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Branch Transfers – How to Calculate the Taxable Value?
Updated on : Aug 8th, 2022
It’s common in business parlance to transfer stock from one business unit to other units, warehouses, depots, etc., within the same or different state. Under the GST regime, GST is levied on such stock transfers.
What is Branch transfer?
Branch transfer implies transferring materials from one location to another in the same organisation. It is also referred to as a Stock Transfer. These kinds of transfers are usually done for several reasons like:
- For manufacturers transferring their semi-finished goods from their production unit to their other unit for further processing
- Transferring goods to warehouses for further supply
- For trader transferring their goods to their other branch due to excessive demand
- From a compliance perspective, the sale is affected to allow the customers (B2B) to avail of input tax credit (ITC) after branch transfers.
Scope of taxation of branch transfers under GST
Under the GST regime, GST is levied on supply, including transfers to distinct persons. Such transfers are taxable under the cases listed below:
- Stock transfer between states (Interstate): Stock transfer of an organisation under the same PAN between two branches or units located in different states will be liable to GST.
- Stock transfer within the same state (Intrastate): The transfer is liable to GST only when the organisation has been registered more than once in one state. Such organisations would be considered as ‘distinct persons’ for GST.
Valuation of branch transfers under GST
Now, as we are through with the understanding of how stock transfers. Let us discuss calculating the value of stock transfers on which GST is levied.
Generally, GST is levied on the transaction value of the goods when the price is the only consideration received for supply and when such supply isn’t between distinct or related persons. Consequently, on stock transfer, the value of the transaction cannot be applied as it’s a supply between the same entity’s branches, which is considered a distinct person under the GST law. Hence, for branch transfers, the value of supply needs to be computed by applying the metrics below:
For a better understanding, let’s use some scenarios:
In case, due to any reason, the methods described above cannot be applied to determine the transaction value of supply; it would be then determined by applying the cost of the goods +10% or by applying the residual method. For instance, ABC ltd., a registered manufacturer in Ahemadabad (Gujrat), transferred its semi-finished goods to its other manufacturing unit located in Lucknow, UP, for further processing. The production cost of such semi-finished goods was INR 30,000.
The value of such transferred goods will be INR 33,000 (30,000*110/100).
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VALUATION OF STOCK TRANSFERS UNDER GST: A FACILITATOR OR IMPEDIMENT?
Nov. 13, 2020 • Madhav Gawri
Valuation under indirect tax laws has been subject to interpretative discrepancies eternally. This is of no surprise realizing the fact that the value of goods or services determines the quantum of tax liability. However, with the introduction of the concept of distinct persons under GST, the tax liability of the same entity transferring goods to its own establishments in different states has increased dramatically.
II. Stock Transfers: Transfer Between Distinct Persons
With the introduction of GST, the scope of the levy has been augmented to include even deemed service transactions. Section 7 read with Schedule I of the CGST Act specifically treats "supply of goods or services or both between related persons or between distinct persons made in the course or furtherance of business even without consideration" as "supply" thereby, attracting levy of GST in such cases. Thus, one can infer that stock-transfers of goods from one State to another by an entity attracts levy under GST.
The rationale behind taxing stock transfers is primarily GST being a dual-tax regime with a State component always in-built. But, the legislative reason may not always aid the economic rationale because no money changes hands between the receiving unit and supplying unit of the same company.[i] The plan is to tax the transaction first and get the same captured in the government system and to subsequently relieve the burden through an input tax credit that can be availed by the receiving unit.[ii] Thus, one needs to resort to Rule 28 of the CGST Rules to determine the value of supply in inter-state stock transfers.
