Abstract
Since GST has been introduced in the country, we have seen number of amendments some of them from retrospective effect. Some of the provisions in GST Acts, are practically not possible to implement and has raised hue and cry. Many have been challenged in court of law. Being an Accountant, through this article we have tried to highlight few provisions which need redrafting and corrections with suitable and practical solutions to make GST good and simple tax in day to day transactions.
Even after four years of implementation and having many rounds of discussions prior to introduction of Goods and Service Tax Acts, (hereinafter refer as “GST”) still it has many technical and legal flaws. Such flaws have unnecessarily raised litigation, which otherwise, could have been avoided. Apart from wastage of money, unproductive litigation and/or rollback of provisions has wasted lot of time of courts, professionals, departmental officials and assesses. The said time and money could have been used for some other improvements in the system.
No doubts, after GST introduction in the country, tax base and revenue collection has gone up. As far as concept of GST is concerned, from consumers’ and also from government point of view, its very good and helpful for economic growth. But based on our experiences and understanding to the laws of GST in last four years, weare of the views that some of the sections, provisions and rules there under need to be redrafted or seek clarifications for better understanding and smooth sailing of GST. It will help to avoid tax evasion and also unnecessary litigation in long run.
In our views following sections or rules or both need some corrections or clarification to make GST users friendly:
Section 7: In section 7 of CSGT Act, term ‘supply’ is described. Any form of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration is subject to GST. It further includes transaction as per Schedule – 1 to Section-7, which are undertaken without consideration are also subject to GST.
Schedule-II help the stakeholders to identify if any supply of goods or services or both are supply of Goods or Supply of services.
Schedule-III talks about transactions which are neither supply of Goods nor supply of services. Hence, are out of the purview of GST.
Issues to be addressed u/s-7:
i. In schedule –I, clause 2, transactions undertaken without consideration especially with related parties or distinct persons, which have any identical products or services available in market and seldom manufactured or rendered as service in course or furtherance of business need more clarity under the law.
For instance: Corporate Guarantees for loan or otherwise given/provided by holding company for its subsidiary or vice –a -versa or with in group companies free of cost. How the valuation shall be done and GST to be paid, need a clarification?
In 43rd GST Council meeting council has further clarified that such services by Centre or State governments for their undertaking or PSU is specifically exempt under said entry No. 34A of Notification 12/2017 dt 28.06.2017 as amended vide Ntf 14/2018 dt 26.07.2018. (Circular No. 154/10/2021-GST dt 17.06.2021)
ii. In Schedule-II, clause 5(e): As mentioned above, schedule-II describe the nature of transaction if it is supply of goods or service. In said clause:
– activity related with agreeing to the obligation to refrain from an act, or
– to tolerate an act or a situation or
– to do an act,
are defined as goods/services and are subject to GST.
So in business, there are certain activities or services which are performed under these conditions but need clarification if are subject to GST.
For example:
a. In case any company recovers “Notice pay recovery” from an employee who has resigned from company is subject to GST or not. As such amount is charged out of employee-employer relationship which is covered under Schedule-III of section -7. It is very well covered under clause 5(e) of schedule-II of Section 7.
In court of law, we have some cases where in it is held that such recoveries are not subject to GST.
1. Order of Commissioner (Appeals) in case of M/s. Gujarat State Fertilisers & Chemical Ltd – It was held that cessation of employment is treated as employment service not liable for the GST.
2. Allahabad CESTAT in case of M/s. HCL Learning Systems Vs CCE, Noida – It held that the amount recovered out of salary already paid is not subject to GST.
Action Needed:
As such transactions are emerged out of employee-employer relationship hence should be treated as exempted service though covered under clause 5 (e) of schedule-II of section -7. Authorities must come out with clear cut verdict to avoid litigation further.
iii. In case of Liquidated Damages, which are again covered under Clause 5(e) of Schedule-7, GST is applicable. However, there is a case where supplier of goods or services is out of India and recipient, a Power sector company, is in India.Recipient who has imported Plant and Machinery but supplier failed to deliver the goods as per contracted terms and is subject to liquidated damages equal to 2% of value of goods in question.
