GST tax liability for specific cases

GST tax liability for specific cases

GST looks simple in theory — charge tax, file returns, claim credit. In practice, specific business situations flip every assumption. The buyer pays instead of the seller. A stock transfer between your own warehouses generates an invoice. Free samples reduce your ITC balance. Get these specific cases wrong and you face tax demands with 18% annual interest, ITC reversals, and penalties that dwarf the original tax. This guide maps nine of the most consequential specific-case rules under GST for FY 2026-27, with the section references, numbers and procedures you need to act on them today.

Reverse Charge Mechanism: When GST Liability Shifts to the Buyer

The default rule under the CGST Act 2017 is that the supplier pays GST. Reverse Charge Mechanism (RCM) overrides that default: the recipient pays the tax directly to the government in cash. No offset against existing ITC is allowed for that payment — cash only. ITC is available on the tax so paid, subject to the normal conditions of Section 16.

Section 9(3) — Notified Supply Categories

Section 9(3) of the CGST Act (mirrored by Section 5(3) of the IGST Act) empowers the government to notify specific goods and services where RCM applies regardless of whether the supplier is registered. Currently notified services include:

• Goods Transport Agency (GTA) services — where the GTA has not opted to pay GST at 12% under forward charge. RCM rate: 5% (no ITC to recipient under this rate) or 12% if GTA opts forward charge.
• Legal services from an individual advocate or firm of advocates to a business entity — 18% GST under RCM.
• Sponsorship services received by any body corporate or partnership firm — 18%.
• Services by a director to a company or body corporate — 18%.
• Renting of immovable property by an unregistered person to a registered person — rate as applicable.
• Import of services (discussed separately below).

Worked example — GTA: Your Pune factory hires a transporter to deliver goods to a Mumbai buyer. Freight: Rs. 40,000. The GTA is not paying GST under forward charge.

• RCM GST @ 5% on Rs. 40,000 = Rs. 2,000
• Payable in cash via GSTR-3B (Table 3.1(d)) for the month of the service
• ITC of Rs. 2,000 claimable in Table 4(A)(3) of the same GSTR-3B
• Net cash out: nil for a fully taxable business — but you must still go through the motion of paying and claiming. Skipping it creates a demand with 18% interest from the month of service.

Section 9(4) — Purchases from Unregistered Dealers

Section 9(4) currently applies only to specified registered persons (notably real estate promoters) receiving certain supplies from unregistered persons. It does not apply universally as it once did before the 2018 suspension. However, CBIC periodically expands the notification base, so verify the current notification before assuming you are outside its scope.

Compliance Sequence for RCM

1. Identify the supply category as notified under Section 9(3) or 9(4).
2. Issue a self-invoice on or before the 18th of the following month (Rule 47 read with Rule 36(2)).
3. Determine the time of supply: the earlier of the date of payment, the date of invoice, or 30 days from the date of invoice.
4. Pay the tax in cash in GSTR-3B Table 3.1(d).
5. Claim ITC in Table 4(A)(3) after confirming Section 16 conditions.

Missing the self-invoice is the single most common RCM error. GST officers treat an absent self-invoice as evidence that the liability was never recognised.

GST on Imports: Goods and Services Work Differently

Import of Goods

When goods cross Indian customs, IGST is levied under Section 5 of the IGST Act read with the Customs Tariff Act 1975. The taxable base is:

> Assessable Value + Basic Customs Duty (BCD) + Other Customs Levies

IGST is collected at the port by customs authorities at the time of clearance. ITC on this IGST is available as soon as the bill of entry is reflected in your GSTR-2B. You do not need to pay again in your GST return — the bill of entry is your evidence. Never claim this ITC manually in GSTR-3B before it appears in 2B; officers routinely raise notices for premature claims.

Import of Services

Import of services is treated as inter-state supply under Section 7(4) of the IGST Act, and tax is payable by the Indian recipient under RCM per Section 5(3). There is no customs clearance event — the trigger is the earlier of:

• Date of payment in the books or bank, or
• Date of receipt of invoice

Worked example — US SaaS subscription: A Bengaluru startup pays USD 3,000/month to a US cloud provider. Exchange rate: Rs. 84/USD.

If the startup delays recognising this liability for six months, the accumulated tax liability of Rs. 2,72,160 (6 × Rs. 45,360) attracts interest at 18% per annum from each month's due date. On a 180-day delay, estimated interest alone exceeds Rs. 24,000 — an avoidable cost.

Branch Transfers and Inter-State Stock Movements

Many founders assume that moving stock between their own offices or warehouses is a non-event for GST. It is not.

Why Every Inter-GSTIN Transfer is Taxable

Schedule I, Entry 2 of the CGST Act deems a supply to have occurred when goods or services are transferred between distinct persons — same PAN but different state GSTINs. The sale is notional (no external consideration changes hands), but GST law treats it as a taxable supply. This prevents businesses from accumulating ITC in low-tax states and consuming it in high-tax states.