III. Value Of Taxable Supply During Stock Transfers: A Case Of Rule 28 Of The CGST Rules, 2017
Recently, a clarification was sought with respect to the valuation of supplies between various depots and factories in the case of Kansai Nerolac Paints Ltd .[iii] wherein the AAR-Maharashtra held that "The supplies to the depots from the factory/manufacturing units or from depot to depot, qualifies as a supply made between distinct persons and provisions to Rule 28 shall apply for the valuation of such supply. And if any dealer is eligible for ITC, the applicant is eligible to value these goods by applying the terms contained in the second proviso to Rule 28. Accordingly, the value declared in the invoice shall be considered as open market value in respect of goods supplied by one distinct entity to another, where the recipient is eligible to claim the full input tax credit." Thus, one can infer from the above ruling that the valuation of supplies between distinct entities can be done on the basis of the value declared in the invoice. However, the major controversy with respect to the second proviso has been discussed in the next part.
IV. The Seed of Conflict: Whether The Second Proviso Is A Continuation Of The First Or The Same Has To Be Read Independently?
Before dealing with the aforesaid question, one needs to know what does the two provisoes to Rule 28 provide for. The first proviso to Rule 28 provides that in situations where the goods are intended for further supply as such by the recipient, then the value of supply (at the option of supplier) will be 90 percent of the price charged by the recipient for the supply of goods of like kind and quality to his unrelated customers. The second proviso to Rule 28 provides that in a situation, where the recipient is eligible for a full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services. The second proviso comes as a welcome relief to the suppliers in case of supplies between distinct and related persons as it showcases the liberal face of the input tax credit when such supplies take place.
In this context, a significant observation has been made by the Tamil Nadu Authority for Advance Rulings (TN AAR) in the case of Specs makers Opticians Private Limited .[iv] Herein, the authority observed that "both provisos are to be read together and not independently, i.e. the Applicant cannot choose whichever proviso is favourable to them. The applicable rule would be Rule 28(a) i.e. Open Market Value, on the satisfaction of both the conditions given in the above provisos i.e. the value would be 90 per cent of the price charged for sale to unrelated consumers on the satisfaction of the condition that the receiving branch is eligible for full credit."
This decision of the Authority was premised on the terms “provided further” used in the second proviso which they interpreted to be a continuation of the first proviso. The TN AAR clearly stated that “if the interpretation of applicant is adopted then he can value any amount and transfer the credit to the recipient”. Placing reliance on a literal interpretation, the Authority reasoned that one cannot add or delete words and Law has to be interpreted in its original form regardless of the consequences that emanate from the interpretation. For instance, when ITC is restrained for certain input/input services, one cannot contend that the consequence of the same results in additional cost in the hands of the recipient and hence, ITC would be available.[v]
The above ruling is in stark contrast to the decision of Appellate Authority for Advance Ruling in the case of M/s GKB Lenses Pvt. Ltd .[vi] wherein the applicant wanted clarification on "whether goods supplied to branches in other states can be valued in terms of the cost price under the second proviso to Rule 28 instead of 90% of MRP as required by the First proviso of the same rule." Further, clarification was sought with respect to the phrase "eligible for the full input tax credit." The Advance Ruling Authority held that the applicant is free to apply the second proviso to Rule 28 for valuation of supply of goods to its branches without taking into consideration the first proviso to Rule 28. Further, the Authority observed that the expression "eligible for a full input tax credit" means that the recipient will be eligible to take a full input tax credit of the amount of tax paid by the supplier as mentioned in the respective invoice or any other document valid under section 16(2)(a) of GST Act and needs to comply with Section 16 to 21 as envisaged in Chapter V of the GST Act.[vii]
In light of the above controversy, the author seeks to prove that the second proviso can be read independently of the first proviso in the following manner. In the words of Kapur, J.: “The proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception..” Moreover, the word "further", as per the Merriam-Webster dictionary, means "in addition". Thus, one can infer that the second proviso is merely an additional or second exception to the main provision and has no relationship with the first proviso. Additionally, the Calcutta High Court in the case of Ever Bright Plastics Pvt. Ltd . v. Collector of Customs [viii] held that, “The phrase “provided further” in the second proviso, only means that another proviso was being added to sub-section 3 of Section 46. From this, it does not necessarily follow that the second proviso was the continuation of the first proviso.” Thus, one can infer that the second proviso should be read independently of the first proviso rather than being in continuation of the first proviso.
