GST Audit Case Study 12 - Non-payment of GST on other income “Pump Hire charges”.

GST Implication -Income other than Sales / Service Receipt if the income considered as supply as per GST act then need to pay GST as per GST laws on it. 

Aims and objectives of GST Audit

Audit in GST should intend to evaluate the credibility of self-assessed tax liability of a taxpayer based on the twin test of accuracy of their declarations and the accounts maintained by the taxpayer. Thus, Audit in GST should have the following objectives:

• Measurement of compliance levels with reference to compliance strategy of the tax administration.
• Detection of non-compliance and revenue realization
• Prevention of non-compliance in the future.
• Discovering areas of non-compliance to prevent taxpayers from continuing with such deviations from expected compliance behaviour that results in erroneous declaration of self-assessed liability.
• Providing inputs for corrections in/amendments to the legal framework which are being exploited by taxpayers to avoid paying taxes.
• Encouraging voluntary compliance.
• Any other goals deemed worth pursuing by the GST administration.

GST Audit Para

Verification of the details of split up of “Other Income” showed that the same included “Pump Hire Charges”. On enquiry, it was informed that while making outward supplies, some customers request for this service and the same is also provided as per demand. The amount collected for the renting of the pumps is accounted under Pump Hire Charges. It was also informed that no GST was paid for these amounts due to ignorance of the provisions governing GST.

It is seen that such services fall under the scope of SAC Code 9954; as these services are provided along with the supply of goods, it is in the nature of composite service and the rate of tax of CGST of 9% + SGST of 9% applicable for RMC appears applicable for the same.

As per Section 59 of the Act, Every registered person shall self-assess the taxes payable under this Act and furnish a return for each tax period as specified under section 39. As per Section 39(7), every registered person who is required to furnish are turn under sub-section (1), other than the person referred to in the proviso thereto, or sub-section (3) or sub-section (5), shall pay to the Government the tax due as per such return not later than the last date on which he is required to furnish such return.

As the above amount of Rs. XXXXX- (CGST) and Rs. XXXXX/- (SGST) are taxable as explained above, due GST is liable to be paid along with appropriate interest and penalty as applicable.

Author’s Note 

GST Implication - Income Other Than Sales / Service Receipt

As per charging section of GST act, GST shall be levied on supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption. As defined in Section 7 of CGST , “Supply includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business”.

When getting any receipt verify, whether it shall be considered as supply as per GST act or not. If yes, then  need to pay GST as per GST laws on it. 

Below are the most common items which need to be considered:

1)   Rental Income:

a)   Commercial Property: Rental income from commercial property is supply and liable to GST.

b)  Residential Property: Rental income from residential property is also supply and covered under GST although the same has been exempted from GST.

2) Interest Income:

a)   Interest Income on Credit Cards -Covered under supply so GST shall be chargeable to it.

b)  It includes interest income from Bank Saving account, Bank FDR, NPS Interest, NSC Interest, Post Office Deposits Interest, PF Interest and any other Interest income for any advance/deposit / debentures. It is included in supply so covered under GST although the same has been exempted wide Notification No. 12/2017-Central Tax Rate Dated 28-06-2017

3)  Income from Partnership Firm of Any Individual Registered under GST:

a)   Salary from Partnership Firm: Not covered under definition of supply in terms of clause 1 of schedule III of the CGST Act, 2017 so no GST is to be levied on the same.

b)  Share of Profit from Partnership Firm: It is neither the receipt for goods nor for services. It is just application of money. So out of scope of GST.

c)   Interest on permanent capital from Firm: It is covered under GST as service of advancing money in consideration of interest but the same has been exempted under Notification No. 12-2017-Central Tax ( Rate ) dated 28-06-2017.

4)  Dividend Income from shares and Capital Gain / Loss on sale of shares / Debentures / MFs: Securities are excluded from good / services in GST Act. GST Act refers the same meaning of securities as defined in Securities Contracts ( Regulation ) Act, 1956 which includes shares, scrips, stocks, bonds, derivative instruments etc. So any income either Dividend / Capital Gain / Loss from securities is not covered in supply. Hence not subject to GST act.

5)  Income out of maturity of insurance policies: Maturity amount received on maturity of insurance policy is mere receipt of money due to application of money which render it to be out of scope of GST. Although Insurance premium payable liable to GST.

6)  GST on Discount Received: Need to reverse the GST ITC if ITC taken while purchasing the good/services and seller of the goods also reduced his tax liability. If seller has not reduced his tax liability, then no need to reverse OR pay the GST.

7)  Any Charges or fee collection from customer: These amount is to be considered as part of consideration of supplies made to customer or considered as separate supply so in both the cases, we need to charge the GST on it.

8)  Creditors Written Off Income:

a)   ITC taken while purchasing the good: As per section 16(2) of CGST Act 2017, if payment is not made within 180 days, amount equal to the ITC needs to pay as outward tax liability.

b)  ITC not taken: There are two views. It can be treated as supply being activities of w/off of amount for consideration of w/off of liability or the opposite view taken based it is a mere accounting entry without knowledge/consent of other party.

9)  Sale of Fixed Assets: It is liable to GST as per the nature of Fixed assets. 

Permanent Transfer of Business Assets where ITC has Been Availed on Such Assets

Permanent transfer or sale of business assets on which input tax credit has been availed will also be treated as supply even if there is no consideration received. GST is applicable to the sale of business assets only. It does not apply to the sale of personal land or building and other personal assets. “Permanent transfer” means transfer without any intention of receiving the goods back. 

Goods sent on job work or goods sent for testing or certification will not qualify as supply as there is no permanent transfer. Donation of business assets or scrapping or disposal in any other manner (other than as a sale - i.e., for a consideration) would also qualify as ‘supply’, where input tax credit has been claimed.

So the above mentioned are some common items whose treatment under GST needs to be verified with due care while filing GST Return. Further the items which are falling under the scope of GST are considered as part of aggregate turnover and rest of the items shall not be considered while calculating aggregate turnover in GST.

Author's Suggestion

If a registered business entity received other income in this case “Pump Hiring Service” required verify, whether it shall be considered as supply as per GST act or not. If yes, then need to pay GST as per GST laws on it. Hence It is also advised to Verify the books of accounts from 01-07-2017 onwards if there any amount received as other income in that period verify, whether it shall be considered as supply as per GST act or not. If yes, then need to pay GST as per GST laws through form DRC-03,  before issuance of notice by the department along with Interest at the rate of 18%  per annum then can escape from huge penalty from the department on account of not paid tax on other income which attract GST received.