Analysis of 9 GST Circulars issued by CBIC on 11th October, 2019

CBIC has issued nine circulars which have great implications on the organization as a whole. Kindly find our analysis of the various Circulars;

1. Summary of Circulars:

S No Issue Date Circular No. Subject
1 11/10/2019 Circular No. 113/32/2019-GST Clarification regarding GST rates & classification (goods) Circular–reg
2 11/10/2019 Circular No. 114/33/2019-GST Clarification on scope of support services to exploration, mining or drilling of petroleum crude or natural gas or both.
3 11/10/2019 Circular No. 115/34/2019-GST Clarification on issue of GST on Airport levies.
4 11/10/2019 Circular No. 116/35/2019-GST Levy of GST on the service of display of name or placing of name plates of the donor in the premises of charitable organisations receiving donation or gifts by individual donors.
5 11/10/2019 Circular No. 117/36/2019-GST Clarification on applicability of GST exemption to the DG Shipping approved maritime courses conducted by Maritime Training Institutes of India.
6 11/10/2019 Circular No. 118/37/2019-GST Clarification regarding determination of place of supply in case of software/design services related to Electronics Semi-conductor and Design Manufacturing (ESDM) industry.
7 11/10/2019 Circular No. 119/38/2019-GST Clarification regarding taxability of supply of securities under Securities Lending Scheme, 1997.
8 11/10/2019 Circular No. 120/39/2019-GST Clarification on the effective date of explanation inserted in notification No. 11/2017- CTR dated 28.06.2017, Sr. No. 3(vi).
9 11/10/2019 Circular No. 121/40/2019-GST Clarification related to supply of grant of alcoholic liquor license.

2. Clarification regarding GST rates & classification (goods) [Circular No. 113/32/2019-GST dated 11th October 2019]

The CBIC has issued the following clarifications in this regard:

Classification of leguminous vegetables when subject to mild heat treatment (parching):

It is clarified that the leguminous vegetables which are subjected to mere heat treatment for removing moisture, or for softening and puffing or removing the skin, and not subjecting to any other processing or addition of any other ingredients such as salt and oil, would be classified under HS code 0713. Such goods if branded and packed in a unit container would attract GST at the rate of 5% [S. No. 25 of notification No. 1/2017- Central Tax (Rate) dated 28.06.2017]. In all other cases such goods would be exempted from GST [S. No. 45 of notification No. 2/2017- Central Tax (Rate) dated 28.06.2017].

However, if the above dried leguminous vegetable is mixed with other ingredients (such as oil, salt etc) or sold as namkeens then the same would be classified under Sub heading 2106 90 as namkeens, bhujia, chabena and similar edible preparations and attract applicable GST rate.

Classification and applicable GST rate on Almond Milk:

It is clarified that since the Almond Milk is made by pulverizing almonds in a blender with water and is then strained. As such almond milk neither constitutes any fruit pulp or fruit juice. Therefore, it is not classifiable under tariff item 2202 99 20. Almond milk is classified under the residual entry in the tariff item 2202 99 90 and attract GST rate of 18%.

Applicable GST rate on Mechanical Sprayer:

It is clarified that the S. No. 195B of the Schedule II to notification No. 1/2017- Central Tax (Rate), dated 28.06.2017 covers “mechanical sprayers” of all types whether or not hand operated (like hand operated sprayer, power operated sprayers, battery operated sprayers, foot sprayer, rocker etc.).

Clarification regarding taxability of imported stores by the Indian Navy:

Indian Naval ship stores are exempted from import duty in terms of section 90(1) of the Customs Act, 1962. Further, as per section 90(2), goods “taken on board a ship of the Indian Navy” shall be construed as exported to any place outside India. Also, section 90(1) and 90(3) of the Customs Act, 1962 provides that imported stores for the use of a ship of the Indian Navy and stores supplied free by the Government for the use of the crew of a ship of the Indian Navy in accordance with their conditions of service will be exempted from duty.

Accordingly, it is clarified that imported stores for use in navy ships are entitled to exemption from GST.

