CA Manoj Nahata*
GST is the biggest Indirect tax reforms which our Country has ever witnessed since Independence. Multiple taxes levied by different States/UT in their own unique way have now become history. Implementation of GST is said to be the game changer for the Indian Economy. The GST law in the Country is basically governed by its mother Act called Central Goods and Services Tax Act 2017. Apart from it, the Integrated Goods and Services Tax Act, 2017 and State/UT Goods and Services Tax Act, 2017 is also governing the law. Further corresponding rules are also notified by the Govt. under the respective Acts.
In contrast to GST, Income Tax Law in India is an age old law which is in existence prior to Independence. Presently, it is being governed by the Income Tax Act, 1961 and the corresponding rules made there under. After implementation of GST, Direct Tax collection of the Country is expected to grow remarkably. In fact after GST implementation we have seen significant growth in the number of income tax assessees and overall collection of tax.
This article is an attempt made to discuss and analyze the impact of Income tax assessment of Business Income on the GST liability of the assessee and the vice-versa.
Prior to the implementation of GST, there were as many as 11 types of Indirect tax laws prevailed in the country. We never tried to analyze and discuss the impact of assessment under those laws on Income Tax assessment and vice-versa. In fact assessments under the Income tax law is going on even today also and the provisions of the erstwhile Indirect Tax laws has been followed or taken into consideration by the assessees as well as the income tax authorities. Now, a question may thus arise as to why the GST law has become so special that one need to discuss and understand its impact on Income Tax assessment and vice-versa. In order to answer this question it becomes crucial to first understand the limitations under which the assessing officers where working under the erstwhile indirect tax laws:
After implementation of GST, the above stated problems has been mitigated to large extent thereby the GST officers are now having database of Income Tax assessees and Income Tax officers are tapping the facts and figures reported under the GST law. Information sharing is made quite easy. Let’s discuss and analyze how the above problems have been mitigated with the introduction of GST:
|Sl||Section of CGST Act,2017||Relevant Provision||Remarks|
|1.||2(6)||Definition of ‘Aggregate Turnover”||“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 (under Income Tax Act, 1961), to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax and cess.|
|2.||2(12)||Definition of ‘Associated Enterprise”||Shall have the same meaning as prescribed u/s 92A of the Income Tax Act,1961|
|3.||2(31)||Definition of “Input Service Distributor”||Office having same Permanent Account number (under Income Tax Act,1961)|
|4.||10(2) –proviso||Composition levy||Provided that where more than one registered persons are having the same Permanent Account Number (issued under the Income-tax Act, 1961), the registered person shall not be eligible to opt for the scheme under sub-section (1) unless all such registered persons opt to pay tax under that sub-section.|
|5.||16(3)||Manner of Input Tax Credit||Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed.|
|6.||17(4)||Apportionment of credit and blocked credit||Provided further that the restriction of fifty per cent. shall not apply to the tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number.|
|7.||25(6)||Procedure for registration||Every person shall have a Permanent Account Number issued under the Income tax Act, 1961 in order to be eligible for grant of registration|
|8.||71(2)(v)||Access to business premises||the income-tax audit report, if any, under section 44AB of the Income-tax Act, 1961|
|9.||150(1) (d)||Obligation to Furnish Income Tax Return||an income tax authority appointed under the provisions of the Income-tax,1961.|
Financial Year 2017-18 is the first year wherein the three quarters starting from 1st July, 2017 and ending on 31st March, 2018 will be covered under the GST regime. Since GST operates on the basis of PAN based registration only so the Income Tax dept. would readily have all the data for these three quarters. However, the data reported under the Income Tax through ITR and Tax audit report would cover figures for all the four quarters i.e. for full financial year including non-GST regime. So in the first year this will pose some mismatch problems and will be subject to reconciliation.
