Moving stock between our own branches: is it taxable under GST?

Your company has a godown in one State and a shop in another. You send goods from one to the other. Nobody pays you. It is the same company, the same books, the same owner. So why would GST apply?

Because GST does not always look at the company as one body. For some purposes it treats your branches as separate persons. This article explains when that happens, how the goods are valued, and what paperwork you must raise on the day the goods leave.

The short answer

A transfer of goods between two of your own branches is a taxable supply when the two branches are "distinct persons" and the transfer is made in the course or furtherance of business. It is taxable even if no money changes hands. If both ends sit under one GST registration, it is not.

Three pieces of law fit together here:

• Section 7 of the Central Goods and Services Tax Act 2017 (the CGST Act) says what counts as supply.
• Schedule I to that Act lists activities that are supply even without payment.
• Section 25 of the CGST Act says which of your branches are "distinct persons".

Step 1: Is it a supply at all? Section 7 and Schedule I

Section 7(1)(a), CGST Act 2017, treats as supply "sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business". Consideration means a payment or something of value in return.

A branch transfer has no consideration. So clause (a) alone would not catch it. But section 7(1)(c) adds "the activities specified in Schedule I, made or agreed to be made without a consideration".

Schedule I, para 2, CGST Act 2017, reads: "Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business."

So a free transfer between distinct persons is a supply, as long as it is for business. Moving stock to your own shop for sale is plainly for business.

Step 2: Are your branches "distinct persons"? Section 25

Two sub-sections of section 25, CGST Act 2017, do the work.

Section 25(4). A person who has obtained, or is required to obtain, more than one registration "whether in one State or Union territory or more than one State or Union territory" shall, in respect of each registration, be treated as distinct persons.

Section 25(5). Where a person who has a registration (or must have one) in a State or Union territory for an establishment also has an establishment in another State or Union territory, those establishments are treated as establishments of distinct persons.

Read them in plain words:

• Different States, each with its own GSTIN. GST registration is State-wise. If your company has a GSTIN in Telangana and another in Karnataka, the two are distinct persons. A transfer between them is a supply.
• Two GSTINs inside one State. Section 25(2), CGST Act 2017, lets a person with several places of business in a State get a separate registration for each place, subject to prescribed conditions. If you took that route, the two registrations are distinct persons under section 25(4). Stock moving between them is a supply.
• One GSTIN, many places in the same State. Here you hold one registration. Section 25(4) does not apply, because you have not obtained more than one registration. Moving stock between your own godowns or shops under that one registration is not a supply under Schedule I, para 2. (Section 25(5) only speaks of an establishment in another State or Union territory.)
• Branch in a State where you are not registered, but should be. Section 25(4) also covers a person who is "required to obtain" registration. Do not ignore a State just because you have not applied there. If you must register, the branch is already a distinct person in the eyes of the law.

Step 3: Which tax applies?

Section 5(1) of the Integrated Goods and Services Tax Act 2017 (the IGST Act) levies integrated tax on "all inter-State supplies of goods or services or both". Under section 7(1) of the IGST Act, supply of goods where the location of the supplier and the place of supply are in two different States is an inter-State supply.

For a transfer between your Telangana and Karnataka registrations, the supplier is located in Telangana and the goods go to Karnataka. That is inter-State. Integrated tax (IGST) applies.

For a transfer between two registrations in the same State, the supply is intra-State under section 8(1) of the IGST Act, and central tax and State tax (or Union territory tax) apply instead, subject to the provisos to section 8(1) of the IGST Act. Which rate applies to your goods depends on the rate notifications for that goods item. Check the current rate for your goods on the GST portal before you raise the invoice.

Step 4: How to value the transfer (rule 28)

If no price is charged, what value do you put on the invoice? Section 15(1), CGST Act 2017, gives transaction value (price actually paid or payable) only where the parties are not related and price is the sole consideration. Between distinct persons, that does not hold. So the Rules step in.

Rule 28(1), Central Goods and Services Tax Rules 2017, applies to supply between distinct persons as specified in section 25(4) and (5). The value shall be, in this order:

• Open market value of such supply (rule 28(1)(a));
• if that is not available, the value of goods of like kind and quality (rule 28(1)(b));
• if neither works, the value under rule 30, and then rule 31, in that order (rule 28(1)(c)).

Rule 30 gives the cost-based method: "one hundred and ten percent of the cost of production or manufacture or the cost of acquisition of such goods". In plain words, take your cost and add 10%. Rule 31 is the fallback "reasonable means" test when the earlier rules fail.

Rule 28 also carries two provisos:

• Goods for further supply as such. Where the goods are intended for further supply as such by the recipient, the supplier may, at his option, use an amount equal to ninety percent of the price the recipient charges for goods of like kind and quality to a customer who is not a related person.
• Full credit available to the recipient. Where the recipient is eligible for full input tax credit, the value declared in the invoice is deemed to be the open market value.

