1.
Background and introduction:-
1.1.
The 28th GST Council meeting on 21.7.2018 had, inter alia, approved
several amendments to the GST laws [namely Central Goods and Service Tax
Act, 2017 (“CGST Act”), Integrated Goods and Service Tax Act, 2017 (“IGST
Act”), Union Territory Goods and Service Tax Act, 2017 (“UTGST Act”)
and the Goods and Service Tax (Compensation to States) Act, 2017 (“GST
Compensation to States Act”)]. The said amendments were placed before the Parliament (and the State
legislatures) for carrying out amendments in the respective GST legislations – the Ministry of Law and Justice published that
the amendment bills to all the GST laws received presidential assent (after
being passed by the Parliament) on 29th August 2018.
However, it is only
tomorrow, on 1st February 2019, that these amendments will come into
force – even then, about six of those amendments are not being notified, as per
Notification No. 2/2019-Central Tax F.No.20/06/16/2018-GST (Pt. II) Dated 29th
January, 2019 (and corresponding State GST notifications).
It is pertinent to recall
that notices were received by assessees across India in the last few months
relying upon amendments introduced vide these Amendment Acts even though as
per Section 1(2) to all of these Amendment Acts, these Amendment Acts were to
come to force only from a date to be notified – these notices were based on an
erroneous interpretation that wherever the amendments were mentioned to be
effective with retrospective effect from July 1, 2017, they would be deemed to
be in force irrespective of such Amendment Acts being notified. Now that it
is clear that those notices were relying upon provisions of law which were not
in force on the date of such notices, it would be interesting to see how the
department deals with such notices. If not withdrawn, such notices would
be vulnerable to be quashed vide appropriate writ petitions.
2.
Amendments that will impact tax controversy
management
2.1
Changes
in definition of ‘Service’ – GST is a tax on
‘supply’ of ‘goods’ or ‘services’. Therefore, in order to attract levy of GST
on a transaction of ‘supply’, the same should be of ‘goods’ or ‘services’.
Since the definition of ‘goods’ and ‘services’ in the CGST Act categorically
excludes ‘securities’ from its ambit, doubts arose as to whether the
transaction in ‘securities’ or facilitating or arranging transactions in
‘securities’ will attract levy of GST. To obviate such doubts, following
explanation is added to the definition of ‘services’ under Section 2(102) of
the CGST Act:
“Explanation
– For the removal of doubts, it is hereby clarified that the expression
‘services’ includes facilitating or arranging transaction in securities”
The insertion of the above Explanation is a positive
change inasmuch as it obviates doubts about taxability of activity of
facilitating or arranging transaction in securities which emanated owing to the
fact that ‘securities’ were kept outside the purview of definition of ‘goods’
and ‘services’ under the CGST Act.
Since this is a clarificatory amendment vide an
‘Explanation’, this has been given a retrospective effect and from
tomorrow, this will be deemed to have been there since July 1, 2017.
2.2
Retrospective
Amendment in the definition of ‘Supply’ – The definition of ‘supply’ under Section 7(1) of the CGST Act, apart
from activities such as sale, barter, exchange, etc., in sub-clause (d) thereof
also included activities specified in Schedule II – which are to be treated as
supply of goods or supply of services. That sub-clause (d) being part of the
sub-section defining the term ‘supply’ led to a situation where an activity
listed in Schedule II would be deemed to be a supply even if it does not
constitute a supply as per clauses (a), (b) and (c) of Section 7(1). Meaning
thereby, even if an activity is not a sale, barter, exchange, etc. (forms of
‘supply’ referred to in sub-clause (a) of Section 7(1) of CGST Act) but is
specified in Schedule II of the CGST Act, it would still be deemed to be a
‘supply’.
This
anomaly is being done away from tomorrow by omitting clause (d) of Section 7(1)
and inserting a new sub-section (1A), which provides as under:
“(1A) Certain
activities or transactions, when constituting a supply in accordance with the
provisions of sub-section (1), shall be treated either as supply of goods or
supply of services, as referred to in Schedule II.”