Further the Income Tax dept. is nowadays working in complete E-environment (ITBA/ITD) including filing of appeals online. So it is assumed that human interference or intervention no more exists and everything is being taken care by the computer system based on certain set of pre-defined parameters. However, certain exceptions to this are there where manual selection of scrutiny cases taken up. Nowadays, the system will prompt message even for a minor mismatch. If the quantum involved is material, then the system will even not dare to pick up the case for scrutiny under Computer Assisted Scrutiny Selection. (CASS)
However, from the F.Y.2018-19 onwards there will be no such problem of mismatch in turnover because the whole period would be under GST net only. So in the coming period who knows the Govt. may introduce a reconciliation statement of turnover under Income Tax Vs. GST turnover in the ITR forms as well as TAR forms itself so that unnecessary scrutiny selection may be avoided.
The impact of Income Tax assessment on the GST liability of the assessee cannot be denied. The time period for completion of assessment is different under each law. But still the author believes that weapon of re-assessment/escapement assessment is always open to the depts. to raise demand. There are so many areas where an order passed under the Income Tax law may create trouble for an assessee from the GST point of view. However, it is also practically not feasible to discuss and analyze each and every such situation here. So we will take some hypothetical situations/examples to extend our discussions:
An assessee may not have obtained GST registration due to the fact that its goods or service are either exempted or not liable to GST. But at present there is no reporting mechanism in the Income tax returns or Tax audit report to state or explain the reason for non-obtaining of GST registration. So this may land assessee in trouble whereby the Income Tax officer may refer the matter to GST authorities for further investigation and assessee needs to offer explanation thereto.
There may also be a situation where an assessee is having turnover of goods and services below the threshold limit of registration as specified u/s 22 of the CGST Act, 2017. But when one calculate the ‘aggregate turnover’ as defined u/s 2(6) there may arise liability to obtain registration. Under GST often assessee commits mistakes in not considering items like Saving Bank Interest, Fixed deposit interest, Interest on loans ,Divided, Debenture Interest etc.(which otherwise are exempt) in the aggregate turnover for calculating the threshold limit. But all these facts and figures will be readily available with the Income Tax officer and the assessee may be liable to pay GST on the turnover which he/she was expecting to be exempted otherwise because of the threshold exemption. The Income tax authority will exchange all such data with the GST department and defaulters are likely to receive notice for registration under GST.
Section 37 of the Income Tax Act, 1961 puts a bar on claiming expenses of personal nature while calculating profit and gain from business of profession. Nowadays, it is a common phenomenon in Income tax assessment proceedings where an Income Tax officer tries to disallow certain percentage of genuine business expenses on the ground of being personal in nature. Once expenditure is disallowed on this ground, it will have a far reaching impact on the GST liability of the assessee as well.
Section 16 of the CGST Act, 2017 also put a bar on claim of ITC on any goods or services which are not related to or for the furtherance of business or are of personal nature. Thus disallowance of business expenses under Income Tax apart from attracting income tax liability will also be subject to tax under GST. Under GST, the assessee needs to reverse ITC claimed earlier and also liable pay interest @24% on such reversal. The matter not ends here. The ITC reversal will also not be consequently allowed as business expenditure under the income tax law as being personal in nature and will again be subject to income tax. However, interest payment under GST on such reversal of ITC should be allowed in view of our discussion in the later paras hereunder. Thus it will really be a costly affair to the assessee. Common heads of such expenses can be cited as-Tours & Travelling, Mobile Phone bills, Vehicle repairs and Maintenance, Vehicle Insurance, Guest House maintenance etc. etc.
In computation of income under the head Profits and gains of business or profession, some of the expenses u/s 43B are allowed under Income Tax Act 1961 and can be claimed by the assessee only in the year in which the payment is actually made. This section has got overriding affect on the other provisions of the I.T. Act. However, the section shall not apply to any sum which is paid on or before the due date of filing of return of income as stipulated under Section 139(1) of the Act.
