The 55th GST Council met under the Chairpersonship of Union Minister for Finance & Corporate Affairs in Jaisalmer, Rajasthan, on 21-12-2024. and made recommendations on various matters including legislative changes, GST rates on specified goods and services, clarifications on contentious issues, measures aimed at trade facilitation. The GST Council, however, deferred several decisions like overall rate rationalisation, GST on life and health insurance premiums etc. The Council inter-alia made the following recommendations for facilitation of trade and measures for streamlining compliances in GST.
2. Let us start with the legislative Changes that were recommended. These changes were made to bring clarity in taxability as well as availability of ITC on certain sectors at the same time ensuring the ease of compliance.
(i) : ITC on construction of immovable property
3. The most deliberated topic in public in recent times was the availability of ITC on construction of immovable property consequent upon the decision of the Honorable Supreme Court in the case Safari Retreats. So let us discuss about it first.
4. The honorable Supreme Court, ruled that if the construction of a building is necessary for providing services such as renting or leasing, it may qualify as an exception under the “plant” provision in Section 17(5)(d) of the Central Goods and Services Tax (CGST) Act 2017. The Clauses (c) and (d) of Section 17(5) are reproduced below-
(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;
(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business
5. This section 17(5) typically disallows/Blocks the availability of Input Tax Credit (ITC) on construction materials used for immovable property (except for plant or machinery). The honourable Apex Court emphasized that the functionality test is crucial for determining whether a building qualifies as a plant or not. The Court explained that if a building is required for conducting activities such as leasing or renting, as covered under clauses (2) and (5) of Schedule 2 of the CGST Act,2017 it could be considered a “plant.” The applicability of the ambit of the recognition of “plant” must be determined by applying a functionality test on a case-by-case basis. The Court also clarified that it is unnecessary to reinterpret Section 17(5)(d) to exclude properties built for rental purposes from its scope.
6. Moreover, the court noted that denying ITC would violate Article 14 of the Constitution, as it unfairly treated developers of rental properties differently from those selling properties, creating an imbalance in the business environment. The judgment highlighted that this denial of ITC would make newer properties less competitive compared to older ones, adversely affecting the real estate market. The Supreme Court held that Section 17(5)(d) should be interpreted in alignment with the GST law’s purpose of avoiding the cascading effect of taxes. It was held that the section was intended to apply to properties built for sale, not for rental purposes. Applying the provision in cases of rental properties, the court observed, would undermine the principle of tax neutrality. The bench in the case also dismissed the challenge to Section 17(5)(d) of the CGST Act, 2017 on its Constitutional validity.
7. In the midst of all these, it has been recommended by the GST Council that Section 17(5)(d) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) to be amended to replace the phrase ‘plant or machinery’ with the phrase ‘plant and machinery’ retrospectively, effective from July 1, 2017, to align the provisions of section 17(5)(d) of CGST Act, 2017 with the intent of the said section, so that the said phrase may be interpreted as per the Explanation at the end of section 17 of CGST Act, 2017. Resultantly, the ITC restriction under Section 17(5)(d) will also be read with the Explanation defining ‘plant and machinery’, as provided under Section 17 of the CGST Act 2017. By introducing this retrospective amendment, the GST Council effectively nullifies the Supreme Court’s decision that interpreted “plant” in a broader context, allowing buildings and structures used for business operations to qualify as “plant.” This could lead to substantial financial implications for companies that had relied on this ruling to claim ITC on construction-related expenses.
(ii): Taxability on vouchers
8. The recommendation at the 55th GST Council Meeting regarding the taxability of vouchers represent a significant shift in the regulatory landscape for businesses utilizing these instruments. Transactions in vouchers is not to be considered as taxable and to be treated neither as supply of goods or supply of services. Thus, GST can not apply on distribution of vouchers on a principal-to-principal basis. However, commission / fee charged by agent to be liable to GST when distribution made on principal-to-agent basis. Unredeemed vouchers should not to be considered a supply and no GST is payable on income booked in the accounts in respect of vouchers.
9. The clarification aligns with recent judicial rulings, including a significant decision by the Karnataka High Court, which held that vouchers are not taxable as supply of goods or services under GST. The honourable HC observed that in substance, the transaction between the assessee and its clients is procurement of printed forms and their delivery. The printed forms are like currency / Negotiable Instrument. The value printed on the form can be transacted only at the time of redemption of the voucher and not at the time of delivery. Therefore, issuance of vouchers is similar to pre-deposit and not supply of goods or services. Hence, vouchers are neither goods, nor services and accordingly, cannot be taxed. This ruling reinforced the notion that vouchers function as prepaid instruments and should not incur tax until they are redeemed for actual goods or services.
