OCTOBER 24, 2017

By K Srinivasan

WHEN there is no GST registration at the place of consumption of inter-state services, how to regulate the flow of credit which is blocked or rather disabled indirectly by Law under GST?

In this article, I have tried to find an answer to the above poser.

Admissibility of ITC of Travel related expenses incurred inter-state such as stay, food, convention etc., is the context in which the above question arises among several similar contexts that one may come across later.

Businessmen, including their employees, often tour in connection with their business which involves travel and stay outside their state.

The question here is 1) whether ITC on business expenses of travel and stay incurred inter-state, are allowed and 2) if it is allowed, is it allowed when incurred in a state other than a place where they don't have a fixed establishment or possess a GST registration.

Answering the first question first, generally ITC of the above expenses are not apparently blocked under Sec 17(5) of the CGST Act.

Also, as per the provisions of IGST Law with reference to passenger travel, it is the place of embarkation for unregistered person and location of the registered person which will be considered as the place of supply.

About a round trip or a return trip we still need to evaluate the other legs of travel for an unregistered person differently from a registered person.

If it is like under old Law, well and good. We will treat the first place of embarkation as the place of supply for all the multiple legs of travel and if place of embarkation and location of the registered person is the same, there will be only an intra-state transaction and there will be no ITC problem.

But that is applicable only to a registered person whereas for an unregistered person each such place of embarkation of a round trip will be the place of supply.

Thus, the return journey if found to commence from a different state from the origin state, then place of supply will be considered outside the state and IGST will be applicable instead of CGST and SGST to the unregistered person.

The type of taxes applicable in case of other travel related expenses such as Hotel, Pantry, Laundry, convention and local travel would all have the elements of business use generally as in the above case. But it must be clearly distinguished and shown as not for personal use.

That apart, the second problem will be such expenses when undertaken in another state, then CGST and SGST applicable to that state alone will be charged as these services are related to place of location of Immovable property namely Hotel and some are performance based services where the happening place is the criteria for determination of the place of supply under GST.

Therefore cross-utilization of ITC of such intra-state taxes of a different state by the business which does not belong there is clearly barred under the GST Law.

The question that still remains is therefore how to enable the business (and its employees availing such services on behalf of the company), to avail of the ITC of the above expenses within the framework of GST law?

Also there is another question the understanding of which will help find an answer to the above question, is what is barring it?

Is it a material restriction under the GST Laws or is it a restriction imposed by the GSTN?

Answering the second part calls for a technical disposition. Let us examine this now.

The restriction of use of ITC belonging to another state's taxes of SGCT/ CGST is for a reason. The above function can't be performed by business and it is the State function.

The Centre is the only agency recognized under GST to handle official transfer of funds both in normal course and as well as in the case of cross-utilization and on termination of ITC chain.

The official transfer of funds is nothing but fund settlement of taxes due to the states and Centre, arising out of usual tax collection made from the place of origin to the place of consumption as per the basic tenet of GST- the destination based consumption tax.

The second aspect arises from cross utilization of IGST towards CGST and SGST liabilities and vice versa. In the former case, the IGST account will be debited and the CGST and SGST accounts will be credited and in the latter case the reverse to ensure transfer of funds from origin state to consumption state.

The last aspect is concerning the termination of ITC chain in the case of B2C transactions where the taxes due to the state of consumption will be distributed based on the location principle of the consumers as there is no further scope of the ITC chain continuing.

As per Article 246 A(2)read with Article 269A, IGST collection and apportionment is the prerogative of the Centre and it has to be done in the manner specified under Article 269A(1) to (4) of the Constitution. Therefore, there is an inherent bar in permitting the cross-utilization by the business themselves of the tax credits of one state towards tax liabilities of another.

In the stated circumstance, the Centre alone has power to do the fund transfer and that is why there in an order of utilization prescribed that IGST credit must be first used for payment of IGST liability and then CGST and SGST.

These are certain working principles of the scheme under GST adumbrated in the 101st Constitutional Amendment Act, 2016 itself to avoid upsetting the Centre's applecart of National indirect tax revenue arising out of GST.

If the answer to the question of above cross-utilization is no, then what is the alternative to claim the credit for there should be parity in the claiming of the above credit if at all it is allowed.

Is it possible to procure all the Hotel related services of stay and food which comes these days as a package in most Hotels through an agent?

Can the agent procure other Hotel related services such as event admission/management and so on by charging IGST to the recipient inter-state, who is located in a state different from where he is procuring the above referred Services.

The answers to the above questions would be yes personally according to me for the following strong reason;

The services procured by the agent without acting as a pure agent as per the GST Law, will entail on him billing to his client on the gross amount charged without the question of any abatements towards the expenses at actuals though his own service is only agency service.

Being an inter-state transaction, ITC of IGST charged by the agent can very well be availed by the recipient company and utilized without the bar of cross-utilization coming into play.

There is also a possibility of some businesses having branches being able to register themselves as ISD and transfer the credit earned at one place to another subject to the provisions of ISD through a legitimate credit transfer.

Under the ISD scheme inter-state transactions enable CGST and SGST credits to be converted as IGST credit and in intra-state transactions IGST credits to be converted as CGST and SGST. This would enable the recipient of credit to discharge the tax liabilities with credit of taxes in such allowable form as required.

The last part of the discussion which has one question to answer though residual in nature, relates to reimbursement of travel and board and lodging expenses under GST.

In case of employees, they will be availing the subject services on behalf of the company and hence the expenses together with the GST will have to be charged to the company and company would of course defray the expenses and take the credit, if its intra-state credit.

But if it is an inter-state credit, then again it can't be availed though defrayed to the employees.

To the contrary, if the services are also availed by the employees on behalf of the company from an agent inter-state on the lines discussed above, the agent will be able to raise an Inter-state Invoice charging IGST and credit can be availed and cross-utilization is possible in the hands of the recipient.

In an intra-state context, there will be no need for any agent as the same state taxes can be availed by the recipient without any recourse to any agency window in his own right.

This is hoped to sum up the issue in its various ramifications known to us so far. If there are more dimensions to it as we go along, we may have to revisit the subject again.

(The author is Assistant Commissioner, GST, Chennai and the views expressed are strictly personal.)