Further the said section also laid down the types of expenses which are allowable on actual payment basis. Clause (a) of said section refers to one such type viz: any sum payable by the assessee by way of tax, duty, cess or fee, (by whatever name called, under any law for the time being in force). So it can be easily understood that GST payable is well covered under the clause (a) of the said section. Now, here couple of questions comes up for our consideration-
i. Whether merely payment made through challan under GST is sufficient or actual set off of such payment lying in cash ledger with the outstanding liability is necessary?
ii. Whether set off of outstanding liability at the year end with the Input Tax credit available subsequently will be considered as payment made?
In order to answer the above questions it becomes necessary to understand the provision of GST law first. The provisions of section 49 of the CGST Act, 2017 explicitly state that payment of tax means payment made through electronic credit ledger or electronic cash ledger. So it is pertinent to note that GST law considers the payment of liability only when it gets offset with the balance lying in cash ledger or credit ledger. This means that until and unless liability is offset the amount will not be considered to be paid.
But the author is of view that as far as GST payable at the end of the previous year is paid through challan (before the due date of filing return of income u/s 139(1)) it is all right and deduction can be claimed u/s 43B based on such payment challan provided assessee in actual utilizes such challans against offsetting its liability outstanding on 31st March. Once the assessee has paid the amount through challan and money is credited & lying in the cash ledger under GST then there should not be any problem because the assessee has already parted with the money by appropriating it to the ex-chequers account. Such challan may however be adjusted at a later date on the GST PORTAL. So the author believes that actual set off of such payment with the GST liability may not be necessary for claiming deduction u/s 43B. The deduction under Income tax law is governed by provision of Income Tax Act and not by Goods & Services Tax Act, 2017. Moreover, if one reads the legislative intent behind introduction of section 43B it becomes crystal clear that the intent is to provide for a tax disincentive by denying deduction in respect of a statutory liability which is not paid in time. However, the matter will be settled only when it will pass through the judicial test in the near future.
But the real problem will arise in the situation where outstanding liability is not paid through challan rather it is offset with the available input tax credit of the subsequent period(s).In such a situation whether such set off will be considered as payment made or paid u/s 43B of the I.T. Act,1961? Will Income Tax officer allow such expenses in computing Profit from Business and Profession?
It has been decided in various judicial pronouncements that payment under section 43B will not only cover actual payment but also constructive payment as well as book adjustments and set off. Let’s discuss a few of them as follows:
Constructive Payments –
Sales tax deferment – If the sales tax (‘ST’) law provides that where deferred ST/ST is deemed to have been converted into loan it is to be treated as actual payment, the same will be treated as paid.
– Mahalaxmi Bricks Mfg Mldg & Fab Ind. (P.) Ltd. 273 ITR 190 (P&H)
– Circular No. 496, dated 25-9-1987, 196 ITR, St 53. and Circular No. 674, dated 29-12-1993, 205 ITR ST 119
Set off –
The Hon’ble Kolkata High Court in the case of CIT Vs. National Standard Duncan Ltd 260 ITR 97 held that where the Bombay Sales Tax Act 1959 and the rules there under allows the assessee to set-off sales tax paid on the purchase of raw material used for the finished products, then such assessee would be entitled to set off or adjustment of its liability to pay sales tax payable on the sale of such finished products, availing such set-off by the assessee should be treated as actual payment of sales tax liability for Section 43B purposes.
Book adjustments –
The Hon’ble Jharkhand High Court held that book adjustments constitute “actual payment” for Section 43B – CIT Vs. Shakti Spring Industries (P) Ltd. 219 Taxman 124.
So based on the above discussed judicial precedents one can understand that if the outstanding GST liability is being set off with the input tax credit available in the next period then there should not be question of disallowance under section 43B of the I.T. Act. However, GST being a new law in the Country so the author believes that the said proposition is yet to be tested by the judiciary in the light of the provisions of the GST law.
The provisions of Interest and late fee under GST are operating quite effectively since its inception. Delay in payment of tax and delay in filing tax return under GST attracts interest and late fee. Now, a question arises whether such interest and late fee are allowable expense under the Income tax law? In the earlier laws also there was the concept of Interest and late fee payment. The same was also tested by the judiciary and held that interest being compensatory in nature is an allowable expenditure and late fee was however a vexed issue and was a matter of dispute. So the author opines that the same proposition is going to be hold good under the GST regime as well.
