JULY 18, 2017

By Rakesh Kumar, Member (CESTAT) (Retd.)

THE GST Council in its various meetings had recommended -

(a) Full service tax exemption in respect of 87 services,

(b) 5% GST rate for 12 services,

(c) 12% GST rate for 7 services,

(d) 18% GST rate for 8 services specifically mentioned and "all the services not specified elsewhere",

(e) 28% GST rate for 4 services, and

(f) GST rate equal to the "Same rate of GST and compensation cess as on supply of similar goods" in respect of –

(1) Transfer of the right to use any goods for any purpose (whether or not for a specified period), and

(2) Any transfer of right in goods or of undivided share in goods without transfer of the title thereof.

1.1 One of the services in the 12% GST rate category is the service of – "Supply of food/drinks in restaurant not having facility of air conditioning or central heating at any time during the year and not having license to serve liquor." In 18% GST rate category are the following four types of food and beverage services –

(i) Supply of food/drinks in restaurant having license to serve liquor;

(ii) Supply of food/drinks in restaurant having facility of air-conditioning or central heating at any time of the year;

(iii) Supply of food/drinks in outdoor catering; and

(iv) Bundled service by way of supply of food and any other article of human consumption or any drink, in a premises (including hotel, convention centre, club, pandal, shamiana or any other place, specially arranged for organizing a function) together with renting of such premises.

1.2 As per S. No. 6(b) of Schedule II of the CGST Act, "composite supply by way of or as part of any service or in any other manner whatsoever, of goods, being food or any article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration" is to be treated as supply of service. Since this implies that such composite supply involving serving of alcoholic liquor for human consumption would be outside the purview of "supply of service", the supply of 'drinks' mentioned in the services under 12% GST rate and 18% GST ratehas to be construed as the supply of drinks other than alcoholic liquor for human consumption. Moreover, since in terms of Art 366(12A) of the constitution of India, supply of alcoholic liquor for human consumption is outside the purview of GST and sale of alcoholic liquor for human consumption is specifically covered by Entry 54 of List II of the 7th Schedule to the Constitution of India,a composite supply involving supply of food and drinks including alcoholic liquor for human consumption cannot be subjected to GST unless the supply of alcoholic liquor for human consumption has been billed separately.

2. In respect of the services, for which total GST rates of 5%, 12% , 18%, 28% or the "same rate of GST and compensation cess as on supply of similar goods" have been recommended by the GST Council, the Central Government has issued Notification No. 11/2017-central tax (rate) dated 28/06/2017 for specifying CGST rates , notification no. 8/2017-integrated tax(rate) dated 28/06/2017 for specifying IGST rates, notification no. 11/2017-union territory tax (rate) dated 28/06/2017 for specifying UTGST rates and notification no.2/2017- compensation cess(rate) dated 28/06/2017 for specifying the rate of compensation cess in respect of the services to which it is applicable. These notifications, for classification of services for the purpose of specifying rates of CGST, IGST and UTGST, follow the "Scheme of classification of services", as given in Annexure to the CGST rate notification no.11/2017-central tax(rate) dated 28/06/2017. This scheme of classification of services divides the services into five sections from Section 5 to Section 9. Each section is divided into headings – each with a four digit code. Each heading is divided into groups, each having a five-digit code. Groups are further divided into individual services , each with a six digit code. Heading 9997 covers certain miscellaneous services and "other services nowhere else classified". However the GST rate notifications mention only the four digit headings and the sub-division of headings, if required, is not as per the Scheme of Service Classification.

2.1 Though the notifications notifying the CGST rates, IGST rates and UTGST /SGST rates have to be in accordance with the GST Council's recommendations,there are some significant deviations from the recommendations of the GST Council in the notifications issued by the Central Government, which are discussed below. Since the CGST rate notification, IGST rate notification and the UTGST notification are identically worded, the problem areas are being discussed only with reference to the CGST rate notification no.11/2017-CT (rate) dated 28/06/2017.

3. S. No. 7(v) and 7(vii) of the notification no 11/2017-central tax(rate) pertaining to heading "9963 (Accommodation, food and beverage service)" specify 9% CGST rate for outdoor catering service involving serving of food or anydrink (whether or not alcoholic liquor for human consumption) and "Supply by way of or as part of any service or in any other manner whatsoever, of goods, including food or any other article for human consumption, or any drink (whether or not alcoholic liquor for human consumption), where such supply is for cash, deferred payment or any other valuable consideration , in a premises (including hotel, convention centre, club, pandal, shamiana or any other place specifically arranged for organizing a function), together with renting of such premises" . Since – (a) supply of alcoholic liquor for human consumption is outside the purview of GST in terms of Art 366(12A) of the constitution of India, (b)the composite supply referred to in S. NO. 6 of Schedule II of the CGST Act, which is to be treated as 'supply of service', excludes the supplies involving supply of alcoholic liquor for human consumption , and (c)even the GST Council , while recommending 18% GST rate for "Supply of food/drinks in outdoor catering" and for "Bundled service by way of supply of food or any other article for human consumption or any drink, in a premises (including hotel, convention center, club, pandal, shamiana or any other place,specially arranged for organizing a function)together with renting of such premises" has not used the expression –"whether or not alcoholic liquor for human consumption" after the word "drinks", the S. NO. 7(v) and 7(vii) of the notification go beyond what had been decided by the GST Council and are contrary to the provisions of Schedule II (S. NO. 6) of the CGST Act. The IGST rate notification and the UTGST rate notification also suffer from the same mistake.