Now, if recipient recovers LD charges from supplier and pay him amount after deducting LD charges from his final payments, will it be export of services? But, transaction does not fulfill the conditions of definition of Export of services u/s 2(6) of IGST Act, 2017.
If recipient charges GST under RCM, he will not get ITC. Moreover, he can recover only up to 2% of contract value. GST will be paid extra and no ITC is available.
Action Needed:
Such transactions must be addressed in law to avoid any evasion of tax and litigation. In other words, if any payment is settled through book entries, especially in case of import/export transactions, a clarification must be issued that such realization of amount shall be or shall not be treated as realization in foreign currency.
Section 9(4):Section -9 of CGST Act, 2017 is charging section. It levies CGST on all intra state supplies of Goods and Services or both paid by the taxable person at notified rates not exceeding 20%, collected by the government.
Section 9(4) is one of the most controversial section and has no background. It is just introduced out of rough idea, without proper homework done.
I, remember a case when discussing GST section 9(4) with one of my clients, a factory owner, who use to serve tea to his staff twice a day. Tea was served by a vendor (rehariwala )having his tea stall outside the factor gate. Monthly bill was around Rs. 35,000/-. When I told that you need to pay 18% GST on tea served by the said rehariwaland have to raise self-taxable invoicesto himself and pay GST on it, then claim ITC. He laughed and asked me Mr Sharma, you don’t have thorough knowledge of the provisions. Just check it again.
In another instance, one of our client company having its gas processing unit in remote area and was having one single bill to its buyer on monthly basis. When I explained the provisions of sec 9(4), CEO of the company was shocked to know that against single invoice for his outward supplies, he was supposed to raise thousands of invoices on his own for their purchases the company made from unregistered persons on monthly basis.
After having hue and cry by dealers and professionals, government deferred the provisions of Section 9(4) wef 13.10.2017 vide Notification No. 38/2017–Central Tax (Rate) Dated: 13/10/2017, but did not withdraw said section for the period 01.07.2017 to 12.10.2017.
Finally, Government amended the said section wef 01.02.2019 vide notification no 2/2019 dt 29.01.2019 as under:
Original Section -9(4) is reproduced as under:
The central tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both
Amended Section 9(4) wef 01.02.2019
[The Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of goods or services or both, and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to such supply of goods or services or both.]
Later on vide notification No. 07/2019 dt 29.03.2019 read with Notification no 03/2019 (CGST Rate) dt 29.03.2019 and Notification 24/2019 (Rate) dt 30.09.2019 government has specified real estate sector “promotors” to pay GST on reverse charge if inputs are purchased below threshold limits on specified goods and services or both.
Such provisions have further complexed the business transactions and has enhance the scope of litigation. It is far away from the spirit of ease of doing business when promoters are asked to pay GST @18% on inputs purchased having shortfall from 80% of thresh hold limit even if the actual rate of GST in case of some of inputs or input services is lower than 18% – (Sr No. 452Q of Schedule III of Notification No. 08/2019-CT (R) dated 28.06.2017 as inserted w.e.f. 1-4-2019.). It is totally undemocratic and illogical provision under the law.
Action needed:
Instead such provisions, better if govt omit said section because under the law we have thresh hold limit of Rs. 40 Lakh for goods and Rs. 20 lakh for Services. So transaction between registered person and Un-registered persons or vice –a -versa are bound to happen. Indian markets are such a complex markets we cannot avoid or discourage such transactions. Better if we allow businesses to buy as per their convenience by putting some upper limits for buying from unregistered persons and improve our systems to keep checks. We must have provisions of law user friendly rather having complex transactions as done for real estate sector.
Section 12: Times of supply of Goods
Sec12(4)(a) supply of voucher– In case of supply of Voucher by any registered person, if Supply is identifiable at the time of issue of voucher the date of issue of such voucher is time of supply and accordingly registered person need to pay tax on outward supply. If supply is not identifiable, then date of redemption of said voucher shall be the time of supply.
