APRIL 10, 2017

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

THE CGST, IGST, UTGST and the Compensation Bills, 2017, have been passed by both the houses of the Parliament and will become a law once the assent of the President is obtained. A careful and close reading of the legal provisions in these Bills reveal there are contradictions galore among the various provisions. These contradictions exist not only in the machinery provisions governing the levies but in the substantive provision covering levy and collection of tax. It will certainly be worth our while to examine these contradictions and bring them to light in the public domain so that the powers that be can take appropriate remedial measures to rectify the anomalies.

2. Let us begin with the charging section 9 of the CGST Act which governs the levy and collection of Central GST in respect of intra-state supplies. To the uninitiated, intra-state supply means where the supplier and the place of supply of the goods and/or services remain within the same State. Our first concern is with respect to sub-section (4) of the said section 9 which reads as follows:

"(4) The central tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both."

2.1 Registration of taxable persons is governed by Sections 22 to 24 and section 22(1) reads as follows:

"22. (1) Every supplier shall be liable to be registered under this Act in the State or Union territory, other than special category States, from where he makes a taxable supply of goods or services or both, if his aggregate turnover in a financial year exceeds twenty lakh rupees:

Provided that where such person makes taxable supplies of goods or services or both from any of the special category States, he shall be liable to be registered if his aggregate turnover in a financial year exceeds ten lakh rupees."

2.2 Thus a taxable person with an aggregate turnover upto Rs. 20 Lakhs in ‘normal category states' and upto Rs. 10 lakhs in ‘special category states', that is North-eastern States, Himachal Pradesh, Uttarakhand and Jammu & Kashmir, need not get themselves registered irrespective of whether the goods and/or services are taxable or not. There is a conflict here between Sec. 22 and Sec.11, which we shall consider a little later. A combined reading of Sec. 9(4) and Sec. 22(1) makes it clear that a registered person procuring goods and/or services from an unregistered person (that is, a person whose aggregate turnover is below Rs. 20 lakhs or Rs. 10 lakhs, as the case may be) has to discharge the tax liability on such goods or services on reverse charge basis. In other words the goods or services are not exempt from tax per se but only the liability to pay tax has been shifted from the supplier to the recipient in such cases. Then what happens to the transactions between unregistered persons without an exemption notification? Without an exemption notification issued under Section 11 exempting the supplies upto the threshold limits of Rs. 20 lakhs/Rs.10 lakhs, the registration provisions under Section 22(1) can not be operationalised.

3. Section 22 deals with registration of taxable persons. As per sec.2 (107)

"taxable person"means a person who is registered or liable to be registered under section 22 or section 24;

The common sense understanding of a taxable person is someone who is liable to pay tax. Registration is only a means of identifying a tax payer and it cannot or should not determine who the tax payer is. The sole determining factor of a taxable person is the taxable event, that is, any person who undertakes the taxable event and in the present case, a person undertaking the supply of taxable goods and/or services. The GST law as it is worded deviates from this basic concept and seeks to determine who the taxable person is through registration mechanism, which in my view is a fundamental flaw. The liability to pay tax can be extinguished either by keeping the event, supply of goods/services, outside the purview of taxability (for e.g. Schedule III) or by exempting the tax payer from levy of tax by issue of a notification under Section 11. Registration should not be used as a means of exemption, as appearing in the present GST law, as it leads to a conflict between Sec 22 and Section 11. In other words, sec. 22(1), by granting waiver from payment of tax to persons whose turnover is below the threshold limit, operates as an exemption provision coming in direct conflict with Sec. 11 which alone empowers the central government to grant exemption on goods and services either absolutely or subject to conditions. The taxable event is ‘supply of goods and services' as spelt out in section 9 (1) and therefore, any exemption from taxation should also be in respect of such supply of goods and services. In indirect taxation, tax is an action in rem. On the other hand, if an exemption notification under Section 11 is issued in respect of supplies made by a person whose annual turnover is below the threshold limit of Rs.20 lakhs/10 lakhs, how can the transaction be taxed under Section 9(4) in the hands of the recipient? If the idea is to encourage procurement of goods/services from registered suppliers (as it appears to be), it would have been much better if the supplier, whose turnover below the threshold limit (of Rs. 20 lakhs/ Rs. 10 lakhs) is given an option to pay the tax, as is the practice in the case of central excise levy in respect of small scale exemption. In my view, a simple and neat solution is always preferable to complicated and artificial/convoluted ones.

