A joint venture (JV) is a business arrangement in which two or more parties agree to bring their resources for the purpose of completing a specific task. This task can be a new project or any other business activity.
Each participant in the Joint Venture is responsible for the profits, losses, and expenses associated with it. However, the venture is its own entity, separate from the other business interests of the participants.
Advantages of Forming Joint Venture
1. Leverage resources
A Joint Venture can leverage the combined resources of both companies to achieve the objectives of the venture. One company may have a well-established manufacturing process, while another may have excellent distribution channels.
2. Cost Reduction
Using economies of scale, both companies in Joint Venture can produce their products at a lower per-unit cost than they would separately. This is especially true for technological advances that are expensive to implement. Other cost savings resulting from a JV may include sharing advertising or labor costs.
3. Combining skills
The two companies or parties forming the JV may each have different backgrounds, skill sets or expertise. When these are combined through a JV, each company can benefit from the talent of the other.
4. Entry to foreign markets
Another common use of a Joint Venture is to partner with a local business to enter a foreign market. A company that wants to expand its distribution network to new countries can enter into a JV agreement to supply products to a local business, thereby benefiting from an already existing distribution network. With some countries restricting foreigners from entering their markets, forming a joint venture with a local entity is almost the only way to do business in the country.
Examples of Joint Venture
One of the best-known joint venture examples is the Caradigm venture agreement between Microsoft Corporation and General Electric (GE) in 2011. Besides this, there was a joint venture held between Hulu and NBC Universal.
Similarly, in 2016 there was a joint venture happened between Fiat Chrysler and Google to develop self-driving cars.
Difference between a joint venture and a partnership
1. A joint venture involves two or more individuals or organizations coming together for a specific project. On the other hand, a partnership is described as a relationship that exists between people running a business with a common view of making a profit. It also includes incorporated limited partnerships.
2. The parties usually form a joint venture for a single goal or project, while a partnership is more often formed for a continuing business purpose.
3. Parties in a joint venture can include a clause in their agreement as to whether parties will share liabilities or whether each party will be held separately responsible.
As opposed to a partnership, the actions of parties involved in a joint venture do not bind other parties without the other parties’ consent to being bound.
Joint Venture under GST
GST is charged on intra-state and inter-state supply of goods and services. Therefore, according to
Section 7 of the CGST Act, 2017, the expression “supply” includes all types of supplies like”
- goods or services or both
- such as sale, transfer, barter, exchange, license, rental, lease or
- A disposition or agreement contemplated by a person in the course
- Enhancing business, and includes activities specified in Schedule II of the CGST Act.
Further, schedule II of the CGST Act, 2017 enumerates the activities which are treated as supplies are supply of goods or services. It also states that, the supply of goods by any unincorporated association or body of persons to a member shall be treated as a supply of goods. The transaction may be for cash, deferred payment, or other valuable consideration.
Cash calls are taxable or not in Joint Venture
whether cash calls are taxable or not will entirely depend on the facts and circumstances of each case. Thus, ‘Cash calls’ are raised by an operating member of the joint venture on other members in proportion to their participating interests in the joint venture(unincorporated). This is to meet the expenditure on the operations to be carried out as per the approved work program and budget. Therefore, the taxability of cash calls can be further explained by the following illustrations:
Example A:
There are 4 members in the JV including the operating member and each one contributes Rs 100 as part of their share. Thus, a total amount of Rs 400 is collected. On the other hand, the operating member purchases machinery for Rs 400 for the JV to be used in oil production.
Clarification:
A will not be the subject matter of ‘ST/GST’. This is for the reason that the operating member is not carrying out an activity for another for consideration. In example”A” the money paid for the purchase of machinery is merely in the nature of the capital contribution and is therefore a transaction in money.
Example B:
There are 4 members in the JV including the operating member and each one contributes Rs 100 as part of their share. A total amount of Rs 400 is collected. O the other hand, the operating member thereafter uses its own machine and performs exploration and production activities on behalf of the JV.
Clarification B
On the other hand, in example B, the operating member uses its own machinery and is therefore providing ‘service’ within the scope of supply of the CGST Act, 2017. This is because, in this scenario, the operating member is recovering the cost appropriated towards machinery and services from the other JV members in their participating interest ratio.
The above clarification is provided on the basis of circular no. Circular No. 35/9/2018-GST dt. 05.03.2018.