Clarification regarding taxability of goods imported under lease:

All goods can be imported under lease without payment of IGST subject to following conditions:

(i) The importer, by the execution of bond, in such form and for such sum as may be specified by the Commissioner of Customs, binds himself to pay IGST under section 5(1) of the IGST Act, 2017 on supply of service covered by item 1(b) or 5 (f) of Schedule II of the CGST Act, 2017 [I.e. any transfer of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services or transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration] ;

(ii) not to sell or part with the goods, without the prior permission of the Commissioner of Customs of the port of importation;

(iii) to re-export the goods within three months of the expiry of the period for which they were supplied under a transaction covered by item 1(b) or 5 (f) of Schedule II of the Central Goods and Services Act, 2017;

(iv) to pay on demand an amount equal to the integrated tax payable on the said goods but for the exemption under this notification in the event of violation of any of the above conditions.

Applicability of GST rate on parts for the manufacture solar water heater and system:

It is clarified that parts including Solar Evacuated Tube falling under chapter 84, 85 and 94 for the manufacture of solar water heater and system will attract 5% GST.

Applicability of GST on the parts and accessories suitable for use solely or principally with a medical device:

It is clarified that 12% IGST would be applicable on the parts and accessories suitable for use solely or principally with a medical device falling under heading 9018, 9019, 9021 or 9022 in terms of chapter note 2 (b).

3. Clarification on scope of support services to exploration, mining or drilling of petroleum crude or natural gas or both [Circular No. 114/32/2019-GST dated 11th October 2019]

It is clarified that the scope of the entry at Sr. 24 (ii) under heading 9986 of Notification No. 11/2017- Central Tax (Rate) dated 28.06.2017 shall be governed by the explanatory notes to service codes 998621 and 998622 of the Scheme of Classification of Services.

It is further clarified that the scope of the entry at Sr. No. 21 (ia) under heading 9983 of Notification No. 11/2017- Central Tax (Rate) dated 28.06.2017 inserted with effect from 1st October 2019 vide Notification No. 20/2019- CT(R) dated 30.09.2019 shall be governed by the explanatory notes to service codes 998341 and 998343 of the Scheme of Classification of Services.

The services which do not fall under the said entries under heading 9983 and 9986 of the said notification shall be classified in their respective headings and taxed accordingly.

4. Clarification on issue of GST on Airport levies [Circular No. 115/32/2019-GST dated 11th October 2019]

Passenger Service Fee (PSF) and User Development Fee (UDF) being charges levied by airport operator for services provided to passengers, are collected by the airlines as an agent and is not a  consideration for any service provided by the airlines. Thus, airline is not responsible for payment of ST/GST on UDF or PSF provided the airline satisfies the conditions prescribed for a pure agent under Rule 33 of the CGST rules. It is the licensee, that is the airport operator (AAI, DIAL, MIAL etc) which is liable to pay ST/GST on UDF and PSF.

Accordingly, the airline acting as pure agent of the passenger should separately indicate actual amount of PSF and UDF and GST payable on such PSF and UDF by the airport licensee, in the invoice issued by airlines to its passengers. The airline shall not take ITC of GST payable or paid on PSF and UDF. The airline would only recover the actual PSF and UDF and GST payable on such PSF and UDF by the airline operator. The amount so recovered will be excluded from the value of supplies made by the airline to its passengers. In other words, the airline shall not be liable to pay GST on the PSF and UDF (for airport services provided by airport licensee), provided the airline satisfies the conditions prescribed for a pure agent under Rule 33 of the CGST rules. The registered passengers, who are the ultimate recipient of the airport services, may take ITC of GST paid on PSF and UDF on the basis of pure agent’s invoice issued by the airline to them.

1. How actually the invoicing will be done by the Airport Operator and Airline is still not clear through wording of Circular.

2. PSF and UDF will not be included in the valuation of air travel services by airlines for the purpose of charging GST.

3. As per the Circular the final recipient can claim credit based on pure agent’s invoice. This is in contravention to section 16(2) which requires a valid duty paying document for claim of credit.

4. It will also pose an issue at the time of GSTR-2A Reconciliation. The recipient will take ITC on the basis of invoice issued by Airline. However the Corresponding tax on such invoice will be actually paid by Airport operator.

The airport operators shall pay GST on the PSF and UDF collected by them from the passengers through the airlines. Since, the airport operators are collecting PSF and UDF inclusive of ST/GST, there is no question of their not paying ST/GST collected by them to the Government.

