CA O. P. Agarwalla, Guwahati
CA Manoj Nahata, Guwahati

Ruling That No GST Payable On The Mobilisation Advances Received In Pre-GST Period By A Works Contractor– Really Correct?

Recently, the Advance Ruling Authority (AAR) of Tamilnadu in case of Shapoorji Pallonji & Company (P.) Ltd has pronounced a ruling vide its order no. 03/ARA/2020 Dated 31.01.2020 on the issue relating to applicability of GST on the mobilisation advance received during the pre GST  period against the works contracts.

Issue involved in the ruling:-

The applicant works contractor had received some amount as mobilisation advance during pre GST regime. A part of the said advance was adjusted during the pre-GST period against the running bills. Remaining balances have been adjusted during GST period. The applicant paid service tax on the total amount of mobilisation advance. VAT was paid as per running bills raised during pre-GST period. Thus, the supply made after 30/06/2017 against the unadjusted amount of mobilisation advance had already suffered service tax whereas no VAT was paid on the said amount .The applicant was of the opinion that the supply against unadjusted advances will attract GST as per the Section l42(11)(c). He claimed input credit against the service tax paid on unadjusted transitional advances in terms of the Section l42(11)(c) in Tran-1.

The Contractee (client of the applicant) has disputed this and expressed his opinion that the portion of the Mobility Advance transited into GST regime would get covered under Section 142(11)(b) of the CGST Act and GST is not leviable on such amount of consideration.

Thus the applicant approached the advance ruling authority and raised queries relating to taxability of the aforesaid unadjusted mobilisation advance under GST laws.

Gist of the Discussion made by the AAR:-

  • Section 142 (11) (a) applies to transaction in goods on which VAT is leviable and it over-rides Section 12 of GST law which states that liability to pay tax on goods arise at the time of supply as determined by provisions of Section 12.
  • Section 142(11)(b) applies to transactions in services on which Service tax was leviable and it over-rides Section 13 of GST law which states that liability to pay tax on services arise at the time of supply as determined by provisions of Section 13.
  • Section 142(11)(c) applies to transactions where tax under both VAT and Finance Act 1994 was paid on any supply and on which GST is leviable to the extent ‘supply’ is made after the appointed date notwithstanding the fact that tax has already been remitted under the erstwhile VAT and Service Tax laws. An exception has been carved out, that VAT and service Tax paid on such transactions under the erstwhile laws would be available as credit under Section 142(11)(c), to the extent VAT and Service Tax has been paid under old laws for the receipt of services/goods/both, which is treated as “supply’ under GST.
  • Therefore, the authority deduced that Section 142(11) (c) is applicable in cases with respect to transactions in which both VAT and Service Tax are paid in the Pre-GST regime and on which GST would be leviable to the extent ‘supply’ is made after the appointed date for the recipient who has actually paid the tax. The authority found that , the applicant has paid Service Tax on the advance received as per the said statute for which the applicant has raised invoice on their service receiver along with the component of service tax but no VAT has been paid/received from their customer on that part of the Mobilisation Advance pertaining to materials and therefore, provision of section 142(11)(c) do not apply here.. Accordingly, the AAR hold that the transitional provisions under Section 142(11)(c) is not applicable to the case of the applicant.
  • Further ‘Supply of Works Contract’ is deemed to be a service under GST. Under the pre-GST regime, service tax was leviable on the service portion of the Works Contract, which in the case at hand being original work, was levied on 40% of the value. The applicant on receipt of advance has paid the service tax on the 40% of the value as required under the provisions of Service Tax. The like situations are more aptly covered under the transition provision at Section 142(11)(b) wherein it is stated that no tax is payable on services under the GST Act to the extent the tax was leviable on the said services under Chapter V of the Finance Act. Therefore, they concluded that GST is not payable on the Mobilisation advance which has been received prior to GST implementation as per Section 142(11)(b) of the Act.

The Hon’ble Advance Ruling Authority has thus ruled as under:-

1. The Transitional Provisions under Section 142(11)(c) is not applicable to the case at hand.

2. The Mobilisation advance to the extent received prior to the implementation of GST towards supply of Works Contract Service is not to be subjected to GST as per the provisions of Section 142(11)(b) of the GST Act 2017.

Why this write-up:-

The above said ruling has again created a debate amongst the tax professionals. For some experts the views expressed in the ruling are correct and appreciable whereas others are dissenting with such views.. Hence it may be a good case for  academic  discussion that whether in the aforesaid ruling the provisions of the laws are  interpreted and applied in the correct manner..

Apparently the aforesaid ruling advocates that:-

1. Section 142 (11)(c) is applicable in cases where both VAT and Service Tax are paid in the Pre-GST regime and is not applicable in case, where only service tax or only VAT has been paid.

