or intangible goods. Intangible assets such as copy rights, trade marks, brand names etc. are capitalized in many cases in the books of account. The services which are utilized in building up such incorporeal rights are capitalized. What treatment should be given to such services?
Clause 5(d) of Schedule II treats development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software as service. Purchase of sophisticated software may be capitalized in the books. Whether such services can be considered as capital goods?
Here, one needs to understand that schedule II seeks to treat certain activities as either supply of goods or supply of services in the hands of the supplier for the purpose of taxation. It will merely have an impact on the discharge of liability. However, in the hands of the recipient, the same activity may be either be goods or services depending upon the true nature of the transaction. The supply of above referred software may be treated as supply of services in the hands of the supplier but the recipient may treat it as goods to be capitalized since time and again, the customized as well as off the shelf software is treated as goods by the courts. This aspect also needs to be looked into while classifying the capital goods and other inputs/input services.
Segregation of capital goods is essential since some of them find place in the negative list. For example, motor vehicles. In clause (d) of section 17(5), all goods and services going into the construction of immovable property meant for own use, excluding plant and machinery, are not eligible for set off. The question crops up here whether all these goods and services should be treated as capital goods and services on which set off is not admissible?
Clarification on these issues ought to be given by the Board.
Transitional credit: So far as transitional credit is concerned, there are many issues therein. For example, form TRAN-1 is filed to show refund of higher amount which is actually not shown in the last return filed before the appointed day. Even if such last return is revised to claim the higher refund, it cannot be considered in view of section 142(9)(b) which prohibits such additional refund to be carried forward. Since TRAN-1 does not auto-check the refund amount filed in the last return under existing law, it allows the higher amount of refund to be carried forward. However, such transition being unlawful, has to be repaid with interest and penalty if utilized to discharge the GST liability. Therefore, transitional credit if improperly availed/utilized, must be repaid with consequential penal burden. But Annual Return expects reporting of the actual amount of such credit carried forward, whether right or wrong. But the GST auditor will have to report such discrepancy.
As one proceeds to conduct the GST audit and file annual return, we will face many more ambiguities and differences in the interpretations.