Archives August 2022

The Central Sales Tax Act, 1956 defines “Turnover” as follows:

Under this Act, “turnover” used in relation to any dealer liable to tax means the aggregate of the sales price received and receivable by him in respect of sales of any goods in the course of inter-State trade or commerce made during any prescribed period and determined in accordance with the provisions of the Act and rules made there under.

Further, section 8A(1) of the said Act provides that in determining turnover, deduction of sales tax should be made from the aggregate of sales price.

According to Section 2(112) of the Central Goods and Services Act, the term ‘Turnover’ is defined as:

‘turnover in State’ or ‘turnover in Union territory’ means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis) and exempt supplies made within a State or Union territory by a taxable person, exports of goods or services or both and inter-State supplies of goods or services or both made from the State or Union territory by the said taxable person but excludes central tax, State tax, Union territory tax, integrated tax and cess.

Under Section 2(91) of the Companies Act, 2013, the term “Turnover” has been defined as:

“Turnover means gross amount of revenue recognized in the profit and loss account from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a financial year;”

“The Guide to Company Audit” issued by ICAI in the year 1980, while discussing “sales”, stated as follows:

“Total turnover, that is, the aggregate amount for which sales are affected by the company, giving the amount of sales in respect of each class of goods dealt with by the company and indicating the quantities of such sales for each class separately.

• Here the term ‘turnover’ would mean the total sales after deducting therefrom goods returned, price adjustments, trade discount and cancellation of bills for the period of audit, if any.
• Adjustments which do not relate to turnover should not be made e.g., writing off bad debts, royalty etc.
• Where excise duty is included in turnover, the corresponding amount should be distinctly shown as a debit item in the profit and loss account.”

The Statement on the Companies (Auditors’ Report) Order, 2003 issued by the Institute in April 2004, while discussing the term ‘turnover’ in paragraph 23 states `as follows:  The term, “turnover”, has not been defined by the Order. Part II of Schedule VI to the Act, however, defines the term “turnover” as the aggregate amount for which sales are affected by the company. It may be noted that the “sales affected” would include sale of goods as well as services rendered by the company. In an agency relationship, turnover is the amount of commission earned by the agent and not the aggregate amount for which sales are affected or services are rendered. The term “turnover” is a commercial term and it should be construed in accordance with the method of accounting regularly employed by the company.

The “Statement on the Amendments to Schedule VI to the Companies Act, 1956” issued by the Institute (Page 14, 1976 edition) (replaced with Guidance Note on Revised Schedule VI of the Companies Act, 1956) while discussing the disclosure requirements relating to `turnover’ stated as follows: –

The disclosure may well be determined by reference to the company’s invoicing and accounting policy and may thereby vary from company to company. For reasons of consistency as far as possible, a company should adhere to the same basic policy from year to year and if there is any change in the policy the effect of that change may need to be disclosed if it is material, so that a comparison of the turnover figures from year to year does not become misleading.”

Although, Schedule III of the Companies Act, 2013 has replaced the Revised Schedule VI of the Companies Act, 1956 in the year 2014, guidance given herein above with respect to meaning of the term “turnover” is still relevant.

The term ‘turnover’ for the purposes of this clause may be interpreted to mean the aggregate amount for which sales are affected or services rendered by an enterprise.

• If GST or any other tax is included in the sale price, no adjustment in respect thereof should be made for considering the quantum of turnover.
• Trade discounts can be deducted from sales but not the commission allowed to third parties.
• If, however, GST or any other indirect tax recovered are credited separately to GST or other tax account (being separate accounts) and payments to the authority are debited in the same account, they would not be included in the turnover.
• However, sales of scrap shown separately under the heading ‘miscellaneous income’ will have to be included in turnover.

Considering that the words “Sales”, “Turnover” and “Gross receipts” are commercial terms, they should be construed in accordance with the method of accounting regularly employed by the assessee.

Section 145(1) of the Income Tax Act 1995 provides that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” should be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The method of accounting followed by the assessee is also relevant for the determination of sales, turnover or gross receipts in the light of the above discussion.

Applying the above generally accepted accounting principles, a few typical cases may be considered:

• Cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of a financing charge and is not related to turnover. The same should not be deducted from the figure of turnover.
• Discount allowed in the sales invoice will reduce the sale price and, therefore, the same can be deducted from the turnover.
• Turnover discount is normally allowed to a customer if the sales made to him exceed a particular quantity. This being dependent on the turnover, as per trade practice, it is in the nature of trade discount and should be deducted from the figure of turnover even if the same is allowed at periodical intervals by separate credit notes.
• Special rebate allowed to a customer can be deducted from the sales if it is in the nature of trade discount. If it is in the nature of commission on sales, the same cannot be deducted from the figure of turnover.
• Price of goods returned should be deducted from the figure of turnover even if the returns are from the sales made in the earlier year/s.
• Sale proceeds of fixed assets would not form part of turnover since these are not held for resale.
• Sale proceeds of property held as investment property will not form part of turnover.
• Sale proceeds of any shares, securities, debentures, etc., held as investment will not form part of turnover. However, if the shares, securities, debentures etc., are held as stock-in-trade, the sale proceeds thereof will form part of turnover.

The turnover or gross receipts in respect of transactions in shares, securities and derivatives may be determined in the following manner:

(a) Speculative transaction: A speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. Thus, in a speculative transaction, the contract for sale or purchase which is entered into is not completed by giving or receiving delivery so as to result in the sale as per value of contract note. The contract is settled otherwise and squared up by paying out the difference which may be positive or negative. As such, in such transaction the difference amount is ‘turnover’. In the case of an assessee undertaking speculative transactions there can be both positive and negative differences arising by settlement of various such contracts during the year. Each transaction resulting into whether a positive or negative difference is an independent transaction. Further, amount paid on account of negative difference paid is not related to the amount received on account of positive difference. In such transactions though the contract notes are issued for full value of the purchased or sold asset, the entries in the books of account are made only for the differences. Accordingly, the aggregate of both positive and negative differences is to be considered as the turnover of such transactions for determining the liability to audit vide section 44AB.

(b) Derivatives, futures and options: Such transactions are completed without actual delivery of shares or securities or commodities etc. These are squared up by receipts/payments of differences. The contract notes are issued for the full value of the underlined shares or securities or commodities etc. purchased or sold but entries in the books of account are made only for the differences. The transactions may be squared up any time on or before the striking date. The buyer of the option pays the premia. The turnover in such types of transactions is to be determined as follows:

• The total of favorable and unfavorable differences shall be taken as turnover.
• Premium received on sale of options is also to be included in turnover. However, where the premium received is included for determining net profit for transactions, the same should not be separately included.
• In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.

