Indian Railway is one of the world’s largest public-sector organizations and its network, traffic, organization and extent of vertical integration are gigantic. It is the world’s largest Railway passenger transport organization, carrying 23 million passengers daily. It is also the world’s third largest Railway freight transport organization 115,000 kilometres of track over a route of 66,000 kilometres and 7,100 stations. It manufactures about 250 electric locomotives, 250 diesel-electric locomotives and 3000 passenger coaches annually at six manufacturing units for its own use and for export.
Indian Railway procures goods and services for manufacturing and maintaining locomotives. Lacs of Vendors supply these goods and services to Indian Railway. There are vendors who exclusively supply goods or services to Indian Railway.
Now we are going to discuss some of the vibrant issues, which these vendors are facing under GST. Now the vendors are bound to think whether GST is a bane or boon for them.
Inverted duty structure
Notification No. 1/2017- Integrated Tax (Rate) dated 28.06.2017, as amended, vide Sr. No. 241 provides for the applicable rate of Integrated Goods and Service Tax that shall be levied on inter-state supply of Parts of railway or tramway locomotives or rolling-stock; such as Bogies, bissel-bogies, axles and wheels, and parts thereof falling under Chapter Heading 8607. As of now rate of IGST on goods falling under Sr. No. 241 is 5%.
Vendors supplying goods to Indian Railway falling under HSN 8607 charges 5% IGST in case of Inter State Supply or 2.5% CGST + 2.5% SGST in the case of Intra State Supply. Whereas, goods or services required to manufacture the goods to be supplied to Indian Railway falling under Chapter Heading 8607 in most of cases attracts 18% as they do not fall under chapter heading 8607. There is gap of 13% between outward supply vis-à-vis inward supply. This gap will be reduced little bit to the extent GST charged on profit margin. Hence, Railway Vendors are facing inverted duty structure under GST.
Section 54(3) (ii) of CGST Act, 2017 read with Section 20 of IGST Act, 2017 allows refund of accumulated credit on account of rate of tax on inputs being higher than the rate of tax on output supplies i.e. Inverted Duty Structure. Whereas, Notification No. 05/2017 – Integrated Tax (Rate) dated 28.06.2017 notifies the goods and Chapter Heading in respect of which no refund of unutilised input tax credit shall be allowed, where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on the output supplies of such goods i.e. Inverted Duty Structure. Sr. No. 14 of the Table appended to this notification notifies chapter heading 8607 with description Parts of railway or tramway locomotives or rolling-stock; such as Bogies, bissel-bogies, axles and wheels, and parts thereof meaning thereby Vendors supplying goods to Indian Railway falling under chapter heading 8607 cannot claim refund of unutilized accumulated input tax credit on account of inverted duty structure.
This provision is impacting a lot to Railway vendors. They are not able to encash this input tax credit and there working capital is permanently blocked. Vendors are in loop whether to expense it out or keep it in books as current assets. Further, Vendors supplying goods to Indian Railway as well as other industry are in advantageous position as compared to those supply goods exclusively to Indian Railway as they will be able to utilize this unutilized accumulated input tax credit towards supply to other industry.
As per the news published on live mint on dated 10.04.2019, railways losing ₹400-500 crore per month and the railway vendors too are losing an equivalent amount on account of not passing the ITC benefits. Therefore, the total loss to the railway ecosystem is more than ₹1,000 crore per month.
Railway vendors are demanding increase in GST rate on the goods falling under chapter heading 8607 so that input tax credit is encashed or Refund of unutilized input tax credit on account of inverted duty structure be allowed.
tds u/s. 51
TDS provisions under Section 51 of CGST Act, 2017 read with section 20 of IGST Act, 2017 enforced with effect from 0.10.2018 in respect of Government supplies. This further added to the problems of Railway Vendors.
Now Railway is deducting 2% GST TDS while making payment to vendors. This 2% GST TDS deducted comes into electronic cash ledger of the vendor after filing of TDS return by Railway. Vendors are not able to utilize this amount as they are already victim of Inverted duty structure and not able to utilize their input tax credit. This is also blocking their working capital.
As, Vendors are not able to utilize this amount, they are filing applications for refund of CASH lying in their electronic cash ledger. We already know it is not easy to get refund from the department. It is also increasing their problems.
Hence, TDS provisions under GST should not be applied in case of Inverted duty structure because vendors in all these cases will have to approach department for refund of CASH accumulated on account of TDS provisions.
Classification of various parts supplied by Railway Vendors has become more important after implementation of GST. In Pre-GST era, Rate of Excise duty on goods falling under chapter heading 8607 was 12% up to 28.02.2016 and 6% from 01.03.2016 to 30.06.17. Before 01.03.2016 there was no difference of excise duty between goods supplied to Indian Railway falling under chapter heading 8607 and the goods falling under other chapter heading. Hence, the question of classification was not relevant from revenue point of view. It became relevant from 01.03.2016 when rate of excise duty on goods falling under chapter heading 8607 reduced from 12% to 6%.
After implementation of GST, classification has become very important as rate of GST on goods falling under chapter heading 8607 is 5% whereas goods falling under other chapter heading attracts 18% or 28% GST.
Indian Railway is insisting to supply all goods under chapter heading 8607 with 5%. A large number of Vendors to Railways have received purchase orders with 5% GST and have supplied goods against these purchase orders with 5%.
Now, teams of officers from Directorate General of GST Intelligence are making rounds at such vendors raising demand of differential of duty (13%) with interest. It has left the MSME suppliers panic stricken. The suppliers of parts and components to the Railways, mostly MSMEs, have been caught in a bind due to confusion in classification in GST regime. This is an issue affecting a large number of vendors to Railways who have supplied material charging 5% GST rate. It is obvious that suppliers did not have any mala fide intention. They collected 5% tax as directed by Railways and deposited the same.
Central Board of Indirect Taxes and Customs vide Circular No. 30/04/2018 – GST dated 25.01.2018 clarified that only the goods falling under chapter 86 supplied to the railways attract 5% GST rate and other goods falling in any chapter would attract the general applicable GST rates to such goods, even if supplied to railways. Circular No. No. 80/54 /2018-GST dated 31.12.2018 clarified that ‘Turbo charger’ even if supplied to Railways will remain classified under heading 8414.
There are thousands of items being supplied to Indian Railway by Lacs of vendors on daily basis. There is difference of opinion between various judgements and Advance Authority Rulings. It is not possible for MSME vendors to classify all these items correctly and take a stand before Indian Railway.
Government should come out with end user base notification to notify lower of rate of GST for goods supplied to Indian Railway or Rate of GST need to be increased to 18% being most common rate of GST. If vendor had to pay 13% along with interest, it will finish vendor.
Anti-Profiteering is another problematic area for railway vendors. Section 171 says any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction. Anti-Profiteering itself is not clear on many counts like (1) it will be calculated entity wise or product wise. (2) How to calculate commensurate reduction etc.
Now, Railway vendors are not clear how to treat unutilized accumulated input tax credit in view of Anti-Profiteering. Whether increased accumulated input tax credit can be treated as benefit to Vendor specially when vendor is not able to take refund of this input tax credit. This is just an artificial asset in books of accounts. If this artificial asset is treated as benefit to vendor and vendor is required to reduce its price to that extent, it will finish the vendor sooner or later. Further, what will be the treatment if vendor expense it out in books of account.
GST council is requested through this article to address the problems of Railway Vendors highlighted above in view of fact the Lacs of people are going to be impacted.
Anish Jain, B.Com.; LL.M.
Prashant Bhardwaj, B.A.; LL.B.