It is said that awareness of errors is the first step towards correcting them. It is because unless we are aware of the errors committed, we would not take any steps towards rectifying them. Errors prove costly under any taxation regime. Errors could be classified into two categories, i.e. clerical error and conceptual error.
Clerical errors: – Minor, inadvertent negligence in computing a figure, or recording or copying a fact or statement is called clerical mistake. For example, if the actual GST liability is Rs. 1,320 and the client had disclosed Rs. 1,230, this error would be termed as that of clerical in nature.
Conceptual errors: – Any error occurring due to wrong understanding of law could be termed as a conceptual error. These errors, being repetitive in nature, put the taxpayers into lot of worry and tension in the long run unless corrective actions are taken to correct the same.
Some of the common conceptual errors are enlisted so that necessary steps to prevent the same are undertaken. The common conceptual errors could be:
1. ERRORS IN CLASSIFICATION: – They occur when a specified goods or service has been classified wrongly.
(1) Classification of goods as a service (and vice versa) or classification of item under one chapter heading into another leading into incorrect rates of GST discharged, wrong exemption claimed, wrong determination of time of supply. This would eventually lead into demand on multiple persons in the supply chain without credit. This may also result in incorrect ITC availment.
Example could be classifying outdoor catering as food and beverages, which would result in differential GST, rate of 13% (since outdoor catering is liable for 18%, whereas food is liable for 5%). Furthermore, ITC would be available for an outdoor caterer but the same is restricted for restaurants.
(2) The wrong classification of bundled services also proves fatal, mainly because of the continuity of such transactions. A mixed supply wrongly classified as composite supply (and vice versa), would generally result in excess/short discharge of GST.
For example, applying different rates of GST on goods and transportation charges would mean a violation of composite supply provision requires to charge full GST on the rate of goods.
(3) Raising of tax invoice as supply of goods instead of supply of services for job work activity performed on principal’s goods.
(4) GTO services classified under GTA, and considered for reverse charge outward liability.
(5) Classifying EOU transactions or other deemed export transactions as zero-rated supply under GST.
2. ERRORS IN TAXABILITY: They occur due to incorrect determination of levy of GST or incorrect interpretation of exemptions.
(1) In case of an item of supply that was exempt under earlier regime but taxable under GST regime, the assessee might continue to treat the same as exempt resulting in erroneous exemption.
(2) If goods/ service are absolutely exempt, but assessee opts to pay GST on the same for the purpose of claiming ITC, such ITC availment could be denied as there was absolute exemption from payment of GST.
Example could be charging GST on electricity in order to avoid reversal of common ITC under rule 42 and rule 43.
(3) If assessee claims any exemption or opts to pay GST at concessional rate (without fulfilling the necessary conditions attached), it might result in short-discharge of GST. For example, claiming ITC when opting to pay 5% GST on renting of motor vehicle.
(4) Non-availment of eligible ITC on exports of exempted goods on the assumption that ITC is not eligible on the same. For example, not claiming ITC when assessee is involved in 100% export of liquor.
(5) Claiming benefit of exports without payment of tax without executing letter of undertaking or bond.
(6) Considering all foreign currency receipts as exports/zero-rated supplies as per GST without paying heed to other conditions to be specified.
For example, treating a foreign currency receipt from a branch as export of service.
(7) Wrong payment of GST under RCM for services, which does not fall under notified services, provided under u/s 9(3). For example, paying GST on courier services equating them with GTA services.
(8) Non discharge of GST on items specified in Schedule I of CGST Act.
For instance, non-payment of GST in case of principal-agent transactions.
(9) GST not discharged on advance received towards taxable supply of service.
(10) Mis-classification of advances as deposits, thereby resulting in non- payment of GST on advances.
(11) GST liability on goods not received from job worker within the prescribed time, as specified in section 143.
(12) GST liability not remitted on waste or scrap generated during job work.
3. INCORRECT DETERMINATION OF PLACE OF SUPPLY: Wrong place of supply would result in paying wrong type of taxes or paying taxes when there is no levy of GST.
(1) Wrong discharge of GST (under RCM) without ascertaining place of supply. This could have negative impact on profitability if the payer is not eligible for full ITC.
Such cases would usually be observed in case of services from overseas vendors. Further, the department may also dispute such ITC stating that the same to be wrongly paid.
(2) Incorrect determination of place of supply resulting in incorrect type of tax discharged. For example, paying CGST, SGST for an inter-state supply (or vice-versa).