2. Though no VAT was paid or payable on the unadjusted mobilisation advance under the repealed TNVAT Act, GST will also not be levied.

It appears that there is sharp conflicts between the interpretations made by different authorities on the provisions of section 142(11) and accordingly it is expected that a debate is being floored to reach to the most acceptable interpretation.

What does section 142(11) actually contains:-

Section 142(11):-

(a) notwithstanding anything contained in section 12, no tax shall be payable on goods under this Act to the extent the tax was leviable on the said goods under the Value Added Tax Act of the State;

(b) notwithstanding anything contained in section 13, no tax shall be payable on services under this Act to the extent the tax was leviable on the said services under Chapter V of the Finance Act, 1994 (32 of 1994);

(c) where tax was paid on any supply both under the Value Added Tax Act under Chapter V of the Finance Act, 1994 (32 of 1994), tax shall be leviable under this Act and the taxable person shall be entitled to take credit of value added tax or service tax paid under the existing law to the extent of supplies made after the appointed day and such credit shall be calculated in such manner as may be prescribed.

Interpretation of the provisions of Section 142(11):-

It is beyond any dispute that section 142(11) lacks clarity and more explicit drafting could have been expected on these vital transitional issues. Literal interpretation of this sub-section may result in conflicts between the provisions of clause (c) with the provisions of clauses (a) and (b).

When there is a conflict between two or more limbs of a statute then the rule of harmonious construction needs to be adopted, this is the rule of interpretation. The best mode of interpretation is to interpret in such a way to harmonise law with laws. The different parts of an enactment and conflict between the various provisions should be sought to be harmonized. The rule follows a very simple premise that every statute has a purpose and intent as per law and should be read as a whole. The interpretation consistent of all the provisions of the statute should be adopted.

While introducing GST laws, some transitional issues were foreseen and addressed by the law makers. To meet the transitional issues relating to existing transactions covered by Sales Tax Laws and Service Tax Laws and to make the provisions to avoid double taxation under the new and existing laws, section 142(11) has been enacted.

Clause (a) of section 142(11) deals with the transactions which were taxable under VAT laws and on which GST is also attracted because of section 12.  Clause (b) deals with the transactions which were taxable under service tax laws and on which GST is also attracted because of section 13. Clause (c) covers the transactions of supplies which were taxable under VAT & Service Tax Laws both and which are also attracting GST as per section 12 and 13.

The most important question now emerges that if clause (a) and clause (b) are covering the transitional transactions of VAT Laws and Service Tax laws, then what could have been the reason or intent behind enacting of clause (c).

We all know that under pre-GST regime, in case of a composite supply (works contracts) VAT/CST was leviable on the value of the deemed sales of goods and Service Tax was leviable on the value of the services supplied. In GST regime such composite supplies are liable to be taxed as supply of services. Transitional transactions of such composite supply carry some particular issues. Such as there may be some cases of composite supplies contracts wherein only VAT has become payable till 30th June 2017 but Service Tax has not become payable till the said date. There may also be cases wherein only service tax has become payable till 30th June 2017, but VAT has not become payable till the said date. Some of the possible reasons for the same may be as follows:-

a) Under VAT Laws, the taxable event of a deemed sales is the transfer of property in goods involved in the execution of the works contract and that the said transfer of property takes place when the goods are incorporated in works contract. Whereas under Finance Act, 1994, the taxable event is providing or agreeing to provide taxable services (to the extent amount received). Thus unlike in VAT laws, Service Tax was leviable on advance against works contracts.

b) Under VAT Laws tax become leviable as soon as the property in goods transferred to the buyer and therefore VAT is leviable even on the works in progress. Whereas the point of taxation is altogether different in case of Service Tax.

In such a situation of composite supply of goods and services taxable respectively under VAT Laws and Service Tax Laws, where only one of the two taxes i.e. Service Tax and VAT was leviable till 30th June, 2017 and where supply has been made under GST laws as per section 12 and 13, it was not possible to apply the provisions of clause (a) and clause (b). Applying clause (a) and (b) to those transactions could have resulted in exempting a portion of such supplies, which was not warranted.

Let us now take an example of a case where the supplier has received Rs. 10 crores as advance on a date prior to the appointed day for a works contract attracting VAT and Service Tax and no work what-so-ever against such advance has been done during pre-GST regime. Service Tax was leviable on such advances and accordingly the same was paid. Taxable event under VAT Act did not trigger and therefore VAT did not become leviable. In this situation, can it be said that no GST will be levied on supply made during GST regime against such advances? Can there be any intention of the law makers to waive tax on supply of goods involved in such supply? It seems that the clause (c) has been enacted to cover such transactions of composite supply, wherein only one of the VAT and Service Tax was due and payable.

