Analysis of changes in GST law vide the 2022 Finance Bill

Introduction

The Finance Bill, 2022 was passed by the Lok Sabha on 1^st February 2022, however an amended Bill (bill) was passed on 25^th March 2022. This bill incorporated several changes to the former bill, and was accepted by the Rajya Sabha without any further alterations. The Finance Minister, Nirmala Sitharaman’s shortest ever budget speech showcased her contentment in outlining the changes brought to GST laws in India. With the progression into a fully automated system, increasing GST revenues, commendable taxpayers, etc., the bill highlights the importance of technology-enabled development and India’s evolving digital economy and also gives a strategy to move towards the vision of India@100.

With some amendments being brought for the relief of taxpayers, few others hint towards the government’s intention of limiting the available amount of input tax credit (hereinafter “ITC”) to the extent of tax actually paid by the suppliers. This paper aims to briefly discuss the significant GST amendments brought in by the bill, while also critically analysing them.

1. ITC claim – additional conditions:

Vide Clause 99, an insertion was made into Section 16(2) of clause (ba) of the CGST Act (hereinafter “the Act”), which provided that ITC can be availed only if such ITC is not restricted under the details communicated to the taxpayer under Section 38 of the act. This essentially means that ITC will only be available for those supplies which show up as ‘unrestricted’ on GSTR 2B of the taxpayer. With already a plethora of restrictions existing on the availment of ITC, such further restriction may cause difficulties to the taxpayers, like an increased amount of their working capital getting blocked.

2. Extension of time limit for various obligations of the taxpayers:

Section 16(4) of the Act which provides the due date for availment of ITC has been amended to provide an extended due date of 30^th November of the succeeding financial year, instead of 20^th October. The same extension was provided to various other sections of GST acts via the bill. This amendment can be seen as a good one since it is a relief for taxpayers; they get a few extra weeks for availing ITC with respect to their invoices or debit note.

The other clauses of the bill, which provide for a similar extension are:

1. Clause 101 – Section 34(2) of the Act – due date for issuance of credit notes extended from 30^th September to 30^th November.
2. Clause 102 – Section 37(3) proviso 1 of the Act – due date for rectification of errors in the details of outward supplies extended from 30^th September to 30^th November.
3. Clause 104 – Section 39(9) proviso 1 of the Act – due date for rectification of errors in the furnishing of returns for non-resident taxable persons extended from 30^th September to 30^th November.
4. Clause 111 – Section 52(6) of the Act – due date for rectification of errors in the statement furnished under Section 52(4) extended from 30^th September to 30^th November.

3. Two-way communication process is removed:

Under the two-way communication process, one party has to communicate the relevant information to the other party, and such other party must either accept or reject the details communicated to them. This process has overall been abolished by the bill through various amendments:

1. Clause 102 – Section 37(2) of the Act provided for a two-way communication process earlier, but has been omitted now.
2. Similarly, vide Clause 103 of the bill, Section 38 of the Act has also been amended to substitute the process of communication of details of inward supplies and ITC to the recipient from the erstwhile two-way communication process to the new auto-generated statement process.
3. Clause 106 – Sections 42, 43 and 43A of the Act which dealt with two-way communication process for filing returns is omitted.

4. Concept of provisional claim of ITC abolished:

Clause 105 – From Section 41 of the Act, the phrase “on a provisional basis” has been removed and the system of providing a provisional credit to the recipient has been abolished altogether. Now, the recipient is completely dependent on the supplier for availing the ITC credit, because according to the amended Section 41(2), if the recipient claims such ITC which has not been filed by the supplier, he shall be entitled to pay an equal amount by way of debit, along with an applicable interest. This amount can be re-availed when the tax liability is paid off by the supplier. However, the implication of this amendment is that now the recipient is liable to pay an interest on the tax liability, the payment of which is delayed by the supplier. So, essentially the government authorities are getting the interest revenue from both the supplier as well as the recipient, that is boosting the tax revenues.