Secondly , if one considers the observation made in Specs makers to be valid, then it would imply that in case the first proviso is applicable for a particular supply, then the said value will have to be considered as deemed open market value as per the second proviso. In such a case, the word "service" used in the second proviso is redundant as the first proviso is applicable only in the case of goods. Hence, the second proviso cannot be interpreted as a continuation of the first proviso as it is a settled principle that "the statute never wastes words."[ix] Thus, one can infer that the two provisos provided in Rule 28 are mutually exclusive and the assessee has the option to choose from either of the two.
If the second proviso to Rule 28 which was intended to provide relief to the single establishment with different branches is not read independently of first proviso them it will cancel out the relief provided and will put an additional burden on the taxpayer. Thus, the second proviso, instead of acting as a facilitator, will act as an impediment.
[ Keywords ]: Stock transfers, valuation, input tax credit, open market value, invoice.
[ Profile of the author ]: Shubhangi Komal is a 5th year Law student in National University of Study and Research in Law, Ranchi and holds a keen interest in constitutional, criminal, environmental, labour and human rights laws.
[ FAQs ]: Who are distinct persons?
Ans: the term “distinct persons” derives its meaning from sub-section (4) and (5) of section 25 of the CGST Act, 2017 such that the term covers a person who has obtained or is required to obtain more than one registration either in one state/union territory or more than one state/union territory. It encompasses all the branches or units or offices, etc., belonging to the same person, whether registered or not.
[i] Dr. G. Gokul Kishore, GST – An agenda for reforms – Part 53 – Valuation under GST – Time to exempt intra-company transactions , Tax India Online (September 03, 2019), https://taxindiaonline.com/RC2/inside2.php3?filename=bnews_detail.php3&newsid=37142
[iii]  106 taxmann.com 288 (AAR- Maharashtra).
[iv] 2019 (27) GSTL 596 (AAR – GST).
[v] CA Vikram Kataria & Adv. Lavanya PR, Valuation for Inter-Branch Transactions Under GST, Tax Guru (Dec. 10, 2019) https://taxguru.in/goods-and-service-tax/valuation-inter-branch-transactions-gst.html
[vii] Is GST ITC available on stock transfer from head office to branches where the invoice value is nil, Faceless Compliance https://facelesscompliance.com/6516/is-gst-itc-available-on-stock-transfer-from-head-office-to-branches-where-the-invoice-value-is-nil
[viii] 1993 (65) E.L.T. 196 (Cal.)
[ix] Visitor Amu v. K.S. Misra, 2007 (8) SCC 594.
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Valuation of Stock Transfers under GST
Valuation of stock transfers has always been a tricky aspect of taxation, and with the implementation of the Goods and Services Tax (GST) in India, it has become even more complicated. The GST regime has brought about significant changes in the way stock transfers are valued, and businesses need to be aware of these changes to ensure that they remain compliant with the tax laws. In this article, we will discuss the various aspects of the valuation of stock transfers under GST and explore how businesses can navigate this complex terrain.
What is a Stock Transfer?
A stock transfer is the movement of goods from one location to another within the same organization. This can be a transfer of goods from one warehouse to another or from a factory to a warehouse. The purpose of a stock transfer is to ensure that the goods are available at the right location at the right time to meet the demand for the products.
The valuation of stock transfers under GST is based on the principles of the GST law, which require that the value of the goods be determined in accordance with the transaction value. The transaction value is the price actually paid or payable for the goods when sold for delivery at the time and place of supply. In the case of stock transfers, the transaction value is deemed to be the value of the goods on the date of the transfer.
The GST law provides for two methods for the valuation of stock transfers:
- Cost of Production Method: Under this method, the value of the goods is the cost of production, including all expenses incurred up to the point of transfer. This method is applicable only when the goods being transferred are manufactured by the sender.
- Open Market Value Method: Under this method, the value of the goods is the open market value of the goods on the date of the transfer. This method is applicable when the goods being transferred are not manufactured by the sender or when the sender cannot determine the cost of production.