4. Now let us see sub-section (5) of Section 9 which reads as follows:

"(5) The Government may, on the recommendations of the Council, by notification, specify categories of services the tax on intra-State supplies of which shall be paid by the electronic commerce operator if such services are supplied through it, and all the provisions of this Act shall apply to such electronic commerce operator as if he is the supplier liable for paying the tax in relation to the supply of such services:

Provided that where an electronic commerce operator does not have a physical presence in the taxable territory, any person representing such electronic commerce operator for any purpose in the taxable territory shall be liable to pay tax:

Provided further that where an electronic commerce operator does not have a physical presence in the taxable territory and also he does not have a representative in the said territory, such electronic commerce operator shall appoint a person in the taxable territory for the purpose of paying tax and such person shall be liable to pay tax."

4.1 This sub-section makes the ‘electronic commerce operator' as the person responsible for paying tax by deeming it as the supplier in respect of specified categories of services. The first question which arises is, can the responsibility for payment of tax be fixed on an entity which is neither the supplier nor the recipient but is a mere provider of platform for effecting the transaction. If this is possible, what prevents the Government in deeming other intermediaries such as banks through which payments are processed and remitted, brokers or commission agents who also undertake collection of sales proceeds in addition to arranging for the transaction as taxable persons ? One might ask what about tax deducted at source by banks and other agencies in respect of direct taxes. We should remember that when a tax is deducted at source, the liability to pay tax does not shift from the tax payer to the tax deductor and it always remains that of the tax payer. That is not the position when an intermediary is deemed as the person liable to pay tax. Can the tax liability be shifted to a person who is one step removed from the transaction in the sense that he is neither a supplier nor a recipient? Can a legal fiction be far removed from reality? I am afraid we are entering into unchartered waters and it would be interesting to see how the courts of law in India will view such a mechanism from the legal and constitutional point of view. In the State of Bombay v. Pandurang Vinayak Chaphalkar and Others   [1953] S.C.R.773, the hon'ble apex court held that,-

"When a statute enacts that something shall be deemed to have been done, which in fact and truth was not done, the court is entitled and bound to ascertain for what purposes and between what persons the statutory fiction is to be resorted to……..."

4.2 The proviso to sub-section (5) further states that if the electronic commerce operator does not have physical presence in a taxable territory, he should appoint a representative or agent to discharge the tax liability. Section 9, we should remember, deals with intra-state transactions, that is, both the supplier and the place of supply remain within the same state. If the electronic commerce operator is deemed as the supplier and does not have a physical presence in a taxable territory, is the transaction not an inter-state one liable to IGST? How can an inter-state transaction be deemed as an intra-state one by forcing the supplier to have a representative or agent within the state to discharge tax liability? If this is possible, where is the necessity to have a separate category of inter-state transaction leviable to a separate tax called IGST? Suppose the electronic operator contends that he will pay IGST (which is equal to CGST+SGST) and not take a registration in another State, how can tax department compel him to register in another State, especially when there is no loss to revenue ? These are all the questions which arise when one carefully analyses the fine print of law in respect of GST and different views are possible on these questions. If the charging section itself is amenable to varying interpretations, one shudders to think how the law can be implemented effectively and smoothly. A similar contradiction exists in the definition of a ‘taxable person' also who is defined as a person required to be registered under Sec. 22 or 24. An ‘input service distributor' is also required to be registered under these provisions and how does he become a taxable person ?; his job is only to distribute the taxes paid on input services.

5. The above analysis is only one example of the confusion and contradiction prevailing in GST law. Similar problems abound in several other provisions of law relating to GST and they would call for several articles on the subject. One only wonders whether the GST law is a case of "draft in haste and rectify in leisure”!

(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.)