Section 12(4) reproduced as under:
In case of supply of vouchers by a supplier, the time of supply shall be—
(a) the date of issue of voucher, if the supply is identifiable at that point; or
(b) the date of redemption of voucher, in all other cases.
In 1st case, where supply is identifiable and GST is paid as per rate applicable on said goods, two issues emerged as under:
– Amount received at the time of issue of voucher, is an advance for future supply. So, if it is against supply of goods, which is an identifiable supply, why GST is payable at the time of issue of voucher. It must be paid at the time of redemption of voucher. Is it not violation of Notification no 66/2017 dt 15.11.2017
– if the custodian of voucher don’t redeem said voucher with in stipulated time and voucher get expired, what will happen to tax already paid at the time of issue of vouchers.
Can registered person claim refund if yes how?
Need not to mention that voucher is not a goods or services, its merely instrument for payment and supply is goods or services being delivered through voucher.
Action needed:
So in both the said cases amendments/clarifications must be issued. In case of Voucher, time of discharge of liability should be redemption of voucher and not the date of issue of voucher.
In case of non-redemption of voucher refund of GST paid should be linked to return filing to ease out the process.
Section 15 : Valuation :
Section 15(4): Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed.
Rule 28. Value of supply of goods or services or both between distinct or related persons, other than through an agent.-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
But in case of Corporate guarantees issued by holding companies for its subsidiary companies for loan or other purposes free of cost, what should be the treatment under GST.
Issues are:
– if it is taxable under GST,
– If answer to above is Yes, how and what should be the value for such services,
Please note that as per 43rd GST Council meeting dt 25.05.2021, guarantee by governments in favor of PSUs for loan purposes in tax free under GST. As per para 5(viii) of press release, to clarify that services supplied by Govt. to its undertaking/PSU by way of guaranteeing loans taken by such entity from banks and financial institutions is exempt from GST. (Circular No. 154/10/2021-GST dt 17.06.2021)
There are no such identical services in market which can be referred for valuation purposes and GST can be charged. In the cases where banks stand as guarantor, banks charged some fee which can be considered for GST purposes. But in above said case service is provided free of cost. Identical service provided by government is exempted.
Action needed
Government should clarify if such services of Corporate entities are taxable or exempted. If taxable how the value for the same can be determined.
Section 16:
This is a section of special importance in GST laws. In section 9, Taxable person pays tax and in Section -16 he claims ITC on taxes paid by him not on outward supplies but on Inward supplies. In July 2017 when IT portal i.e GST Portal could not perform to file GSTR-1, GSTR-2 and GSTR -3 government immediately came out with GSTR-3B to payor collect GST for July 2017. Registered person filed their GSTR-3B based on invoices received for their inputs and invoiced raised for outward supplies and net liability for GST.
Claiming ITC is just utilizing currency for taxable person as he gets his liability of GST reduced to the extent. But government has laid down certain conditions to be fulfilled by taxable person before using that currency. Some of the conditions looks impractical and have been imposed without knowing ground realities and have created havoc in industry. Let us see how?
Section 16: Eligibility and conditions for taking input tax credit.—
(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,––
(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;
(b) he has received the goods or services or both.
[Explanation.— For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services––
(i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;
(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person;]38
(c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and
(d) he has furnished the return under section 39:
Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:
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:
Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.
(3) Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed.
(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or [******]39 debit note pertains or furnishing of the relevant annual return, whichever is earlier.
[Provided that the registered person shall be entitled to take input tax credit after the due date of furnishing of the return under section 39 for the month of September, 2018 till the due date of furnishing of the return under the said section for the month of March, 2019 in respect of any invoice or invoice relating to such debit note for supply of goods or services or both made during the financial year 2017-18, the details of which have been uploaded by the supplier under sub-section (1) of section 37 till the due date for furnishing the details under sub-section (1) of said section for the month of March, 2019
If we go by the plain reading of this section, there is no issue and is clear on ITC availment. But if we carefully rea the clause 16(2)(c ), we found that how a buyer of goods or services or both can compliance this provision. The buyer has paid the consideration and GST on goods or services or both to the supplier as per the mutually agreed terms and his role is over. Now this is supplier who has to pay GST to Government on his outward supplies for which section -9 is enacted. And for any violation of provisions of laws, action shall be initiated by the department against said supplier under section 73 or 75 or section 122 as the case may be.
