CA Inter Taxation - GST MCQ Test 10: answer key

Question 1 · 2 marks · Chapter 2 - Supply under GST · hard

Scenario. Aarav Industrial Systems Ltd. (AIS), a registered manufacturer of specialised electrical equipment in Maharashtra, undertakes several transactions during the financial year 2025-26. The company maintains its books on the mercantile basis and makes taxable outward supplies under the regular scheme.\n\nOn 12 June 2025, AIS permanently transfers a testing machine, on which it had availed full ITC, to its wholly owned subsidiary, Zenith Components Pvt. Ltd. (ZCPL), without charging any amount. Both companies are separately registered and operate from the same industrial premises. Their directors have common business interests, but they maintain separate legal identities and accounts.\n\nOn 5 August 2025, AIS receives an advance of ₹8,00,000 from an unrelated customer for a customised production machine. The machine is dispatched on 19 August 2025 and the tax invoice is issued on the same date. The customer pays the remaining consideration on 10 September 2025. AIS is neither a composition taxpayer nor engaged in supplying specified actionable claims. Separately, AIS enters into a technical consultancy agreement on 1 October 2025. The consultancy service is provided on 20 November 2025, an invoice is issued on 25 November 2025, and an advance of ₹3,00,000 had already been received on 10 October 2025.\n\nIn December 2025, AIS sells equipment to its distributor, Nova Electrical Traders, for ₹24,00,000. The manufacturer subsequently grants Nova a financial credit note of ₹2,00,000 as a general volume discount. There is no agreement between the manufacturer and the ultimate customers regarding any compulsory resale price or discount. Nova independently owns the equipment after purchase and undertakes ordinary promotional activities for its own sales. No separate consideration is agreed for those activities. AIS does not reduce its original output tax liability against the financial credit note.\n\nDuring January 2026, AIS purchases raw materials for ₹12,00,000 plus GST of ₹2,16,000, supported by valid tax invoices. The materials are received and used exclusively for taxable manufacturing operations. AIS pays the supplier within 180 days. In addition, it distributes some finished products as unconditional gifts to business associates without charging consideration. The related input tax credit had been availed earlier. AIS also receives a commercial credit note from another supplier for a post-sale discount, without any reduction in the supplier's original tax liability or the tax charged in the original invoice.\n\nAIS maintains separate records for each transaction and has filed its regular returns. Ignore any other transactions, exemptions and adjustments not specifically mentioned.

Examine the GST implications of the permanent transfer of the testing machine by AIS to ZCPL without consideration. Which of the following statements is correct?

1. Yes, it is a supply because the companies are separately registered and the transfer of a business asset on which ITC was availed falls under Schedule I. (correct answer)
2. Haryana, because the supplier and recipient are both registered in Haryana and the physical movement of goods originally commenced from the supplier's registered warehouse in Gurugram.
3. Yes, it is a supply only if the subsidiary pays consideration, because a permanent transfer of a capital asset cannot independently constitute a supply.
4. No, it is not a supply because a wholly owned subsidiary and its holding company are treated as the same person for GST purposes.

Answer: A — Yes, it is a supply because the companies are separately registered and the transfer of a business asset on which ITC was availed falls under Schedule I.

Working. Permanent transfer of a business asset + ITC previously availed = supply even without consideration.

Explanation. Schedule I treats permanent transfer or disposal of business assets on which ITC has been availed as supply even without consideration. Further, AIS and ZCPL are separate legal persons and their relationship falls within the related-person framework. The most tempting wrong option is b: absence of consideration does not prevent a transaction covered by Schedule I from being treated as supply. Their common premises do not alter this result.

Where it goes wrong. Confusing the general requirement of consideration with transactions specifically covered by Schedule I.

Authority. Section 7(1)(c); Schedule I, paragraph 1; Section 2(84); Section 15(5)

Question 2 · 2 marks · Chapter 6 - Time of Supply · hard

Determine the time of supply of the customised production machine for the purpose of payment of GST by AIS. Consider the advance received on 5 August 2025 and the subsequent dispatch and invoice.

1. Rs. 5,00,000, because the contract price agreed between the parties is the transaction value under section 15(1) and pre-delivery testing charges cannot be added under section 15(2) of the Central Goods and Services Tax Act, 2017.
2. 19 August 2025, because Notification No. 66/2017 CT prescribes payment of GST on outward supplies of goods by reference to the date of invoice or the last date on which the invoice ought to have been issued. (correct answer)
3. 10 September 2025, because GST becomes payable only when the entire consideration is received by the supplier.
4. 19 August 2025, because receipt of advance is outside the scope of consideration under section 2(31) and the invoice date is therefore irrelevant.

