GST: Clearing the Fog by way of “As is where is” basis regularizations

– CA Lakshman Kumar Kadali
– CA Asha Latha Tasupalli

Disputes in businesses are inevitable, notably on account of tax-related disputes. The 7 years long safari of Goods and Services Tax (GST) since its implementation has demonstrated that GST is no exception, as it has been riddled with interpretational challenges, absurdity of provisions, frequent amendments, etc. Amidst of all this, the trade and industry has adopted diverse practices concerning the tax rates, exemptions and more, often due to differing interpretations of rate & exemption notifications. As a result, certain taxpayers have either short paid the taxes or failed to pay them altogether, while others have claimed exemptions for the same supply of goods or services. These varied practises have led to a flood of notices and demand orders, requiring taxpayers to pay the differential taxes. To resolve these issues, several reforms have been introduced by the Government such as the amnesty scheme for waiver of interest & penalty under Section 128A of the Act, extension of time limits for availing ITC under Section 16(4) of the Act, etc.

The recent 55^th GST Council meeting convened on 21-12-2024 and the 53rd GST Council meeting convened on 22-06-2024, introduced several noteworthy recommendations encompassing tax rate adjustments, trade facilitation measures, and revisions in Law & Procedures. These changes, anticipated eagerly under the new government, signify a substantial transformation in the GST landscape. The implementation of these reforms was effectuated through circulars, notifications, and Finance Act, 2024 which carry legal force.

Previously, the 53^rd GST Council recommended approximately 11 to 12 goods and services to be slated for regularization under ‘as is where is’ basis and recent 55^th GST Council meeting on the same line proposed the following recommendations:

a. To exclude composition scheme taxpayers from the entry at S. No. 5AB introduced vide N.N. 09/2024-CTR dated 08.10.2024 vide which renting of any commercial/ immovable property (other than residential dwelling) by unregistered person to registered person was brought under reverse charge. Further, to regularize the period from the date when the N. N. 09/2024-CTR ibid, became effective i.e. from 10.10.2024 till the date of issuance of the proposed notification on “as is where is” basis, and

b. To clarify that ready to eat popcorn which is mixed with salt and spices are classifiable under HS 2106 90 99 and attracts 5% GST if supplied as other than pre-packaged and labelled and 12% GST if otherwise. However, when popcorn is mixed with sugar thereby changing its character to sugar confectionary (e.g. caramel popcorn), it would be classifiable under HS 1704 90 90 and attract 18% GST. It has been decided to regularise the issues for the past on “as is where is” basis.

This approach of regularization on an ‘as is where is’ basis aims to formalize past practices by either exempting or reducing tax rates, or by categorizing certain transactions as non-supply. The Government has issued various Circulars to give effect to the above recommendations and the details of those Circulars are as follows:

It’s worth noting that similar regularization measures have been previously implemented through Circulars to address GST payment issues for past periods. Examples include:

Unlike Customs Act, 1962, and the Central Excise Act, 1944, which had mechanisms for providing ‘as is where is’ basis exemptions, the current GST Act lacks specific provisions. Therefore, a proposal to insert Section 11A in the Act was deliberated during the 53^rd GST Council meeting. This amendment would authorize the non-recovery of duties previously not levied or short-levied due to established common/trade practices under the GST Acts. The same has been inserted in CGST Act vide Section 116 of Finance Act (No.2), 2024.

There may be curiosity, what qualifies as common practices? The following examples could be viewed as common practices, drawn from numerous circulars issued under previous tax regimes as well as GST-

a. Prevailing multiple interpretations

b. Genuine doubts w.r.t. rate of tax, classification, exemptions

c. Regularization of certain assessments

d. Ambiguity of provision of law

e. Overlapping entries of notifications

f. Divergent practices being followed in the field

g. Section/general trade practices etc

One might also wonder as to why there is a requirement to insert a completely new Section when Section 11 of the Act already grants power to government to exempt certain supply of goods or services from payment of GST. It is important to understand that the primary requirement for granting an exemption under Section 11 of the Act is to serve the ‘public interest’ which means that the exemption should be beneficial for the welfare of the general public. This could include exemptions aimed at supporting certain sectors, promoting economic activities, or achieving social objectives. The exemptions provided by Government vide N. N. 12/2017-CT(R) dated 28-06-2017 are issued in public interest.

On the contrary, regularizations aim to rectify inconsistencies or uncertainties in tax compliance or administration, addressing challenges stemming from varied practices, interpretations, or administrative complexities within the GST framework. It is implemented through amendments, clarifications, to harmonize and resolve tax-related issues arising from diverse practices or interpretations. In essence, while both concepts may intersect in certain contexts, they primarily serve distinct purposes within the GST Act: public interest exemptions aim for societal benefits, while regularization addresses practical implementation issues.

