What to anticipate from Centre review of Legal Issues in GST

As the Goods and Services Tax (GST) regime completed its fourth year on 1 July 2021, there are still issues that plagues several industrial sectors in India.

Industry bodies were set to raise several issues with the Government in relation to GST compliances, legislation, and administration ahead of the fourth anniversary of the indirect tax reform¹

Crucial issue from divergent industry perspectives includes-

• Process of rectification and refinement in GST network system
• Blocking of Input tax credit without any reasoning
• Admissibility of input tax credit in case constructors of malls, hotels or offices which are used for taxable purposes
• Applicability of GST rate or HSN code
• Reverse charge mechanism issues
• Qualification of certain services (back office, support services) as zero-rated
• Intermediary services and place of supply issue
• Rigorous compliance burden faced by small taxpayers

Various industry bodies have taken up such critical matters along with other concerns with the GST Council Secretariat. Already, multiple issues have been taken up with GST Council on which clarifications, updates were provided in multiple GST council meetings.

Centre Begins Review of Legal Issues in GST

• The Centre has begun a comprehensive review of the GST law, as well as various rules pertaining to the levy.² The review is expected to simplify the law and reduce disputes
• The review is aimed at clearing the air on issues as mentioned above and certain issues in which contradictory judgements/rulings are pronounced
• A government official said these issues, along with many others, will then be taken to the officials’ committee of the GST Council for discussion. Subsequently, based on the feedback, a detailed proposal will be put to the council for a final decision.³
• The official added that the central and state governments had received multiple representations from the industry on these matters.³
• States and field formations have also flagged issues that need to be clarified, either through a change in the rules or the law itself. “It was felt that some of the issues that have been flagged should be examined and necessary clarification or changes to laws should be taken up to address them to bring down litigation,” the official said.³
• The Government has sought to reduce litigation over direct and indirect taxes, but GST has seen a rise in disputes at multiple forums. Conflicting views on several issues, including from the Authority for Advance Rulings, have also added to the conundrum

What to anticipate from the Centre review?

GST was implemented on 1 July 2017, since then the GST Council has held multiple GST council meetings and addressed concerns of various industry issues, GST compliance related issues by providing clarifications, amending rules, simplifying GST returns format and so on.

As mentioned above, the Centre review is expected to streamline and deduce the complexity of open issues under GST laws by providing-

• Clarifications on contradictory judgements and advance rulings

The contradictory rulings on the applicability of GST on certain transactions (head office and liaison office, intermediary transactions etc.) has created immense confusion and uncertainty amongst the businesses. A due clarification from the government on this issue will surely be helpful to put an end to all such litigations.

• Setting up of an Appellate tribunal which would streamline the litigation process

The constitution of National and other Benches of the appellate tribunal under the CGST Act, 2017 is an absolute necessity of the hour and the Government cannot drag its constitution for an indefinite period. It is imperative that the Centralized Appellate Authority for Advance Ruling is made operative on priority basis so that the future litigations are curbed at the initial stage itself.

• Suitable amendments, addition of explanations to rules and provisions under GST law

There are handful of judgements wherein it was held that certain rules/provisions are ultra vires to GST law (refund of input services in case of inverted rate duty, RCM applicability on ocean freight). The government should amend the said provision to avoid any further litigation and settle the long-drawn dispute on such aspects

• Streamlining of ambiguous tax positions by providing clarifications

Even though advance ruling is applicable only to the applicant, such rulings under GST regime may prompt companies to evaluate their service contracts and revisit their tax positions. It is pertinent to note that to address the ambiguity. A few of advance ruling judgements which need clarifications for all industry sectors are

• • GST on services by corporate office employees for other units
  • GST applicability on notice pay recovery
  • Inclusion of discounts, reimbursements, subsidies in transaction value
  • Calculation of GST on maintenance charges collected from members by co-operative housing societies above INR 7,500
• Relief for taxpayers by clarifying issues relating to input tax credit availability

Expenses as listed below are generally incurred for furtherance of business and in course of business on which ITC availability may be allowed to manage working capital and cost benefit ratio-

• • Employee benefit expenses in nature of insurance, medical, well-being of employees. Companies have incurred massive volume during last one year due to the COVID-19 pandemic
  • Corporate social responsibility (CSR) expenses which are incurred as per statutory requirement of Companies Act. It is relevant to note that a recent advance ruling had held that ITC should be available on CSR expenses treating the same as expenses in course of business
  • Repairs, renovation of office, construction cost incurred by hotel, malls should be allowed as the same are unswervingly correlated to starting and functioning of business
  • ITC on inherent loss during manufacturing process should not be reversed considering the loss is occasioned by consumption in the process of manufacture which is inherent to the process of manufacture itself.
  • Blocking of the electronic credit ledger on account of mismatch in GSTR- 2A and GSTR-3B without providing any detailed reasoning and opportunity of being heard
• Relief for taxpayers by simplifying process of filing GST returns
  • Filing of multiple GST returns on monthly basis and keeping track of timely filing of all relevant compliances is a perilous job for many sectors. A simplified single monthly return should be introduced by GST Council
  • Composition taxpayers are required to file monthly return with annual return in form GSTR-4 however, exemption is provided from filing of annual return in form GSTR-9 for taxpayers having aggregate turnover below INR 2 crores. Similar exemption should be provided to composition taxpayers by making GSTR-4 compliance as optional
• Clarifications on refund related issues

Various clarifications have been issued for smooth and quick disbursal of GST refunds. Out of which certain key clarifications issued were challenged

• • Inclusion of ITC related to input services in case of refund on account of inverted duty structure which are directly related to sale of such goods
  • Authorities have ruled out contrary rulings for administrative and support services provided to foreign client, where payment is received in foreign exchange services by treating either it as export of services or intermediary services. Refund applications are rejected or not filed by Companies due to unclear tax position
• Clarifications on GST rate and HSN applicability

A string of contrasting rulings by different state authorities has raised quite a few eyebrows and there are voices now that question the sensibility and maturity of the state-wise structure. Some of such instances are-

• • The Authorities for Advance Rulings of Gujarat, Tamil Nadu, and Andhra Pradesh ruled 12% of GST is applicable on flavored milk, but the Karnataka AAR ruled 5%
  • In another case, Maharashtra AAR held that solar procurement and installation contracts will attract 18% GST, while Karnataka AAR ruled a 5% GST rate
  • Classification of HSN and GST rate applicability

We believe that if the government clarifies such perilous issues faced by industry sectors, it will further strengthen GST’s long-term impact on the economy.

It would be vital to evaluate the tax positions adopted by the Company in the wake of such review and interesting and beneficial across all industry sectors once clarifications, updates are issued through suitable mode of communication by the GST Council

¹ https://economictimes.indiatimes.com/news/economy/policy/industry-bodies-to-take-up-gst-issues-with-govt-gst-to-mark-4-years-on-july-1/articleshow/83960032.cms

² https://economictimes.indiatimes.com/news/economy/policy/centre-begins-review-of-legal-issues-in-gst/articleshow/84624490.c ms

³ https://mydroll.com/centre-begins-review-of-legal-issues-in-gst/