Therefore the authors are  of the view that clause (c) has been enacted to cover cases of such composite supplies, where only one of the VAT or Service Tax was due and where supply has been made during GST regime.

Thus conjoint reading of all the three clauses the principles stood as under:-

1. GST will not be levied on the transitional transactions of sales of goods (pure sales) on which tax was leviable under repealed VAT laws, irrespective of the fact that time of supply of such goods as per section 12 of CGST Act is post GST.

2. GST will not be levied on the transitional transactions of supply of services (pure services) on which tax was leviable under repealed Service Tax Laws, irrespective of the fact that time of supply of such services as per section 13 of CGST Act is post GST.

3. GST will be levied on transitional transactions of composite supply falling under both VAT and Service Tax Laws, where VAT or Service Tax has been paid and where supply has been provided during GST period. VAT or Service Tax paid under the existing laws shall be allowed as credit of such paid amount of VAT or Service Tax.

It is worth to see the provisions of rule 118 of CGST Rules, which also support the above interpretation:-

Rule 118:- Every person to whom the provision of clause (c) of sub-section (11) of section 142 applies, shall within the period specified in rule 117 or such further period as extended by the Commissioner, submit a declaration electronically in FORM GST TRAN-1 furnishing the proportion of supply on which Value Added Tax or service tax has been paid before the appointed day but the supply is made after the appointed day, and the Input Tax Credit admissible thereon.

Whether payment of VAT and Service Tax both is a pre-condition for clause (c):-

Clause (c) of section 142(11), as interpreted by the AAR Tamilnadu  in the aforesaid case, is applicable in cases with respect to transactions in which both VAT and Service Tax are paid in the Pre-GST regime and on which GST would be leviable to the extent ‘supply’ is made after the appointed date for the recipient who has actually paid the tax. Hon’ble AAR has held that as the applicant had paid service tax and not VAT on the unadjusted advances, he will not be covered by the aforesaid clause and accordingly will be not liable to pay GST on such amount.

Before analyzing the aforesaid interpretation, let us go through the content of the clause (c), which is as under:-

(c) where tax was paid on any supply both under the Value Added Tax Act and under Chapter V of the Finance Act, 1994, tax shall be leviable under this Act and the taxable person shall be entitled to take credit of value added tax or service tax paid under the existing law to the extent of supplies made after the appointed day and such credit shall be calculated in such manner as may be prescribed. (emphasis supplied)

If we make the literal interpretation of above clause, the aforesaid rule of the AAR seems to be incorrect. It is true that the clause (c) could have been drafted more clearly and explicitly, but even in the existing situation, the authors of this write up do not find any reason to derive a meaning that the sub-clause (c) is applicable in cases where both service tax and VAT have been paid.

The clause begins with the words “where tax was paid” which clearly denotes that the law makers has used to mean a single tax, otherwise instead of “tax was paid”, the words “taxes were paid” would have been used.  Furthermore, the word “or” used between the phrases “value added tax” and “service tax” in the said clause is also important and it also put a question on the interpretation made by the AAR.  Moreover, if the views taken by the AAR is presumed to be correct then it would be a situation of tax enrichment inasmuch as one is escaping VAT liability as well as GST liability on mobilization advances which the law maker never intended.

Conclusion:-

In our view all the three clauses of section 142 (11) means as follows:-

1. Transitional independent transactions of sales of goods on which VAT was payable will be outside the purview of GST even if as per section 12, the supply has been made after 30/06/2017.

2. Transitional independent transactions of services on which Service Tax was payable will be outside the purview of GST even if as per section 13, the supply has been made after 30/06/2017.

3. Transitional transactions on which both VAT and Service Tax were payable on material and service portion respectively are out of the purview of GST even if the supply is being made after 30/06/2017.

4. Transitional transactions, which were subject matter of both VAT and Service Tax and at one of VAT or Service tax has been payable in either of the Acts, will attract GST. VAT or Service Tax paid in existing law on such transactions will be allowed as credit in Tran-1.

Whether the AAR Tamilnadu in the aforesaid case has laid down true interpretation?

In view of the discussion made above, it is clear that the instant ruling lacks correct interpretation of statutory provisions of the law and the authors beg to differ and are  of the view that the ruling that no GST is payable on the mobilization advance  needs reconsideration.

Note: The above views expressed are the personal views of the authors based on their own interpretation of the provision of law. The possibility of other view(s) on the subject matter cannot also be ruled out. Thus the readers are advised to check all the outcomes and act accordingly.

CA. O. P. Agarwalla, Guwahati and CA. Manoj Nahata

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One Comment

  1. Arun says:

    I think AAR is correct ..in my view …no transition law can undo the taxable event which already happened …hence interpretation taken by AAR seems to be correct ..despite the fact in section 142 phrase ‘tax was paid’ has been used

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