(c) Delivery based transactions: Where the transaction for the purchase or sale of any commodity including stocks and shares is delivery based whether intended or by default, the total value of the sales is to be considered as turnover.

Further, an issue may arise whether such transactions of purchase or sale of stocks and shares undertaken by the assessee are in the course of business or as investment. The answer to this issue will depend on the facts and circumstances of each case taking into consideration the nature of the transaction, frequency and volume of transactions etc.

In case such transactions are for the purposes of investment and income/loss arising therefrom is to be computed under the head ‘Capital Gains’, then the value of such transaction is not to be included in sales or turnover for deciding the applicability of audit under section 44AB.

However, in case such transactions are in the course of business, then the total of such sales is to be included in the sale, turnover or gross receipts as the case may be, of the assessee for determining the applicability of audit under section 44AB.

The term “gross receipts” is also not defined in the Act. It will include all receipts whether in cash or in kind arising from carrying on of the business which will normally be assessable as business income under the Act. Broadly speaking, the following items of income and/or receipts would be covered by the term “gross receipts in business”:

• Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India;
• Any indirect tax re-paid or repayable as drawback to any person against exports under the Customs and Central Excise Duties and Service Tax Drawback Rules, 1995;
• The aggregate of gross income by way of interest received by the money lender;
• Commission, brokerage, service and other incidental charges received in the business of chit funds;
• Reimbursement of expenses incurred (e.g., packing, forwarding, freight, insurance, travelling etc.) and if the same is credited to a separate account in the books, only the net surplus on this account should be added to the turnover for the purposes of Section 44AB;
• The net exchange rate difference on export sales during the year on the basis of the principle explained in (v) above will have to be added;
• Hire charges of cold storage;
• Liquidated damages;
• Insurance claims – except for fixed assets;
• Sale proceeds of scrap, wastage etc. unless treated as part of sale or turnover, whether or not credited to miscellaneous income account;
• Gross receipts including lease rent in the business of operating lease;
• Finance income to reimburse and reward the lessor for his investment and services;
• Hire charges and instalments received in the course of hire purchase;
• Advance received and forfeited from customers.
• The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.

The following items would not form part of “gross receipts in business” for purposes of section 44AB:

• Sale proceeds of fixed assets including advance forfeited, if any;
• Sale proceeds of assets held as investments;
• Rental income unless the same is assessable as business income;
• Dividends on shares except in the case of an assessee dealing in shares;
• Income by way of interest unless assessable as business income;
• Reimbursement of customs duty and other charges collected by a clearing agent;
• In the case of a recruiting agent, the advertisement charges received by him by way of reimbursement of expenses incurred by him;
• In the case of a travelling agent, the amount received from the clients for payment to the airlines, railways etc. where such amounts are received by way of reimbursement of expenses incurred on behalf of the client. If, however, the travel agent is conducting a package tour and charges a consolidated sum for transportation, boarding and lodging and other facilities, then the amount received from the members of group tour should form part of gross receipts;
• In the case of an advertising agent, the amount of advertising charges recovered by him from his clients provided these are by way of reimbursement. But if the advertising agent books the advertisement space in bulk and recovers the charges from different clients, the amount received by him from the clients will not be the same as the charges paid by him and in such a case the amount recovered by him will form part of his gross receipts;
• Share of profit of a partner of a firm in the total income of the firm excluded from his total income under section 10(2A) of the Income-tax Act;
• Interest, remuneration received by Partner from partnership firm.
• Write back of amounts payable to creditors and/or provisions for expenses or taxes no longer required.

Thus, the principle to be applied is that if the assessee is merely reimbursed for certain expenses incurred, the same will not form part of his gross receipts. But in the case of charges recovered, which are not by way of reimbursement of the actual expenses incurred, they will form part of his gross receipts.

In case of profession, the expression “gross receipts” in profession would include all receipts arising from carrying on of the profession. A question may, however, arise as to whether the out-of-pocket expenses received by him should form part of his gross receipts for purposes of this section.

Normally, in the case of solicitors, advocates or chartered accountants, such out of pocket expenses received in advance are credited in a separate client’s account and utilized for making payments for stamp duties, registration fees, counsel’s fees, travelling expenses etc. on behalf of the clients. These amounts, if collected separately either in advance or otherwise, should not form part of the “gross receipts”.

If, however, such out of pocket expenses are not specifically collected but are included/collected by way of a consolidated fee, the whole of the amount so collected shall form part of gross receipts and no adjustment should be made in respect of actual expenses paid by the professional person for and/or on behalf of his clients out of the gross fees so collected. However, the amount received by way of advance for which services are yet to be rendered will not form part of the receipts, as such advances are the liabilities of the assessee and cannot be treated as his receipts till the services are rendered.

It may be noted that in cases where the assessee carries on more than one business activity, the results of all business activities should be clubbed together. In other words, the aggregate sales, turnover and/or gross receipts of all businesses carried on by an assessee would be taken into consideration in determining whether the prescribed limit (Presently Rs. 1 crore & Rs 10 crore for certain specified cases) as laid down in section 44AB has been exceeded or not. However, where the business is covered by section 44B or 44BBA, turnover of such business shall be excluded. Similarly, where the business or profession is covered by section 44AD or 44ADA or 44AE and the assessee opts to be assessed under the respective sections on presumptive basis, the turnover thereof shall be excluded. So far as a partnership firm is concerned, each firm is an independent assessee for purposes of Income-tax Act. Therefore, the figures of sales of each firm will have to be considered separately for purposes of determining whether or not the accounts of such firm are required to be audited for purposes of section 44AB.

It must also be understood that the issue whether the turnover exceeds the prescribed limit (Presently Rs.1 crore & Rs 10 crore for certain specified cases) in the case of business or the gross receipts exceed the prescribed limit (Presently Rs. 50 lakhs) in the case of profession is to be determined in each year independent of the results obtained in the preceding year or years. Further, this section applies only if the turnover exceeds the prescribed limit according to the accounts maintained by the assessee.

If the Assessing Officer wants the assessee to get his accounts audited in cases where the figures of turnover as appearing in the books of account of the assessee do not exceed the prescribed limits, he has an option to pass an order under section 142(2A) directing the assessee to get his accounts audited from a chartered accountant as may be nominated by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner.