Valuation Under Rule 28

For transfers between distinct persons where the recipient is eligible for full ITC, Rule 28 allows the value to be declared as either:

• The open market value (OMV), or
• 90% of the OMV, or
• Any value declared by the supplier if the recipient is entitled to full ITC

For recipients not entitled to full ITC (such as composition dealers, exempt businesses), the value must be the OMV or computed per Rule 30/31.

Worked example — Delhi to Pune warehouse: A manufacturer produces goods at Rs. 8,00,000 cost, OMV Rs. 10,00,000. Transfers to Pune warehouse (GSTIN 27XXXXX):

The transaction is revenue-neutral for a fully taxable business — but it requires a proper tax invoice, e-way bill (where value exceeds Rs. 50,000), and the invoice to be declared in GSTR-1. Omitting these creates reconciliation failures in GSTR-2B and triggers ITC mismatch notices.

Free Samples, Gifts and Promotional Schemes

Free Samples and the ITC Reversal Trap

When you give goods away without any consideration — free drug samples to doctors, demo units to prospects, trial products to customers — Section 7(1) says there is no supply (no consideration). However, Section 17(5)(h) blocks ITC on goods disposed of as gifts or free samples. The ITC you claimed on procurement must be reversed in GSTR-3B Table 4(B)(1).

Worked example — pharma company: A pharma firm procures samples worth Rs. 3,00,000 at 12% GST (ITC claimed: Rs. 36,000). All samples are distributed free.

• ITC reversal required: Rs. 36,000
• Report in GSTR-3B Table 4(B)(1) in the month of distribution
• Do not reverse based on estimates — reverse in the period of actual distribution

If you deferred the reversal by three months, interest of 18% p.a. on Rs. 36,000 for 90 days = approximately Rs. 1,596 becomes payable alongside the reversal.

BOGO and Bundle Promotions

A "buy one, get one free" offer is analysed as a composite supply if the items are naturally bundled, or a mixed supply otherwise. The key principle: there is a consideration (the price of the first unit), and the "free" unit is part of the same supply. The GST rate applies to the total transaction value. No separate ITC reversal is required here — the output tax is already computed on the full bundle price.

The mistake businesses make is treating the free unit as a "gift" and reversing ITC. If the customer paid for the bundle, it is not a gift — it is a discounted supply.

Employee Gifts and the Rs. 50,000 Rule

Gifts to employees are excluded from "supply" under Schedule I only if the value per employee per year is up to Rs. 50,000. Above that threshold, the excess is a deemed supply and you must pay output GST. ITC on the procurement of those gifts is blocked under Section 17(5)(h) regardless of whether they cross the threshold.

Deemed Exports, Merchant Exports and Zero-Rated Supplies

Deemed Export: Taxed but Refundable

Supplies to Export Oriented Units (EOU), holders of Advance Authorisation (AA), holders of Export Promotion Capital Goods (EPCG) licences and certain notified government projects are deemed exports under Section 147 of the CGST Act. Tax is charged at the normal applicable rate, but a refund is available — either to the supplier or the recipient, but not both, and only after filing RFD-01.

The window for filing RFD-01 for deemed export refunds is two years from the date of supply. Miss it and the refund is lost permanently.

Merchant Export Concessional Rate

A merchant exporter is a person who buys goods domestically and exports them without processing. Supplies to a merchant exporter attract a concessional rate of 0.1% IGST (0.05% CGST + 0.05% SGST for intra-state) under Notification No. 41/2017-IGST (as amended).

Conditions:

• The merchant exporter must provide their GST registration number and GSTIN of the exporting port on the purchase order.
• Export must be completed within 90 days of the supply date.
• A letter of undertaking or bond in the merchant exporter's name must be in place.

If the 90-day condition is not met, the differential tax (normal rate minus 0.1%) becomes payable by the supplier with interest at 18% p.a. from the original supply date.

Worked example: Supplier sells goods worth Rs. 15,00,000 (normal rate 18%) to a merchant exporter.

Works Contracts and Real Estate: Rates That Depend on Project Type

A works contract is defined under Section 2(119) of the CGST Act as a contract for building, construction, fabrication, installation or repair of immovable property where transfer of property in goods is involved. It is always treated as a supply of service under Schedule II, Entry 6(a).

Residential Rates (No ITC After Scheme Change)

For residential real estate sold before Occupation Certificate (OC):

• Affordable residential (carpet area ≤ 60 sq m in metro / 90 sq m elsewhere; price ≤ Rs. 45 lakh): 1% GST, no ITC
• Other residential (non-affordable): 5% GST, no ITC

Builders who chose the new rates from 1 April 2019 cannot claim ITC on inputs, input services or capital goods used in residential projects. Claiming ITC on cement, steel or contractor invoices for such projects is a serious error — it will be demanded back with interest and penalty.

