In today’s global economy, many companies are part of complex supply chains, with different constituents residing in different locations. The interstate branch transfer of stock throughout the supply chain can present complex tax challenges to companies. For example, what items are taxable, and under which circumstances? Which forms must companies obtain and fill out, in order to remain compliant? This article provides a quick overview of such tax implications on interstate stock transfers from one branch to another
Interstate stock transfer defined
According to Section 6A of CST Act, 1956 under MVAT, interstate stock transfer means the movement of goods from one state to another by a dealer, to any other place of its business or to its principal agent or principal, whereby such movement is not by reason of sale.
If a dealer claims that it is not liable to pay MVAT under Section 6A, then the burden of proof lies with that dealer. “Proof” includes furnishing to the assessing authority a declaration (filled out and signed by the principal officer of the other place of business, or its agent or principal) containing a description of the goods in question, along with evidence of the dispatch of these goods. If the dealer fails to furnish this declaration, then the movement of the goods will be determined to have occurred as a result of sale, and the goods will therefore be taxable.
Form F to prove stock transfer
The “declaration” mentioned above has to filed in Form F, which is required by the Branch or Depot or Agent from the VAT authorities of the state government in which the goods are delivered. F Forms are collected on a monthly basis by the Branch. Submission of Form F is mandatory to prove non-taxable stock transfer. Without Form F, the stock transfer will be characterized as “normal sale” and therefore taxable. Such CST has to be paid to the state government where the movement of goods commenced.
However, F Forms are not conclusive evidence of Branch Transfer. The dealer must also provide transit documents relating to movement of goods, such as LR / RR / Courier Receipts / Airway Bills, etc., together with F forms.
What qualifies as branch transfer exemption?
The exemption for branch transfer is available only if goods are transferred to another state without any pre-existing sale transactions. For example, if there is a ‘lump sum’ transfer of goods to a branch, depot or agent who will stock the goods on-premise in order to fulfill potential (but not pre-existing) sales to customers, then that lump sum transfer is tax-exempt.
However, if that transfer of goods is made to fulfill any pre-existing orders at the branch, the transfer will not qualify for an exemption; the VAT authorities from the dispatching state will demand full rate CST.
Retention under Rule 53(3) of MVAT Rules, 2005
If a dealer dispatches any taxable goods outside Maharashtra state for non-sales reasons, to anywhere else in India, including:
- to his own place of business
- to his agent or to a commission agent, or
- to his principal’s place of business,
then an amount equal to 4% of the purchase price of the corresponding taxable goods (not being treated as capital assets, or used as fuel and natural gas) will be deducted from the set-off amount of the purchases.
Where goods purchased in Maharashtra have been used for trade at the branch located outside Maharashtra, it is possible to correlate such purchases with branch transfer. In such cases, it is not necessary to calculate the ratio of turnover of branch transfer for determining retention under Rule 53(3), because those purchases have already been identified.
For purchases where a link with branch transfer cannot be established (for example, when purchased goods are used in manufacturing final products and full branch transfer is not made for such products), then the ratio of turnover is the only basis available for determining the corresponding value of purchases used for branch transfer.
Such a ratio is calculated by dividing the turnover of branch transfer by the gross turnover of sales in a period for which the dealer files returns. Thus, if a dealer is required to file monthly returns, then it has to calculate the ratio on a monthly basis.
For branch transfer valuation, the value of goods transferred can be taken from excise invoices prepared for such transfers.
Stock Transfer Ratio
Calculating retention can be complex and time-consuming, and that’s where tax automation solutions can help companies. The following example illustrates how set-off retention is calculated, when direct identification isn’t possible for purchases used for branch transfers. Please note that taxable purchases of furniture & other capital assets, fuels and gases, etc. are not considered in the interstate stock transfer calculation ratio. Turnover of capital assets is excluded for determining the proportionate taxable purchases.
Example
| Items | Amount |
| Net OMS Sales | 5,000.00 |
| Exports | 10,000.00 |
| Net Local Sales | 5,000.00 |
| Inter State Stock Transfer | 5,000.00 |
| CST | 100.00 |
| MVAT | 625.00 |
| GTO | 25,725.00 |
| Taxable Purchases of Raw material | 3,000.00 |
| Taxable Purchases of Furniture & other capital assets, fuels and gases. | 1,000.00 |
Solution:
| Items | Amount |
| Net OMS Sales | 5,000.00 |
| Exports | 10,000.00 |
| Net Local Sales | 5,000.00 |
| Inter State Stock Transfer | 5,000.00 |
| Total Taxable Sales (A) | 25,000.00 |
| Inter State Stock Transfer (B) | 5,000.00 |
| Inter State Stock Transfer Ratio (C) = B/A*100 | 20% |
| Taxable Purchases of Raw material (D) | 3,000.00 |
| Proportionate Taxable purchases for Interstate Stock Transfer (E) = (C) * (D) | 600.00 |
| Retention u/r 53(3) @ 4% on (E) | 24.00 |
To learn more about how Avalara can help with MVAT and GST automation, contact us through https://www.avalara.com/in/contact-us/
This article is contributed by CA Mukund Abhyankar.
Disclaimer: This Whitepaper is made available by Avalara for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal or tax advice. The whitepaper should not be used as a substitute for competent legal or tax advice from a licensed professional in your state or country.