Denying the ITC to buyer for a fault of supplier is against the constitutional rights of an individual. It can also be a violation of Article 14, Article 19(1)(g) and Article 300A of the Constitution of India.
The said provisions have been challenged before the court of law on the grounds that :
– denying ITC to a buyer of goods and services would tantamount to treating both the ‘guilty purchasers’ and the ‘innocent purchasers’ at par
– denying ITC to a buyer of goods or services for default of the supplier of goods or services would tantamount to shifting the incidence of tax from the supplier to the buyer, over whom it has no control whatsoever, is arbitrary and irrational
– It would also clearly frustrate the underlying objective of removal of cascading effect of tax as stated in the Statement of object and reasons of the Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014.
– no liability can be imposed on it on the principle of vicarious liability on account of fraudulent conduct of the suppliers, who have obtained registration on the basis of fictitious documents.
Further, buyer purchased goods or services from said supplier only because government issued him registration under GST Laws and allowed him to do business in India. Moreover, in e-invoice era, such provisions have no relevance.
On the other side, If we put all the conditions under section 16(2) together, registered person will not be eligible for ITC till all the four conditions are fulfilled. If so, it is denial of ITC and that is against the spirit of law to eliminate the cascading effects for no reasons of bonafide buyer.
Action needed: Instead of having clause 16(2)(c ), better if the said clause should be omitted and ITC must be allowed based on Section 16(a), (b) and (d).
Friends, in 2nd proviso to section 16(2), it is mentioned that where recipient does not pay consideration and GST on goods or services received within 180 days from the date of invoice, he shall revers ITC availed and pay the same along with interest. The said proviso is reproduced as under:
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:
Practically it is very difficult for registered or unregistered person to track each and every purchase or inputs bills for 180 days. In normal businesses having turnover up to Rs. 50 Cr average number of purchase or inputs bills from registered persons on daily basis are between 50 to 100. It again depends on industry to industry. So with 50 bills daily have 1200-1500 bills a month and 15000-18000 bills a year. It may not be possible to track each transaction if payments have been made within 180 days or not.
Action needed:
At the most we can have the said proviso for outstanding more than three months or six months as on 31st March, every year and ITC should be reversed with interest. In other words, ITC should not be allowed for creditors as on 31st March or date of balance sheet having outstanding more than three or six months. It will ease out the process for better controls.
Further, u/s 16(4) law permits ITC to buyer of goods or services or both in respect of Invoices or Debit notes after due date of furnishing GSTR-1 return for the month of Sept, of following the end of Financial year to which said Invoices or Debit notes pertain or filing of Annual return under GSTR-9, whichever is earlier.
In said provisions also there are many issues and need to be addressed again. There are many reasons and cases when it is not possible to close the books from GST perspective by 30th Sept of following FY.
Action needed:
Assesse or dealer should be allowed to settled their ITC against invoices or Debit notes, as the case may be on or before filing of Annual Returns. So that all transactions related with particular FY can be closed with filing of Annual Return. Any recovery of Tax/Interest/Penalty shall be deposited through DRC-03 and any refund should be allowed to claim in Annual Return with a provision to get credit of same in Electronic Credit Ledger immediate after filing of Annual Return.
Conclusion:
There are many other issues in GST acts which need more research work to match with the business transactions to make it user friendly. Amendments in appropriate provisions of law will help smooth sailing of the laws to practice it in true spirit. It was our small effort to highlight some of the issues under GST and also for a better understanding of the readers. No doubts government has simplified many clauses but still lot of work is yet to be done and this journey is continuing. Roll back of provisions or frequent amendments are not the solutions.
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