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GST impact on Mobile Handset Companies - Part II
Nimish Goel, Partner & Head, Indirect Tax, International Business Advisors
Ujjwal Kumar Pawra, Senior Manager
This is the second article in a two article series discussing how GST shall impact the mobile handset companies in India. The first article dealt with issues surrounding imports, make in India, stock transfers, tax rate, barter and CENVAT Credit while the second article shall discuss issues around Valuation.
Valuation Mechanism – Copying is Dreadful
Since inception of mobile handset companies in India, they have been subject to valuation on the basis of MRP (for Customs). However, domestic transactions are mostly carried out at transaction value. Under GST Model law the concept of MRP is proposed to be replaced with the ‘transaction value’ method (scope of which is enlarged).
While going through the provision, it is difficult to ignore the ‘inspiration’ from Excise and Customs Law. While the latter laws were formulated with different intention, the ‘inspiration’ may have its own ramifications. However, it would be interesting to see, how GST officers would consider the transactional value especially when the gambit of transaction value is enlarged. At the same time, it is important to understand whether the GST officers are well equipped to determine the true spirit of transaction value especially when similar issues under Customs and Excise laws have resulted in a plethora of litigations. There may be a possibility that similar litigations are initiated basis under the proposed model without considering the fact that the erstwhile rulings were in respect to a different statute with different objective.
Section 15 of the Model GST law enlarges the scope of ‘transaction value’ by compulsorily adding few items to compute the transaction value. We have attempted to capture few impact areas:
15(2)(a) any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods and/or services;
Warranty Expenses
The defective component is replaced by the Authorized Service Centre (‘ASC’) and charges are borne by the handset mobile companies.
...Under the proposed GST regime, it is imperative to examine:
- Whether faulty component replaced by Authorized Service Centre (‘ASC’) would be considered as an expense incurred by ASC on behalf of the Company;
- What would be the transaction value under such circumstances especially when there is no consideration flowing from the ultimate customer?
15(2)(b) the value, apportioned as appropriate, of such goods and/ or services as are supplied directly or indirectly by the recipient of the supply free of charge or at reduced cost for use in connection with the supply of goods and/ or services being valued, to the extent that such value has not been included in the price actually paid or payable;
Dead On Arrival (‘DOA’) – Dead yet costly
The DOA mobile handset is replaced by the ASC and cost is ultimately replaced by handset companies. Currently, it is done by issuing a Free of Cost (‘FOC’) invoice. Under the proposed regime, it is imperative to examine:
- Whether mobile handset provided to the customer FOC basis will be considered a supply subject to GST;
- If yes, what would be the transaction value of the supply; and
- Who would be liable to pay tax and who would take the credit considering the supply is intra-state (between the ASC and the customer), whereas the mobile handset company is not receiving the goods in the first leg.
...- At the time of returning the DOA phone, whether it would be considered as a ‘supply’ by the customer and whether this transaction would come under taxability under reverse charge mechanism
Free of Cost (‘FOC’) – No free lunches
Mobile handset companies often distribute handsets at events/ promotions for which no consideration is charged. Following issues may require some clarification:
- Handsets distributed free of charge to public for promotion would be considered as a supply?
- What would be the transaction value in such case where no consideration is being received; and
- How would the credit mechanism flow in such transaction which would depend upon the fact the who is the recipient of the mobile phone, entity organizing the event or the ultimate recipient of the handset?
15(2)(c) royalties and licence fees related to the supply of goods and/or services being valued that the recipient of supply must pay, either directly or indirectly, as a condition of the said supply, to the extent that such royalties and fees are not included in the price actually paid or payable;
Royalty – May be painful
Currently, few mobile handset companies are engaged in a legal tussle with few oversea Android technology providers for use of such technology in their mobile phones. The matter is sub judice at the Delhi High Court and the Hon’ble Supreme Court. It is only a matter of time that future of such litigations would get decided.
...Under GST regime, following aspects may require some clarification:
- Whether importer of the handset (not the manufacturer) would directly or indirectly be liable to pay the royalty amount? Whether this chain would extend to the distributor and thus royalty amount being added in every chain of transaction?
- Whether these transactions would come under the purview of condition of sale?
(e) incidental expenses, such as, commission and packing, charged by the supplier to the recipient of a supply, including any amount charged for anything done by the supplier in respect of the supply of goods and/or services at the time of, or before delivery of the goods or, as the case may be, supply of the services;
All expenses to be included?
Under proposed GST regime, ‘any amount charged for anything done by the supplier’ is required to be added in the transaction value. Basis this provision following may be introspected:
- Whether costs such as transportation, freight would be required to be added in transaction value? The same is added under current regime under Entry tax laws.
- What shall be the future of common expenses incurred by the company such as advertisement, audit expenses, rent of head office, etc. because such expenses are typically booked at head office and recovered through sale of goods. Thus it may be interpreted that the branch would ultimately be paying for common expenses as well.
- Though the net result of including such expenses would be tax neutral for the company (as credit would be admissible at receiving location), this aspect sooner or later will surely invite litigation.
...15(2)(h) any discount or incentive that may be allowed after the supply has been effected:
Provided that such post-supply discount which is established as per the agreement and is known at or before the time of supply and specifically linked to relevant invoices shall not be included in the transaction value.
Year-end sales incentives still litigious
Under the current regime, many states do not allow ‘post sales discount’. Under the GST regime, it is clearly worded that any discounts post supply would be added to the ‘transaction value’. However, the addition comes with an exception i.e. if any post supply discount is as per the agreement known at the time of the supply and linked to specific invoices, the same shall be removed from transaction value. Consequently, the discount amount would not attract GST.
For a better clarity, let’s take following example. A distributor of mobile phones is able to procure 10,000 units from the company during a particular year. As per the agreement, post supply of 9,000 units, distributor shall be entitled to turnover discount. Both the entities are aware of the discount amount at the time of agreement. In addition, both are aware that the target is reasonable and quite achievable. In such cases:
- Would discount be attributable to few invoices or all the invoices?
- If yes, which ones specially if goods are supplied in lots throughout the year?
- This aspect is ambiguous and might result in litigation
To top it up, as per Section 15(4)(iii) of the Model GST law, the transaction value shall not be accepted if there is a reason to doubt regarding the truth or accuracy of the transaction value declared by the supplier.
...Conclusion
The above mentioned are an indicative list of issues that would impact the mobile handset companies. The mobile handset companies are going to benefit in certain area (such as import duty being creditable and CENVAT Credit being available) and adversely impact in certain areas (such as transaction value or rate of tax). This it is imperative that such companies not only spend time on transaction structuring, warehousing, supply chain, IT system, contracts renegotiating but also spend ample focus on determining the current value of handsets that will be subject to the transaction value. Though implementation of GST with effect from April 01, 2017 looks ambitious, the mobile handset companies should gear up and leave no stone un-turned.