Summary: Since the introduction of GST in India, taxpayers have faced challenges related to interpretational ambiguities and non-payment or short payment of taxes. To address these issues, the GST Council has issued circulars to regularize past practices, leading to the insertion of Section 11A in the Central Goods and Services Tax Act, 2017 (CGST Act). This section aims to clarify the government’s authority to regularize GST non-recovery based on common trade practices. It asserts that if a generally prevalent practice leads to non-levy or short levy of GST, the government may decide not to recover the tax. This change, effective from November 1, 2024, is intended to prevent undue burden on businesses and reduce litigation risks. However, the applicability of refunds for taxes erroneously paid on non-leviable transactions during the period from July 1, 2017, to October 31, 2019, remains contentious. The provisions do not permit refunds for that period, potentially leading to disputes regarding the legality of tax collection under Article 265 of the Constitution. Ultimately, while Section 11A provides clarity and a mechanism for addressing GST compliance issues, it also raises questions about fairness and legal authority in tax recovery practices.
Introduction:
During the seven years of GST implementation, taxpayers have encountered various challenges due to genuine interpretational issues and ambiguities in the GST provisions, leading to non-payment or short payment of taxes. Taxpayers frequently approached the GST Council seeking relief, which resulted in the Department issuing circulars to regularise the past practices followed by taxpayers.
The insertion of Section 11A in the Central Goods and Services Tax Act, 2017 (“the CGST Act”) addresses the uncertainties surrounding the Department’s approach in regularising past practices, which were previously handled through circulars issued based on the GST Council’s recommendations.
These circulars, while resolving contentious issues, also regularised past practices on an “as is basis”. Though the term “as is basis” was not explicitly clarified in all circulars, it is inferred that the Government’s intent was to ensure that taxpayers who had paid taxes in the past would not be eligible for refunds, while no tax would be demanded from those who had not discharged their tax liabilities earlier.
Examples of this approach includes the GST rates on supplies such as ice cream from ice cream parlors, un-fried or uncooked snack pellets, imitation zari thread or yarn, fibre drums, ‘rab’ and by-products of dal/pulse milling like chilka, khanda, and churi/chuni, etc.
However, this practice of issuing circulars to regularise past practices raised concerns about the legal validity of such directions, as there was no explicit provision empowering the Government to do so. The insertion of Section 11A now clarifies and strengthens the Government’s authority to regularise past practices, dispelling any doubts about the legality of such measures.
This insertion aims to address situations where common trade practices led to unintentional GST non-compliance, providing a mechanism for the government to resolve such issues without penalising businesses unduly.
The Section 11A is identical to Section 11C of the Central Excise Act, 1944 and Section 28A of the Customs Act, 1962. It underscores the government’s commitment to fairness and ease of doing business by mitigating the impact of previously followed practices deemed incorrect.
Important recommendation in the 53rd GST Council Meeting held on June 22, 2024:
The 53rd GST Council Meeting was held on June 22, 2024 in New Delhi under the Chairmanship of Hon’ble Union Finance Minister. The GST Council has introduced several reforms aimed at easing compliance burdens and reducing litigation under the GST framework. In a move to provide flexibility in recovering duties not initially levied or short-levied under GST Acts the Council proposed inserting Section 11A in the CGST Act to empower the Government, to regularize instances where GST was not levied or short-levied due to common trade practices.
Effective Changes proposed in the Union Budget, 2024:
The Finance (No.2) Bill, 2024 proposes the insertion of new section 11A in the CGST Act after Section 11 of the CGST Act, to empower the Government to regularise non-levy or short levy of central tax where it is satisfied that such non-levy or short levy was a result of general practice.
Notified Section 11A of the CGST Act:
The Ministry of Finance, through Notification No. 17/2024–Central Tax dated September 27, 2024, announces the commencement dates for various provisions of the Finance (No. 2) Act, 2024. The provisions of Section 116 of the Finance (No.2) Bill, Act will come into force on 1st November 2024.
Relevant Sections:
“Power not to recover Goods and Services Tax not levied or short-levied as a result of general practice.
11A. Notwithstanding anything contained in this Act, if the Government is satisfied that—
(a) a practice was, or is, generally prevalent regarding levy of central tax (including non-levy thereof) on any supply of goods or services or both; and
(b) such supplies were, or are, liable to,—
(i) central tax, in cases where according to the said practice, central tax was not, or is not being, levied, or
(ii) a higher amount of central tax than what was, or is being, levied, in accordance with the said practice,
the Government may, on the recommendation of the Council, by notification in the Official Gazette, direct that the whole of the central tax payable on such supplies, or, as the case may be, the central tax in excess of that payable on such supplies, but for the said practice, shall not be required to be paid in respect of the supplies on which the central tax was not, or is not being levied, or was, or is being, short-levied, in accordance with the said practice.”
Meaning thereby:
The Section 11A starts with a non-obstante clause. Consequently, in case of any conflict between proposed Section 11A and any other provisions in the GST Act, proposed Section 11A shall prevail. Section 11A empowers the government to waive the recovery of GST that was not levied or was short-levied due to a generally prevalent practice in trade.
Section 11A also helps to ensure that businesses are not unduly burdened by retrospective tax demands based on practices that were widely accepted and followed within the industry.
Insertion of refund provisions for issues clarified under Section 11A of the CGST Act:
An unresolved question persists regarding whether refunds will be granted to taxpayers who erroneously paid taxes on transactions that, as per Section 11A of the CGST Act, were not subject to GST. In accordance with Article 265 of the Constitution, no tax shall be levied or collected except by the authority of law. Therefore, any tax wrongfully deposited would be eligible for a refund, subject to the fulfillment of the condition of unjust enrichment.
It is further clarified that for taxes already paid in respect of transactions or activities during the period from July 1, 2017, to October 31, 2019, no refund shall be available. This creates a potential hardship for taxpayers who complied with the law as it stood during that period. Such a situation may give rise to litigation, contending that the denial of refunds is violative of Article 265 of the Constitution and lacks lawful authority to collect tax on these transactions. Hence, refunds should be provided, subject to unjust enrichment, where genuine taxpayers have paid taxes for the period from July 1, 2017, to October 31, 2019, on transactions that were otherwise not leviable.
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