4. Heading 9966 of the Annexure to the CGST Notification No. 11/2017 – Central Tax (rate) dated 28/6/17 detailing the scheme for classification of services covers – "rental services of transport vehicles with or without operators."

4.1 Heading 9971 of the Annexure covers "Financial and related services". Service code 997118 in this heading covers "Financial leasing services".

4.2 Heading 9973 of the Annexure covers "Leasing or rental services, with or without operator".This heading covers the leasing or rental of goods and also the licensing for the right to use of intellectual property and similar products(intangible goods).Since the "rental of transport vehicle, with or without operator" is covered by heading 9966, the heading 9973 would not cover the rental of transport vehicles, but would cover the leasing of transport vehicles and also the leasing or rental of all other goods.This heading in respect of leasing or rental of tangible goods does not make any distinction between leasing or rental involving a transfer of right to use and the leasing or rental without transfer of right to use.

4.3 In respect of the services of – (a) Transfer of the right to use any goods for any purpose (whether or not for a specified period) and (b) Any transfer of right in goods or of undivided share in goods without the transfer of title thereof,the total GST rate recommended by the GST Council is –"Same rate of GST and compensation cess as on supply of similar goods" .There are three components of this rate-(i) CGST rate, (ii) SGST/UTGST rate and (iii) Compensation cess.In case, such transactions are inter-state, the total GST rate would be the IGST rate plus Compensation cess. While the Central Government's notifications no 11/2017-central tax(rate) dated 28/06/2017 , 8/2017-integrated tax(rate) dated 28/06/2017 , no. 11/2017-union territory tax (rate) dated 28/06/2017and no. 2/2017-compensation cess(rate) dated 28/06/2017 notify the rates of CGST , IGST , UTGST and compensation cess respectively for these service transactions , the notifications issued by the State Governments notify the rate of SGST for the same.

4.4 Serial no. 17 of the CGST rate notification prescribes CGST rate for various "leasing and rental services, with or without operator" of Heading 9973 of the Annexure. Serial No. (i) and (ii) of Serial No. 17 prescribe CGST rate of 9% and 6% for temporary or permanent transfer or permitting the use or enjoyment of intellectual property (IP) rights in respect of Information Technology software and other intangible goods respectively. Serial No. (v) prescribes the CGST rate of 2.5% for leasing of aircrafts by an operator for operating scheduled air transport services or scheduled air cargo service, by way of transaction covered by clause (f) of Para 5 of Schedule II of the CGST Act 2017, i.e., leasing involving transfer of right to use , whether or not for specified period,for some consideration. Serial no. (iii) & (iv) prescribe CGST rate for the following transactions-

"… (iii) Transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration…"

"… (iv) Any transfer of right in goods or an individual share in goods without transfer of title thereof…";

and the rate of tax prescribed is "…Same rate of central tax as on supply of like goods involving transfer of title in goods"

This is in accordance with the rate of GST on supply of these services as recommended by the GST Council. However the Serial no. (vi) prescribes the same CGST rate, i.e. the "same rate of central tax as applicable on supply of like goods involving transfer of title in goods" for – "…Leasing or rental service, with or without operator, other than (i), (ii), (iii), (iv) and (v) above". The Serial no. (vi) would also cover the rental of tangible goods without transfer of right to use, i.e. the transactions of the type covered by clause 65(105)(zzzzj) of the Finance Act, 1994 during the period prior to 01/07/2012 and Section 66E(f) of the Finance Act, 1994 as it stood during the period w.e.f. 01/07/2012.

4.5 Since the GST rate equal to the "same rate of GST and compensation cess as on supply of similar goods" has been recommended by the GST Council only for two types of service transactions- "Transfer of right to use any goods for any purpose (whether or not for specified period)" and "Any transfer of right in goods or of undivided share in goods without transfer of title thereof", the GST rate notification of the Central Government , by prescribing the same CGST rate for the rental of goods without transfer of the right to use , has gone beyond what the GST Council had recommended. The IGST rate notification and the UTGST notification also commit the same mistake.The rental of tangible goods without transfer of right to use should have been treated as covered by "All other services not specified elsewhere" in the list of services for which 18% GST rate has been recommended by the GST Council and it is this rate which should have been prescribed for such transactions in the notification.In this regard, it will be seen that the compensation cess notification specifies the rate –"Same rate of cess as applicable on supply of similar goods involving transfer of title in goods" only for the two types of service transactions as mentioned in para4.3 above and for "any other supply of services", the rate specified is "Nil".

5. When the first para of each of the rate notifications – CGST rate notification, IGST rate notification and UTGST rate notification mentions that the rates are being notified on the recommendations of the GST Council, there is absolutely no scope for deviation from the recommendations of the GST Council while notifying the rates.Such deviations will only add to confusion and result in avoidable litigation.

(The views expressed are strictly personal.)