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written by Khatabook | December 15, 2021

Effect of GST on Air Conditioners

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In the previous tax regime, there was Service Tax on service transactions and Value Added Tax (VAT) on transactions related to sales of goods. However, with adoption of the Goods and Services Tax (GST), the indirect tax framework changed as GST absorbed both Service Tax and VAT and became India's pillar of the indirect tax structure.

With its implementation, there has been a significant change in the taxability of electronics, particularly the impact of GST on air conditioners, as the government of India has maintained a 28% GST rate for air conditioners despite lower GST rates on other electronics items. Therefore, let's know more about the GST on air conditioner and their HSN codes.

What is the GST effect on air conditioner?

Previously, consumer durables were subject to two significant taxes: VAT and excise duty. The aggregat e rate was approximately 23%. Now, the new GST rate on air conditioner is subject to a 28% GST charge. Consumers will bear the brunt of the higher tax burden charged by businesses. Air conditioner prices have risen by at least 5% as a result of this.

Let's use an example to understand the air conditioner price after GST better.

Item: Voltas 1.5 Ton 5 Star Split Air Conditioner 

Particulars

Pre GST

Post GST

Manufacturing Cost

25,000

25,000

Excise duty @ 12.5%

3,125

0

Cost of Production

28,125

25,000

Loading & Unloading and Transportation cost

4,000

4,000

Overhead

5,000

5,000

VAT @ 12.5%

4,640

0

GST @ 28%

0

9,520

Sale Price of Product

41,765

43,520

Also Read: Difference Between VAT and GST

Note: The VAT rate is assumed to be 12.5%. The amount of VAT charged was determined by the state of the transaction. As a result, air conditioners now cost more than they did before the GST.

What is the taxability of an Air Conditioner?

The act of supplying anything is considered a taxable event under GST. All sales, exchanges, transfers, rentals, leases, and disposals are included in the supply. Supply value Equals Transaction value. The price paid or payable for the supply of goods or services is the transaction value.

The 'Transaction Worth' will be used to determine the value of the supply. Some dealers/suppliers additionally give installation services as part of the transaction. In such instances, the supply of air conditioners and their installation are naturally bundled in the ordinary course of business, resulting in a composite supply. The supplied value will be the sale price of the air conditioner plus installation costs.

What is the GST rate on air conditioner?

The GST rate has been divided into categories based on the type of product. The Goods and Services Tax (GST) is currently divided into five distinct rates: 0%, 5%, 12%, 18%, and 28%.

The GST rate on air conditioners includes a motor-driven fan and parts for altering temperature and humidity. It also includes machines in which humidity cannot be individually managed, which was set by the GST council at the time of the implementation of GST in July 2017 as 28%.

What is the HSN code for AC?

The HSN code air conditioner is listed below.

HSN Code

Description

8415

Air-conditioning equipment with a motor-driven fan and elements for adjusting temperature and humidity, including those with humidity that cannot be controlled individually.

841583

Not incorporating a refrigerating unit

841510

Window or wall types, self-contained or split system

84151010

Split System Air conditioning Machines, Comprising Motor-Driven Fan And Elements For Changing Temperature And humidity

84158310

Split air conditioners with a capacity of 2 tonnes or more that do not include a refrigeration unit.

84158390

Not incorporating a refrigerating unit: Other HSN Code and Indian Harmonised System Code.

GST in case of import of Air Conditioners

In the case of imports, the government has added Import Duties on air conditioners in addition to the 28% GST. The following are the total taxes levied on an air conditioner:

Tax Head

Tax Rate

Taxable Amount

Basic Customs Duty (BCD)

20%

Assessed Value

IGST

28%

Assessed Value BCD

Social Welfare Surcharge

10%

Assessed Value BCD Surcharge 

Also Read: Effect of GST on the Indian Economy

Input Tax Credit (ITC) on Air Conditioner

Even though air conditioners are mounted on the walls, they may be removed and relocated. It isn't a portable asset. Because a centralised air conditioning system is deemed a plant and machinery rather than immovable property, the restrictions imposed by Section 17(5) should not apply. Under Section 17(5), there are certain circumstances where ITC is not allowed to the recipient in respect to works contract services for construction or addition of immovable property (except plant and machinery).

In addition, if the AC is placed in a corporate office or factory, ITC may be available. Furthermore, AC producers can claim ITC on the raw materials they use, removing the cascading tax effect.

Conclusion

The air conditioner (AC) market has grown as a result of technological developments. In Financial Year (FY) 2021, the market was valued at INR 293.37 billion. It is estimated to reach INR 991.57 billion in FY 2027, with a CAGR of 24.30% between FY 2022 and FY 2027. Despite rising temperatures, the Indian government considers air conditioners to be a luxury item and therefore, it is in the highest tax band. 

 The air conditioner is no longer a luxury item but rather a necessity. Companies are developing new models that use ozone-friendly refrigerant gas and energy-saving strategies while considering the environment's impact. Therefore, reform in the GST rate on air conditioners can lead to a further increase in the sales of these electronics.  

For more information on GST, subscribe to Khatabook

FAQs

Q: Is it appropriate to incorporate post-supply discounts or incentives in the transaction value?

