Income Tax and GST Relation

Goods and Service Tax (GST) is going to become a reality in India. If all go well, it is going to be effective from 01st April 2017 across the country including Jammu & Kashmir.

This would be a biggest reform in history of India, particular in Indirect Taxation where around 11 types of taxes are going to be subsumed in single tax. No doubt, GST will be a game changer for Indian Economy. It will open a new way for developing of under developed states like Bihar, Orissa, Uttar Pradesh, etc. Eastern part of country, which is as of now is not developed or under developed, will be having more benefit due to GST.

GST is new law and maximum provisions have been borrowed from existing Central Excise Act, Finance Act, 1994, State VAT Acts, etc. There are some specific provisions which have been taken from other laws like Income Tax Act, Customs Act, etc.

Here we highlighted some provisions which either have been taken from Income Tax Act, 1961 or are in reference to it.

PAN based Registration Number under GST.
1. As per section 19(4) of proposed Model Law of GST, all registrations will be based on PAN (Permanent Account Number). Such PAN is being issued by Income Tax Department.

Even today, Excise and Service Tax registrations are being linked with PAN but so far State VAT is concern, they are not connected with PAN. Though State commercial taxes department are asking PAN of taxpayer but their TIN (Trader Identification Number) is not linked with PAN.

Now in proposed GST Law, a registration number which will be issued by GSTN (Goods and Service Tax Network), will be PAN based. In other words, now all registrations under GST, whether CGST or SGST, will be linked with PAN.

A fifteen-digit registration number will be issued under GST. First two digits will represent State code, next 10 digits will be PAN, thirteenth digit would be alpha-numeric (1-9 and then A-Z) and would be assigned depending upon the number of Registrations a legal entity (having the same PAN Number) has within the State. To illustrate, a legal entity with single registration within the State would have "1" as its 13th digit of GSTIN. If the same legal entity goes for a second registration for a second business vertical in the same State, the 13th digit of GSTIN assigned to this second entity would be '2'. This way 35 business verticals of the same legal entity can be registered within a State. The 14th digit of GSTIN would be kept BLANK for future use. The 15th Digit will be the check digit.

Now by having such PAN based registration, value of total turnover reported in all returns under GST, whether it is CGST or SGST, will be reported to Income Tax Department by GSTN. Tax payers would be required to reconcile the amount of total turnover from all returns under GST, to the amount as mentioned in the annual financials. Such reconciliation might be asked by Income Tax Authorities during scrutiny or any other proceedings.

Transfer of property to be void in certain cases
2. Section 56 of Model GST Law says, where a person, after any tax has become due from him, creates a charge on or parts with the property belonging to him or in his possession by way of sale, mortgage, exchange, or any other mode of transfer whatsoever of any of his properties in favour of any other person with the intention of defrauding the Government revenue, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the said person

Provided that, such charge or transfer shall not be void if it is made for adequate consideration and without notice of the pendency of such proceeding under this Act or, as the case may be, without notice of such tax or other sum payable by the said person, or with the previous permission of the proper officer.

This concept has been borrowed from section 281 of the Income Tax Act, 1961 and State VAT laws. it appears it has been taken in piece and parcels. Also it seems some drafting error because Main section doesn't mention about phrase "pendency of such proceeding" but Proviso does say about it. It appears main section has been taken from VAT laws and Proviso has been borrowed from Income Tax Act.

There are basic differences in model GST law and Income Tax Act with reference to this provision which are as follows: -
Income Tax and GST Relation

relation between gst and income tax

Timing of invoking of provisions of this section
A.As per section 281 of the Income Tax Act, during the pendency of any proceeding under this Act or after the completion thereof, but before the service of notice under rule 2 of the Second Schedule, if any assessee creates a charge on, or parts with the possession (by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever) of, any of his assets, such charge, transfer or any action will be void subject to such conditions.
In Model GST Law, where a person, after any tax has become due from him, creates a charge on or parts with the property belonging to him or in his possession by way of sale, mortgage, exchange, or any other mode of transfer whatsoever of any of his properties in favour of any other person with the intention of defrauding the Government revenue, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the said person.

 If we understand the phrase "after any tax has become due" in general parlance, in any case tax will always be due once supply take place. Since the taxpayer has to pay monthly taxes (CGST, SGST or IGST) after reducing of Input Tax credit, therefore every case will become like that. Income Tax Act says if any proceeding due or any service of notice due after completion of such proceedings, but GST laws are differentiating from it and it covers almost all tax payers whether any proceeding is pending against taxpayer or not. Proceeding as we understand that if any scrutiny assessment, re-assessment or search or any other action by Tax Department but in GST, every registered person will have some tax due whether any scrutiny proceedings or otherwise is pending or not.

 With reference tax due in erstwhile sales tax act, the Calcutta High Court in case of Recols (India) Ltd., In re [1953] 4 STC 371, has held that as soon as there is a taxable turnover, the tax is due.