The issue of delay in the payment of indirect tax law is directly covered by the judgment of Hon’ble Apex Court in the case of Lachmandas Mathura Vs. CIT reported in 254 ITR 799(SC) in favour of assessee on the ground that interest being not penal in nature rather it is compensatory in nature and thus allowable u/s 37(1).
So far as payment of late fee under Indirect tax law is concerned it is a settled position that only those expenses which are penal in nature and incurred for an offence or which is prohibited by law are not allowed as deduction u/s 37(1). But late fee payment as the name suggest is not a penalty. It is thus an allowable expense. At the same time one can argue that the late fee is nothing but cost of default made and also not compensatory in nature so it is basically in the nature of penalty only. The Hon’ble Supreme Court in case of Swadeshi Cotton Mills Ltd. vs. CIT, (1967) ITR 57 (SC) held that where the amount paid is partly penal and partly compensatory, the amount to the extent that it is compensatory could be allowed as deduction. The author is of the opinion that the late fee is not a penalty and thus it should be allowed deduction as normal business expenditure. In this matter one can also refer section 234E of the Income Tax Act whereby assessees are paying late fee on account of failure to submit TDS statements timely and the same is allowed on the ground not being penal in nature.
With the introduction of E-way bill mechanism under GST, the tax dept. is seen pro-active in levy of tax and penalty for any contravention or departure from statutory compliances. Furthermore the provisions of levy of tax and penalty is also being invoked in case of evasion of tax is detected. Under GST law tax paid on account of demand and recovery is also not allowed to be set off with any other liability under the GST. So here comes a question to our mind that whether such tax payment which remains unadjusted would be allowable business expenditure under the Income Tax law?
In this respect it is pertinent to first discuss here the position under the earlier laws. Service tax audit by the departmental officers was a common phenomenon for all the assessees. Often the departmental officers raised service tax demand which the assessee was required to pay in spite of the fact that the same was never collected from the service receiver. After making the demanded payment of service tax, the assessee got immunity from service tax penal proceedings. But this led to one new battle between the assessee and the Income tax dept. The Income Tax dept. denied the service tax payment claim of the assessee as business expenditure. This situation created litigation between the assessee and the dept. The Hon’ble Gujrat High Court in case of Commissioner of Income Tax-III Vs. Kaypee Mechanical India (P.) Ltd. [(2014) 45 taxmann.com 363 (Gujarat)] had an occasion to deal one such issue wherein the Court dismissed the Revenue’s appeal and held that where assessee had not collected and deposited service tax but on being pointed out, deposited same, amount being expended by assessee in course of business was allowable as business expenditure.
Now, the instant judgment of Gujrat High Court on eligibility of service tax as a business expenditure u/s 37(1) of the Income Tax Act, 1961 is going to have a far reaching impact under the GST law well. Nowadays, assesses are very prompt in making payment of the demanded amount in order to get relief from the mandatory penalties under the GST law. Thus this judgment will certainly encourage assesses to make the payment of legitimate demand raised by the tax dept. because the fear of disallowance under Income Tax law of such payment will no more exists now. This will surely minimize litigations.