10. Accordingly, falling in line with the judiciary’s opinion and as recommended by the GSTC, the provisions related to taxability of vouchers i.e., Sections 12(4) and 13(4) of the CGST Act 2017 providing for time of supply and Rule 32(6) of the Central Goods and Services Tax Rules, 2017 related to valuation of vouchers will have to be omitted.
(iii): In-bond sale of goods by Special Economic Zone (SEZ)/Free Trade Warehousing Zone (FTWZ)
11. The taxability of in-bond sales of goods by Special Economic Zones (SEZ) and Free Trade Warehousing Zones (FTWZ) is a nuanced area under the Goods and Services Tax (GST) framework. FTWZs are considered a part of the SEZ framework, which allows for certain tax benefits. Goods imported into an FTWZ are treated as being outside India’s customs territory, meaning they are exempt from customs duties and GST until they are cleared for home consumption. However, in one of the rulings, the Tamil Nadu Authority for Advance Ruling (AAR) has held that the transfer of title of goods or multiple transfers within an FTWZ does not constitute a transaction in a bonded warehouse as defined under the CGST Act. Therefore, such transfers are not exempt from GST. When goods are sold from an FTWZ to a Domestic Tariff Area (DTA), this is treated as an import by the DTA, which means that customs duties and IGST will be applicable at the time of clearance. The amendments to Schedule III of the CGST Act 2017 under Clause 8(a) & 8(b) specify that certain transactions involving warehoused goods before clearance for home consumption are not considered supplies under GST. However, transactions within FTWZs do not fall under this exemption, as they are not classified as bonded warehouse transactions. Several AARs across the states has consistently ruled that transactions within FTWZs do not enjoy the same exemptions as those in bonded warehouses, leading to potential implications / litigations for businesses operating in these zones.
12. In order to mitigate this difficulty and to bring consistency for having similarity treatment as in respect of supply transactions in a customs bonded warehouse, clause (aa) to be inserted in Entry 8 of Schedule III of the CGST Act,2017 to include supply of goods warehoused in a SEZ or FTWZ to any person, before clearance of such goods for export or to Domestic Tariff Area. Thereby, treating such transactions as ‘neither supply of goods nor supply of services. The said insertion to be effective retrospectively, from July 1, 2017. While goods stored in these zones benefit from certain exemptions while in transit or before clearance, the transfer of title within an FTWZ does not qualify for GST exemption, leading to potential tax liabilities for businesses engaged in such activities. This amendment will facilitate trade by bringing equality in such transactions.
(iv): Taxability under reverse charge for certain services:-
13. Sponsorship services involve a contractual agreement where one party (the sponsor) provides financial or other support to another party (the sponsored) in exchange for promotional benefits, such as brand visibility or advertising during events. The GST rate applicable to sponsorship services is generally 18%. However, for certain cultural or artistic events, a lower rate of 12% may apply. This differentiation in tax rate is based on the nature of the event being sponsored. Sponsorship services provided to body corporates or partnership firms are typically taxed under the Reverse Charge Mechanism (RCM). This means that the recipient of the sponsorship service (the sponsored entity) is responsible for paying the GST, rather than the sponsor. This is mandated by Section 9(3) of the CGST Act 2017 and related notifications. Now it has been recommended by the Council that Sponsorship services provided by the body corporates to be taxed under Forward Charge Mechanism. There is no additional burden but only shift in the person liable to pay the tax from the recipient (sponsored) to Supplier (Sponsor). The benefits on ITC are also undisturbed. Being under Forward Charge Mechanism, the only change is that the tax liability by the supplier can now be discharged with available ITC too.
(v): GST under RCM on renting of an immovable property (other than residential dwelling) by composition optees:
14. The liability to pay Goods and Services Tax (GST) under the Reverse Charge Mechanism (RCM) for renting immovable property, specifically commercial properties, has undergone significant changes as of October 1, 2024. As per the recent changes under the GST law, if an unregistered landlord rents out commercial property to a registered tenant, the liability to pay GST shifts from the landlord to the tenant. This means that the tenant must now pay GST directly to the Government under the RCM framework. The applicable GST rate for renting commercial properties is 18%. This rate applies regardless of whether the tenant is registered or unregistered, but under RCM, only registered tenants including Composition Optees will be liable to pay this tax when renting from an unregistered landlord. The Reverse Charge Mechanism is applicable with all obligations for composition scheme optees when dealing with unregistered suppliers. These composition scheme optees are required to pay applicable taxes in cash without claiming ITC, and maintain proper documentation. This defies the purpose of opting for Composition Scheme which offers simple compliance obligation facilities. In order to continue such benefits to such composition scheme optees, Composition taxpayers are to be excluded from the liability to pay GST under reverse charge on renting of an immovable property (other than residential dwelling) received from an unregistered person. Past practices will also to be regularised on ‘as is where is’ basis.