Under section 28(v), any interest, salary, bonus, commission or remuneration, by whatever name called, due to or received by, a partner of a firm from such firm shall be chargeable under the head profits and gains of business and profession. However, partner does not do any business independently but firm was carrying on business in which assessee is only a partner, therefore, remuneration received by assessee from partnership firm cannot be treated as gross receipt/turnover.

FAQs

1. Whether the sales by a commission agent or by a person on consignment basis forms part of the turnover of the commission agent and/or consignee as the case may be?
   In such cases, it will be necessary to find out, whether the property in the goods or all significant risks, reward of ownership of goods belongs to the commission agent or the consignee immediately before the transfer by him to third person. If the property in the goods or all significant risks and rewards of ownership of goods continue to belong to the principal, the relevant sale price shall not form part of the sales/turnover of the commission agent and/or the consignee as the case may be.
   If, however, the property in the goods, significant risks and reward of ownership belongs to the commission agent and/or the consignee, as the case may be, the sale price received/receivable by him shall form part of his sales/turnover.
2. Will the securities purchased by the share brokers on behalf of their customers be accounted in the turnover of share brokers?
   Share brokers, on purchasing securities on behalf of their customers, do not get them transferred in their names but deliver them to the customers who get them transferred in their names. The same is true in case of sales also. The share broker holds the delivery merely on behalf of his customer. The property in goods does not get transferred to the share brokers. Only brokerage which is being accounted for in the books of account of share brokers should be taken into account for considering the limits for the purpose of section 44AB.
   However, in case of transactions entered into by share broker on his personal account, the sale value should also be taken into account for considering the limit for the purpose of section 44AB. The case of a sub-broker is not different from that of a share broker.
3. While calculating the value of the turnover, whether we should include any extra and ancillary charges to the value?
   The invoices may involve ancillary charges such as those relating to packing, freight, forwarding, interest, commission, etc. It is suggested that generally the value of turnover should be disclosed exclusive of such ancillary and extra charges, except in those cases where separate demarcation is not possible due to the accounting system followed by the company or where the company’s billing procedure involves a composite charge inclusive of various services.
4. Whether any amount received in advance for services which are yet to be rendered, will form part of the gross receipts?
   The amount received by way of advance for which services are yet to be rendered will not form part of the receipts, as such advances are the liabilities of the assessee and cannot be treated as his receipts till the services are rendered.
5. A question may arise in the case of an assessee carrying on business and at the same time engaged in a profession as to what are the limits applicable to him under section 44AB for getting the accounts audited?
   In such a case, if an assessee’s professional receipts are, say, rupees fifty-four lakhs but the total sales, turnover or gross receipts in business are, say, rupees seventy-two lakhs, it will be necessary for the assessee to get the accounts of the profession and also the accounts of the business audited because the gross receipts from the profession exceed the limit of rupees fifty lakhs. If, however, the professional receipts are, say, rupees forty-two lakhs and total sales turnover or gross receipts from business are, say, rupees eighty-six lakhs, in these circumstances, gross receipts, turnover etc. from profession or business is not in excess of the limits specified in section 44AB for mandate of audit.

DID YOU ALSO RECEIVE ANY NOTICE FROM THE GST DEPARTMENT REGARDING INTEREST ON LATE FILING OF GSTR 3B?
Well if yes, you have your solution right here.

GST Department has been scrutinizing GST returns of preceding years. Any informality or mismatch In GST returns would result in issuing of Show-Cause Notice by the department. Earlier, Late Fee was charged as a penalty for filing late GST returns. But now, GST Department has also started charging Interest for late filing of the returns. Annual Interest of 18% is being charged by the department for late filing. Form DRC can be filed in response to the show-cause notice.

DRC-01 – SUMMARY OF SCN

GST Officer may serve SCN to a registered person due to following reasons:

• Tax not paid/ short paid
• Tax erroneously refunded
• Input tax credit wrongly availed/ utilized.

In case of Bona-fide defaulter: 2 years+ 9 months from due date of filing of Annual return of relevant FY. While in case of Mala-fide defaulter like fraud, suspension, etc. : 4 years+ 6 returns of relevant FY.

DRC- 02 – SUMMARY OF STATEMENT

If GST Officer wants to issue SCN on the same ground as specified in DRC-01, for additional period, than as specified, he may do so by serving the statement under DRC-02.

DRC-03 – PAYMENT MADE VOLUTARILY OR MADE AGAINST SCN

DRC-03 is a form under the GST law that is required to be filed for voluntary tax payments towards demand or tax shortfall noticed later on after the time limit to file returns of a financial year expires. DRC-03 is a voluntary tax payment form in which a taxpayer can pay the tax by raising its liability voluntarily or in response to the show-cause notice (SCN) raised by the GST department.

Form DRC-03 is used for making a voluntary payment of tax. Voluntary payment can be made either:

• Before the issuance of show cause notice
• Within 30 days of issue of SCN, in case the show cause notice is already issued

WHEN SHOULD AN ASSESSEE MAKE PAYMENT THROUGH DRC-03?

The following are the causes for making payment under DRC-03:

1. Audit/Reconciliation Statement: Where the auditor has discovered any case of short payment of tax, interest or penalties or excess claim of the input tax credit, and the time limit is expired to report the same in their GST returns, the taxpayer shall make voluntary payment in DRC-03 and report it in GSTR-9. GST Auditor should report the same in GSTR-9C too.

2. Investigation: If during any investigation, it is revealed that the taxpayer had defaulted incorrect payment of taxes, he can voluntarily make payment in DRC-03.

3. Annual Return: Reconciliation of GST for the entire year shall be conducted before proceeding to prepare and file annual returns. Taxpayers are given an option to pay any differences in cash and report it by filing DRC-03.

4. Demand or in response to show cause notice: The taxpayer has an option to pay the tax demanded along with interest using DRC-03 in response to a show-cause notice, but within 30 days of the date of the issue mentioned in the show-cause notice.

Form DRC-03 is filed for making a voluntary payment of outstanding liabilities under Sections 73 and 74 of the CGST Act. A taxpayer can self-ascertain the tax before issuance of SCN or within 30 days of SCN determination to avoid the hassles of demand and recovery provisions.

1. Section 73 – deals with cases where there is non-payment/under-payment of tax without any intention or invocation of fraud.
2. Section 74 – deals with cases where there is non-payment/under-payment of tax with intention or invocation of fraud

5. Liability Mismatch – GSTR-1 to GSTR-3B: This option was added in the GST portal in February 2021 while selecting the reason for using the DRC-03 form. If the tax authorities have sent notice for differences, being shortfall of tax liability in GSTR-3B when compared to GSTR-1, then the taxpayer must make the payment in DRC-03 or reply by justifying the reasons.