Apart from above points, the impact of IT assessment on the GST liability of an assessee may also be understood from the following perspective:
The exercise of assessment is generally taken up by the tax dept. once annual return is filed by the assessee. The due date for filing 1st Annual Return under GST for the F.Y.2017-18 covering the period 01.07.2017 to 31.03.2018 is presently fixed as 30th June,2018. So till that time it is more or less confirmed that assessment is not going to take place. However, chances of assessment like provisional assessment (Section 60), assessment of non-filers (Section 62) etc. etc. even without furnishing of annual return cannot also be ruled out. Likewise impact of Income Tax assessment on GST liability of an assessee the reverse is also possible. The impact of GST assessment on the income tax liability of an assessee is now closer due to the free flow of information or exchange of data between the two departments. There may be various areas where an assessment under GST may impact income tax liability. But for the sake of convenience we will discuss some hypothetical situations as follows:
In GST assessment or audit proceedings the input tax credit claim of an assessee will be the core area to be examined by the authorities. The Tax dept. will try to disallow ITC either on the ground of not in the furtherance of business or personal in nature or due to blocked nature as specified u/s 17 of the CGST Act, 2017. Once an input tax credit is disallowed owing to personal in nature then it may impact the income tax liability of an assessee. The Income Tax dept. will try to examine the eligibility of such expenses on which input was claimed on the touchstone of section 37 of the Income Tax Act, 1961.Though each department is independent and has their independent process of enquiry, assessments etc. but still once the information related to disallowance of ITC of personal nature is shared with the Income Tax dept. then it will give them a grip to examine the matter further. Once the income tax department, after proper findings, comes to a conclusion that such expenses on which GST dept. disallowed input credit are personal in nature then additions under Income Tax law is inevitable. Further question of levy of penalty u/s 271(1) (c) may also come into play. Thus the assessee may face double burden one under GST by way of reversal of ITC and other under Income tax by way of addition of such expenses to the income of the assessee. So in this way GST assessment may impact IT assessment of an assessee.
After implementation of GST it has become our habit to claim input tax credit on capital goods as well. The rule for eligibility of ITC on capital goods is similar to those of goods and services as discussed above i. e for furtherance of business and not of blocked nature. Further separate formulae have been prescribed under rule 43 of the CGST Rules, 2017 where there is common use of such capital goods partly for business purposes and partly for personal purposes. Also it is noteworthy to mention that an assessee availing input credit on capital goods is not entitled to claim depreciation under the I.T. Act, 1961 to the extent of such input claimed. Now, the real challenge will arise in cases where the GST assessing officers/audit party disallow input claim of an assessee on the ground that capital asset is personal in nature or for not in the course of furtherance of business. In such a scenario the assessee will face following problems:
Under section 171 of the CGST Act, 2017 specific provisions on Anti- profiteering have been legislated. The anti- profiteering provisions are inherently designed to protect consumers by restricting the companies to benefit unjustly on account of any reduction in GST rates or enhancement in tax credit pool. So once GST officer makes up his mind to pull an assessee under anti-profiteering clause and the charges are framed and confirmed then in such scenario the Income tax dept. will also try to invoke its jurisdiction. The Income Tax dept. would try to find out whether due to such undue profit or gain there has been a commensurate increase in the income tax liability of the assessee at all.
Apart from above points, the impact of GST assessment on the Income Tax liability of an assessee may also be looked from the following perspective:
After implementation of GST law one thing is going to be certain that there will be a huge fall in the tax evasion. It has been noticed at times that businesses report a different value of stock in their annual VAT return as compared to their Income Tax return. This valuation is sometimes inflated to show higher profits to maintain the credit score against the loans taken from the bank, while on the other hand, many entities deflate the value of stock to attract less tax liability.
Under the GST law, every movement of taxable goods having invoice value above Rs 50,000/- is subject to generation of E-way bill. Further every sale invoice (B2C) will also get uploaded on the GST portal. These invoices will, in turn, be referred to the buyer. But the return filed under the VAT law or CST laws do not require validation from the buyer. A major implication of this information sharing between I.T. & GST dept. would be that the tax evaders who window dress their books at the year end to lessen their tax liability will find it harder to do so. Such actions or window dressing were possible before as the Income Tax Department did not have any access to the data which is filed under the state VAT laws. However, under the new regime, GSTN will be the single repository to all these transactions and the Income Tax Department will have a clear picture of the total sales and purchases, and eventually the overall profitability, of every business. So it is clear that an upward assessment under one law is going to impact the liability of the assessee under the other law as well.
*The author is a practicing chartered accountant at Guwahati and can be reached at: firstname.lastname@example.org
Disclaimer: The views expressed are purely the personal views of the author. So the readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. The author is not responsible in anyway.