Reality of GST Savings on buying Smartphones | CA Sahil Jain - YouTube

Good evening!

Yesterday, one of my clients, Mr. Kapoor

He came to me to consult regarding one of his Income Tax Case

Now, when he came,

He instantly offerred me a box of sweets & asked me to have one

I got puzzled about why he is offering me sweets even after being involved in a tax case

He said the sweets have nothing to do with the income tax case

You just listen to what I just did

I asked him what he did

He told me that he has booked iphone 13 pro max 1 hour back

I congratulated him (sarcastically) and then asked him how much he paid for it

He told me that he paid 1,40,000 for the phone

I appreciated again (again sarcastically XD)

I asked him to get our consultancy fee dues settled instantly

To change the topic, he told me that while he has paid 1.4 Lacs for the phone but the phone costed him "ONLY" 1.18 Lacs

I was like, "Sure, why not!"

Joking aside

I told him that if you think the phone costed you 1.18 Lacs and not 1.4 Lacs

just because you can take Input Tax Credit of the GST Paid

you are living in a delusional world and will not be able to save this much

You might think that GST portion in the price will not form part of your cost, but it will!

I'll explain you how

Have a look! While explaining to him

I told him that, let's say, you have purchase any capital good

Not just a phone. You could've bought a phone, furniture, AC or anything that is not an "Input" for your business

It shouldn't be something that you sell as a part of your business. Such an item is called as a "Capital Good"

So, any good that you've purchased and will capitalise in your books

For example, let's say, you purchased it for 4 Lacs

and on this amount, you've paid a GST of 20k @5%

In that case, on reading Sections 16 to 21 of CGST Act, 2017

You will feel that you can avail ITC of entire 20k in the first month of purchase

and that is true also. You will be able to avail it in this way.

You had paid 20k on account of GST while purchasing the good

You will avail the ITC of entire 20k paid by you

and after availing the same, you will ascertain Output Tax Liability of your business in that month

which will get reduced by 20k on account of utilization of this ITC

as a result of which

the GST of 20k which you paid for purchasing this good

You'll save that 20k on account of reduction of Output Tax Liability

And indirectly, this 20k will not form part of your expense

So, while purchasing the good, you might feel that 20k GST will not form part of cost but that's not right

It's not like you can avail the ITC and then forget about it

Do not forget about it because the government won't let you off so easily

I'll explain how

Any capital good that you purchase

If you see practically, the life of different capital goods will be different,

mobile, laptop, furniture might have life of 2 yrs, 4 yrs & 10 yrs respectively

Different assets have different life in the real world

But when you look at GST Law

the government has DEEMED for all capital assets

that their life is of 5 years

1,2,3,4 & 5

and these 5 years commence from the date of the invoice

So the government lets you avail entire ITC as soon as you receive the good

But, govt. keeps a strict vigil on you

to make sure that you use this good in your business for at least 5 years

If you sell the asset before the end of this 5 year period, the government will

ask you to reverse a portion of the 20k ITC that you availed on purchase

since we had given you the ITC of 20k with an assumption that you will use the asset for 5 years

in which case, the benefit of entire 20k would've been available to you

But since you have sold the asset before the end of 5 year period, you will have to reverse some ITC benefit

Now, let's understand how this reversible amount is calculated

Let's say that I tell you the asset which was purchased for 4 Lacs plus 20k GST

the same asset is being sold to some other person

within 2 years from the date of purchase

2 years were completed from the life of 5 years

Within 2 years itself, the asset is sold to someone for 50k

In this case, the govt. will do as follows

The govt. will ask you to do 2 things

Firstly, tell the tax on transaction value

i.e., tell the tax on 50k consideration that you've sold the asset for

The seller might get confused about

the rate of GST to be used to determine the "tax on transaction value"

the govt. advises to use the same rate given in original invoice if the rate has not changed

So if the good is subjected to same GST rate today also, you will multiply 50k with 5% giving you a GST Amount of Rs. 2,500

This is the tax on transaction value

Now, the govt. wants you to compare this figure with another figure

Where this other figure is "ITC pertaining to the remaining useful life"

Now, let's see how it is to be computed

The govt. wanted you to avail entire ITC if you were to use the asset for entire period of 5 years

You've availed the entire ITC at once but it pertains to 5 years

So 4k ITC can be attributed to every year

but you've sold the asset within 2 years of use

so the life of 3 years is still remaining for use

Now, how do you calculate ITC pertaining to these remaining 3 years?

3 X Rs. 4,000 per year

which gives you a figure of Rs. 12,000

we've written that figure down here

Now, the govt. has provided u/s 18(6) of CGST Act

that you have to select HIGHER of these 2 amounts which in our case is Rs. 12,000

So this amount is to be paid

whenever you sell the asset for 50k after 2 years

Som if this person says that 20k GST paid did not form part of my cost

Is the statement wrong? It definitely is wrong

You did get an ITC of 20k but you had to eventually reverse ITC of 12k at the time of sale

So, on net basis, you got a benefit of Rs. 8k only

you can say that you've save 8k on account of ITC

but cannot claim that your cost reduced by 20k

Similarly, if you apply this analysis to my client's iphone case

then again, I asked my client one simple question

for how long will you be using the iphone? More than 5 years?

to which he replied, No, I won't be able to use it for 5 years

I've never been able to use any mobile for more than 2.5 years

couldn't use it because of any xyz reasons

And I agreed that it is practically not possible to use phones for 5 years

And since it cannot be used for 5 years, your statement of having paid 1.4 lacs

but the cost being only 1.8 lacs on account of the ITC is not a correct statement

If you know that you might sell the phone in 2 years

then you can rationally say that you'll save about 40% of GST paid on purchase

but the remianing 60% will still be forming part of your cost

Do not ignore it

And going forward, if Amazon or Flipkart or any Businessman represents to you

that the phone is of 1.4 Lacs but will cost you only 1.18 Lacs

then, you can easily deduce

that all of these people are just trying to make a fool out of you

I hope you've learnt something from this discussion

and if you're planning to purchase any capital good

then you will be able to effectively assess its cost

by considering the actual period for which you plan to use the asset in business

If the period is more than 5 years, you might save entire GST

provided you use that capital good in your business

However, if you plan to use the asset for less than 5 years

Then do this analysis to practically check how much ITC you can effectively take benefit of

In this analysis that we've done today, I'll tell you in some video how some people

unethically try to evade this tax which is legally required to be paid

We'll talk about the entire modus operandii but I'll make a separate dedicated video for that

See you in the next video, take care of yourself, bye!