6. ITC Mismatch – GSTR-2A/2B to GSTR-3B: The GST portal also added this as an option in February 2021 for selecting the reason while paying tax in DRC-03. The department can send a notice for claiming excess Input Tax Credit (ITC) in GSTR-3B when compared to GSTR-2B. The taxpayer must use this form while depositing the excess claims of ITC.

Point to note: All the payments need to be made either from input tax credit available in electronic credit ledger or cash balance available in the electronic cash ledger. But, in case of interest and penalties ITC utilization is not available. It has to be compulsorily paid in cash. There is no way to make partial payments against SCN liability.

STEPS TO FILE DRC-03

Step 1: Login to GST portal and click on “My Applications” under User Services.

Either of the two circumstances can occur under which a taxpayer makes payment:

1. A taxpayer has not made any payment and does not have a Payment Reference Number (PRN)
2. A taxpayer has generated PRN but is unutilized and comes for payment.

In Case I where a taxpayer has not made any payment, the following steps are required to be performed.

Step 2: Select the Application Type as ‘Intimation of Voluntary Payment – DRC-03’ and then click ‘New Application.’

Step 3: A taxpayer will have two options whether payment is made voluntary or against show-cause notice (SCN):

• Voluntary payment: The payment date will be auto-populated without an option to edit.
• Payment against SCN: A taxpayer has to manually enter the SCN Number and select the issue date which must be within 30 days of making payment.

Application for intimation of voluntary payment can be saved at any stage of completion for a maximum time period of 15 days. If the same is not filed within 15 days, the saved draft will be purged from the GST database.

Step 4: Put the SCN Reference Number as the Reference Number generated on the Notice.

• Notice can be viewed under Services> User Services> View Additional Notices/Orders. Rest of the details will be auto-generated by the Reference Number.
• The payment shall be done within 30 days from the date of issue of notice.

Step 5: When all the details are filled, Click on “Proceed to Pay”.

Step 6: A page will appear to generate the Challan specifying the amounts in Electronic Credit Ledger, Electronic Cash ledger and Electronic Liability Ledger.

Step 7:   Select the name of the ‘Authorized Signatory’ and the Place. Click on “Create Challan” and make the payment.

Step 8: To view your saved application, navigate to Services > User Services > My Saved Applications option.

Click on “File” option. Two options will be available – either to File with EVC or File with DSC.

In Case II where the taxpayer has generated Payment Reference Number (PRN) but is unutilized and comes for payment within the time frame –

Step 1: Follow the steps as mentioned in Case 1 till the taxpayer reaches on Intimation of payment made voluntarily or against the SCN page.

Step 2: Select ‘Yes’ for the option – Have you made payment? and enter the PRN.
If PRN is not available, it can be extracted from the ‘Electronic Liability Register’ under Services>Ledgers>Electronic Liability Register.

Step 3: A link, known as ‘Get payment details’ will be displayed. Once the taxpayer clicks on it, details will be auto-populated on the basis of the respective payment that was made.

Step 4: Click on ‘File’ to view draft DRC-03 and then follow the same steps to file the application as mentioned in Case 1.

WHAT HAPPENS AFTER FILING DRC-03?

After submitting Form DRC-03, Status will be shown as “Pending for Action by Tax Officer”.

DRC -04 – ACKNOWLEDGEMENT

The taxpayer gets an acknowledgement as issued by the tax officer in the form GST DRC-04 (Acknowledgement of Acceptance of voluntary payment). There is no restriction on making another payment on a voluntary basis by a taxpayer, where the acknowledgement by the tax officer is still pending. However, you cannot make a new application while one application is still in the draft.

DRC- 05 – CONCLUSION OF PROCEEDINGS

Once payment has been made, then officer shall use an order in Form DRC-05 specifying about the conclusion of proceedings in respect of such notice.

DEFINITION OF BUSINESS

According to section 2(13) of the Income Tax Act, the term “business” is defined as any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.”

The term `Business’ means an activity being carried on continuously and systematically by a person with the application of his labor or skill with a view to earn income. The expression “business” does not necessarily mean trade or manufacture only, it has a much wider meaning. Business simply means any economic activity being carried on for earning profits. In any business, repetition of transactions or continuity of similar transactions is not a necessary element. Transactions may not be regular in nature.

The following activities have been considered as ‘Business’:

• Advertising agent
• Clearing, forwarding and shipping agents
• Couriers
• Insurance agent
• Nursing home
• Stock and share broking and dealing in shares and securities
• Travel agent

DEFINITION OF PROFESSION 

The term ‘Profession’ is defined under Section 2(36) of the Act Profession also includes vocation which is only a way of living. “Profession” involves the idea of an occupation requiring purely intellectual skill or manual skill controlled by the skill of the operator, as distinguished from an operation which is substantially the production or sale or arrangement for the production or sale of commodities.

 Classification of any activity as ‘business’ or ‘profession’ will depend on the facts and circumstances of each case.

As per Section 44AA of the IT Act, the following have been considered as ‘Profession‘:

• legal,
• medical,
• engineering,
• architectural profession,
• the profession of accountancy,
• technical consultancy or
• interior decoration.

Further under Rule 6F and other professions notified thereunder, the following activities can also be considered as a ‘Profession‘:

(i) Authorized Representative,

(ii) Company Secretary,

(iii) Film Artists/Actors, Cameraman, Director including an assistant director; a music director, including an assistant music director, an art director, including an assistant art director; a dance director, including an assistant dance director; Singer, Story-writer, a screen-play writer, a dialogue writer; editor, lyricist and dress designer,

(iv) Information Technology.

DIFFERENCE BETWEEN BUSINESS AND PROFESSION

FAQs

1. Are Nursing Homes and Hospitals a Business or a Profession?

• If Nursing Home or Hospital is owned by an Individual then it will be treated as ‘Profession’. But if it is owned by a Company or a firm then it will be treated as ‘Business’ because an artificial body like a company or a firm cannot possess any personal skills required to practice in a profession.

2. Teaching institutes are Business or Profession?

• Same logic will be applicable in case of teaching institutes. Teaching is a profession as specified skills are required to teach any student/class. But in case of a teaching institution, it is an artificial body, and hence, it will be considered as a business. But a teaching institution can be considered as a Profession if it is owned by an individual.

