Analysis Of Input Tax Credits Under Goods And Services Tax Act 1999

Overview of the case study

In the given case, the sales of the Dziko gallery were low in 2017, but its business expenses were high. The gallery hired neighboring artists to paint artworks for selling. For this reason,  some art supplies such as paints and brushes were purchased for them. In 2017, the gallery bought a package of art supplies for $1000, for which it was charged $100 as GST. The gallery also purchased 5 frames at $100 each for the artworks being featured for sale, for which it was charged $50 as GST. The gallery had also incurred input taxes on other overhead expenses, which totaled $15,000 in input taxes. The gallery’s total ‘input taxes’ for the year 2017 were, therefore, $15,150.

Now, after analyzing the case properly, the issues here is to determine what actually Input Tax Credits (ITC) means, when an Input Tax Credits can be claimed(ITC) and when it cannot. The most important and primary issue which to be determined here is that how much Input Tax Credits could the gallery claim for the year 2017.

As per the GST Act of 1999, the Input Tax Credits is discussed under the Section 7-1. This Section 7-1 of the New Tax System (GST Act) states that the Goods and Services Tax is payable on taxable importations and taxable supplies. The rights to participate tax credits rise on creditable importations and creditable acquisitions.  

Section 48-45 of the New Tax System GST Act, 1999, declares in detail, who is permitted to input tax credits. From these sections, it will be clear that which business can claim input tax credits and which cannot. All the above sections will also be able to determine that how much input tax credits could the gallery claim for the year 2017.

Under the section7-1 of the GST Act the Input Tax Credits comes. An entity can entitle a credit of any services and goods for any GST incorporated into the cost which it purchases for its commercial purposes. This is recognized as a GST credit (or an input tax credit which is the credit of its business contributions for the tax incorporated into the fee). The general plan of the GST portrayal is that the business yet gains a credit for the GST component of supplies made by others to the business for GST account on the supplies it creates. This credit is named as the input tax credit as on the business inputs it is a credit for tax paid. Input tax credits are proposed to promise that the final load of the GST will fall on private consumer or on the end user.

Applicability of GST sections to the case

According to Section 11-20 of Goods and Services Tax Act invented in 1999, the business entities for any creditable attainment are enabled to the input tax credit that it makes. To privilege the input tax credits the entity should be recorded for GST. It can prevail a credit on the ground of GST incorporated into the value it pays for products it uses in its commercial purposes. This is known as a GST credit or input tax credit. In the statement of business activity t claims input tax credits. On the ground of certain conditions, the input tax credits are claimed by the entity:

• It aims to apply its acquisitions or purchase mainly for its business.
• GST is included within the purchase price.
• The thing which is purchased gives or is liable to fulfil payment.
• The supplier provides one tax invoice (for purchases further than A$82.50).

While input tax credits are claimed, ensuring that the GST registration is done by the suppliers. A four-year time constraint applies for claiming input tax credits.

Section 48-45 of the Goods and Services Tax Act declares in detail that who is entitled to input tax credits.

A business entity cannot claim an input tax credits:

• GST in the cost is not required for the purchases.
• Without the help of a considerable tax invoice
• The wages that are paid to the staff does not fall under GST.
• There is a limit specified for the purchases of motor vehicles.

GST does not include the services and the foods:

• Foods are considered without GST as for example.
• Tax input items (for example, loan interest and bank charges)
• The business purchases which is not registered for GST (and so GST can’t be charged).

An entity additionally can’t claim input tax credits for the accompanying, regardless of whether GST is incorporated into the cost:

• Purchases it means to usage for isolated or residential tenacities.
• Purchases which means to the usage of the casting of input-taxed materials, for example, those connected in providing residential accommodation
• A few purchases which is not claimed as an income tax deduction, for example, expenses that are used in entertainment.
• Purchase of land under the margin scheme.

Input tax credit implies at the span of disbursing tax on output, a business entity is to decrease the tax that it had previously compensated on inputs and wage the balance quantity. When it purchases an item/service from a dealer who is registered, it pays taxes at the time of purchase. At the time of selling, it collects the tax which varies the taxes which is paid at the span of purchase with the amount balance liability of tax (tax on sales minus tax on purchase) and of output tax (tax on sales) thus to be paid to the government. Which is known as usage of input tax credit.

After analyzing the given case properly, it is very much clear that in this case the Section 7-1 of Goods and Services Tax Act, 1999 is applicable. Many other Sections such as Section 48-45, Section 11-20 etc of the same Act is also applicable. From these sections, individuals can get a clear idea of Input Tax Credits. As well as individuals can learn when they can claim input tax credits and when they cannot.