Answer: B — 19 August 2025, because Notification No. 66/2017 CT prescribes payment of GST on outward supplies of goods by reference to the date of invoice or the last date on which the invoice ought to have been issued.

Working. Advance: 05.08.2025; invoice and dispatch: 19.08.2025. Special procedure under Notification No. 66/2017 CT applies. Time of supply for payment of GST: 19.08.2025.

Explanation. Although section 12(2) ordinarily considers the earlier of the invoice date or payment date, Notification No. 66/2017 CT prescribes the special procedure for registered suppliers of goods, excluding composition suppliers and specified actionable-claim suppliers. Under this procedure, GST on outward supplies of goods is payable with reference to the invoice date or the date on which the invoice ought to have been issued. Hence, 19 August is the applicable date. Option a applies the general provision without considering the special procedure.

Where it goes wrong. Applying the ordinary earlier-of-two-dates rule without considering the special procedure for outward supplies of goods.

Authority. Section 12(2)(a); Section 31(1); Notification No. 66/2017 CT dated 15.11.2017

Question 3 · 2 marks · Chapter 6 - Time of Supply · medium

What is the time of supply of the technical consultancy service provided by AIS, assuming the advance was received in relation to the identified service?

1. 10 October 2025, because the advance was received before the service was completed and before the invoice was issued. (correct answer)
2. 20 November 2025, because the time of supply of services is invariably the date of actual provision of service.
3. 25 November 2025, because the invoice date always determines the time of supply where an invoice is issued within the prescribed period.
4. 1 October 2025, because Notification No. 66/2017 CT exempts all registered taxpayers from paying GST on advances for goods and services.

Answer: A — 10 October 2025, because the advance was received before the service was completed and before the invoice was issued.

Working. Advance receipt: 10.10.2025; service: 20.11.2025; invoice: 25.11.2025. Earlier relevant date under section 13(2): 10.10.2025.

Explanation. Under section 13(2), the time of supply of services under forward charge is generally the earlier of the invoice date, where the invoice is timely issued, and the date of receipt of payment. The advance was received on 10 October, before the service was provided and the invoice issued. Therefore, 10 October determines the time of supply. Notification No. 66/2017 CT provides relief for goods, not services.

Where it goes wrong. Extending the relief for advances received against goods to services.

Authority. Section 13(2); Section 31(2); Notification No. 66/2017 CT dated 15.11.2017

Question 4 · 2 marks · Chapter 7 - Value of Supply · hard

Determine the treatment of the ₹2,00,000 financial credit note granted by the manufacturer to Nova Electrical Traders and the implications for the value of supply made by the manufacturer to Nova.

1. Rs. 1,20,000, because rent-a-cab service is eligible for input tax credit when used exclusively for transportation of factory workers during night shifts under statutory requirement.
2. The transaction value remains ₹24,00,000, but the discount constitutes consideration for an independent promotional service supplied by Nova to the manufacturer.
3. The transaction value remains ₹24,00,000 because the financial credit note does not satisfy the conditions for reducing the value under section 15(3), and the ordinary promotional activities do not constitute a separate service merely because the discount was granted. (correct answer)
4. The transaction value becomes ₹26,00,000 because every financial credit note received by a dealer is treated as additional consideration for the original supply.

Answer: C — The transaction value remains ₹24,00,000 because the financial credit note does not satisfy the conditions for reducing the value under section 15(3), and the ordinary promotional activities do not constitute a separate service merely because the discount was granted.

Working. Original transaction value = ₹24,00,000. No qualifying prior agreement or other required conditions for deduction are established. Financial credit note = ₹2,00,000. Taxable transaction value remains ₹24,00,000.

Explanation. Under section 15(3), a post-supply discount can be excluded from value only when the statutory conditions, including the prior agreement and the required linkage to relevant invoices, are satisfied. The facts do not establish those conditions. Circular No. 251/08/2025 GST also clarifies that ordinary promotional activities undertaken by a dealer for its own sales do not automatically amount to a separate service. Option b incorrectly treats routine dealer promotion as an independent taxable supply.