 In case of CST v. Sri Jagatbandhu Mohanty, [1961] 12 STC 706, the Orissa High Court said that there are two important points of difference between the Bihar Sales Tax Act and the Indian Income-tax Act, 1922. (1) Whereas income-tax for the assessment year is assessed on the income of the previous year, sales tax becomes liable to be paid immediately after each sale is effected though, for facility of computation and payment of tax, provision has been made for the filing of returns at the. expiry of each quarter. (2) Whereas rates of income-tax vary in accordance with the amount of income and therefore no one can be certain of what income-tax he has to pay at least until the accounting year expires, the rate of sales tax does not vary on the amount of taxable turnover and a dealer, therefore, can always be certain of what sales tax he has to pay as soon as he effects a sale. In other words, sales tax becomes payable immediately after a sale is transacted. It said further that the words 'due' and 'payable' are separate. Eventually, honourable high court came to the conclusion that it is, therefore, clear that to the extent of liability admitted in a return the amount of tax is payable before the dealer submits that return. Thus, there is no doubt that the tax is payable since the sale is transacted and it is incumbent upon the registered dealer to state that amount in the return when submitted.

 In our view, aforesaid provision in model GST law, is very draconian with reference to Tax payers. This will have wide impact on taxpayers. Though one more condition, i.e.," intention of defrauding the Government revenue" has been added but the question is how the taxpayer's intention will be known to the Tax Officers. It is very much subjective and unable to measure.

Definition of Property: The word "property" nowhere is defined in model GST Law
B. In absence of definition, it includes movable and immovable property. Whether personnel property also includes or only which is related to business. In case of company, whether it can apply on property which owned by Directors. Since Act is silent about this, therefore we need to travel at General definition. In case of Income Tax Act, it applies to only "Assets" and such asset also has been defined in the Act. As per Income Tax, "Assets" means land, building, machinery, plant, shares, securities and fixed deposits in banks, to the extent to which any of the assets aforesaid does not form part of the stock-in-trade of the business of the assessee.

Threshold for small transactions
C. In Income Tax Act, such provisions will not be applicable where the amount of tax or other sum payable or likely to be payable is five thousand rupees or less and the value of assets charged or transferred is ten thousand rupees or less. In contra, Model GST Law doesn't prescribe any threshold for small transactions.

Associated Enterprise
3. As per section 2(13) of Model GST law, Associate Enterprise will be same as defined in section 92A of the Income Tax Act, 1961. As per Income Tax Act, an associate enterprise means an enterprise—

(a)which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or

(b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.

Section 2(82) of model law defines the term related persons. As per this "persons shall be deemed to be "related persons'' if only –

(a) they are officers or directors of one another's businesses;
(b) they are legally recognized partners in business;
(c) they are employer and employee;
(d) any person directly or indirectly owns, controls or holds five per cent or more of the outstanding voting stock or shares of both of them;
(e) one of them directly or indirectly controls the other
(f) both of them are directly or indirectly controlled by a third person;
(g) together they directly or indirectly control a third person; or
(h) they are members of the same family;
Explanation I. - The term "person" also includes legal persons.

Explanation II. - Persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.

Though definition of related persons as mentioned above, is not included the associated enterprise as defined in section 2(13). In absence of this, it would not have substantial effect as such even reference has been drawn from Income Tax Act.

As per section 15(4) of Model GST Law, Where the supplier and the recipient of the supply are related to each other, then even if the existence of their relationship did not have any influence on the price of supply, the transaction value will be determined as per prescribed rules. A detailed scrutiny will be carried out by the Officers under GST for determining transaction value. It might be possible to arrive same value on which transaction took place but a detailed scrutiny will be carried out. In same line even associated enterprise is not a related person but Tax officer will have same belief as in case of related person.

Capital Assets
4. As per section 2(19) of Model GST law, capital assets shall have the meaning as assigned to it in the Income Tax Act, 1961 (43 of 1961) but the said expression shall not include jewellery held for personal use or property not connected with the business

ITC will not be available: as per Section 16(10), Where the registered taxable person has claimed depreciation on the tax component of the cost of capital goods under the provisions of the Income Tax Act, 1961, the input tax credit shall not be allowed on the said tax component Depreciation under income tax.

As per Explanation 9 to Section 43 of the Income Tax Act, 1961 the actual cost of asset shall be reduced by the amount of Excise duty which has been claimed as CENVAT. Tax Auditor under Income Tax Act also need to certify in clause 18 of Form 3CD to Income Tax Rules 1962, (Tax Audit Report), any kind of adjustment for CENVAT credit for capital assets. If the auditee has claimed any CENVAT credit under Central Excise Rules for tax component than depreciation under income tax is not allowable for the same.

Annual Information Return
5. Like section 285BA of Income Tax Act, which prescribes for notified persons for filing of annual information return (AIR) for prescribed transactions. In same line, Section 117 of model GST law says that the an income tax authority appointed under the provisions of the Income-tax Act, 1961 (43 of 1961), who is responsible for maintaining record of registration or statement of accounts or any periodic return or document containing details of payment of tax and other details of transaction of goods or services or transactions related to a bank account or consumption of electricity or transaction of purchase, sale or exchange of goods or property or right or interest in a property, under any law for the time being in force, shall furnish an information return of the same in respect of such periods, within such time, in such form (including electronic form) and manner, to such authority or agency as may be prescribed.

A return called an 'information return' would be required to be filed by specified persons. It is expected that this would be used by the Government/s for exchange of information. Penalty for non-filing or defective filing is Rs.100/- per day for each day during which the failure continues, would be payable

Tax Audit Report under Income Tax Act

6. Tax Audit Report under section 44AB of the Income Tax Act, 1961 is required to make available before inspecting authority under GST. If any officer from GST, comes for survey, such tax audit report is one of the documents which need to be make available before him/her. Even any chartered accountant who would be deputed by GST department for Audit or otherwise, may ask for Tax Audit report which has been done as per provisions of section 44AB of the Income Tax Act.
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