Ans:

 Yes, if the post-supply discount is determined by an agreement known at or before the time of supply, it is specifically linked to the relevant invoice. If the recipient has reversed input tax credit attributable to the discount, the discount is allowed as an admissible deduction under Section 15 of the model GST law.

Q: What is the legal stance on the reversed input tax credit if the supplier recognises the error later and feeds the information?

Ans:

Suppliers can upload invoices at any time before September of the following fiscal year and pay duty and interest on any missing invoices in their GSTR-3 for the month in which they failed to upload the invoice.

The recipient is entitled to a reduction in his output tax due to the amount by which the provider has corrected the mismatch. The recipient will be repaid the interest paid at the time of reversal by crediting the amount in the corresponding head of his electronic cash ledger.

Q: Is it appropriate to incorporate post-supply discounts or incentives in the transaction value?

Ans:

Yes, the discount is allowed as an admissible deduction under Section 15 of the GST law. If the post-supply discount is established according to an agreement known at or before the time of supply, is specifically linked to the relevant invoice, and the recipient has reversed input tax credit attributable to such discount.

Q: For our new office, our company is contemplating a proposal for a service contract for centralised air conditioning. Is GST input for Works Contract Services available? For Centralized Air Conditioning, the vendor would offer material and labour.

Ans:

 According to section 17(5)(c) on "Works contract services when supplied for construction of an immovable property, other than plant and machinery, except where it is an input service for further supply of works contract," the ITC is disallowed.

The ITC does not apply to Plant and Machinery, even if they are immovable property plants. The central air conditioner consists of chilling units mounted outside the wall, on the roof, or the ground, and fans and ducting attached to the walls or ceiling.

It qualifies for ITC even if a machinery section is embedded in the ground or attached to immovable property. Because of this, a central air conditioning system qualifies for an ITC.

Q: Is there anything in the GST that addresses how products returned by the recipient are taxed?

Ans:

Yes, Section 34 deals with circumstances like this. When the recipient returns the items, the registered person (provider of goods) may issue a credit note with the necessary information. The provider must record the credit note's details in the returns for the month it was issued, but no later than September after the end of the fiscal year in which it was created or the date of submitting the relevant annual return, whichever comes first.

The credit note's details must match the recipient's corresponding input tax credit claim reduction in their valid return for the same tax period or any subsequent tax period. And the supplier's claim for a reduction in output tax liability that matches the recipient's corresponding reduction in ITC claim must be finally accepted and communicated to both parties.

Q: Under GST, how would the tax due on a composite supply be calculated?

Ans:

A composite supply that consists of two or more supplies, has one primary supply based on which the tax is calculated. For instance, in a flower shop, flowers are the primary supply whereas flower ornaments or gardening supplies are secondary. 

Q: Is it possible to claim an input tax credit for air conditioners used in office buildings?

Ans:

Yes, ITC on electronic equipment used in office buildings, such as air conditioners and refrigerators, is permitted.

Q: What happens if an input tax credit (ITC) is obtained more than once based on the same document?

Ans:

If the system detects that an ITC is being claimed on the same document more than once (duplication of claim), the amount of the credit will be applied to the recipient's output tax due in return [section 42(6)]. 

Q: Should credit for a service provided be awarded to the state where it is billed or the state where it is rendered?

Ans:

The tax will be levied in the state where the supply is made. The supplier will collect the IGST, and the IGST will be credited to the beneficiary.

Q: A GST-registered taxpayer (sole proprietor) has died; we want to revoke the GST registration with effect from the date of death, but one month’s GST is still pending.

Ans:

i. Is it possible to pay GST first and then cancel our GST registration

ii. How do we pay one month's GST if we cancel it first?

 If taxes are owed to the government, a deceased person's lawful successors will be responsible for paying the debts, plus interest. This is addressed in Section 79 of the CGST Act. As a result, it is recommended that dues be paid, returns are completed, and then the registration can be cancelled. You might approach the jurisdictional official and explain the situation, as well as your willingness to settle the deceased's debts. To protect your interests, this should be done via a written letter.

Q: What is the GST treatment for composite and mixed supplies?

Ans:

 The composite supply will be considered as if it were a part of the main supply. A mixed supply would be viewed as a supply of the specific items or services subject to the highest tax rate.

Q: What is the difference between composite and mixed supply?

Ans:

A composite supply consists of two or more taxable supplies of commodities or services, or both, or any combination of the two, that are bundled in the natural process and supplied in tandem in the ordinary course of business, with one of them being the major supply. This is a composite supply when a consumer buys a television set and receives a warranty and a maintenance contract with the TV. In this case, the primary supply is television, while warranty and maintenance services are optional.

A mixed supply is a collection of multiple independent supplies of commodities or services, or any combination thereof, made in tandem for a single price that could normally be delivered separately. For instance, a shopkeeper may sell storage water bottles in addition to a refrigerator together in a mixed supply instead of selling them seperately.

Q: Will the transaction constitute a supply if an air conditioner merchant permanently moves an air conditioner from their stock in trade for personal use at home?

Ans:

Yes, even if there is no consideration involved, the permanent transfer or disposal of business assets when an input tax credit has been claimed on those assets will be considered a supply under GST.

Q: What are the AC HSN code and GST rate?

Ans:

The current GST rate on AC is 28%, and AC HSN codes are 8415, 841583, 841510, 84151010, 84158310, 84158390.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.