Introduction
The Goods and Services Tax (GST) is a significant reform in indirect taxation in India. While GST governs the taxation of goods and services, it has a substantial impact on the computation and taxation of income under the Income Tax Act, 1961. Understanding the interplay between GST and income tax is crucial for businesses and professionals to ensure compliance and optimize tax planning.
This blog explores how GST impacts income from business or profession under income tax, including its effect on turnover, expenses, and tax deductions.
GST and Its Relevance to Income Tax
GST influences the calculation of income under the head “Profits and Gains of Business or Profession” in the following ways:
- Turnover and Gross Receipts
- Turnover for GST includes the taxable value of supplies, exempt supplies, and exports.
- For income tax purposes, turnover determines audit requirements under Section 44AB and eligibility for presumptive taxation under Sections 44AD and 44ADA.
Example:
If a business has a turnover of ₹8 crore, where ₹2 crore is GST, only ₹6 crore is considered for income tax calculations if GST is excluded in invoices. - Claiming Input Tax Credit (ITC)
- GST paid on purchases and expenses can be claimed as ITC, reducing the cost of goods sold or operating expenses.
- This lowers the deductible expenses under income tax, increasing taxable income.
- GST as Income or Expense
- GST collected is not treated as income since it is a liability payable to the government.
- GST paid is not considered an expense if ITC is availed; however, GST on disallowed expenses (e.g., personal expenses) can be treated as an expense.
Key Areas Where GST Impacts Income Tax
| Aspect | GST Treatment | Impact on Income Tax |
|---|---|---|
| Turnover for Tax Audit | Includes GST in taxable supplies | GST can push turnover above thresholds for audit under Section 44AB. |
| Eligibility for Presumptive Taxation | Turnover includes GST unless separately accounted | May disqualify businesses from Sections 44AD or 44ADA schemes. |
| Input Tax Credit | Reduces net expenses for GST-registered entities | Increases taxable income under business profits. |
| Disallowed Expenses | GST on personal or disallowed expenses is not claimable | Treated as part of expenses under income tax. |
| Reverse Charge Mechanism | GST paid under reverse charge is eligible for ITC | Expenses under reverse charge without ITC are deductible. |
Illustrative Examples
1. Turnover and Presumptive Taxation
A trader with a turnover of ₹2 crore, including ₹36 lakh of GST, is under presumptive taxation:
- If GST is excluded, turnover is ₹1.64 crore, and presumptive taxation under Section 44AD applies.
- If GST is included, presumptive taxation cannot be opted for as turnover exceeds ₹2 crore.
2. GST on Disallowed Expenses
If ₹50,000 is spent on personal travel and ₹9,000 is paid as GST, the ₹9,000 GST becomes part of the expense under income tax as it is ineligible for ITC.
3. Impact of ITC
A professional spends ₹1 lakh on office furniture, paying ₹18,000 as GST. If GST ITC is claimed, the expense for income tax is ₹1 lakh. If ITC is not claimed, the expense becomes ₹1.18 lakh.
Compliance Challenges
- Reconciliation of GST and Income Tax Records
- Discrepancies between GST returns and income tax filings can trigger scrutiny.
- Ensure invoices, ITC claims, and expenses align across both systems.
- GST Refunds
- GST refunds are not taxable under income tax as they are considered recoveries.
- GST on Mixed Supplies
- Businesses providing mixed supplies (taxable and exempt) must accurately segregate turnover for income tax purposes.
Judicial Precedents
1. CIT v. Delhi Flour Mills Co. Ltd. (1974)
- Turnover for income tax excludes indirect taxes like GST if separately accounted for.
2. Gannon Dunkerley & Co. v. CIT (1993)
- Taxes recovered from customers and paid to the government are not part of income.
FAQs
1. Is GST part of turnover for tax audit purposes?
Yes, GST is included in turnover unless separately accounted for in the books.
2. Can GST refunds be treated as income?
No, GST refunds are recoveries and not taxable as income.
3. How does GST affect presumptive taxation?
GST-inclusive turnover may disqualify businesses from presumptive schemes under Sections 44AD and 44ADA.
4. Is GST paid under the reverse charge mechanism deductible?
Yes, if ITC is not claimed, GST paid under reverse charge is deductible as an expense.
5. What happens if GST and income tax filings do not match?
Discrepancies may lead to scrutiny, penalties, or disallowance of expenses.
Conclusion
GST has a profound impact on the computation of income under the Income Tax Act. By understanding how GST influences turnover, expenses, and tax deductions, businesses and professionals can ensure compliance and avoid penalties. Proper reconciliation between GST and income tax records is essential for smooth operations and optimized tax liability.
Additional Resources
Learn more about Tax Provisions on the official Income Tax India website.
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