The second proviso matters in practice. If the receiving branch will claim full credit on the tax, the value you declare on the invoice is accepted as open market value.

Step 5: The document on the day the goods leave

Section 31(1), CGST Act 2017, says a registered person supplying taxable goods "shall, before or at the time of" removal of goods for supply, where the supply involves movement of goods, "issue a tax invoice showing the description, quantity and value of goods, the tax charged thereon and such other particulars as may be prescribed".

So the sending branch raises a tax invoice, addressed to the GSTIN of the receiving branch, at or before dispatch. It shows the value from rule 28 and the tax charged.

A delivery challan is not a substitute here. Rule 55(1), CGST Rules 2017, allows a challan in lieu of invoice only for listed cases: liquid gas where quantity is unknown, job work, "transportation of goods for reasons other than by way of supply", and other supplies notified by the Board. A transfer between distinct persons is a supply under Schedule I. It is not a movement "for reasons other than by way of supply". A challan is the right paper for a movement that is not a supply, such as stock moved between two places under one registration. Rule 55(3) also says goods moving on a challan must be declared as specified in rule 138, which is the e-way bill rule. Check the current e-way bill threshold and rules on the e-way bill portal before you move the goods.

Step 6: What the receiving branch does

Section 16(1), CGST Act 2017, lets a registered person take credit of input tax charged on a supply of goods to him "used or intended to be used in the course or furtherance of his business". The receiving branch takes credit of the IGST (or CGST and SGST) on the tax invoice, subject to the other conditions of section 16. One of them, in section 16(2)(aa), is that the supplier has furnished the invoice details in its statement of outward supplies and they have been communicated to the recipient.

Section 16(2)(a) needs a tax invoice or debit note issued by a registered supplier. Rule 36(1)(a), CGST Rules 2017, lists "an invoice issued by the supplier of goods or services or both in accordance with the provisions of section 31" as a valid document for claiming credit. The invoice you raised for the transfer is that document.

The sending branch reports the transfer as an outward supply in its return. The receiving branch claims the credit. Return due dates and forms change. Check the current due dates on the GST portal.

What not to do

• Do not treat the transfer as "no sale, so no GST". Schedule I, para 2 was written for exactly this.
• Do not use a delivery challan for a transfer between two GSTINs. It is the paper for non-supply movements.
• Do not skip the State where you must register. Section 25(4) reaches a person "required to obtain" registration.
• Do not invent a price. Follow rule 28(1) in order.

What to do now

• Next step: List every GSTIN your company holds and the State of each. Mark every pair of places where stock moves between different GSTINs. Raise a tax invoice for each such movement, valued under rule 28(1) of the CGST Rules 2017 (Schedule I, para 2 and section 25(4), CGST Act 2017).
• Deadline: The tax invoice must be issued before or at the time of removal of the goods (section 31(1), CGST Act 2017). Return due dates: check the current date on the GST portal before you file.
• Consequence: A transfer between distinct persons is a supply even with no payment (Schedule I, para 2, CGST Act 2017). If no invoice is raised and no tax is paid, output tax is left unpaid for that supply, and the receiving branch has no invoice to support credit (section 16(2)(a), CGST Act 2017).

Have a CA review your facts before you act or file.

Frequently asked questions

1. Is moving stock between two warehouses in the same State, under one GSTIN, taxable?
No. Schedule I, para 2, CGST Act 2017 needs the parties to be related or distinct persons "as specified in section 25". With one registration, section 25(4) does not apply. You may issue a delivery challan for the movement (rule 55(1)(c), CGST Rules 2017).

2. What if my branches in two States are the same legal company?
They are still distinct persons for GST if each holds its own State registration (section 25(4), CGST Act 2017). The company is one in company law. GST looks at registrations.

3. Which tax do I charge on an inter-State branch transfer?
Integrated tax under section 5(1) of the IGST Act 2017, because the supply is inter-State (section 7(1), IGST Act 2017). For a transfer between two registrations in the same State, central tax and State tax (or Union territory tax) apply, subject to the provisos to section 8(1) (IGST Act 2017).

4. What if I do not know the open market value?
Move down the list in rule 28(1), CGST Rules 2017: goods of like kind and quality, then rule 30 (110% of cost of production or acquisition), then rule 31. Where the receiving branch is eligible for full input tax credit, the value declared in the invoice is deemed to be the open market value (second proviso to rule 28(1)).

5. Can the receiving branch claim credit on the tax I charge?
Yes, if it meets the conditions of section 16, CGST Act 2017. It needs a tax invoice (section 16(2)(a)) and must use the goods in the course or furtherance of business (section 16(1)).

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See Also

• Gifts to employees and free samples: when GST applies and when the credit is lost
• ASMT-10 scrutiny notice: how to reply within 30 days
• Do we pay GST under reverse charge on freight, advocate fees and director fees?