The main thing is the calculation of the input tax credits. The above sections include the method of calculating the input tax credits that the gallery could claim for the year 2017. As per the case, the gallery had hired local artists to paint artworks to be sold. For that purpose, it purchased art supplies such as paints and brushes for them. In 2017, it purchased a package of art supplies for $1000, for which it was charged $100 in GST. The gallery also purchased 5 frames (at $100 each) for the artworks being featured for sale, for which it was charged $50 in GST. It also incurred input taxes on other overhead expenses, which added $15,000 in input taxes. The gallery’s total ‘input taxes’ for the year 2017 were, therefore, $15,150. Now from the above sections that were mentioned previously, a business entity can privilege a credit for any GST incorporated into the value it pays for things it uses in its business. So, the gallery had purchased the paints and brushes, 5 frames and also the other overhead expenses which it had incurred were for its business. Therefore, the gallery could claim total input tax credits of $15,150 for the year 2017. However, as the GST on sales is $500 so input tax credit of $500 can be claimed.

Calculation of Input Tax Credits

Conclusion:

In accordance with Goods and Services Tax Act, 1999 all the issues that had risen from this case are all sorted out. In addition, the Sections such as Section 7-1, Section 11-20, etc of this New Tax System (Goods and Services Tax) Act 1999 had concluded that the gallery could claim total input tax credits of $15,150 for the year 2017.

In the given case, Dziko Gallery received payment for the sales of an art production that they sold to a buyer from the UK. The payment was received on 1^st January 2016 and the shipment was sent on January 20, 2016. It is required to figure out the possible GST that has been implicated on the cost of goods sold, and there is another requirement for stating the GST implication in case of returning the goods from the buyer after paying him the refund.

According to the Goods and Services Tax Act 1999, the exporters in Australia do not have to pay any GST if one of the following circumstances takes place in 60 days of the date of shipment:

• Either any payment for the goods is received by the supplier
• Or the supplier matters an invoice for the goods.

In case of paying in installments, the suppliers can ask for an extension for the 60 day period or the final installment will be regarded as the payment or invoice. In case of refund, the GST is not implemented in that case too as the supplier already filed to claim for the GST credits in the price of purchases.

As Dziko Gallery has received the payment before shipping the goods and issued an invoice immediately, there will be no GST charged for the export of the supplier. In the case of re-exportation, the goods that were sold to the buyer will still be GST free as far as the ruling of the New Tax System (Goods and Service Tax) Act 1999 is concerned. The 60 days period can also be extended according to the ruling. Thus, the supplier can claim the GST credit for once and the re-exportation will not cost any further GST charges as far as the taxation ruling of GST is concerned.

Conclusion

The supplier should claim the return on GST credits after shipping the product to the buyer and the payment invoice should be recorded immediately in order to obtain the tax relief and other credits for exporting the goods to the UK. As for the re-exportation, the supplier can ask an extension for the 60 days period in order to get rid of the GST charges implicated on the goods sold.

GST implications on export and re-importation of goods

In this scenario, Dziko Gallery imported a canvas stretcher in December 2017 from Gold Stretcher Ltd, which is based on Canada. After two months, the frame of the stretcher broke thus the company had to send the machine to the supplier for repair as the machine was still under warranty. The machine was re-imported after one month. Now it is required to examine the GST and customs duty implication for the importation and re-importation of the canvas stretcher.

According to the New Tax System (Goods and Services Tax) Act, GST is payable on most goods which are imported to Australia. It is mandatory for each individual, business entity or organization regardless of a registered GST payer or not. But if a business entity imports goods on regular basis, the entity can claim for GST credit for the goods imported. The payable GST amount is 10% of the cost of the goods and is collected by the Department of Affairs. The amount of GST will be implemented upon the total cost of the value of the goods, payable custom duty, the cost in the transport and the insurance cost. The GST needs to be paid before the goods are being released.

The goods priced above $1000 needs to be released from the customs by submitting the completed import declaration from and paying all the charges including customs duty, GST, and other taxes. The charges of the customs duty depend on the total cost of the goods.

Dziko Gallery has to pay the GST and customs duty for the importation of the stretcher machine in the first time. The customs duty and the GST for the machine will be calculated over the total cost of the machine including transport. Dziko Gallery should issue the import declaration in order to release the goods from customs authority. But in the time of re-importation, the entity does not need to pay the customs charges or the GST as the issued import declaration report can be submitted to the customs authority in order to release the goods in which the tax was pre-paid.

Conclusion

Dziko Gallery should appoint a good customs broker in order to get every requirement fulfilled in accordance with the legislation and the rates of customs and other taxes. The import declaration should be issued properly in order to make it sure that the goods can be taxable only for once.

Customs duty and GST payable on imports to Australia

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