The collection charges paid by airport operator to airlines are a consideration for the services provided by the airlines to the airport operator (AAI, DAIL, MAIL etc) and airlines shall be liable to pay GST on the same under forward charge. ITC of the same will be available with the airport operator.

5. Levy of GST on the service of display of name or placing of name plates of the donor in the premises of charitable organizations receiving donation or gifts from individual donors [Circular No. 116/35/2019-GST dated 11th October 2019 ]

Individual donors provide financial help or any other support in the form of donation or gift to institutions such as religious institutions, charitable organisations, schools, hospitals, orphanages, old age homes etc. The recipient institutions place a name plate or similar such acknowledgement in their premises to express the gratitude. When the name of the donor is displayed in recipient institution premises, in such a manner, which can be said to be an expression of gratitude and  public recognition of donor’s act of philanthropy and is not aimed at giving publicity to the donor in such manner that it would be an advertising or promotion of his business, then it can be said  that there is no supply of service for a consideration (in the form of donation). There is no obligation (quid pro quo) on part of recipient of the donation or gift to do anything (supply a service). Therefore, there is no GST liability on such consideration.

Some examples of cases where there would be no taxable supply are as follows:-

(a) “Good wishes from Mr. Rajesh” printed underneath a digital blackboard donated by Mr. Rajesh to a charitable Yoga institution.

(b) “Donated by Smt. Malati Devi in the memory of her father” written on the door or floor of a room or any part of a temple complex which was constructed from such donation.

In each of these examples, it may be noticed that there is no reference or mention of any business activity of the donor which otherwise would have got advertised. Thus where all the three conditions are satisfied namely the gift or donation is made to a charitable organization, the payment has the character of gift or donation and the purpose is philanthropic (i.e. it leads to no commercial gain) and not advertisement, GST is not leviable.

It may be noted that the Circular covers the donations or gifts received by charitable organizations from Individual donors ONLY. It does talk about donations or gifts received from non-individuals/ corporates. However, it looks like the same principles would apply in case donation or gift received from non-individuals / corporates.

6. Clarification on applicability of GST exemption to the DG Shipping approved maritime courses conducted by Maritime Training Institutes of India [Circular No. 117/36/2019-GST dated 11th October 2019]

It is clarified that the Maritime Training Institutes and their training courses are approved by the Director General of Shipping which are duly recognised under the provisions of the Merchant Shipping Act, 1958 read with the Merchant Shipping (standards of training, certification and watch-keeping for Seafarers) Rules, 2014. Therefore, the Maritime Institutes are educational institutions under GST Law and the courses conducted by them are exempt from levy of GST. The exemption is subject to meeting the conditions specified at Sl. No. 66 of the notification No. 12/ 2017- Central Tax (Rate) dated 28.06.2017.

7. Clarification regarding determination of place of supply in case of software/design services related to Electronics Semi-conductor and Design Manufacturing (ESDM) industry [Circular No. 118/37/2019-GST dated 11th October 2019]

In contracts where service provider is involved in a composite supply of software development and design for integrated circuits electronically, testing of software on sample prototype hardware is often an ancillary supply, whereas, chip design/software development is the principal supply of the service provider. The service provider is not involved in software testing alone as a separate service. The testing of software/design is aimed at improving the quality of software/design and is an ancillary activity. The entire activity needs to be viewed as one supply and accordingly treated for the purposes of taxation. Artificial vivisection of the contract of a composite supply is not provided in law. These cases are fact based and each case should be examined for the nature of supply contracted.

Therefore, it is clarified that the place of supply of software/design by supplier located in taxable territory to service recipient located in non-taxable territory by using sample prototype hardware / test kits in a composite supply, where such testing is an ancillary supply, is the location of the service recipient as per Section 13(2) of the IGST Act. Provisions of Section 13(3)(a) of IGST Act do not apply separately for determining the place of supply for ancillary supply in such cases.

8. Clarification regarding taxability of supply of securities under Securities Lending Scheme, 1997 [Circular No. 119/38/2019-GST dated 11th October 2019]

The activity of lending of securities is not a transaction in securities as it does not involve disposal of securities. The clause 4 of para 4 relating to the Scheme under the Securities Lending Scheme, 1997 doesn’t treat lending of securities as disposal of securities and therefore is not excluded from the definition of services.