Resultantly, tomorrow onwards - for any activity to
qualify as a ‘supply’ under GST, mere inclusion in Schedule II (“ACTIVITIES
OR TRANSACTIONS TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES”)
would not suffice; the said activity has to qualify as ‘supply’ first [under
Section 7(1)] and only then it would get further classified as ‘supply of
service’ or ‘supply of goods’ as per Schedule II. It is pertinent to note
that as per the CGST Amendment Act, the above changes have been deemed to be in
effect from July 1, 2017 itself – ie., these amendments would have a
retrospective effect, once notified from
tomorrow.
This is a fundamental clarification and would go a
long way in affecting existing advance rulings as well as mitigating future
litigation.
For example, when one is examining if ‘liquidated
damages’ qualifies as a ‘supply’, till now the positon adopted by the tax
authorities is that liquidated damages are covered within the scope of entry “agreeing
to the obligation to refrain from an act, or to tolerate an act or a situation,
or to do an act” specified in Schedule II of the CGST Act and therefore,
GST is payable on amount received as ‘liquidated damages’ irrespective of the
fact whether it constitutes ‘supply’ in terms of sub-clauses (a), (b) and (c)
of Section 7(1). This position of the tax authorities also finds an echo in
the Advance Ruling by the Authority for Advance Ruling (“AAR”) of State of
Maharashtra in the case Maharashtra State Power Generation Company
Limited [TS-187-AAR-2018-NT; now upheld by Appellate Authority for
Advance Ruling (“AAAR”) too].
However, with the retrospective deletion of sub-clause
(d) to Section 7(1) and insertion of new sub-clause (1A), tax authorities (and
the Maharashtra AAR and AAAR?) may have to revisit their position and will have
to determine if payment of liquidated damages in a given scenario constitutes a
‘supply’ first. Only in a situation where payment of ‘liquidated damages’
constitutes a ‘supply’ in terms of clauses (a), (b) and (c) of Section 7(1) of
CGST Act can they go on to examine if the payment is towards the “agreeing
to the obligation to refrain from an act, or to tolerate an act or a situation,
or to do an act” specified in Schedule II of the CGST Act. The currently
prevalent opinion/position as adopted by Industry/tax experts alike is that
there is no ‘supply’ in case of receipt of ‘liquidated damages’.
2.3
Schedule
III changes - End of confusion apropos in-bond sales and high sea sales - Schedule III specifies “ACTIVITIES
OR TRANSACTIONS WHICH SHALL BE TREATED NEITHER AS A SUPPLY OF GOODS NOR A
SUPPLY OF SERVICES”. Two notable amendments have been made in
Schedule III in the form of insertions. The first insertion in the form of
Clause 7 has been made for supply of goods from a place in the non-taxable
territory to another place in the non-taxable territory without such goods
entering into India. Industry/tax experts
had mostly adopted a view that such transactions would not attract GST in
India; however, the fear of unnecessary litigation lingered – this amendment
would go a long way to mitigate such exposure.
The
second one deals with high-sea-sales/in-bond-sales. Earlier, clarifications
were issued by the Central Board of Indirect Taxes and Customs with respect to
in-bond sales and high sea sales (and amendments made to Customs Tariff Act)
clarifying that IGST shall be charged only once and that too as an additional
duty of customs at time of clearance of such goods. Pursuant to the same, the
CGST Amendment Act inserts a new clause 8 in Schedule III to give effect to the
said clarification, basis which, it now stands clarified that activities of a
high-sea seller or an in bond seller neither qualifies as a supply of goods nor
qualifies as a supply of services.
But are these not retrospective amendments? – Admittedly, unlike some of the other provisions,
these provisions have not specifically been given retrospective effect in the
CGST Amendment Act. However, since the aforesaid issues were clarified by the
Government on earlier occasions, assessees would be tempted to apply these
retrospectively (being clarificatory in nature). It is hoped that the tax
authorities accept such retrospective interpretation as that would help in
reducing unwarranted litigations for the past period.
