Section 159 of Finance Act 2023: Impact on Honest GST Taxpayers

Section 159 of the Finance Act 2023: Creating undue hardship for tax-compliant and honest taxpayers

Section 159 of the Finance Act, 2023, has been notified by the Central Board of Indirect Taxes and Customs (hereinafter referred to as CBIC) w.e.f. 1^st October 2023. However, after reading the bare text of the section, it is surprising how the Legislature drafted the law, making it challenging to figure out the rationale behind that section. Section 159 of the Finance Act 2023 is reproduced below.

159.(1) In Schedule III to the Central Goods and Services Tax Act, paragraphs 7 and 8 and the Explanation 2 thereof (as inserted vide section 32 of Act 31 of 2018) shall be deemed to have been inserted therein with effect from the 1st day of July, 2017.

(2) No refund shall be made of all the tax which has been collected, but which would not have been so collected, had sub-section (1) been in force at all material times.

At the outset, Schedule III to the CGST Act 2017 contains activities/transactions that are treated neither as a supply of goods nor a supply of services. The CGST Amendment Act, 2018,[1] vide its section 32 w.e.f. 1st February 2019 amended Schedule III to the CGST Act, 2017 to include three more activities/transactions, namely: –

1. Merchant Trading (Paragraph 7)

2. In-Bond Sales [Paragraph 8(a)]

3. High Seas Sales [Paragraph 8(b)]

Section 32 of the CGST Amendment Act, 2018 is reproduced below for your reference: –

32. In Schedule III of the Principal Act, —

(i) after paragraph 6, the following paragraphs shall be inserted, namely: –

“7. Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India.

8.(a) Supply of warehoused goods to any person before clearance for home consumption;

(b) Supply of goods by the consignee to any other person, by endorsement of documents of title to the goods, after the goods have been dispatched from the port of origin located outside India but before clearance for home consumption.”;

(ii) the Explanation shall be numbered as Explanation 1 and after Explanation 1 as so numbered, the following Explanation shall be inserted, namely: —

‘Explanation 2. – For the purposes of paragraph 8, the expression “warehoused goods” shall have the same meaning as assigned to it in the Customs Act, 1962.’

So, section 32 of the CGST Amendment Act, 2018 first incorporated the above three activities/transactions in Schedule III of the CGST Act, 2017. But this amendment was made effective prospectively, i.e., from 1^st February 2019. It can be inferred that this was a trade-friendly measure introduced to eliminate litigation and interpretational issues.

However, when Section 159 of the Finance Act 2023 was notified, it made the above amendment applicable retrospectively from 1^st July 2017. The reason behind carrying out this retrospective amendment could be to provide clarity and avoid any legal dispute/hardship on the taxpayers for the intervening period, i.e., from 1^st July 2017 to 31^st January 2019. However, making the amendment retrospective, with the condition that no refund of tax already paid on such supplies before 1^st February 2019, would cause a considerable loss for tax-compliant and honest taxpayers.

Let us now dive deep, analyse and compare the impact of a prospective and a retrospective amendment, particularly with reference to the GST law.

Case 1 – Suppose a particular good/service was taxable until a certain time. However, pursuant to a GST Council’s Meeting, it was decided that the particular good/service shall be declared exempt and that the Legislature implement this amendment prospectively. Since the Government notifies this amendment from a prospective date, the trade cannot approach the Government and claim a refund of the tax already paid for the period when the said good/service was taxable. The only tangible advantage to the trade is that they no longer have to pay tax on this exempted good/service but merely have to declare it in their GSTR-1 & 3B returns, and consequent ITC reversal provisions would apply to them for the inputs utilised in effecting the said exempt supply.

Case 2 – Suppose the same good/service was taxable until a specific time. However, pursuant to a GST Council’s Meeting, it was decided that the particular good/service shall be declared exempt and that the Legislature implement this amendment retrospectively. Since the Government notifies this amendment from a retrospective date, it can be said that it was never the intention of the Government in the first place to levy or collect tax for the intervening period when the said good/service was taxable. Now, since the said good/service is declared exempt from a retrospective date, it becomes obligatory for the Government to grant a refund for the tax already collected. Otherwise, this violates Article 265 of the Constitution of India, which states that “taxes not to be imposed save by authority of law”, i.e., no tax shall be levied or collected except by authority of law. Thus, any tax unconstitutionally collected is liable for a refund.

We can clearly observe that, in the instant case, Case 2 is applicable for the amendment, which has been notified retrospectively by the Finance Act, 2023, vide Section 159. Also, it is noteworthy that transactions like high seas sales, in-bond sales, and merchant trading are high-value transactions, and substantial tax liabilities arise from these transactions. Hence, it becomes obligatory on the part of the Government to grant relief in the form of possible refunds for taxes already paid before 1^st February 2019 by tax-compliant and honest taxpayers. Not granting relief in the form of possible refunds clearly violates Article 265 of the Constitution of India. Hence, this section of the Finance Act 2023 is a good case for judicial scrutiny.

[1] No. 31 of 2018.