(3) Considering Ship to location as place of supply in a Bill to-Ship to transaction.
(4) Not charging integrated tax for renting of immovable property located in a state other than the registered state.
(5) Treating a non-taxable transaction as taxable (or vice versa) by virtue of incorrect place of supply.
(6) Considering registered location of recipient as per GSTIN instead of delivery location for supply of goods.
(7) Considering activity as export of services despite goods being made physically available by the recipient to the supplier.
(8) Considering location of goods as place of supply instead of registered recipient location for goods transport services.
(9) Intermediary services considered as export of services, although place of supply is the location of the supplier of service.
4. ERRORS IN TIME OF SUPPLY: These errors usually result in early/late discharge of GST or in excess/short discharge of GST, in case of change in GST rate.
(1) Early /delayed payment of GST due to non-compliance of time of supply provisions.
(2) Excess/short payment of GST on account of non-compliance with time of supply pertaining to change in rate of tax. (
(3) Taxability on provisions made where the supplier of service is location outside taxable territory and the supplier and recipient are associated enterprises.
5. ERRORS IN VALUATION: – They would result in GST short-paid or excess discharged.
(1) Claiming pure agent deduction without satisfying the necessary conditions prescribed (rule 33).
(2) Wrongly claimed deduction on post sale discounts (without compliance of section 15(3) (b).
(3) Non-monetary consideration ignored (rule 27) for valuation purpose.
(4) GST not discharged on Interest/penalty collected for delayed payments.
(5) Ignoring rule 28 in case of related party transactions.
6. ERRORS IN ITC & PAYMENT OF TAX: – These errors result in wrong or excess availment of ITC payment of tax.
(1) ITC availed on photocopy of invoices without having the original invoice.
(2) ITC availed without receipt of goods merely based on invoice.
(3) Non-remittance of statutory dues (i.e. GST) to government after collecting from customers. Invocation of demand u/s 74 leads to denial of credit to customer and could hamper the reputation of the company.
(4) Non-reversal of ITC along with interest in cases where payment is not made to supplier within 180 days from invoice date (or) not availing credit reversed after making payment to vendor.
(5) ITC wrongly availed on restricted supplies u/s 17(5).
(6) Non-availment of input tax credit on bank charges, vehicle insurance, asset insurance and telephone bills.
(7) Wrong reversal of ITC on warranty replacements (which forms part of cost of the product).
(8) Non-reversal of proportionate common input tax credit in respect of exempted supplies and non-business use, i.e. non-application of rule 42 and rule 43 in case of exempted supplies or usage for non-business purpose.
(11) Proportionate ITC reversal on annual basis not made, as per rule 42(2).
(12) Wrong reversal of ITC on capital goods using procedure prescribed u/r 42 instead of rule 43 (Rule 42 is applicable only for inputs and input services)
(13) Availment of RCM credit in subsequent months, which would have an impact on cash flow.
(14) ITC missed GTA services when option of 5% GST payment opted under RCM. (The restriction of ITC applies only for the supplier; thus, recipient may avail ITC irrespective of rate of tax)
(15) ITC missed out due to incorrect interpretation of section 17(5). Example: Non-availing ITC in case of repairs and maintenance to building (not capitalised)
(16) ITC pertaining to various locations not distributed under ISD.
7. OTHER ERRORS: Some other conceptual errors would also become known such as,
(1) Collection of GST by unregistered persons/ composition dealers, even though prohibited under law.
(2) Failure to obtain mandatory registration in case of interstate taxable supplies of goods. (Not applicable for supply of services)
(3) Refund benefit under GST not exercised by exporter.
(4) ITC reversed merely on the oral instructions of departmental officers/audit parties without ascertaining reason for the same.
(5) Wrong application of interest rates. Example, interest on delayed payment made at 24%, instead of 18%.
(6) Not applying for refund of excess tax paid under cash ledger through Form RFD-01A.
(7) Benefits under other indirect tax laws not being explored, i.e. FTP, Customs.
GST law being new and with rapid changes, there could always be possibility of assessee missing out on some of these important conceptual aspects and end up resulting non-compliance of the law.
However, there is need to make a distinction between erroneous application of law and fraudulent actions undertaken to with an intent to evade the tax. All the taxpayers should not be seen as having mala fide intention considering that the level of mistakes committed in the early years of implementation of GST could be very high.
February 2019
Common Conceptual Errors in GST