Commercial Real Estate

Works contracts for commercial properties (offices, retail, warehouses) attract 12% GST with ITC available. Ensure your project classification is documented at contract stage, because reclassifying from residential to commercial (or vice versa) mid-project creates cascading ITC adjustment obligations.

Joint Development Agreements (JDA) — Time of Supply

Under a JDA, the landowner transfers development rights (TDR) to the developer in exchange for built-up area. The time of supply for TDR is the earlier of completion certificate / first occupation of the units, or transfer of possession. The developer's GST liability on flats allotted to the landowner is computed at that point. Many developers miss this trigger and recognise GST only when the units are sold — creating a time-of-supply error and interest exposure.

Composition Scheme: Eligibility, Restrictions and Filing

Section 10 of the CGST Act permits small businesses to pay tax at concessional flat rates:

Special category states have a lower threshold of Rs. 75 lakh.

What You Cannot Do as a Composition Dealer

• Make inter-state outward supplies of goods — a composition dealer discovered making even one inter-state goods supply loses composition eligibility for the entire financial year, triggering regular GST and penalties on all supplies from day one.
• Issue a tax invoice or collect GST separately from the customer — you can only issue a Bill of Supply.
• Claim ITC on any input, input service or capital good.
• Supply through an e-commerce operator who is required to collect TCS.

Filing Calendar

• CMP-08 (tax payment challan): Due on the 18th of the month following the end of each quarter. For Q1 FY 2026-27 (April–June), due date is 18 July 2026.
• GSTR-4 (annual return): Due on 30 April after the end of the financial year — i.e., 30 April 2027 for FY 2026-27.

Late fee on GSTR-4: Rs. 200 per day (Rs. 100 CGST + Rs. 100 SGST), subject to a maximum of Rs. 10,000 per return.

Common Mistakes and How to Fix Them

1. Missing self-invoices for imported services. Every month your company pays a foreign vendor for software, consulting or royalties, raise a self-invoice by the 18th of the following month. Maintain a register of all foreign vendor payments as a source trigger.

2. Treating branch transfers as nil-rated. Some businesses file an inter-state branch movement under zero rate or exempt. The correct treatment is IGST at the applicable rate with a tax invoice. If historical transfers were under-reported, compute the liability, pay with interest, and file GST DRC-03 voluntarily to reduce penalty exposure.

3. Reversing ITC incorrectly on BOGO promotions. BOGO is a discounted supply, not a gift. Do not reverse ITC on the "free" unit if consideration was received for the bundle. Document the promotional pricing policy to support this position in audit.

4. Claiming ITC on residential project inputs under the new scheme. Once a builder opts for the 1% / 5% scheme, all ITC is permanently barred. Builders who continue claiming ITC on common-area construction or project management costs are sitting on a demand waiting to happen.

5. Missing the 90-day merchant export window. Build a calendar trigger — 85 days after each merchant export supply date — to verify shipping bill numbers with the merchant exporter. If the deadline is approaching and export has not happened, reverse the differential tax proactively.

6. Time of supply errors under RCM. RCM time of supply is not simply the invoice date. It is the earlier of payment, invoice date, or 30 days from the invoice date. For advance payments to foreign vendors, the time of supply is the payment date itself. Book the liability in the correct GSTR-3B period to avoid interest.

7. Composition dealers making inter-state sales. If you are in composition scheme and receive a bulk interstate order that seems too good to refuse, calculate the full-year tax cost of exiting composition before accepting it. The loss of scheme status for the whole year almost always outweighs a single order's margin.

Worked Example: Annual GST Diagnostic for a Mid-Size Manufacturer

Consider a Hyderabad-based auto-component maker with FY 2026-27 turnover of Rs. 12 crore. A mid-year diagnostic surfaces these issues:

The branch transfer error alone accounts for over Rs. 9 lakh in tax plus Rs. 81,000 in interest. Voluntary disclosure through DRC-03 before a GST scrutiny notice reduces penalty from 100% of tax to 15% — a saving of Rs. 1,47,600 just on that one item.

Key Takeaways

• RCM is a cash liability — you cannot use existing ITC to pay RCM tax. Pay first, claim back second. Set up a monthly RCM register covering GTA, legal, foreign services and director services.
• Import of services is RCM too — every foreign subscription, consulting fee or royalty has an IGST liability payable by you. Time of supply is earlier of payment and invoice receipt.
• Branch transfers between different GSTINs are taxable supplies even with no external consideration. Use Rule 28 correctly and raise proper tax invoices with e-way bills.
• Free samples require ITC reversal under Section 17(5)(h) in the month of distribution. BOGO promotions do not — know the difference before you file.
• Merchant exports save significant GST at 0.1% IGST, but the 90-day export condition is a hard deadline. Track it actively.
• Real estate builders on the 1%/5% scheme cannot claim ITC on any input — including cement, steel and sub-contractor bills. This is non-recoverable if claimed and subsequently reversed with interest.
• Composition dealers must not make inter-state goods supplies — even one transaction voids the scheme for the entire year. Review every order above state lines before dispatch.