NOVEMBER 29, 2016

By Gopi Obulam

THE Goods and Service Tax (GST) Law has taken a big momentum under the Stewardship of Mr. Narendra Modi, Prime Minister of India. There is lot of enthusiasm and vigor has been played by Centre to bring the GST alive by 1 April 2017. Though, the date is very aggressive by looking at the activities to be performed before new tax regime takes charge, the way Govt. is focusing to take it forward would attract everybody's attention.

GST Law which is subsuming many indirect taxes and taking shape to bring-out 'One Tax – One Nation' motto into liveis conceptually a good way forward.

However, the success of GST Law which is designed as one of the important tools for 'ease of doing business' is highly dependent upon its construction and legal frame work.

We have seen today that there are as many fiscal laws covering different aspects and all / most of them have faced / been facing judicial scrutiny - either some of the provisions have been challenged or entire law itself. Unconstitutionality of one law; or one of the provisions of law; would have reduced the coffer's bag to that extent alone, in today's framework. Now, that the GST Law is subsuming many of such legislations and incarnating to perform all such functions of existing laws for the Centre, States and to the tax payers as well, any ambiguity in GST Law leading to judicial scrutiny would have serious bearing on exchequer(s) and all stakeholders. GST Law being taxing statute, it requires strict interpretation of the provisions. Our endeavor to switchover to reformation in the form of GST law is after 69 years of Independence and hope of the people of India is that GST law shall survive, serve and celebrate a centenary.

Accordingly, it is expected that the construction of GST Law would be under due care with 'explicit provisions', 'identified events of taxation' and its payers.

In the case of Govind Saran Ganga Saran Vs Commissioner of Sales Tax and Others (SC) - 2002-TIOL-589-SC-CT, their Lordships held that -

The components which enter into the concept of a tax are well known. The first is the character of the imposition known by its nature which prescribes the taxable event attractingthe levy , the second is a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax , the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability . If these components are not clearly and definitely ascertainable it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness in the legislative scheme defining any of those components of the levy will be fatal to its validity [Emphasis Supplied].

From the above, it is clear that, unless a fiscal legislation brings-out / covers the following 4 aspects with certainty and without vagueness, the legislative scheme defining such components of the levy makes the law fatal to its validity.

1. Taxable Event attracting the levy

2. Indication of person on whom the levy is imposed and who is obliged to pay the tax

3. Rate at which it is imposed

4. Measure or value to which the rate will be applied for computing tax liability.

Let us examine the above aspects and guiding principles with reference to newly drafted Model CGST/SGST Law [GST Law].

Sec 3. Meaning and Scope of Supply:

(1) Supply includes

(a) all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business,

(b) importation of service, whether or not for a consideration and whether or not in the course or furtherance of business, and

(c) a supply specified in Schedule I, made or agreed to be made without consideration.

(2) Schedule II, in respect of matters mentioned therein, shall apply for determining what is, or is to be treated as supply of goods or supply of services.

(2A) Where a person acting as an agent who, for an agreed commission or brokerage, either supplies or receives any goods and/or services on behalf of any principal, the transaction between such principal and agent shall be deemed to be a supply.

(3) Subject to sub-section (2), the Central or a State Government may, upon recommendation of the Council, specify, by notification, the transactions that are to be treated as –

(i) a supply of goods and not as a supply of services; or

(ii) a supply of services and not as a supply of goods; or

(iii) neither a supply of goods nor a supply of services.

(4) Notwithstanding anything contained in sub-section (1), the supply of any branded service by aggregator, as defined in Sec 43B, under a brand name or a trade name owned by him shall be deemed to be supply of the said service by the said aggregator.

Sec 3 has been designed under GST Law to bring-out what is the 'meaning and scope of supply'. But, it stopped at defining the scope itself. It has not envisaged anything related to 'intra-state supplies' though it has covered multiple aspects whether warranted or not.

Levy and Collection of Central / State Goods and Service Tax

(1) There shall be levied a tax called Central / State Goods and Service Tax (CGST / SGST) on all intra-state supplies of goods and/or services at the rate specified in the Schedule ____ to this Act and collected in such a manner as may be prescribed.

(2) The CGST / SGST shall be paid by every taxable person in accordance with the provisions of this Act.

(3) ………

Let us compare the guiding principles laid down in Govind Saran Ganga Saran (supra), with the above provisions of GST Law:

1. Taxable Event attracting the levy:

All Intra-state supplies of goods and / or services ---- Sec 7(1)

2. Indication of person on whom the levy is imposed and who is obliged to pay the tax:

All Taxable Persons ---- Sec 7(2)

3. Rate at which it is imposed

As per Schedule to the Act --- Sec 7(1)

4. Measure or value to which the rate will be applied for computing tax liability.

Taxable supply is defined u/s 2(97). Value of taxable supply is defined under Sec 15 of GST Act.

Let us understand whether all the guiding principles are satisfied to conclude GST Law in its present form would be valid law.

Taxable Event

1. Though, the taxable event under CGST / SGST law has been identified to be 'Intra-state supplies of goods and / or services', there is no definition as to what would constitute 'intra-state supplies of goods and / or services' under the GST Law.

Sec 3A of Model Integrated Goods and Services Act (IGST Act) under Chapter II defines as to when Supplies of goods and/or services in the course of intra-state trade or commerce. Whether the said definition will have any sanctity for the purpose of computation of tax under CGST and SGST Laws is million-dollar question as the Constitution under amended Article 286 never entrusted the power to Parliament to define as to what constitute 'intra-state' supply.

(a) Outside the state; or

(b) In the course of import into or export, out of territory of India.

It appears that, the Model IGST Act has not formulated principles on the above subjects but formulated the principles as to what would constitute to be 'intra-state supply'.

When, the fiscal legislations i.e., CGST / SGST Acts have not defined as to what constitute 'intra-state supply' though the event to be considered for taxation is 'intra-state supply' , it appears that, they primarily fail to be legislations without infirmity.

2. Indication of Persons:

Sec 7(2) of GST Law identifies that the tax has to be paid by every 'taxable person' and 'taxable person' is defined under Sec 9 of GST Act.

3. Rate at which it is imposed

As per Schedule to the Act

4. Measure or value to which the rate will be applied for computing tax liability.

For the purpose of levy tax, statute may consider measure such as value, number, weight on which tax would be computed.

'Taxable Supply' is defined u/s 2(97) under Chapter I and 'Value of Taxable Supply' is defined under Sec 15 of GST Act under Chapter IV. However, Levy and collection has been covered under Chapter III of GST Act. While so, Section7 of the Act never contemplates to adopt the said taxable value envisaged u/s 15 for the purpose of charging CSGT/SGST nor there is any machinery provision under Chapter III to define the value to be adopted.The event used in charging section is 'intra-state supply of goods and / or services' but, reference to the value is available for 'taxable supply'. Unless, charging section or a machinery provision provides to that effect, as to what is that measure the statute has considered for the purpose of levy tax, assuming and defining such measure and its attributes elsewhere in the statute has no meaning. At this juncture, it is quite possible to comment that, the taxable value defined under Section 15 is independent of Section 7 of GST Act brought under Chapter III and accordingly, it appears that the measure is missing.

In nutshell, out of 4 governing principles, it appears that, the Model GST law satisfies 2 without ambiguity and the rest arevery ambiguous and lead to litigation and judicial scrutiny, if Parliament and State Legislatures adopt the Model CSGT and SGST laws respectively,without any modifications.

The hurry and urgency of bringing new law shall not make the efforts futile and lead the law into the situations of being void ab initio.

(The author is Director – Tax Dispute Management at Flipkart and the views expressed are strictly personal.)