(vi) Invoice Management System (‘IMS’)
15. In Order to enable taxpayers to efficiently address invoice corrections/amendments with their suppliers through the portal, a new communication process was brought over the common portal. This facilitated taxpayer in matching of their records/invoices vis a vis issued by their suppliers for availing the correct Input Tax Credit (ITC). GSTN has developed this new functionality called Invoice Management System (IMS) which will allow the recipient taxpayers to either accept or reject an invoice or to keep it pending in the system, which can be availed later. This facility was made available to the taxpayer from 1st October 2024 onwards on the GST portal. The said functionality is a major enhancement in the ITC ecosystem of GST. Now, only the accepted invoices by the recipients would become part of their GSTR-2B as their eligible ITC. Therefore IMS provides the taxpayers an opportunity to review the genuineness and authenticity of the received invoices. Once the suppliers save any invoice in GSTR 1 / IFF / 1A /the same invoice would be reflected in the IMS dashboard of the recipient for further action. In this regard, the GSTC has recommended that
> Section 38 of the CGST Act 2017 and Rule 60 of the CGST Rules 2017 to be amended to provide for generation of Form GSTR-2B basis the actions taken by the taxpayers as per the IMS.
> Section 34(2) of the CGST Act 2017 to be amended to provide for the condition of reduction of ITC by recipient on credit note issued by supplier, for the supplier to take tax adjustment on such credit note.
> Rule 67B to be inserted to provide the manner for adjusting output tax liability of supplier against credit note.
> Section 39(1) and Rule 61 to be amended to permit filing of Form GSTR-3B only after generation of Form GSTR-2B on the portal.
These amendments will bring in Legislative authority for the Invoice Management System, which is a taxpayer facilitative measure.
(vii) Pre-deposit for filing appeal
16. Currently, in terms of proviso to Section 107(6) of the CGST Act 2017 with effect from 01st January 2022 a pre-deposit equal to 25% of the penalty demand is payable for filing appeal before the Appellate Authority where an order demanding penalty (only) is passed under Section 129(3) of the CGST Act 2017 i.e., detention/ seizure of goods or Conveyances. Further, no pre-deposit required when an appeal is filed before GST Appellate Tribunal. In this regard, the GSTC has recommended
> Section 107(6) of the CGST Act 2017 to be amended to reduce pre-deposit from 25% to 10% for filing appeals before the Appellate Authority. Also, Section 112(8) of the CGST Act to be amended to provide for payment of 10% pre-deposit for filing appeals before the Appellate Tribunal in such cases.
(viii) ISD Changes:-
17. The definition of the ISD has been widened as part of the Finance Act 2024 to include the invoices liable to tax under the RCM in addition to distribution of credit for common input services. The ISD registration was made Mandatory for the entities registered in multiple states to distribute the common ITC of input services procured from third parties, including transfer of RCM credit, to such distinct persons. Now as per the recommendations along-with intra-state reverse charge transactions, inter-state reverse charge transactions also to be included under ISD Mechanism effective April 1, 2025.
(ix) New provision for persons not required to be registered:-
18. A New Rule 16A of the CGST Rules 2017 is to be inserted to provide for generation of temporary identification number for persons, who are not liable to be registered under CGST Act 2017 but are required to make tax payments. This will help in completing the payment processes where GST registration is not required. There will be an amendment to Rule 87 (4) of CGST Rules, 2017 (payment of unregistered persons based on Temporary Reference Number) incorporating a reference to the new Rule and consequential modification of FORM GST REG-12 i.e., (Order of Grant of Temporary Registration/ Suo Moto Registration).
(x) Waiver of Late Fees:-
19. Suppose a taxpayer fails to file both Annual Return and Form GSTR-9C, then, in terms of Section 47(2) of the CGST Act 2017, he is liable to a fee of Rs.200/- per day during which the default continues (Rs. 100 under CGST law + Rs. 100/- under State / Union Territory GST law) capped to a maximum amount of 0.50% (0.25% under the CGST Law + 0.25% under the SGST / UTGST Law) of turnover in the State/UT. These provisions apply to the filing of GSTR-9; however, no specific requirements apply to GSTR-9C, and hence, the filing of GSTR-9 and non-filing of GSTR-9C could be subject to a general penalty of Rs 25,000. The 55th GSTC has recommended that in respect of Form GSTR-9C for the FY 2017-18 to FY 2022-23, late fee to be waived in excess of the late fee payable till the date of filing of Form GSTR-9 of the respective year, provided Form GSTR-9C is filed by March 31, 2025.
