RELATED PERSONS IN DRAFT GST ACT, 2016

GST Update 21.01.2016

GST DAILY DOSE OF UPDATION:-

RELATED PERSONS IN DRAFT GST ACT, 2016:-

Section 2(55) gives defination of related persons as follows:-

Persons shall be deemed to be ‘related persons’ if only-
(a)             They are officers or directors of one another’s businesses;
(b)             They are legally recognised partners in business;
(c)              They are employer and employee;
(d)             Any person directly or indirectly owns, controls or holds five per cent or more of the outstanding voting stock or shares of both of them;
(e)              One of them directly or indirectly controls the other;
(f)               Both of them are directly or indirectly controlled by a third person;
(g)             Together they directly or indirectly control a third person;
(h)             They are members of the same family;

Explanation I.- The term ‘person’ also includes legal persons.
Explanation II.- Persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other shall be deemed to be related;

From the analysis of the defination, it is observed that the defination is very wide in its scope. This is reflected by the fact that even relationship of employer and employee has been included for treating two persons as related. Say for example, if Mr. X is director in Company A and is also employee in Company B, then also, Company A and Company B will be treated as related person which was not the case earlier. Furthermore, as per clause (d), any person directly or indirectly owns five per cent or more of the outstanding voting stock or shares of both of them is a very easy condition to be fulfilled in a number of cases. Presently, under the Central Excise Act, section 4 spells out a number of situations wherein persons will be treated as related and the percentage of ownership of shares is specified as 25% or 50%. On comparing the percentage with the proposed, the 5% shareholding is extremely low and this will lead to treating a number of persons as related.

It is further submitted that the meaning of control is also not defined. However, in normal parlance, control is associated with holding more than 50% of the voting rights so as to participate in decision making process. The meaning of the control needs to be properly defined. Moreover, in the proposed Act, two persons will be treated as related merely if they are members of the same family which is also weird condition.

It is submitted that the implication of two persons being treated as related persons is that the valuation of the transaction is to be ensured at arm length’s price. However, if the proposed defination is imported in the GST Act, it will lead to more valuation disputes and litigation.

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GST Update 21.01.2016

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