The lender temporarily lends the securities held by him to a borrower and charges lending fee for the same from the borrower. The borrower of securities can further sell or buy these securities and is required to return the lended securities after stipulated period of time. The lending fee charged from the borrowers of securities has the character of consideration and this activity is taxable in GST since 01.07.2017.

Apart from above, the activities of the intermediaries facilitating lending and borrowing of securities for commission or fee are also taxable separately.

The supply of lending of securities under the scheme is classifiable under heading 997119 and is leviable to GST@18% under Sl. No. 15(vii) of Notification No. 11/2017- Central Tax (Rate) dated 28.06.2017 as amended from time to time.

For the past period i.e. from 01.07.2017 to 30.09.2019, GST is payable under forward charge by the lender and request may be made by the lender (supplier) to SEBI to disclose the information about borrower for discharging GST under forward charge. The nature of tax payable shall be IGST. However, if the service provider has already paid CGST / SGST / UTGST treating the supply as an intra-state supply, such lenders shall not be required to pay IGST again in lieu of such GST payments already made.

With effect from 1st October, 2019, the borrower of securities shall be liable to discharge GST as per Sl. No 16 of Notification No. 22/2019-Central Tax (Rate) dated 30.09.2019 under reverse charge mechanism (RCM). The nature of GST to be paid shall be IGST under RCM.

  • The Circular states that for the past period i.e. from 01.07.2017 to 30.09.2019, GST is payable under forward charge by the lender and request may be made by the lender (supplier) to SEBI to disclose the information about borrower for discharging GST under forward charge. But how this information would be made available by the SEBI is not clear.
  • It is also stated that the tax payable shall be IGST without having regard to the place of supply provisions. This again is in contravention to Section 12, 13 of IGST Act which specifies POS rules for various services.

9. Clarification on the effective date of explanation inserted in notification No. 11/2017- CTR dated 28.06.2017, Sr. No. 3(vi) [Circular No. 120/39/2019-GST dated 11th October 2019]

As per Clause 3(vi) of CGST Rate Notification 11/2017 dated 28-06-17, Composite supply of works contract as defined in clause (119) of section 2 of the CGST Act, 2017, provided to the Central Government, State Government, Union Territory, a local authority, a Governmental Authority or a Government Entity by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession is taxable @ 12%

The clarificatory notification 17/2018-CTR dated 26-07-18 was issued u/s 11(3) to clarify that The term ‘business’ shall not include any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities.

As per section 11(3) of CGST Act, the Government may insert an explanation in any notification issued under section 11, for the purpose of clarifying its scope or applicability, at any time within one year of issue of the notification and every such explanation shall have effect as if it had always been the part of the first such notification.

It has now been clarified that clause 3(vi) was inserted in CGST rate notification w.e.f. 21-09-2017 although the clarificatory notification dated 26-07-18 mentions 27-07-2018 as the effective date of applicability.

Comments:

It is not open to the CBIC to issued circular to amend the effective date of applicability of Notification. The legality of this circular can be challenged in the court of law. But, since, the circular is beneficial to the assessee, the assessee is not going to challenge the circular.

10. GST on license fee charged by the States for grant of Liquor licences to vendors [Circular No. 121/40/2019-GST dated 11th October 2019]

The service by way of grant of alcoholic liquor licence, against consideration in the form of licence fee or application fee or by whatever name it is called, by State Government as neither a supply of goods nor a supply.

It is now clarified that this special dispensation applies only to supply of service by way of grant of liquor licenses by the State Governments as an agreement between the Centre and States and has no applicability or precedence value in relation to grant of other licenses and privileges for a fee in other situations, where GST is payable.

Jointly By:

CA. Chitresh Gupta
FCA, B. Com(H), IFRS (Cert.), IDT (Cert.)
Co-Author of book “GST –Law, Analysis & Procedures”
Faculty on Goods & Services Tax by ICAI
CA. Shilpi Gupta
FCA, M.Com, B. Com(H) -SRCC
Co-Author of book “GST –Law, Analysis &
Procedures”
Faculty on Goods & Services Tax by ICAI

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