(xi) Hotel accommodation and restaurant services therein
20. According to the GST law, GST rates for hotels would be applicable on the “declared tariff”. The GST rate charged on hotel rooms is based on the declared tariff, even if you get a discount. The definition of ‘declared tariff’ is to be removed from the relevant notifications related to services rates and exemptions. Further, the definition of ‘specified premises’ to be amended to link the rate of GST on accommodation units in hotels to the actual value of the supply (vis-à-vis declared tariff as presently existing). With effect from April 1, 2025, the GST rate on restaurant services in hotels to be depended on the ‘value of supply’ of the accommodation provided by the hotel in the previous financial year. The two tier rates are:
> 18% GST with ITC if the value of supply of any unit of accommodation exceeded Rs. 7,500/-
> 5% GST without ITC if the value of supply of any unit of accommodation equal to or below Rs. 7,500/-
The Option for hotels to pay 18% GST with ITC on restaurant services, subject to declaration to be given before the financial year or at the time of registration.
(xii) Clarity on GST Changes for Used Car Dealers:
21. The 55th Goods and Services Tax Council’s decision to harmonize the GST rate on old and used vehicles to 18% has stirred a lot of discussions. The revised rate recommended by the 55th GST Council meeting, applies to all old and used vehicles, including electric vehicles (EVs), sold by registered businesses. This means individuals who are not registered under GST remain unaffected by this change. All the discussions stems from the valuation of used car under the concept called “Margin Scheme” for which understanding Rule 32(5) of CGST Rules 2017 is necessary.
22. As per Rule 32(5) of the CGST Rules 2017, Margin Money which will be the value of supply in case of used cars is the difference between the selling price and purchase price. It is like i.e., if “₹12 Lakh sale price and ₹9 Lakh purchase price then “Margin money” is (+) ₹3 lakhs and GST is payable only on the positive margin. If it is negative no GST is payable.
23. Now, the Key Points to note here are that Unregistered to Unregistered (C2C) Transactions are not taxed earlier, not taxed now too. The Customer-to- Business (C2B) Transactions are out of GST scope as it is not in the course or furtherance of business. Then, Who Will Be Impacted by GST Rate Hike (12% to 18%)? The answer is resellers who are in the business of buying and selling second hand cars and buyers who purchase vehicles from these business entities. Actually, all old vehicles (except EVs & small vehicles) were already taxed at 18% under GST. Now every such transaction is at 18% in a harmonized way. That is the only change. This approach ensures that the tax reflects only to the extent of value addition by the dealer, which is considered a supply of service under the GST framework. So now after the recommendations are implemented, there will be a uniform GST rate of 18% which is calculated only on the margin earned by dealers i.e. the difference between the sale price and purchase price of the vehicle and not on the total value of the vehicle and when if the margin is negative, no GST is payable. Unfortunately, few don’t understand what the law was before and what has actually changed leading to a lot of misconceptions!
(xiii) GST on Ready-to-eat popcorn:-
24. GST Council has recommended to issue a clarification on taxation of popcorn that pre-packed and labelled ready-to-eat snacks will attract a 12% tax while an 18% GST will be levied if it is caramelised. It is like this.
> “Ready-to-eat popcorn” which is mixed with salt and spices, and has the essential character of namkeens currently attracts a 5% GST if it is not pre-packaged and labelled.
> If it is supplied as pre-packaged and labelled, a 12% GST is levied.
> However, when popcorn is mixed with sugar (caramel popcorn), its essential character changes to that of a sugar confectionary and would therefore be classifiable under HS 1704 90 90 and attract an 18 % GST, as per the clarification.
There is no change in the tax rate of popcorn and the GST Council has only recommended that the Central Board of Indirect Taxes and Customs (CBIC) will issue a circular clarifying the current taxation regime of popcorn.
(xiv) Other changes in Law:-
21. Other Changes in Law inter alia include
> To amend sub-rule (1) of rule 19 of CGST Rules, 2017 to include reference to FORM GST CMP-02 in the said rule to allow the taxpayers to modify their “category of registered person” in Table 5 of FORM GST CMP-02 through FORM GST REG-14.
