ADVANCE RULING FROM GUJARAT AUTHORITY FOR ADVANCE RULINGS (GAAR)- WHETHER A RISK ON PERSONAL CAPACITY?

[Re. Shree Sawai Manoharlal Rathi (GST AAR Gujarat); Advance Ruling No. GUJ/GAAR/R/2020/10; Dated-19/05/2020]

 It has come into knowledge that an Application under clause (e) of Section 97(2) of CGST Act, 2017, for determination of the liability to pay tax on any goods or services or both, was filed on 23.08.2018 by one Shree Sawai Manoharlal Rathi, a unregistered person, before The Gujarat Authority for Advance Rulings (GAAR). The applicant has seeking an advance ruling in respect of the following question:

1. Whether Interest received in form of PPF would be considered for the purpose of calculating the threshold limit of Rs.20.00 Lakh for registration under GST Law?

2. Whether Interest received on Personal Loans and Advanced to family/ friends would be considered for the purpose of calculating the threshold limit of Rs.20.00 Lakh for registration under GST Law?

3. Whether Interest received on Saving Bank Account would be considered for the purpose of calculating the threshold limit of Rs.20.00 Lakh for registration under GST Law?

The Gujarat Authority for Advance Rulings (GAAR), in the aforesaid application by registered the matter as ADVANCE RULING NO. GUJ/GAAR/R/2020/10 (In Application No. Advance Ruling/SGST&CGST/2018/AR/50), has given answers of all three questions in ‘Affirmative’ with the discussions as mentioned in thereto, vide their order dated 19.04.2020.

By the means, The Gujarat Authority for Advance Rulings (GAAR) has directed that any interest or income earned on the Public Provident Fund (PPF), savings bank account, and extended deposits/advances shall be included while computing the aggregate turnover under GST.

Let us see what has been discussed before Gujarat Authority for Advance Rulings (GAAR) in the aforesaid matter.

Facts of case:

1. The applicant has submitted that he is an individual having not engaged in any business. His receipts are only from savings, personal loans and advances and deposits, which are reflected in the Income Tax Returns.

2. The applicant has further submitted that his estimated receipts for the F.Y. 2018-19 is likely to be totally Rs.20,12,000/-, which includes,

(i) Rent receipts: Rs.9,84,000/-,

(ii) Bank interest: Rs.3,000/-,

(iii) Interest on PPF deposit: Rs.2,76,000/- and

(iv) Interest on Personal Loans and Advances: Rs.7,49,000/-.

3. The applicant further submitted that their interpretation of law is that if interest is received on loans and advances, deposits and savings Bank account by an individual person, who is not engaged in any such business and who is not a money lender, then such Interest Receipts is not a Supply and does not attracts GST, as the same is neither “In the course of Business” nor “In the furtherance of Business”.

4. The applicant further submitted that he relies on the definition of “Scope of Supply” given under Section 7 of the CGST Act, 2017, which clearly states that the receipts should be “In the course or furtherance of Business”.

5. The applicant further submitted that the receipts from personal loans and advances, deposits and Bank Interest are not covered under “Business” as per the definition of “Business”given under Section 2(17) of the CGST Act, 2017.

6. In view of the above, the applicant further submitted that for the purpose of calculating the threshold limit of Rs.20.00 Lakh for obtaining registration under GST law, such interest receipts are not required to be aggregated.

In the light of the above, the applicant asked the above mentioned three questions from the GAAR.

The GARR considered the submission of the applicant with the following observations:

12. Section 2(6) of the Central Goods & Services Tax Act, 2017 defines the term “aggregate turnover” as under:

 “aggregate turnover” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax and cess.”

 12.1 We find that the “aggregate turnover” is an all-encompassing term covering all the supplies effected by a person having the same PAN. It specifically excludes:

    • Inward supplies effected by a person which are liable to tax under reverse charge mechanism; and
    • Various taxes under the GST law, Compensation cess.

12.2 “Exempt supply” is defined under Section 2(47) of the CGST Act, 2017 (hereinafter referred as “The Act”) as reproduced below-

“Exempt Supply” means supply of any goods or services or both which attracts nil rated of tax or which may be wholly exempt under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes Non- Taxable supply.

 12.3 “Nil rated supply” is nowhere defined in GST Law. The basic difference between nil rated and exempt supply is that the tariff is higher than 0% in case of exempt supply. But there is no tax payable due to exemption notification. Whereas in case of NIL rated supply, the tariff is at NIL rate so there is no tax without the exemption notification.