The Government has been providing the exemptions on ‘as is where is’ basis which means that the compliance made prior to such date shall not be disturbed. This includes the compliance made by the taxpayers by making payment of tax and the compliance made by the taxpayer by not making the payment of tax. In both the cases, the Government is not disturbing the compliance made by the taxpayers.

The scope of the phrase ‘as is where is’ has been clarified vide Circular No. 236/30/2024-GST dated 11-10-2024, wherein it was stated that the phrase “as is where is” generally refers to the transfer of property in its current condition, with all faults and defects, whether visible or not. The transferee accepts the property in its existing state, without the seller being responsible for any liabilities, such as service charges, taxes, or dues. This was highlighted in the case K.C. Ninan Vs. Kerala State Electricity Board and Ors.[1], where the Hon’ble Supreme Court stated that the seller does not assume responsibility for any dues when the property is transferred on an “as is where is” basis.

When a tax matter is regularized on an “as is where is” basis, any lower tax rate or exemption claims made by taxpayers will be accepted. The intent behind this clarification is to treat payments at a lower rate, including nil rate claims, as full discharge of tax liability for the period regularized. This applies even if other suppliers paid at a higher rate. The Circular illustrates as below how this will work in practice:

a. Difference in rate of tax: When some taxpayers paid 5% GST on a supply of “X” while others paid 12% but the GST Council recommended to reduce the GST rate to 5% prospectively, with past transactions regularized on an “as is where is” basis. Taxpayers who paid 5% GST will not need to pay the 7% difference, and those who paid 12% will not be eligible for refunds.

b. Exemption Vs Taxability: When some taxpayers claimed exemption while others paid 5% GST on supply “X” due to doubts over an exemption entry, but the GST council recommended to tax the same at 5%. Past transactions will be regularized, and taxpayers who did not pay GST and declared the transactions as exempt will be considered to have fully discharged their tax liability. They need not pay the 5% differential. However, no refunds will be given to those who already paid 5%

c. Different interpretations of GST Rates – 0 Vs 5% vs 12%: When there was confusion between the 5% and 12% GST rates, with some taxpayers paying 5% and others 12%, but GST Council clarified that the applicable rate is 12%. Past transactions will be regularized on an “as is where is” basis. Taxpayers who paid 5%, need not pay the differential tax, while those who paid 12% will not receive refunds. However, if no tax was paid, the full 12% will be recovered.

Further, the Law Committee recommended that no refund of GST or Compensation Cess may be allowed on account of any notification issued in this regard. The “as is where is” basis exemption is providing relief to the taxpayers who have not paid the taxes and at the same time it is also not allowing the compliant taxpayers to claim the refund of taxes paid for the past periods. While the erstwhile provisions allowed for the refund of duties paid in excess due to established practices when notifications were issued under the aforementioned provisions, this aspect raises concerns about potential legal challenges, particularly concerning the constitutional validity of withholding such refunds. If the amendment is implemented without providing refund benefits for taxes paid earlier, could taxpayers potentially approach the Courts, arguing that the benefit of non-recovery of such duties applies universally to all taxpayers, irrespective of their prior tax payments?

The Hon’ble Supreme Court, in Union of India Vs. VKC Footsteps India Pvt. Ltd.[2], clarified that refunds are not a constitutional right, subject to statutory provisions and can be regulated with conditions. The Court emphasized that refunds are not automatic, even in cases of illegal tax levies, as per nine judges Bench decision in case of Mafatlal Industries Limited v. Union of India[3]. Parliament has the authority to decide on refund provisions, and tax legislation allows flexibility in this regard. Further, in case of Union of India v. NITDIP Textile Processors Private Limited[4]., the Court noted that any discrimination faced by individual taxpayers does not violate Article 14, as long as the law applies generally and does not unfairly target specific individuals. The Court recognized that some taxpayers may benefit or be disadvantaged by legislative decisions, but this is inevitable within the scope of tax law.

Hence, from a constitutional standpoint, refund cannot be considered as a statutory right and cannot compel for granting refunds where specifically not provided under the taxation statute. Therefore, refund may could not be sought for the taxes paid in the past, especially when trade practices are considered legally acceptable and are treated as right under the eyes of law. However, the Hon’ble Supreme Court in the case of Corporation Bank Versus Saraswati Abharansala[5], where in it was held that refund of excess payment of sales tax on higher rate upon subsequent rate reduction with retrospective effect subject to no unjust enrichment and further held that the State is bound to act reasonably having regard to the equality clause contained in Article 14 of the Constitution of India.

Further, the Hon’ble Delhi Tribunal in the case of Tube Investments of India Ltd. Versus Commr. of C. Ex., Delhi-I[6], wherein it was held that refund cannot be sought on service tax already paid on services received from goods transport operators stating that the same would not get covered by the retrospective amendment to Section 117 of Finance Act, 1994. However, Hon’ble Ahmedabad Tribunal in the case of 20 Microns Limited Versus Commissioner of C. Ex. & S.T., Vadodara[7], where in it was held that refund is allowed on Service Tax already paid on the services namely, CHA Services and Terminal Handling Charges used with regard to export of their goods in light of retrospective amendment of definition vide notification of specified services holding it means taxable services that have been used beyond factory or any other place or premises of production or manufacture of the said goods.