Companies Act, 2013 defines “charge” as an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage. There are various forms of creation of charge. Some of the terms used of creation of charge are: Mortgage, Hypothecation, Pledge, etc. Although these terms are used interchangeably many times, there is different meaning attached to these words. So in this article, you will be able to understand each of the terms separately which are used in the contracts.

MORTGAGE:

A mortgage is one of the ways to create charge against immovable property where the amounts involved are generally very high, and the transfer of title is often passed. Mortgage is the transfer of interest in a specific immovable property in order to secure an existing or future debt.

• The legal ownership of the asset can be transferred to the lender under mortgage if the borrower defaults on the repayment of the loan amount. However, the borrower continues to remain in possession of the property.
• A mortgage is usually used for immovable assets which are permanently fixed to the earth or attached to the land like house, land, building, or any property, etc. Home loans are classified as mortgages.
• The person creating the mortgage is called as Mortgagor while the person in whose favor mortgage is created (usually Banks) is called as Mortgagee.

PLEDGE:

Pledge is the bailment of goods as a security for payment of debt or performance of a promise. Bailment means delivery of goods with some purpose and with the condition that when the purpose is accomplished, the goods will be delivered back to the Bailor. Pledge is a contract between the lender and borrower, where the borrower pledges an asset as a security to the lender. Under Pledge, the ownership of the asset remains with the borrower, however, the possession of the asset is transferred to the Banker/Pledgee.

• Pledge can be charged only on movable goods like stocks. The bank shall take care of the possession in good faith and as the same as its own goods.
• In case of default by the borrower, the bank has a right to sell the goods in his possession with any intervention of the court and recover the amount due.
•  If there is any surplus while selling the asset, the amount is returned back to the pledger (borrower).
• The asset can only be sold by the pledgee after giving reasonable reminder and notice to the pledgor(borrower).
• In case of pledge, risk of lending comparatively reduces because possession of assets is with the lender.
• Some examples of pledge are gold /jewelry loans, advance against goods or stock, advances against National Saving Certificates etc.

HYPOTHECATION:

Hypothecation is another way of creating a charge but against movable assets. Hypothecation means offering an asset as collateral security to the lender. The borrower enjoys both the ownership as well as the possession.

• In the case of any default by the borrower, the lender can take the possession of the security and exercise his right to seize the asset and sell the asset to recover the dues.
• The charge created under hypothecation is Equitable Charge (where there is no variation).
• But in case of hypothecation of stocks to the bank, the charge which is created is called floating charge.
• The common example for hypothecation is car loans. In car or vehicle loans, it remains with the borrower but the same is hypothecated to the bank or financer. If the borrower defaults, the bank then takes the possession of the car after providing sufficient notice to recover the money.
• Sometimes when a bank or financial institution puts the already pledged asset as collateral for borrowing from another bank, it is called re-hypothecation.

ASSIGNMENT:

An assignment is another type of charge on current assets or fixed assets. Under assignment, the charge is created on the assets held in the books. Assignment refers to the transfer of right or interest to recover the debt.

• The transferor of the claim is called as the Assignor (Borrower) and the transferee is called the Assignee (Bank).
• Assignor cannot give better title to the assignee than what assignor has.
• In case of default, the assignee, i.e., the bank can recover the amount of actionable claim from the original debtor without reference to the Assignor.
• Assignment is possible through writing only.
• Assignment can be of two types: Legal and Equitable Assignment. Legal Assignment is the agreement where all the legal formalities are done on stamp paper while in case of equitable assignment, all the formalities are written on the paper but the legal element is missing from this.
• Examples of assignments include life insurance policies, books of debts, receivables, etc., which the bank can finance. For example – A bank can finance against the book debts. The borrower assigns the book debts to the bank in such a case.

LIEN:

The right to retain a property belonging to someone else till his debt is liquidated is called as Lien. Under a lien, the lender gets the right to hold up the asset used as collateral against the funds borrowed. However, unless the contract states otherwise, if the borrower defaults on the loan, the lender doesn’t have the right to sell the property.

Example: A piece of cloth is given to a tailor to stitch a suit. After the suit is made, the tailor has the right to retain it as security with him till he is paid the stitching charge by the person who placed the order for the suit. Once the payment is received, the tailor is bound to give the suit to the person concerned.

• It is a right given to the creditor to retain/possess the security until the loan amount is paid. It is the strongest form of security since possession of the security is with the creditor.
• Lien can be on both movable and immovable property.
• But generally, lending companies choose to have mortgages on immovable property and lien on movable security like shares, gold, deposits, etc.
• Examples of lien include rent receivable, unpaid fees, etc.

SET-OFF

A settlement of mutual debt between a creditor and a debtor through offsetting transaction claims is also known as setoff. In order to cover a loan in default, a bank has a legal right to seize funds of a guarantor or the debtor. The right of set-off enables the bank to combine two accounts (a loan account and a deposit account) of the same person. Through this settlement, a creditor can collect a greater amount than they usually could under bankruptcy proceedings. When a setoff clause is entered into, the bank can seize the customer’s current deposit.  For purposes of set-off, all bank branches are treated as one single entity. A bank exercising a right of setoff must fulfill the following conditions:

• the account from which the firm transfers funds must be held by the customer owing the firm money;
• the account from which the firm transfers the money and the account from which the money would otherwise have come, must be held with the same firm;
• both the accounts must be held in the same capacity by the customer;
• the debt must be due and payable.

COMPANIES (INCORPORATION) THIRD AMENDMENT RULES, 2022

Companies (Incorporation) Third Amendment Rules, 2022 has been notified on 18^th August 2022 by Ministry of Corporate Affairs (MCA) to further amend the Companies (Incorporation) Rules, 2014. In this amendment, MCA has introduced a new Rule 25B, which is about Physical verification of the registered Office of the Company. However, this new Rule will come into effect once notified in the Official Gazette.

OVERVIEW OF RULE 25B

Earlier, as per Section 12 of the Companies Act 2013, physical verification of the company’s registered office was required only when ROC have reasonable grounds to believe that the company concerned is not carrying on a business. However, after the amendment in the Companies (Incorporation) Third Amendment Rules, 2022, physical verification has been implemented as per Rule 25B.

After Rule 25A (Active Company Tagging Identities and Verification), MCA has inserted new Rule 25B (Physical verification of the Registered Office of the company).

Companies (Incorporation) Third Amendment Rules, 2022 has been introduced by the government to ensure a more transparent process for the physical verification of companies’ registered addresses. According to the new Rule 25B, the Registrar of Companies (ROC), based upon the information made available on MCA 21 portal, shall visit the Address of the Registered Office of the company and do the physical verification of the Registered Office of the company.