12.4 Thus, the different kinds of supplies covered under the “aggregate turnover” are:

(i) Taxable Supplies;

(ii) Supplies that have a NIL rate of tax;

(iii) Supplies that are wholly exempted from SGST, UTGST, IGST or Cess; and

(iv) Supplies that are not taxable under the Act (alcoholic liquor for human consumption and articles listed in section 9(2) and in Schedule III);

(v) Export of goods or services or both, including zero-rated supplies.

13. We further find that under GST, Supply is considered a taxable eventfor charging tax. The liability to pay tax arises at the ‘time of supply of goods or services’. Thus, determining whether or not a transaction falls under the meaning of supply, is important to decide GST’s applicability.

13.1 Section 7 of the Central GST Act, 2017 defines the term “Supply” as under:

7. (1) For the purposes of this Act, the expression “supply” includes––

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

(b) import of services for a consideration whether or not in the course or furtherance of business;

(c) the activities specified in Schedule I, made or agreed to be made without a consideration; and

(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.

(2) Notwithstanding anything contained in sub-section (1),––

(a) activities or transactions specified in Schedule III; or

(b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services.

(3) Subject to the provisions of sub-sections (1) and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as—

(a) a supply of goods and not as a supply of services; or

(b) a supply of services and not as a supply of goods.

 13.2 Thus, the Supply includes sale, transfer, exchange, barter, license, rental, lease and disposal. If a person undertakes either of these transactions during the course or furtherance of business for consideration, it will be covered under the meaning of Supply under GST.

13.3 Supply has two important elements:

a) Supply is done for a consideration;

b) Supply is done in course of furtherance of business.

13.4 Notification No. 12/2017-Central Tax (Rate) and Notification No.9/2017- Integrated Tax (Rate), both dated 28.06.2017, as amended, provides a list of services exempted from payment of Central Tax on intra-State supply and Integrated Tax on Inter-State supply. Entry 27(a) of the Notification No. 12/2017 and Entry 28(a) of the Notification No. 9/2017 relates to services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest.

13.5 The services regarding interest income are covered under the above Notification. Therefore, such services are exempted from payment of GST and the individual is not required to discharge GST on the activity of providing services by way of extending deposits, loans or advances where the consideration is represented by way of interest. Therefore, in given case GST is not leviable on Interest Income earned by the Applicant.

14. From the above, it is revealed that the applicant is an individual with an annual turnover of more than Rs.20 Lakh. Since this income is interest-related, the turnover is exempt from GST. However, the Applicant also supplies services of “Renting of immovable property” along with activity of providing services by way of extending deposits, loans or advances where the consideration is represented by way of interest. His turnover from the rent income is Rs.9.84 Lakh and we know that this transaction (“Renting of immovable property”)is chargeable to GST. However, his taxable turnover is only Rs.9.84 Lakh. Going by the definition of “aggregate turnover”, the Applicant is required to consider the value of both the taxable supply i.e. “Renting of immovable property”and exempted supply of service provided by way of extending deposits, loans or advances for which they earned interest income, to arrive at “Aggregate Turnover” to determine the threshold limit for the purpose of obtaining registration under the GST Act.

15. In view of the above, we conclude that the Applicant is required to aggregate the value of exempted interest income earned by way of extending deposits in PPF & Bank Saving accounts and loans and advances given to his family/friends along with the value of the taxable supply i.e. “Renting of immovable property” for the purpose of calculating the threshold limit of Rs.20.00 Lakh for obtaining registration under GST law.

Observations of Author:

The recent ruling could potentially put individuals into jeopardy with no clear distinction between personal and business purpose outlined by the authorities. This ruling can bother many interest earners like retired person (who will required to take GST Registration as per this Ruling) as it has not distinguished between interest earnings in the individual capacity and in the business capacity.

However, please note that Section 103 provides that an advance ruling pronounced by AAR or AAAR shall be binding only on the applicant who sought it in respect of any matter referred to in 97 (2) and on the jurisdictional tax authority of the applicant. This clearly means that an advance ruling is not applicable to similarly placed taxable persons in the State. It is only limited to the person who has applied for an advance ruling.

The definition of “Scope of Supply” given under Section 7 of the CGST Act, 2017, which provides that the receipts should be “In the course or furtherance of Business” and for this purpose the authority has failed to discuss definition of “Business” as defined under Section 2(17) of the CGST Act, 2017. Therefore, the said ruling might be challenged before appellate authority on the said ground.

The Author would like to place the following question, which should be answered into the four corners of the GST law.

If any transaction/receipt which is not covered under the definition of “Scope of Supply” given under Section 7 of the CGST Act, 2017 and not passed the test of the “Scope of Supply”, but Government has notified the said transaction as “Exempt Supplies”. Means, the said transaction/receipt is exempt as per the notification by not supply as per law, whether it would be considered for the purpose of calculating the threshold limit of Rs.20.00 Lakh for registration under GST Law?

Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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