Impact of GST on Stock Transfers
The implementation of GST has had a significant impact on the valuation of stock transfers. Under the previous tax regime, businesses were required to pay a Central Sales Tax (CST) on inter-state stock transfers. The CST was levied at the rate of 2%, and businesses were allowed to claim credit for the CST paid. However, under the GST regime, businesses cannot claim credit for the Integrated Goods and Services Tax (IGST) paid on inter-state stock transfers. This means that businesses need to factor in the GST paid on stock transfers while calculating the cost of production or the open market value of the goods.
Another significant change brought about by the GST regime is the introduction of the concept of 'place of supply'. Under the GST law, the place of supply is the location where the goods are delivered, and this location determines the applicable GST rate. This means that businesses need to be aware of the place of supply while valuing their stock transfers.
The valuation of stock transfers under GST is a complex aspect of taxation that businesses need to be aware of. The principles of the GST law require that the value of the goods be determined in accordance with the transaction value, and businesses need to use either the cost of production method or the open market value method to value their stock transfers. The implementation of GST has brought about significant changes in the valuation of stock transfers, and businesses need to be aware of these changes to ensure that they remain compliant with the tax laws.
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Home GST Branch Transfers – How to Calculate the Taxable Value
Branch Transfers – How to Calculate the Taxable Value
Yarab A | Updated on: August 24, 2021
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Branch transfer refers to the transfer of materials from one unit/location to another unit/location belonging to the same business entity. It is also known as Stock Transfers. Branch transfers are done for various reasons, such as:
- Transfer of semi-finished goods from the manufacturing unit to another unit for further processing
- Transfer of goods to godowns/warehouse for further supply
- Trader may transfer goods to another branch due to demand
- From the perspective of compliance- to enable the customers (B2B) to avail input tax credit , branch transfers are done and then the sale is affected.
Whatever may be the reason for transfer of goods, it is vital for businesses to understand the tax implications on such transfers.
- How are these transfers treated for the purpose of statutory compliance? Are they taxable?
- If taxable, what is the value to be considered for the purpose of tax levy?
Let us understand the treatment of transfers under the current Indirect Tax regime and in GST
Under Central Excise, the valuation of stock transfers depends on the nature and the purpose for which the transfer is effected by a manufacturer. A transfer may be for any of the following reasons:
- For further processing to another manufacturing unit
- Transfer to a depot
- Transfer to any other premises from where the sale is done.
Under VAT, stock transfers are not taxable on furnishing ‘Form F’. However, input VAT on purchase of goods should be reversed at a certain percentage which differs from state to state. For example, If VAT paid on purchase is 12.5 %, then the excess of 4 % i.e., 8.5% will be allowed as Input VAT credit and 4% will be reversed.
Stock transfer under GST Regime
Under GST , levy of tax is on supply which includes transfers to distinct persons, and transfers are taxable under the following two cases:
- Intrastate stock transfer : Taxable only when the entity has more than one registration in one state. These entities will be considered as ‘distinct persons’.
- Interstate stock transfer : Transfer between two branches/units located in different states under the same PAN will be taxable
Now, we know the taxability of stock transfers. Let us discuss the calculation of value of stock transfers on which GST is levied.
Broadly, GST is levied on the transaction value when price is the sole consideration received for supply and when supply is not between related or distinct persons. As a result, on stock transfer, the transaction value cannot be applied since it is a supply between 2 branches of the same entity, which is referred to as a distinct person. Hence, for stock transfers, the value of supply should be calculated by applying the following metrics:
Let us understand the applicability of the above valuation in different scenarios
If for any reason the above methods cannot be applied for determining the value of supply, it will be determined by applying the cost of the product+ 10 % or by using the residual method.