• As per the new rule 25B, ROC will carry out a physical verification of the location of the Registered Office of the company in the presence of two independent witnesses.
• The Registrar shall carry the documents filed on the MCA 21 portal in support of the Address of the company’s registered office for physical verification.
• To check the authenticity and validity of the documents as well as the office, the same shall be cross-verified with the copies of supporting documents of such Address collected during the physical check, duly authenticated from the occupant of the property where the Registered Office is situated.
• The Registrar will also need to have a photograph of the company’s registered Office for proof during the physical verification.
• If required, RoC will also seek assistance from the local police.

After conducting the verification process, a detailed report shall be prepared including all the information such as location details and photographs.

REGISTERED OFFICE OF A COMPANY

The company’s Registered Office is the main Office of the Company at which all the communication relating to the company are sent by the governmental departments. Company’s Registered Office shall be declared during company incorporation/LLP incorporation by the Directors of the company/LLP and they shall maintain all the required documents at the registered Office.

• Registrar of Company (ROC) will be determined by the state or location where the Registered Office of the Company is situated.
• Any change in the Company’s address/location of the Registered Office must notify the Registrar of Company (ROC) within a specified period of time.

REPORT ON PHYSICAL VERIFICATION OF COMPANIES REGISTERED OFFICE

Verification Report of the Registered Office of the company will be prepared by RoC in the given format.

• Name and Company Identification Number (CIN) of the company
• Latest Address of the company as per the MCA 21 records
• Date of authorization letter issued by the Registrar of Companies
• Name of Registrar of Companies
• Date and Time of Physical verification
• Location Details of Company along with the landmark
• Details of person available at the time of Physical verification

Along with these details, ROC will also have to attach the following documents with the report:

• Copy of agreement/ownership /rent agreement/No objection certificate (NOC) of the registered Office of the company from owner/tenant/lessor
• Photograph of the Registered Office
• Self-Attested ID card of the person available

NOTICE TO COMPANY AND DIRECTORS

Suppose the Registered Office is unable to receive and acknowledge all notices due to its location or any other issue. In that case, the ROC will notify the Company and all Directors of the intention to remove the company’s name from the official Register of Companies (ROC) by the way of show-cause notice and request them to send their reply along with the required documents.

The Director of the company needs to send their reply against the show-cause notice along with the necessary documents within 30 days from the date of the notice by the MCA; otherwise, ROC will have to take further action under section 248 of the Companies Act.

SPECIAL MENTION ACCOUNT (SMA)

Special Mention Account (SMA) is an account which is exhibiting signs of incipient stress resulting in the borrower defaulting in timely servicing of her debt obligations, though the account has not yet been classified as NPA as per the extant RBI guidelines. In 2014, the classification of Special Mention Accounts (SMA) was introduced by the RBI to identify those accounts that has the potential to become an NPA/Stressed Asset. There are three types of SMA – SMA 0, SMA1 and SMA 2. They are usually categorized in terms of duration.

SMA SUB-CATEGORIES	BASIS FOR CLASSIFICATION
SMA – 0	1-30 Days
SMA – 1	31-60 Days
SMA – 2	61-90 Days

EXAMPLE:

Assuming due date for an account as 4th day of every month (say 4th Aug, 2022):

• If the EMI/entire dues of a particular account are not received into the bank account before the day end process is run on the 4th calendar day i.e the due date, the account shall be treated as overdue after day end process. Accordingly, this account shall be classified as SMA-0. The account shall remain classifies under SMA-0 until the end of the 30^th day.
• If this account remains continuously overdue even after the completion of day end process on 30th day from the initial due date, after its classification as SMA-0, the account shall be classified as SMA-1 and shall continue to remain under this head till the 60^th day.
• Similarly, if the account continues to remains overdue even after the end of 60 days, it shall get classified as SMA-2 upon running of day end process on the 61st day from the initial due date. The maximum days to remain under SMA -2 is 90 days.

If the account remains continuously overdue for 90 days, it shall get classified as NPA (Non-Performing Asset) upon running of day end process on the 91st day from the initial due date.

NON-PERFORMING ASSETS (NPAs)

A non-performing asset (NPA) is a classification used by financial institutions for loans and advances that are in default or in arrears. In general, loans are classified as NPAs when the payment is outstanding for a period of 90 days or more, though some lenders can use shorter or longer time window in considering a loan or advance past due based on the conditions of the loan. A loan can be classified as a nonperforming asset at any point during the term of the loan or at its maturity.

Nonperforming assets (NPAs) are listed on the Balance Sheet of every bank or other financial institution. After a specified period of non-payment by the borrower, the lender will force the borrower to liquidate any assets that were pledged in the debt agreement. In case no assets were pledged, the lender may have to write-off the asset as a bad debt. He can also sell it at a discount to any collection agencies.

Nonperforming creates a significant burden on the balance sheet of the lender. The nonpayment of interest or principal reduces the lender’s cash flow, which can disrupt budgets and decrease earnings. Loss provisions created on loans are set aside to cover any potential losses which may occur, and it therefore reduced the capital available with the Banks. Once the defaulted loans are determined, the actual losses are written off against the earnings. Carrying a significant amount of NPAs on the balance sheet over a period of time is an indicator to regulators that the financial fitness of the bank is at risk.

PURPOSE OF NPAs

It is crucial for both the borrower as well as the lender to be aware of their assets whether they are performing or non-performing assets.

In case of the borrower, if the asset is a non-performing asset and interest payments are not done, it can affect their credit and growth possibilities in a negative way. It might hamper their ability to obtain any future borrowing.

In case of the bank/lender, interest earned on loans acts as a main source of income. Therefore, non-performing assets will affect their ability to generate adequate income and thus, their overall profitability. Keeping a track of NPAs is highly significant for banks since it will adversely affect their liquidity and growth abilities.

Non-performing assets would be manageable, but it depends on the amount of NPAs how many there are and how far they have stayed overdue. Most banks can take on a fair amount of NPAs in the short term. However, if the volume of NPAs continue to increase over a period of time, it threatens the financial health and future success of the lender.

