Indian Newslink readers have asked the following questions:
I have been issued with an invoice (for $1000) dated September 20, 2010 with GST at 12.5%. I have budgeted this amount as payable in October. Am I liable to pay GST at 15%?
I have sent an invoice for $2500 with GST calculated at 12.5% to a client. He says he will pay in October (I have no problem with that) but at 12.5% GST. Is he right?
Inland Revenue Department (IRD) replies:
GST 12.5% will apply in both cases, since at the time of supply rule, which determines when a supply takes place and therefore what GST rate applies to the supply. Time of supply occurs when an invoice is issued for a supply, or any payment made towards a supply, whichever comes earlier.
So in both the questions asked, the time of supply is prior to October 1, 2010 (because invoices were issued accordingly). Therefore, so both sales will have GST charged at 12.5%. It is immaterial that payments are made later.
Our Columnist and Tax Expert Vijay Talekar explains further:
There are a number of issues which need to be considered during the transition from 12.5% to 15%.
Whether the GST rate of 12.5% or 15% applies will depend on the “Time of Supply.” How will you account for GST, i.e. payment, invoice or hybrid basis is irrelevant in determining the applicable rate of GST.
TOS is triggered at the earlier of the time an invoice is issued or the time any payment is received by the supplier.
Transitional Rules for GST rate increase if you account for GST on payment basis:
The time of supply rules will ensure that GST for all supplies until September 30, 2010 would be at 12.5% thereafter at 15%.
The transitional rules require those registered on payment basis to make a one-off adjustment in their GST return for the period ended September 30, 2010.
The need for adjustment
GST registered persons/entities on payment/cash basis will account for GST on their income and expenses for the period ended September 30, 2010. It is likely that they will have income and expense prior to October 1, 2010, for which a tax invoice has been issued, and GST charged at 12.5%.
But payment for those invoices is not received/made until September 30, 2010.
If these GST registered persons/entities were to account for the GST on these incomes and expenses on or after October 1, 2010, the applicable GST rate would be 15% and not 12.5%. Obviously, this means they would be paying or claiming more GST than what was actually charged or received at the time the invoice was issued/received.
The following examples may help understand the situation better.
Example One
Auckland Electricals Limited and Kiwi Connections Limited (not real names) both account for GST on payment basis or cash basis.
On September 24, 2010, Auckland Electricals Limited supplied and invoiced electrical goods worth $11,250.00 (including GST of $1250.00) to Kiwi Connections Limited.
Kiwi Connections Limited makes the payment of this invoice on October 2, 2010. As the tax invoice is issued on September 24, 2010 the GST component is $1250.00
However, since the payment is made on October 2, 2010, the GST component in that payment would be calculated as $1146.39 ($11,250.00*3/23, which is the new fraction used to calculate GST component).
If the transitional rate changes adjustment is not done by both parties, then, Auckland Electricals Limited will pay more GST of $217.39 ($1467.39 less $1,250.00); and Kiwi Connections Limited would claim more GST of $217.39 from IRD.
Hence three is a need for GST Transitional Rate changes adjustment.
The Calculation Method
1. Identify the supplies made before September 30, 2010 based on Time of Supply (TOS) Rules. (a) Purchases and expenses for which invoices have been received but no payment has been made until September 30, 2010. These are also called “Accounts Payable or Creditors (b) Sales and income for which invoices have been issued but no payment has been received prior to October 1, 2010. These are also called “Accounts Receivable or Debtors.”
2. Complete the Adjustment Calculation. Total the creditors calculated in (a) above, similarly total the debtors in (b) above; subtract the total of (a) from (b) and call this (c); Divide the result obtained in (c) above by 51.75. The answer is the amount of “Transitional Rate Change Adjustment” that should be shown in the GST Return for the period ended September 30, 2010.
3. Where to put this amount of Transitional Rate change Adjustment? If the total of
1 (a) above is more than that of 1 (b), then include this figure in Box 9 on the GST
Return. If the total of 1(a) is less than the total of 1(b), then include this figure in Box 13 of the GST Return.
Example 2
Auckland Electricals Limited (not real name) accounts for its GST on payment/cash basis. The GST Return period is September 30, 2010.
On September 30, 2010, the company would calculate its creditors and debtors as under:
Creditors: $50,000.00
Debtors: $65,000.00
Rate Change Calculations
· Creditors $50,000.00 – Debtors $65,000.00 =$15,000.00
· $15000/51.75 = $289.86
· As the creditors are less than debtors, the rate change adjustment of $289.86 should be printed in box 13 of the GST Return.
When the payments are eventually made/received for creditors/debtors, these will be accounted for at 15% on or after October 1, 2010. As the adjustment has already been made in the September GST Return, nothing further needs to be done.
Vijay Talekar is Director, Tax Experts Limited (Chartered Accountants), based in Auckland. The above article should be considered only as a guideline and not specific advice. Mr Talekar absolves himself along with the management and staff of Tax Experts Ltd and Indian Newslink of any responsibility or liability that may arise from the above article. Readers should seek professional advice before acting upon any information contained above.