Yarab A | Jun-24-2017
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Valuation For Inter-Branch Transactions Under GST
- Lavanya Rajakumar
- | Goods and Services Tax - Articles - Featured
- Download PDF
- 10 Dec 2019
- 49,380 Views
A. Need for Valuation Rules for Transactions Within Company
During the pre-GST era, for inter-State stock transfers the major concern of the Industry was with regard to additional cost of CST and the compliance burden of submission of statutory forms. However, there was no concept of deemed service between branches located in two different States and hence there was no requirement to pay Service Tax on such activities. With the introduction of GST, by virtue of Schedule I, the scope of levy has been enhanced to cover even deemed service transactions.
The scope of supply enumerated under Section 7 of the CGST Act, 2017 covers within its ambit the term “transfers” and further Schedule I specifically covers within its scope the supply made between related or distinct persons even if made without a consideration.
The term distinct person derives its meaning from section 25 of the CGST Act, 2017 which would cover the branches or units or offices, etc., belonging to the same person, whether registered or not.
It is clear from the literal interpretation of the provisions that stock transfer / services between branches covered under two different GSTINs attracts levy under GST, the challenge comes with the valuation for such transfers.
Section 15 of the CGST Rules, 2017 prescribes the valuation to be adopted, wherein the supplier and recipient of the supply are not related, and price is the sole consideration for such supply. Sub section (4) & (5) of section 15 of the CGST Act,2017 provides that in any other case the valuation shall be determined in such manner as may be prescribed and the prescription is in rules.
The basic objective of the valuation rules in such cases, appears to address the concerns of over/under invoicing, in order to avoid tax loss to the Revenue. For instance, an input is transferred by Branch A in Chennai to Branch B in Delhi for further manufacture, wherein the input is taxable, and the final product is exempted. In such a scenario, the issuing branch could try to possibly reduce the price to minimise the impact of tax cost at the receiving branch. In order to avoid such tax planning, the valuation for such transactions are governed under specific rules under the CGST Rules,2017.
B. What the Valuation Rules provide for
Chapter IV of the CGST Rules, 2017 covers rule 27 to 35 which deals with the valuation procedure to be adopted for every case where the parties are related. Rule 28 specifically deals with determining value of supply between distinct or related persons. Rule 28 reads as follows:
“The value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall-
(a) be the open market value of such supply;
(b) if the open market value is not available, be the value of supply of goods or services of like kind and quality;
(c) if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order:
Provided that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person:
Provided further that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services.
The term Open Market Value is defined by virtue of Explanation provided under Chapter IV of the CGST Rules, 2017 as follows:
“open market value of a supply of goods or services or both means the full value in money , excluding the integrated tax, central tax, State tax, Union territory tax and the cess payable by a person in a transaction, where the supplier and the recipient of the supply are not related and the price is the sole consideration , to obtain such supply at the same time when the supply being valued is made”
C. Where is the Confusion?
The doubt arises by virtue of the provisos given under Rule 28 in order to determine the “Open Market Value”
- The first proviso provides an option to the supplier to adopt a value, which is equal to 90% of the value at which the recipient supplies similar goods to unrelated customers, where the goods are intended for further supply.
- The second proviso provides that the value given in the invoice would be termed to be the open market value where the recipient is eligible for full ITC.
A question arises as to whether the second proviso is a continuation of the first, or the same has to be read independently. In this context the TN AAR in the case of Specs makers Opticians Private Limited [2019 (27) G.S.T.L. 596 (A.A.R. – GST)] , had ruled that
“both provisos are to be read together and not independently, i.e. the Applicant cannot choose whichever proviso is favourable to them. Applicable rule would be R.28(a) i.e. Open Market Value, on satisfaction of both the conditions given in the above provisos i.e. the value would be 90% of the price charged for sale to unrelated consumers on satisfaction of the condition that the receiving branch is eligible for full credit.”
The Authority gave the above ruling based on the words “provided further” used in the second proviso, which they interpreted to be a continuation of the first proviso.
The AAR TN states that if the interpretation of applicant is adopted then he can value any amount and transfer the credit to the recipient. Law has to be interpreted as it is and cannot add or delete words. Law cannot be interpreted based on the consequences that emanate from the interpretation. For instance, when ITC is restricted for certain input/input services, we cannot argue that the consequence of the same results in additional cost in the hands of the recipient and hence ITC would be available.