TYPES OF NON-PERFORMING ASSETS (NPA)

• Term Loans, Cash Credit and Overdraft Facilities are treated as NPA if the installment of the loan, whether principal or interest, is due for more than 90 days.
• Agricultural Advances are considered as NPAs if the principal payments have stayed overdue for the specified period of time. The specified period is defined as
  • two or more crop seasons/harvest seasons for short duration crops, and
  • one crop duration for long duration crops.
• There could be other types of NPAs, including residential mortgages, home equity loans, credit card loans, non-credit card outstanding, and direct & indirect consumer loans. Expected payment on any account is overdue for more than 90 days would be classifies as NPA.

CLASSIFICATION OF NPA FOR BANKS

Classification of NPAs can be done among 3 categories:

1. Sub- Standard Assets: Sub-standard assets are those assets that have remained NPAs for a period of less than or equal to 12 months (91 days to 12 months) and the risk of the asset is normal. Risk is significantly higher as compared to Standard Assets. Banks are generally ready to take some reductions in the market value on the loan amounts categorized under this.
2. Doubtful Debts: The term ‘Doubtful Debt’ itself means that there is a very low chance of recovery of its advances/loans from the party. Doubtful assets are those assets that have remained under sub-standard NPAs for a period of more than 12 months. Such advances can put the bank’s liquidity and reputation in jeopardy.
3. Loss Assets: The final classification of non-performing assets is loss assets. This loan is identified either by the bank itself or by an external auditor/ internal auditor. The bank, in this case, has to write off the entire loan amount outstanding.

Duty Credit Scrips is an initiative scheme introduced by the Government of India under the Foreign Trade Policy in 2015. Duty Credit Scrips were introduced to provide incentive to the Exporters to boost the inflow of forex in India. What these scrips are to exporters is same as for what vouchers are to shopaholics. These can be issues to Exporter of Goods as well as Services. Exporters get these scrips from the government for exporting goods or services outside India. These Scrips can be used to set off duties while importing to India.

The value of scrip varies from scheme to scheme, product to product and country to country. However, the scrip value in most of the cases is in the range of 2% to 5% of the realized FOB Value (in free foreign exchange). Validity of Duty Credit Scrips varies according to the nature of the scrips.  

Exporters can use Duty Credit Scrips (DCS) for the payment of:

PURPOSE OF DUTY CREDIT SCRIPS

• Duty Credit Scrips can be used by the exporters to pay their tax liabilities on imports, if any.
• DCS are transferrable in nature. So, if the exporters do have enough imports to set off these scrips, Exporters can sell them to those who import and can set off against their own tax liabilities.
• Duty Credit Scrips can also be revalidated on special request to DGFT (Directorate General of Foreign Trade) under crucial circumstances.
• Duty Credit Scrips cannot be used to set-off CGST/SGST/IGST liability.

DOCUMENTS TO BE SHARED WITH AUTHORITY FOR OBTAINING DCS

• Copy relating to the foreign inward remittance certificate
• Copy of IEC code.
• CA certificate
• Copy of RCMC certificate, i.e. Registration cum membership certificate
• Copy relating to the invoice
• Copy of foreign exchange earned
• List of directors (in case of companies)
• Board resolution

WHAT IS REMISSION OF DUTIES AND TAXES ON EXPORT PRODUCTS (RoDTEP) SCHEME

A scheme designed to provide rewards to exporters to offset infrastructural inefficiencies and associated costs. The Duty Credit Scrips and goods imported/ domestically procured against them shall be freely transferable. The Duty Credit Scrips can be used for:

(i) Payment of Basic Customs Duty and Additional Customs Duty specified under sections 3(1), 3(3) and 3(5) of the Customs Tariff Act, 1975 for import of inputs or goods, including capital goods, as per DoR Notification, except items listed in Appendix 3A.

(ii) Payment of Central excise duties on domestic procurement of inputs or goods,

(iii) Payment of Basic Customs Duty and Additional Customs Duty specified under Sections 3(1), 3(3) and 3(5) of the Customs Tariff Act, 1975 and fee as per paragraph 3.18 of this Policy.

Objective of the RoDTEP scheme is to promote the manufacture and export of notified goods/ products. To apply for RoDTEP scheme, an IEC is required. Other pre-requisites as mentioned in the Chapter 3 of Foreign Trade Policy and Hand book of Procedures may be referred.

WHAT IS SERVICE EXPORTS FROM INDIA SCHEME (SEIS) SCHEME

Under the framework of the SEIS Scheme, under implementation since 01.04.2015, service exporters for eligible service categories, are granted benefits in the nature of transferable Duty Credit Scrips as a percentage of Net Foreign Exchange earned on export of the eligible services in a financial year. The Duty Credit Scrips can be used Payment of Basic Customs Duty and certain other duties as listed in para 3.02 of FTP 2015-20

Pre-Requisites for Applying for SEIS Scheme

All eligibility criteria are outlined in FTP and HBP however salient ones are:

• Should have an active IEC at the time of rendering services
• Should have certain minimum earnings
• Should have exported eligible services as notified in Appendix 3D/3E/3X (Appendix 3X will be applicable on claim for FY 2019-20 and Appendix 3D/3E will be applicable for other year claim)
• Does not fall under ineligible categories as in public notice 45 dated 05.12.2017
• Services provided under Modes 1 and 2 only are allowed for claim for eligible services
• Negative Net Foreign Exchange earnings (NFE) makes the entitlement under zero for the financial year

WHAT IS REBATE OF STATE AND CENTRAL LEVIES AND TAXES (RoSCTL) SCHEME

Scheme to rebate all embedded State and Central Taxes/levies for meant for exports of made-up articles & garments. Pre-Requisites for Applying for RoSCTL Scheme is that an IEC is required.

WHAT IS EXPORT PROMOTION CAPITAL GOODS (EPCG) SCHEME

The objective of the Export Promotion Capital Goods (EPCG) Scheme is to facilitate import of capital goods for producing quality goods and services and enhance India’s manufacturing competitiveness. EPCG Scheme allows import of capital goods for pre-production, production and post-production at zero customs duty. Capital goods imported under EPCG for physical exports are also exempt from IGST and Compensation Cess up to 31.03.2020. Alternatively, the exporter may also procure Capital Goods from domestic market in accordance with provisions of paragraph 5.07 of FTP. Capital goods for the purpose of the EPCG scheme shall include:

– Capital Goods as defined in Chapter 9

– Computer systems and software which are a part of the Capital Goods

– Spares, moulds, dies, jigs, fixtures, tools & refractories

– Catalysts for initial charge plus one subsequent charge

EPCG scheme covers manufacturer exporters with or without supporting manufacturer(s), merchant exporters tied to supporting manufacturer(s) and service providers.