2.4
Rationalizing Input Tax Credit – First and foremost, availment of ITC on
activities or transactions specified in Schedule III [other than sale of land
and, subject to clause (b) of paragraph 5 of Schedule II, sale of building] has been allowed by excluding it
from the ambit of ‘exempt supply’ on which ITC is blocked as under section
17(3) of the CGST Act vide a new Explanation. Thus, aforementioned changes in
Schedule III (refer 2.3 above) read with the proposed amendment
to Section 17(3) pertaining to value of ‘exempt supply’ for credit reversal
essentially means that no credit reversal will be required in cases of ‘High
Sea Sales’ or ‘In-Bond Sales’, even though the
high-sea/in-bond seller would not be liable to pay GST thereon. This is an important
amendment and would effectively overrule the advance
ruling issued by the Maharashtra Advance Ruling Authority in the case of BASF
India Limited, GST-ARA,
application no. 27 dated 21.02.2018 wherein the following was held:
“Yes. In view of the detailed discussions and observations with
respect of Question 1above, the goods sold on high sea sales basis being
non-taxable supply as per section 2(78) of the CGST Act and being exempt supply
as per section 2 (47) of the CGST Act, the input tax credit to the extent of
inputs, input services and common input services would be required to be
reversed by the applicant as per section 17 of the CGST Act”
This
is a welcome move and a step towards reducing litigation.
Is this not a retrospective amendment? – Unlike some of the other Explanations inserted by
the CGST Amendment Act, this Explanation does not start with the words – “For
the removal of doubts, it is hereby clarified”. However, if the amendments
in Schedule III manage to receive a retrospective treatment, this Explanation
on credit reversal should also get the same treatment. It will be interesting
to see the stance adopted by the Tax authorities in this regard. Without a
retrospective operation to this, demands for credit reversal would commence
soon for all high sea sales/in-bond sales and even mercantile transactions
(ie., supply of goods from one place outside to another place outside India
without such goods entering into India).
Other
changes vis a vis Input Tax Credit are discussed below:
(i)
The
amendments in Section 17 (5) (a) of the CGST Act is a step towards reducing
restrictions and ambiguities in respect of the ITC available with respect to
motor vehicles – credit restriction is now applicable only for motor
vehicles for transportation of persons having approved seating capacity of
not more than thirteen persons (except when they are used for making specified
taxable supplies). Input tax credit in respect of dumpers, work-trucks,
fork-lift trucks and other special purpose motor vehicles should now be
available – this will mitigate one stream of potential tax litigation on credit
for such vehicles.
This amendment will also
impact the advance ruling and AAAR order order in case of CMS Info Systems
Limited, [Maharashtra AAAR ORDER NO. MAH/AAAR/SS-RJ/04/2018-19 Date- 06th
August, 2018] who was providing cash management services in India. There was
difference in opinion of the members of the AAR, Mumbai on the question
pertaining to eligibility to avail input tax credit on the purchase of cash
carry vans which are used for the cash management business; the AAAR however
held that Input Tax Credit is not available to CMS Info Systems Limited on
purchase of motor vehicles i.e. cash carry vans, which are purchased and used
for cash management business and sold post usage as scrap. With the above
amendment, credit should be available for cash carry vans too.
(ii)
Presently,
in accordance with the provisions of section 17(5)(b), input tax credit (“ITC”)
is not available in respect of food and beverages, health services, travel
benefits etc. to employees. A proviso has been inserted after sub rule (iii) of
17(5)(b) of the CGST Act to allow ITC, tomorrow onwards, in respect of such
goods or services or both where the provision of such goods or services or
both is obligatory for an employer to provide to its employees under any law
for the time being in force. This particular amendment should help in
reducing litigations apropos ITC on employee related expenses; however, some
disputes may still arise with respect to interpretation of the employer’s
obligation “under any law for the time being in force”.
2.5
Power
of recovery extended to ‘distinct persons’ - Explanation 1 have been inserted in section 79 (1)
of the CGST Act to provide that ‘person’ under this section shall include
‘distinct persons’ too. This is probably to ensure that tax authorities have
the power of recovery of tax demands from ‘distinct persons’ present in
different States / UTs in order to ensure speedy recovery from other
establishments of the registered person – basically,
it appears that, from tomorrow, CGST
liability for a registered office in Gurgaon, Haryana can be recovered from
another registered branch office in Mumbai, Maharashtra.
This
further strengthens the hands of the tax authorities and may be susceptible to
misuse to create undue pressure on assessees even in genuine cases where
multiple interpretations were possible and the assessee has adopted a
favourable position.