Further, the Hon’ble Kerala High Court in the case of Anishia Chandrakanth Versus Superintendent, Central Tax & Central Excise, Thiruvananthapuram[8], has held that taxpayers are not entitled to refund of the late fees paid over and above Rs. 10,000/- before amnesty for waiver of the same in excess of Rs. 10,000/- for belatedly filing of form GSTR 9 is commenced via notification.

However, pre-deposits made during investigations, which are not taxes, should be refunded, as confirmed by the Karnataka High Court in Union of India v. Bundl Technologies Pvt. Ltd[9]. The Court ruled that such deposits violated constitutional provisions, requiring their return. Finally, in Jay Shree Tea and Industries Ltd. vs. Commissioner of C. Ex[10], the Court made a distinction between duties paid for cleared goods, which belong to the government, and deposits made for future duty payment, which belong to the taxpayer and should be refunded if not utilized.

Another proposal deliberated in the 53^rd Council Meeting was amending Section 9(1) of the Act for not levying GST on Extra Neutral Alcohol (ENA) used for manufacture of alcoholic liquor for human consumption. Different state policies being followed for taxing ENA has necessitated for this proposal. This was not proposed to be made in Section 11A as it is not industry or general practice but state practice.

A critical question arises regarding the retrospective or prospective application of Section 11A. It is known fact that the Government has already granted various exemptions on as is where is basis as explained in the starting of this article. However, the power to grant on an “as is where is” basis exemption is coming only from insertion of Section 11A in the Act. In this context, the compliant taxpayers may raise a dispute on the power of the government in granting exemptions prior to the effective date of Section 11A by issuing different circulars. Unless Section 11A is given retrospective effect, the validity of such exemptions may end up in disputes.

 Issues that require regularisations:

Despite several Circulars aimed at regularizing taxpayer difficulties with GST rates and exemptions, there are still unresolved disputes that the government may need to address through extended regularizations for past periods. Some of these issues include:

a. Irregular ITC availment: Uncertainty remains regarding whether Section 11A applies to irregular ITC claims. While the language of the Council’s meeting focuses on output tax, it could be argued that issues like incorrect or late ITC availment should also be covered under Section 11A, given that output tax is discharged using ITC.

b. Import demands: There has been a common practice of not discharging taxes on goods or services when the place of supply is located outside India. Regularization should be provided especially regarding short or non-levy of taxes on imports.

c. Concessional tax rates for sub-subcontractors: There is ongoing uncertainty around concessional tax rates applicability to sub-subcontractors, and whether these practices can be regularized.

d. GST under Reverse Charge Mechanism not paid: In cases where full ITC is eligible and the transaction is revenue-neutral, some taxpayers have failed to pay the reverse charge tax. Regularization options for such cases need further clarity.

e. Procedural irregularities: Lapses in following procedural requirements need to be addressed and regularized, particularly when no substantial tax evasion is ivolved.

f. Non-issuance of invoice & non-payment: There are instances where full ITC eligibility exists, but invoices were not issued or payments not made. These should be considered for regularization, provided there is no intent to evade taxes.

In summary, extending Section 11A to address these unresolved issues could help clarify uncertainties and provide a fair approach for taxpayers.

Conclusion:

In conclusion, while the insertion of Section 11A seeks to streamline GST administration by addressing historical inconsistencies, its implications on tax refunds and ongoing proceedings remain subject to further clarifications. The GST Council’s proactive approach in proposing these amendments reflects its commitment to fostering a more predictable and compliant GST regime. These amendments help the trade to settle their past dispute and streamline their compliance in future periods. However, businesses must be cautious, as relying on future regularizations could encourage non-compliance. Taxpayers and tax professionals should stay updated on regulatory changes to avoid risks. Ultimately, while these measures are positive, businesses must continue to meet their compliance obligations to ensure long-term success and avoid future legal or financial issues.

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Notes:- 

[1] 2023 (5) TMI 1251 – SC

[2] 2021 (52) G.S.T.L 513 (S.C.)

[3] 1997 (5) SCC 536

[4] 2011 (273) E.L.T. 321 (S.C.)

[5] 2009 (233) E.L.T. 3 (S.C.)

[6] 2006 (4) S.T.R. 55 (Tri. – Del.)

[7] 2017 (47) S.T.R. 257 (Tri. – Ahmd.)

[8] 2024 (86) G.S.T.L. 266 (Ker.)

[9] 2021 (11) TMI 108 – Karnataka High Court

[10] 2005 (190) ELT 106 (Tri – Kolkata)