Where it goes wrong. Confusing a financial credit note with a qualifying post-supply discount and confusing ordinary promotional activity with a separately contracted service.

Authority. Section 15(1); Section 15(3); Circular No. 251/08/2025 GST dated 12.09.2025; Section 2(31)

Question 5 · 2 marks · Chapter 8 - Input Tax Credit · hard

Consider the ITC implications of the commercial credit note received by AIS and the unconditional gifts distributed by AIS. Which statement correctly describes the position?

1. Noida, because the billboard is an immovable structure fixed to earth and advertising display services in relation to immovable property are governed by section 12(3) of the IGST Act, 2017.
2. AIS need not reverse ITC attributable to the commercial credit note merely because of the financial adjustment, but ITC attributable to goods distributed as unconditional gifts is blocked. (correct answer)
3. AIS must reverse all ITC on its January purchases because any commercial credit note automatically reduces the taxable value of the original purchases.
4. AIS may retain ITC on both transactions because every purchase made in the course of business qualifies for credit under section 16.

Answer: B — AIS need not reverse ITC attributable to the commercial credit note merely because of the financial adjustment, but ITC attributable to goods distributed as unconditional gifts is blocked.

Working. Commercial credit note without reduction of original tax liability: no corresponding ITC reversal merely on that ground. Unconditional gifts: ITC blocked under section 17(5)(h).

Explanation. Circular No. 251/08/2025 GST clarifies that the recipient is not required to reverse ITC merely because a supplier issues a financial or commercial credit note without reducing its original tax liability. Conversely, section 17(5)(h) blocks ITC on goods disposed of by way of gift or free samples. Option d overlooks the specific statutory restriction applicable to gifts, notwithstanding the general business-use condition under section 16.

Where it goes wrong. Assuming that the general business-use eligibility condition overrides the specific blocked-credit provision for gifts.

Authority. Section 16(1); Section 17(5)(h); Circular No. 251/08/2025 GST dated 12.09.2025

Question 6 · 2 marks · Chapter 8 - Input Tax Credit · medium

AIS has availed ITC of ₹2,16,000 on eligible raw materials received in January 2026 and used exclusively for taxable manufacturing operations. The supplier is paid within 180 days. Which statement correctly describes the eligibility of this credit?

1. ITC is unavailable because the raw materials are capitalised in the books of account, even though they are used in taxable manufacturing.
2. ITC is available only if AIS establishes a one-to-one correlation between the raw materials purchased and each individual taxable outward supply.
3. ITC of ₹2,16,000 is available, subject to fulfilment of the statutory conditions under section 16, because the goods are received, supported by valid tax invoices, used for business and paid for within 180 days. (correct answer)
4. ITC is available only after the supplier files its annual return, irrespective of receipt of goods, possession of the invoice and payment of consideration.

Answer: C — ITC of ₹2,16,000 is available, subject to fulfilment of the statutory conditions under section 16, because the goods are received, supported by valid tax invoices, used for business and paid for within 180 days.

Working. Eligible ITC = ₹2,16,000. Goods received, valid invoice available, business use exclusively for taxable supplies and payment within 180 days. Subject to the remaining statutory conditions, full ITC is available.

Explanation. Section 16(2) prescribes the relevant conditions for taking ITC, including possession of a tax invoice, receipt of goods, payment of tax to the Government and furnishing of the prescribed return. The 180-day payment condition is also satisfied. Since the materials are used exclusively for taxable business supplies, no apportionment or blocked-credit restriction arises on the stated facts. Option b incorrectly introduces a one-to-one correlation requirement, which GST law does not prescribe.

Where it goes wrong. Confusing the general eligibility conditions with a non-existent one-to-one correlation requirement.

Authority. Section 16(1); Section 16(2); Second proviso to section 16(2); Section 17(1)

Question 7 · 2 marks · Chapter 15 - Returns · medium

Scenario. Mitra Engineering Pvt. Ltd. is a registered regular taxpayer having an aggregate turnover of ₹1.96 crore during the financial year 2025-26. Its turnover includes taxable domestic supplies, exempt supplies and inter-State supplies, and excludes GST and compensation cess. The company has furnished all applicable monthly returns and discharged its tax liability. It has not opted for the composition scheme and is not covered by any special category of registration. Its management is considering whether it must prepare and furnish an annual return for FY 2025-26. The company had also furnished its annual return for the preceding financial year.