2.6
Changes
in provisions pertaining to ‘Mandatory Pre-deposit’ - Section 107 & Section 112 of the CGST Act (and
section 20 of the IGST Act) contains provisions in respect of appeals to
Appellate Authority and Appellate Tribunal respectively. As per the current
provisions, appeals cannot be filed before the Appellate Authority or Appellate
Tribunal unless the appellant pays fully, that part of the amount of tax,
interest, and penalty arising from the impugned order, as is admitted by him.
Further, appellant is required to pay a sum equal to 10% and further 20%
(total of 30%) of the tax in dispute arising from the order appealed against
for filing an appeal before the Appellate Authority and Appellate Tribunal
respectively.
Vide
the amendment, a ceiling of Rs. 50 crores (factoring total pre-deposit
under CGST+SGST or under IGST) for filing an appeal before the Appellate
Authority and further Rs. 100 crores (factoring total pre-deposit under
CGST+SGST or under IGST) for filing an appeal before the Appellate Tribunal.
While
one hoped for rationalization of the mandatory pre-deposit provisions before
filing appeals under GST and especially the introduction of some ceiling(s) on
pre-deposit, the expectation was that such a cap on mandatory pre-deposit would
be in line with the cap as it existed in the pre-GST regime. Under the
erstwhile Central Excise and Service Tax provisions, mandatory pre-deposit for
filing an appeal before the first Appellate Authority was 7.5% and before the
CESTAT it was 10% of the disputed amount of tax. The ceiling was capped
at Rs. 10 crores in both cases. Last year, the High Court of Delhi in
the case of Santani Sales Organisation Vs. CESTAT and Ors.
[TS-21-HC-2018(Del)] in the context of erstwhile Central Excise/
Service Tax provisions clarified that 10% would not be in addition to and
over 7.5% of pre-deposit made for first appeal.
Thus,
while under the erstwhile Central Excise/ Service
Tax law, an assessee/appellant was required to make a mandatory pre-deposit of
only 10% till second appeal stage subject to a maximum ceiling of Rs. 10
crores, under GST a comparably placed assessee/appellant would now be required
to deposit 30% of tax in dispute subject to an overall ceiling of Rs. 100
crores – a hike of ten-times!
Fixing
a high ceiling of Rs. 50 crores for appeal to Appellate Authority and further
Rs. 100 crores for appeal to Appellate Tribunal has made the provision
vulnerable to legal challenge through writ petitions
as being ‘arbitrary, extortionate, disproportionate, a colourable device
effectively nullifying the right of assessees to file appeal etc’.
The
Supreme Court of India in the case of Mardia Chemicals Ltd. and Ors. vs.
Union of India [2004 (4) SCC 311] held that excessive
pre-deposit before filing an appeal renders the appellate remedy as illusory.
Mandatory pre-deposit of 30% of tax in dispute subject to an overall ceiling of
Rs. 100 crores may also renders the
appellate remedy under GST as illusory. It is also important to know that
under the erstwhile Central Excise/ Service Tax regime where the mandatory
pre-deposit was limited to only 10% subject to overall ceiling of Rs. 10
crores, there have been a few cases where the Courts have held that appeal should
be admitted and heard without insisting on pre-deposit. It is only a matter
of time before assessees approach the High Courts for admitting appeals without
insisting on pre-deposit. Considering the requirement of excessive pre-deposit,
the High Courts are likely to give relief to the assessees as many a times tax
authorities create demand on frivolous issues (as is evident from the
disproportionately high success rate of appeals by assessees in India).
Therefore, instead of rationalization of litigation under GST, these
amendments to the appeal provisions have further opened room for litigations.
2.7
Retrospective
amendments to transitional provisions to disallow
transition to GST of the credit of cesses like Education Cess (“EC”) and
Secondary and Higher Education Cess (‘SHEC’) etc – Let us begin with a perusal of the
relevant legal provision;
the changes as effective from tomorrow, are highlighted in Orange font colour :–
Section 140(1) A registered
person, other than a person opting to pay tax under Section 10, shall be
entitled to take, in his electronic credit ledger, the amount of CENVAT credit
of eligible duties carried forward in the return relating to the period
ending with the day immediately preceding the appointed day, furnished by him
under the existing law in such manner as may be prescribed:
…………
Explanation
1.—For the purposes of sub-sections (1), (3), (4) and (6), the expression “eligible
duties means-……
Explanation 3- For removal of doubts, it
is clarified that the expression ‘eligible duties and taxes’ excludes any cess
which not been specified in Explanation 1 or Explanation 2 above and any cess
which is collected as additional duty of customs under sub-section (1) of
Section 3 of Customs Tariff Act, 1975.