> To amend section 34(2) of CGST Act, 2017, to specifically provide for requirement of reversal of input tax credit as is attributable to a credit note, by the recipient, to enable the reduction of output tax liability of the supplier and concurrently to insert a new rule 67B in CGST Rules, 2017, to prescribe the manner in which the output tax liability of the supplier shall be adjusted against the credit note issued by him.
> To amend section 39 (1) of CGST Act, 2017 and rule 61 of CGST Rules, 2017 to provide that FORM GSTR-3B of a tax period shall be allowed to be filed only after FORM GSTR-2B of the said tax period is made available on the portal.
(xiv) Miscellaneous clarifications / Measures: –
22. Other measures inter alia include
> GST not payable on the ‘penal charges’ levied and collected by banks and NBFCs from borrowers in case of non-compliance with loan terms.
> E-commerce operators (ECOs) not required to reverse ITC under Sections 17(1) / 17(2) of the CGST Act, for supplies on which they are liable to pay tax under reverse charge under Section 9(5) of the CGST Act 2017.
> Goods to be considered as ‘received’ by recipient under Section 16(2)(b) of the CGST Act, where delivery of goods is made by the supplier at the supplier’s place of business and the property in the goods transfers to the recipient at such location (ex-works supplies).
> Supplier of online services such as online money gaming, OIDAR services, etc., to unregistered recipients, to include the name of recipient’s State on tax invoice. The said state name to be deemed as recipient’s address on record for the purposes of determining place of supply.
> Section 148A to be inserted in the CGST Act, 2017 to empower the Government to implement the ‘Track and Trace Mechanism’ for specified evasion-prone commodities. This system will involve affixing a Unique Identification Marking on the goods or their packages, to provide a legal framework for its development and to ensure effective traceability of these commodities throughout the supply chain. This will provide a legal framework for developing such a system and will help in implementation of the mechanism for tracing specified commodities throughout the supply chain
(xv) Rate Changes / Clarifications: –
23. There were also recommendations for change in the rate of tax for Goods and Services like
> To reduce the GST rate on Fortified Rice Kernel (FRK), classifiable under 1904, to 5%.
> To exempt GST on gene therapy.
> To extend IGST exemption to systems sub-systems, equipment, parts, sub-parts, tools, test equipment, software meant assembly/manufacture of Long-Range Surface-to-Air Missile (LRSAM) system under Notification 19/2019-Customs.
> To reduce the rate of Compensation Cess to 0.1% on supplies to merchant exporters at par with GST rate on such supplies.
> To exempt from IGST imports of all equipment and consumable samples by Inspection Team of the International Atomic Energy Agency (IAEA) subject to specified conditions.
> To extend the concessional 5% GST rate on food inputs of food preparations under HSN 19 or 21 that are supplied for food preparations intended for free distribution to economically weaker sections under a government program.
> To exempt GST on the contributions made by general insurance companies from the third-party motor vehicle premiums collected by them to the Motor Vehicle Accident Fund, constituted under section 164B of the Motor Vehicles Act, 1988. This fund is constituted for providing compensation/ cashless treatment to the victims of road accidents including hit and run cases.
> To clarify that Autoclaved Aerated Concrete (ACC) blocks containing more than 50% fly ash content will fall under HS 6815 and attract 12% GST.
> To clarify that pepper whether fresh green or dried pepper and raisins when supplied by an agriculturist is not liable to GST.
> To amend the definition of ‘pre-packaged and labelled’ to cover all commodities that are intended for retail sale and containing not more than 25 kg or 25 litre which are ‘pre-packed’ as defined under the Legal Metrology Act, or a label affixed thereto is required to bear the declarations under the provisions of the Act and rules.
Before bidding adieu……
24. One of the very important aspects that was looked upon with great interest by all stake holders is formation of GST Appellate Tribunal. The GST Council took note of the procedural rules proposed for the internal functioning of the GSTAT, which would be notified after examination by the Law Committee. This would help in operationalization of the GSTAT at the earliest. Next important thing was that Council also decided to extend the time frame for the Group of Ministers on the restructuring of the GST Compensation till 30th June, 2025. On the request of the State of Andhra Pradesh the Council recommended that a Group of Ministers be constituted to examine the legal and structural issues, and recommend a uniform policy on imposition of levy in case of a natural disaster/calamity in the State.
25. Well….. So many changes to be meticulously analysed, nevertheless all in the interest of Trade facilitation and to synchronise with the Economic compulsions of the country. Very importantly, the recommendations of the GST Council would be given effect through the relevant circulars/ notifications/ law amendments which alone shall have the force of law.
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