APRIL 04, 2017

By P R Chandrasekharan, (IRS) (Retd.)

THE much awaited Central Goods and Services Tax Bill, 2017 and Integrated Goods and Services Tax Bill, 2017 paving the way for levy of GST by the Central Government were introduced in the Lok Sabha on the 27th March, 2017 and passed by the Lok Sabha on the 29th March, 2017. A careful scrutiny of the various provisions of these bills reveal that there are many links missing leading to confusion and lack of clarity in the legal concepts underlying them. These issues need to be addressed and resolved at the earliest lest it leads to avoidable conflicts in future.

2. First let us examine the definition of "goods" and "services" in the CGST Bill. Clause 2(52) of the said bill defines goods as follows:

(52) "goods" means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;

Similarly service has been defined in Clause 2 (102) as:

(102) "services" means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;

Thus both 'money' and 'securities' fall outside the scope of 'goods' as well as 'services'. The term 'security' has been defined in Clause 2(101) as:

(101) "securities" shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956;

'Security' has been defined in the 1956 Act as follows:

(h) "securities" include-

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

[(ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;]

(ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;]

(id) units or any other such instrument issued to the investors under any mutual fund scheme; (ii) Government securities;

(iia) such other instruments as may be declared by the Central Government to be securities; and

(iii) rights or interest in securities;

3. Since "security" and "rights or interest in security" are neither goods nor services, how will the transactions relating to security will be treated under GST? Will they be exigible to GST at all or not? The question is relevant in the context of "stock broking" services, which was one of the three services brought under the service tax net for the first time in 1994. In the absence of any explicit legal provision to cover stock broking services under the category of 'taxable services', it is possible to challenge the levy on stock broking services. If the legislative intention is to tax these activities under the category of 'supply of services', the position should be made clear beyond any shadow of doubt by suitably amending the provisions; otherwise, there could be legal challenges on the levy of service tax on stock broking services.

4. As per the definition of 'goods', it includes actionable claims. Insurance is an actionable claim and is considered as a "service" in the existing law. Thus there is a departure in the tax treatment of insurance in the proposed GST law. What complicates the matter further is Schedule III (read with section 7(2) of CGST Act) which deals with "ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED NEITHER AS A SUPPLY OF GOODS NOR A SUPPLY OF SERVICES". As per Serial No.6 to the said Schedule - "6. Actionable claims, other than lottery, betting and gambling."- are neither goods nor services. Therefore, insurance claims which are actionable claims go out of the purview of 'goods' and 'services' as defined in the new law. What are they then? How will the transactions relating to insurance claim be treated for tax purposes? The place of supply of "insurance services" find a specific mention in Section 12(13) of the proposed IGST Act. Thus there is a contradiction between the definitions of 'goods' and 'services' in the CGST law and the place of supply of services in the IGST law. Similar issue will arise in the case of 'on-line lottery' and 'on-line betting or gambling' some of which my fall under Sec. 2(17) (vii) of IGST Act as 'online gaming' under the "Online information and data access or retrieval" service. The definitions given under the various provisions are contradictory creating confusion and difficulties in interpretation. One does not understand what was the need to include 'actionable claims' under the category of goods, especially when a Constitution Bench of the hon'ble Supreme Court in the case of Sunrise Associates vs. Govt of NCT of Delhi & Ors. in Civil Appeal No. 4558 of 1998 on decided on 28th April, 2006 - 2006-TIOL-40-SC-CT-LB had held that lottery tickets which are 'actionable claims' can not be levied to sales tax as 'goods'. It would appear that the persons who drafted the provisions and the Law Ministry who vetted these provisions were not either aware of the correct legal position or plainly dis-regarded the law. This does not augur well as disputes might arise when established practice and understanding of law is overturned for no rhyme or reason.

5. Section 9 of the CGST Act empowers the Central Government to levy tax on the supply of goods or services. Therefore, if an activity is neither 'goods' nor 'services', the levy cannot apply or operate. I have highlighted only a very few of the issues that could crop up and this is only the tip of the iceberg. There are many such issues pertaining to interpretation. For instance Article 366 (29A) deems certain service activities as 'sale of goods'. In the proposed GST law these activities are rightly categorized as 'services'. However, care was not taken to omit the definition under Art. 366 (29A) which would become redundant once the GST laws come into operation. At the time of carrying out the Constitutional amendment, it should have been ensured that there is no contradiction between the provisions of the constitution and the provisions of the new law under enactment. One wonders what the Law Ministry was doing when they were vetting the various legal provisions! The Government would be well-advised to iron out the issues as discussed above if they desire a hassle and litigation free implementation of the new tax regime.

(The author is former Member (Technical) CESTAT, Mumbai and now Professor, DoR Chair, National Law School of India University, Bengaluru. The views expressed in this article are strictly personal and do not, in any way, represent that of the organization the author is associated with.)