Stock Transfers – Taxability & Valuations

Under Central Excise, a registered manufacturer making a stock transfer of excisable goods, should pay excise duty on 100% +10% of cost of production and under VAT, on furnishing Form F, stock transfers are not taxable. However, input VAT on purchase of goods should be reversed at certain percentage which differs from state to state.

Under GST, levy of tax is on Supply which includes transfers and with the definition of distinct person, branches need to be treated as a different entity. Accordingly, any stock transfers are taxable in the following two cases:

  • Intrastate stock transfer: Only when an entity has more than one registration in one state.
  • Inter StateStock transfer: Transfer between two entities located in different states is taxable

The taxability of stock transfers under GST will have an impact on cash flow. This is because, tax is paid on the date of stock transfer, and ITC is effectively used when stock is liquidated by the receiving branch. Hence, under GST, for businesses engaged in stock transfers, especially in case of pharma and FMCG goods, the need of additional working capital arises due to tax instances. This will be a challenge for SMEs who operate with thin working capital.

Consider a seasonal business where production happens throughout the year, but sale happens during a particular season. In such cases, funds may be blocked for long durations. This is because GST needs to be paid in the month in which branch transfers are done, but credit will be effectively utilised during the month in which sale is done.