However, in an earlier contrary ruling by the AAAR in the case of GKB lenses Pvt Ltd [2018-TIOL-18-AAAR-GST] which upheld the order of the AAR, which held that
“The Applicant has the option of not supplying goods to its branches under the first proviso of Rule 28 and is eligible to value these goods by applying the terms of Second proviso to Rule 28 of the CGST Rules, 2017”.
D. What the Statute actually provides for
1. Reference to Judicial Precedents
In this context we would like to refer the order of the Hon’ble High Court of Calcutta in the case of Ever Bright Plastics Pvt. Ltd. v. Collector of Customs [1993 (65) E.L.T. 196 (Cal.)] wherein it was argued that the word “further” indicates something in addition to what had been provided to the first proviso and if any permission was required for the cases covered by the first proviso, then such permission would also be required in the second category of cases the HC ruled that
“The phrase ‘provided further’ in the second proviso, only means that another proviso was being added to sub-section (3) of Section 46. From this, it does not necessarily follow that the second proviso was the continuation of the first proviso.”
2. Reference to Existing Provision of CGST Act,2017
In addition, we can also refer to the existing provision under the CGST Act,2017 which contains more than one proviso. For instance, section 16 of the CGST Act, 2017 contains two provisos in a similar fashion as provided under rule 28 of the CGST Rules, 2017 which is as under:
Provided that where the goods against an invoice are received in lots or installments , the registered person shall be entitled to take credit upon receipt of the last lot or installment:
Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed:
If the view mentioned in the case of Specks maker ibid is adopted, the above 2 nd proviso (of credit reversal in case of late payment to vendor) would be interpreted to be applicable only in case of supplies in lots and not in case of other supplies.
However, we are aware that the Government does not intend to interpret it so. It is thus abundantly clear that both provisos are independent and cover two different aspects related to input tax credit. That being the case, similarly worded provisions in a statute cannot be interpreted differently. Thus, it is clear that the two provisos in rule 28 of the CGST Rules,2017 are mutually exclusive and the assessee has the option to choose either of the two.
3. Provisos redundant for a Service Transaction
If the view in the case of Specs makers Opticians ibid is considered to be correct i.e. in case the first proviso is applicable for a particular supply, then the said value will have to be adopted which will be considered as deemed OMV as per the 2 nd proviso, then the word ‘service’ used in the 2 nd proviso is redundant as the 1 st proviso is applicable only in case of goods and thereby the 2 nd proviso cannot be considered to be in continuation of the 1 st one as it is a settled principle that the statue never wastes words as held by the Supreme Court in the case of Visitor Amu v. K.S.Misra [2007 (8) SCC 594].
Also, in view of the authors, even going by the intention of the valuation rules where the recipient is eligible for full ITC (revenue neutral issue), the benefit of opting for either of the provisos should be available.
Special thanks to CA Shilpi Jain for vetting the article
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Hi Lavanya, Can we send goods for job work on delivery challan without paying GST from one registered manufacturing unit to another related registered branch unit situated outside the state, having the same PAN, under the job-work provisions u/s 143 of CGST Act? Please revert.
Lavanya , Can we also send goods for job work on delivery challan with out paying GST form our one registered manufacturing unit to another related registered manufacturing unit, having same PAN, under job-work provisions u/s 143 of CGST ACT?
Sir, Very good analysis of the “”provided further “”
Beautifully narrated article on Valuation For Inter-Branch Transactions Under GST.
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- Dealing with GST Notices: Challenges, Types and Solutions
- A Critical Study with Reference to GSTR2A, 2B & Circumstances Under Which Reversal of Input Tax Credit Arises
- Indian Stock Market Timings: Trading Hours Explained
- GSTN Advisory: Two-factor Authentication for Taxpayers
- Biometric Aadhaar Authentication: GST Registration Advisory for Andhra Pradesh
- Delhi GST Department Implements Digital DIN
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