Determine whether Mitra Engineering Pvt. Ltd. is required to furnish an annual return for FY 2025-26.

1. Yes, because every registered person making taxable supplies is required to furnish an annual return irrespective of aggregate turnover.
2. Yes, because the exemption applies only to taxpayers whose aggregate turnover is strictly less than ₹2 crore.
3. No, because all regular taxpayers having aggregate turnover below ₹5 crore are permanently exempt from furnishing annual returns under section 44.
4. No, because the statutory notification exempts registered persons having aggregate turnover up to ₹2 crore in any financial year from furnishing the annual return for that financial year, effective for FY 2024-25 onwards. (correct answer)

Answer: D — No, because the statutory notification exempts registered persons having aggregate turnover up to ₹2 crore in any financial year from furnishing the annual return for that financial year, effective for FY 2024-25 onwards.

Working. Aggregate turnover = ₹1.96 crore. Exemption threshold = up to ₹2 crore. ₹1.96 crore is within the prescribed threshold. Annual return for FY 2025-26 is not required.

Explanation. Section 44(1) empowers the Commissioner, on the recommendations of the Council, to exempt specified classes of registered persons from furnishing annual returns. Notification 15/2025-CT provides this exemption to registered persons whose aggregate turnover in a financial year is up to ₹2 crore, effective from FY 2024-25 onwards. Mitra's turnover of ₹1.96 crore falls within the threshold. Option b incorrectly interprets the inclusive expression 'up to' as excluding ₹2 crore.

Where it goes wrong. Misinterpreting the inclusive ₹2 crore threshold and overlooking the statutory update.

Authority. Section 44(1); Notification 15/2025-CT

Question 8 · 1 marks · Chapter 13 - Payment of Tax · hard

Scenario. Rudra Manufacturing Ltd. is a registered regular taxpayer. Its value of taxable supplies, excluding exempt and zero-rated supplies, during October 2026 is ₹58 lakh. The company is subject to rule 86B. Its cumulative output tax liability from April to October 2026 is ₹20 lakh, of which ₹1.50 lakh has already been discharged through the electronic cash ledger. No other exception to rule 86B applies. The company proposes to discharge the remaining October output tax liability entirely through its electronic credit ledger.

Determine whether Rudra Manufacturing Ltd. can discharge its entire October 2026 output tax liability through the electronic credit ledger, considering the amended exceptions to rule 86B effective from 01.02.2026.

1. Yes, because rule 86B does not apply to registered manufacturers whose taxable supplies exceed ₹50 lakh in a month.
2. No, because the value of taxable supplies exceeds ₹50 lakh in October 2026, and rule 86B invariably restricts ITC utilisation to 99% of the output tax liability.
3. No, because the exception under rule 86B requires cash payment exceeding 1% of the current month's output tax liability rather than the cumulative liability up to that month.
4. Yes, because its cumulative cash payment of ₹1.50 lakh exceeds 1% of its cumulative output tax liability of ₹20 lakh, and it therefore falls within an exception to rule 86B. (correct answer)

Answer: D — Yes, because its cumulative cash payment of ₹1.50 lakh exceeds 1% of its cumulative output tax liability of ₹20 lakh, and it therefore falls within an exception to rule 86B.

Working. Monthly taxable supplies = ₹58 lakh, exceeding ₹50 lakh. Cumulative output tax liability = ₹20,00,000. One per cent = ₹20,000. Cumulative cash payment = ₹1,50,000. Since ₹1,50,000 exceeds ₹20,000, the exception applies. Rule 86B restriction is inapplicable.

Explanation. Rule 86B generally restricts ITC utilisation to 99% of output tax liability where the monthly value of taxable supplies, excluding exempt and zero-rated supplies, exceeds ₹50 lakh. However, the amendment effective from 01.02.2026 provides an exception where cumulative output tax discharged through the electronic cash ledger exceeds 1% of cumulative output tax liability up to the relevant month in the current financial year. Here, ₹1.50 lakh exceeds ₹20,000 (1% of ₹20 lakh). Hence, the restriction does not apply. Option c incorrectly uses the current month's liability instead of the cumulative figure.

Where it goes wrong. Applying the monthly ₹50 lakh threshold without examining the amended cumulative cash-payment exception.

Authority. Rule 86B of the CGST Rules; Notification No. 20/2025 CT dated 31.12.2025; Section 49(4)