It
is clear from Section 28 of the CGST Amendment Act that this amendment will be
implemented as being retrospective in nature and would thus lead to massive demands across the country since many assessees
have transitioned such credit to GST and several of them would have utilized
the same also.
There were concerns earlier that since ‘Explanation 1’ was being made
applicable vide the above amendment to sub-section (1), transitioned credit of
even input services, goods in stock etc – to address the same, Circular No.
87/06/2019-GST has been issued on 2.1.2019 clarifying that:
“…it has been decided not to notify the clause (i) of sub-section (b)
of section 28 and clause (i) of sub-section (c) of section 28 of CGST
(Amendment) Act, 2018 which link Explanation 1 and Explanation 2 of section 140
to section 140(1). This would ensure that the credit allowed to be
transitioned under section 140(1) is not linked to credit of goods in stock, as
provided under Explanation 1, and credit of goods and services in transit,
as provided under Explanation 2”
Thus, the concerns about transitional credit other than credit of cesses
have been mitigated vide the above circular read with Notification No.
2/2019-Central Tax F.No.20/06/16/2018-GST (Pt. II) Dated 29th January, 2019
which “appoints the 1st day of February, 2019, as the date on which the
provisions of the Central Goods and Services Tax (Amendment) Act, 2018 (31 of
2018), except clause (b) of section 8, section 17, section 18, clause
(a) of section 20, sub-clause (i) of clause (b) and sub-clause (i) of clause
(c) of section 28, shall come into force”.
However, this amendment is still likely to face
challenges in various High Courts through writ petitions on the ground of
taking away vested rights of the assessees.
The
term ‘vested’ has not been defined anywhere and reference for that can be
placed on the judgment of the Hon’ble Supreme Court in the case of J.S.Yadav
v State of UP & Ors [(2011) 6 SCC 570], wherein the Court
held that “the word vest is normally used where an immediate fixed right in
present or future enjoyment in respect of a property is created. With the long
usage the said word vest has also acquired a meaning as an absolute or
indefeasible right". The Supreme Court in a number of cases has held
that Credit that was validly taken is indefeasible and thus is a vested right.
The
Legislature no doubt has the competence and the power to enact a retrospective
law, but that should be sustainable on the touchstone of constitutional
principles. Vide this amendment, the GST Council has sought to specifically
deny the utilization of EC & SHEC as input credit under GST even though
strong legal arguments exist to contend that assessees were entitled to carry
forward the same to GST regime. Tracing the history of EC & SHEC, it can be
seen that even though the levy of the same had been repealed, yet registered
assessees were NOT disallowed to carry forward the unused EC & SHEC in
their CENVAT Credit ledger. A reasonable conclusion which emerges is that the
same was to be carried forward, crystallized and used as Transitional Credit
under Section 140(1) of CGST Act read with Rule 117 of CGST Rules.
The
action of denying the same vide this retrospective
amendment can be argued to be arbitrary because it purports to take away vested
right of carry forward of EC & SHEC to GST regime for utilization
thereunder, and thus will cause unjust hardship to the registered persons. Assessees
planning writ petitions on the foregoing points will do well to remember that
the Delhi High Court in the case of Cellular Operators Association of
India Limited (COAI) v UOI [(2018) SCC Online Del 7282] held that EC
& SHEC is not in the nature of vested right and hence, utilization of
credit cannot be claimed once EC & SHEC has
been subsumed and taken away from the statute book - Such assessees will have
to successfully distinguish the applicability of the COAI judgment from
the facts and circumstances of the present discussion as the issue before the
Hon’ble Delhi High Court in COAI was restriction on utilization of the credit
of EC and SHEC under CENVAT Credit regime.
Irrespective
of the fate of such challenges, at a macro-level, it is dis-appointing that
this government too has resorted to retrospective amendments to bolster their
interpretation of tax laws.
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