As per Section 3 of the draft GST law the term supply includes all forms of supply of goods and/or services such as sale ,transfer,barter,exchange,license,rental,lease or disposal made or agreed to be made etc..
From the definition, it is clearly understood that the term transfer will be treated as a supply and the taxability of certain specific supplies without consideration implies that stock transfer under GST taxable.
Under current scenario of central excise , a registered manufacturer on making the stock transfer of excisable goods should pay excise duty on the cost of production and under VAT on submitting Form F, stock transfers are not taxable.However input VAT on material purchase for production can be claimed to a certain extent as per the rate specified in respective state VAT laws.
As GST levies tax on supply which includes transfer instead of sale, different branches has to be treated as different entity. There should be interstate and intrastate transfer which is taxable under IGST,SGST and CGST respectively.A new concept of business vertical within an organisation within a state requires separate registration shall come into force. The term business vertical has clearly defined under Section 2 subsection 18.
The taxability of transfers will make an impact on cash flow. This is because, tax is paid on the date of transfer and ITC is effectively used when stock is liquidated by the receiving branch. Hence under GST, for businesses engaged in stock transfers, especially in case of FMCGs additional working capital has to be raised due tax liability.
This will be a challenge to SMEs working under thin working capital. Thus everyone will be much concerned with the inventory levels and try to compare the profitability on bulk purchase or transfer with the fund being held up as tax component.
Under VAT input on materials used for production of finished goods which are transferred are available at reduced rate.
Generally 4% will be reversed. The ITC reversed will be added as product cost and will result in cascading effect.
However, under GST tax paid on stock transfer will be fully available as input credit.
There is no declaration forms are required which results in faster processing of stock transfers.
Though stock transfers are taxable under GST, the tax is fully allowed as credit. This will eradicate the cascading effect which exists under current regime and as a result, products will be more cost effective. Although this is bound to create a crunch in working capital, effective planning of branches and leveraging of cross branch transfers can reduce the impact on working capital.