WHAT IS TRANSPORT AND MARKETING ASSISTANCE (TMA) SCHEME

The “Transport and Marketing Assistance” (TMA) for specified agriculture products scheme aims to provide assistance for the international component of freight and marketing of agricultural produce which is likely to mitigate disadvantage of higher cost of transportation of export of specified agriculture products due to trans-shipment and to promote brand recognition for Indian agricultural products in the specified overseas markets.

To apply for TMA scheme, an IEC is required. Other pre-requisites as mentioned in the Chapter 7 of Foreign Trade Policy and Hand book of Procedures may be referred.

SALE OF DUTY CREDIT SCRIPS (DCS)

In case, the holder (Exporter) of these scrips is unable to use them for any reason, he/she can sell them in the market. Buyer (Any Importer) of the scrips would usually buy them at a discount on the face value. The buyer of the scrips would not pay the full value of the scrips.
For example: If a holder has a Duty Credit Scrip worth Rs.2,00,000 and he is unable to use them, he should sell it in the market. Since the buyer of these scrips would not pay the full amount, it should be sold at a discount. The buyer may buy these scrips at Rs.1,80,000 instead of Rs.2,00,000.

Although these scrips are sold for Rs.1,80,000, It would still have the face value of Rs.2,00,000 and can be used for the payment of duties equivalent to Rs.2,00,000. The Buyer of these scrips gets the benefit of Rs.20,000 by paying Rs.1,80,000 instead of Rs.2,00,000. And the seller benefits from the transaction by encashing at least Rs.1,80,000 because the scrip would have been useless until its validity if he wouldn’t have used it or sold it.

GST ON RENTING OF IMMOVABLE PROPERTY FOR COMMERCIAL PURPOSE

Renting of any immovable property for a business or commercial purpose would attract GST @ 18% on the taxable value. In case of Commercial purpose, GST would be collected by the Owner/ Landlord and would be payable to the GST Department under forward charge mechanism. 

OWNER/LESSOR	TENANT/LESSEE	GST PAYABLE	INPUT TAX CREDIT
UNREGISTERED	UNREGISTERED	NO GST	NOT APPLICABLE
UNREGISTERED	REGISTERED	NO GST	NOT APPLICABLE
REGISTERED	UNREGISTERED	GST UNDER FORWARD CHARGE PAYABLE BY OWNER	ITC CAN BE CLAIMED BY THE OWNER
REGISTERED	REGISTERED	GST UNDER FORWARD CHARGE PAYABLE BY OWNER	ITC CAN BE CLAIMED BY THE OWNER

GST ON RENT OF IMMOVABLE PROPERTY FOR RESIDENTIAL PURPOSE

GST had been exempted on renting of residential property to any person up to 17^th July, 2022 but according to the recent amendment under GST Act, GST is applicable on Residential Property with effect from 18^th July, 2022 Renting an immovable property is considered as a supply of service and it attracts GST @ 18%.

• If any residential property is rented out to a registered person now, Tenant (i.e., the recipient) will be liable to pay tax at the rate of 18% under the reverse charge mechanism.
• However, GST is not attracted if the residential property is rented out to any unregistered person and therefore no liability would arise under GST.
• So, if the Tenant is registered under GST, then only GST would be liable to be paid.
• In case of residential property, it does not matter if the Landlord is registered/unregistered under GST.

OWNER/LESSOR	TENANT/LESSEE	GST PAYABLE	INPUT TAX CREDIT
UNREGISTERED	UNREGISTERED	NO GST	NOT APPLICABLE
UNREGISTERED	REGISTERED	GST UNDER RCM PAYABLE BY TENANT	ITC CAN BE CLAIMED BY THE TENANT
REGISTERED	UNREGISTERED	NO GST	NOT APPLICABLE
REGISTERED	REGISTERED	GST UNDER RCM PAYABLE BY TENANT	ITC CAN BE CLAIMED BY THE TENANT

REGISTRATION

It is the choice of the landlord or the owner whether he/she wants to take registration in the same state in which the property is situated or in different state. It is left to the option of the landlord. They must identify the place of supply to decide if CGST and SGST is charged or IGST applies.

Any business whose aggregate turnover exceeds Rs.20 lakhs in a financial year has to mandatorily register under Goods and Services Tax (GST). This limit is set at Rs 10 lakhs for North Eastern and hilly states flagged as special category states.

SECTION 194I – TDS ON RENT

While talking about renting of immovable property, liability under Section 194I also attracts. Section 194I requires to deduct TDS on payment of rent to any resident (Landlord). It imposes an obligation for TDS deduction @10% on persons (other than individual/HUF) making rental payments to resident Indians above a specified limit, i.e., Rs.2,40,000 in a year. However, in case of Individuals/HUF, if the total sales/gross receipts/turnover exceeds limit as per section 44AB during the preceding financial year in which such income is credited or paid by way of rent, shall be obligated to deduct TDS @10% under this section.

The TDS is applicable both to residential and commercial properties and it shall be paid on the Gross Amount excluding GST.

TDS must be deposited by the 7th of the subsequent month except for the month of March. However, for the month of March, TDS needs to be deposited by 30th April.

FAQs

Q.1. If any Company/LLP/Firm/AOP/BOI takes a residential property for the purpose of residence to rent its employees, would it attract GST?

Residence provided to its employees will be considered as business expenditure. Therefore, GST will be paid under RCM and the ITC of the GST can be claimed by the Tenant.

Q.2. Can a composition dealer who is registered under GST claim ITC if it takes a residential dwelling for the purpose of residence on rent?

A composition dealer who is registered under GST if takes a residential dwelling for the purpose of residence on rent, it will be considered as an item of business expenditure. GST will be paid under RCM but as per section 10(4), ITC of the GST paid cannot be claimed as they pay tax at prescribed lower rates.

Q.3. What will be the treatment of GST if a proprietorship concern takes a residential property on rent for himself or his family?

When an individual who is registered under GST as a proprietorship concern takes a residential dwelling on rent for himself or his family, then it will be considered as personal expenditure and not a business expenditure. So, personal expenditure would also attract GST under reverse charge mechanism but it cannot claim ITC against the GST paid.

Q.4. When a residential dwelling is taken by a registered person on rent for commercial purpose, who will pay GST?

When a residential dwelling is taken on rent for commercial purpose by a registered person, it will be treated at par with the commercial unit. If the landlord is unregistered, then GST shall not be levied either to the landlord or the tenant. If the landlord is registered, GST will be charged on forward charge basis and the recipient can take the ITC of the same.