5. Implications of 1, 3 and 4 together:

The amended Section 38 of the Act when read with the new clause (ba) of Section 16(2) of the Act, shows that the government intended to provide for an auto-generated system wherein the recipient can clearly see the supplies he can avail a credit for and the supplies for which, he cannot. Basically, the recipient is now obligated by the unilateral communication in GSTR 2B for availment of ITC credit. Section 38 of the Act provides instances of suppliers’ defaults, due to which the recipient shall not get the ITC. This implies that the government intended to establish a self-policing system to manage the supplier defaults, instead of them having to chase down every single defaulter. With this, the government’s burden reduces, and the recipient’s increases as they have to constantly keep a check on the suppliers’ compliance with the filings, to maintain their available ITC amount. This is unfair to the recipient because it is something out of their control, and essentially the supplier’s prerogative only. The same was also observed by the Calcutta High Court in a 2019 ruling that legitimate recipients with proper documentation should be awarded credit.[1] Further, a creation of such dependency between the supplier and the recipient will lead to increased conflicts, thus opening floodgates of litigation.

6. Utilisation of amount available in electronic cash ledger:

Vide Clause 109, Section 49(10) of the Act was amended to insert an additional provision wherein a registered person or a taxpayer was allowed to transfer the amount (CGST credit) available in their electronic cash ledger to the electronic cash ledger of a “distinct person” (as CGST or IGST credit). A distinct person is explained in Sections 25(4) and (5) of the Act, as meaning different GST registration numbers (GSTINs) under the same PAN, or establishments of the same person in different states.

Further, an insertion of sub-section (12) was made to provide a restriction on usage of the available ITC. It says that the government along with the GST council may specify the maximum proportion of a taxpayer’s output liability which can be discharged using the credit available in their electronic cash ledger. This proportional restriction seems arbitrary and unfair as it hints towards the government’s intention of trying to earn higher GST revenues.

7. Retrospective amendments:

1. Clause 110 – Section 50(3) of the Act – retrospective (w.e.f 1^st July 2017) levy of interest on wrongly availed and utilised ITC at a maximum rate of 24%. However, this maximum limit of 24% is brought down to 18% vide Clause 115 of the bill, which provides for a retrospective amendment of the 2017 Notification no. 13. Clauses 118 and 121 also provide for the same amendment of 18% as the effective rate of interest, in relation to IGST Act and UTGST Act respectively. Owing to this amendment, an interest will only be levied when a particular amount of ITC is availed, as well as ‘utilised’ because the section reads “availed AND utilised”. So, in situations where the ITC has wrongly been availed but not utilised, there will not be a levy of interest. This is a fair and reasonable amendment as it makes space for innocent errors on the part of taxpayers. Further, because of the provisional clarity and its retrospective application, there will be a reduction in the prevailing confusion and settlement of litigation regarding the same.
2. Clause 114 – The common GST portal was notified as ‘www.gst.gov.in’ with retrospect from 22^nd June 2017, for all the functions under GST Rules 2017, except for e-way bills and generation of invoices, because there are separate portals for these.
3. Clause 116, 119 and 122 provides a retrospective exemption, during the period from 1^st July 2017 to 30^thSeptember 2019, to the supply of unintended waste generated during the production of fish meal (except fish oil), from the purview of CGST, IGST and UTGST respectively. This exemption was however subject to a condition that if either GST was paid, then there would be no refund.
4. Clause 117, 120 and 123 provides a retrospective exemption for “service by way of grant of alcoholic liquor license against consideration in the form of license fee or application fee or any other name used by the State Governments” from being taxed under the CGST, IGST and UTGST respectively. This service is declared as an activity or transaction which will not be treated as a supply for the purpose of GST taxation. This exemption was however subject to a condition that if either GST was paid, then there would be no refund.

8. Few timeline changes:

9. Miscellaneous:

Owing to the substantial amendment of Section 38 of the Act, a few other related provisions had to be amended as well. These provisions made a reference to the old Section 38 and such references were removed vide various amendment clauses of the bill:

1. Clause 107 – Section 47 of the Act – reference to Section 38 was removed and a provision was made to levy late fee for delay in filing of returns under Section 52 as well, along with the already existing Section 39 and 45.
2. Clause 108 – Section 48(2) of the Act
3. Clause 113 – Section 168 of the Act

10. Conclusion:

While few of the amendments like concession in applicable GST rates, extension of time limit by more than one month; the bill has proved to be beneficial to the taxpayers. But there still remains grey areas in the GST regime, which still need mending and further clarification. Further, the bill was expected to provide certain relief to the taxpayers, owing to the aftereffects of the COVID-19 pandemic, but it failed to do so. Reduction in GST rates, provision of some sort of support to small businesses liable to pay GST, etc. would have been quite helpful; it could have saved a major chunk of their working capital, and for consumers, their disposable income would increase with post-pandemic GST-related concessions.

[1] LGW Industries Limited v. Union Of India & Ors., (2019).