OCTOBER 31, 2017

By Jigar Shah, Partner & Ambarish Pandey, Sr. Associate, L&S Ahmedabad

THE purpose of this write-up is to bring to the notice of the readers the disparity in provisions relating to time of supply and payment of GST in case of domestic transaction and import of goods transaction.

Each tax law will have taxable event and occurrence of which there would be liability to pay tax. However, as the levy and collection of tax are two different function, liability to pays tax may get deferred depending up on the statutory provisions.

For example, the levy in case of service tax was rendition of service. However, by virtue of Point of Taxation Rules, 2011 and deeming fiction used in it, even though the consideration as advance was received (without rendition of services), there was a liability to pay service tax.

The reference to service tax law given in above paragraph is of somewhat significance. The reason behind it is that if we compare the central excise duty wherein levy was on event of manufacture of goods but the collection of duty was deferred to succeeding month. There was no such deeming fiction or point of taxation which would make liable the assesse to pay central excise duty if the manufacturer simply receives any payment in advance for future supply of manufactured goods. Similarly, there was no provision under any local VAT law which would make the supplier of goods liable to pay local VAT on the advance received.

Under the current GST law, Section 12 and Section 13 of CGST Act, 2017 determine the time of supply for the goods and services respectively. For ease of reference, both the Sections are reproduced below:

"12. Time of supply of goods: (1) The liability to pay tax on goods shall arise at the time of supply, as determined in accordance with the provisions of this section. (2) The time of supply of goods shall be the earlier of the following dates, namely:- (a) the date of issue of invoice by the supplier or the last date on which he is required , under sub-section (1) of section 31 , to issue the invoice with respect to the supply; or (b) the date on which the supplier receives the payment with respect to the supply:

…..

Explanation 1: For the purposes of clauses (a) and (b), "supply" shall be deemed to have been made to the extent it is covered by the invoice or, as the case may be , the payment.

Explanation 2: For the purposes of clause (b), "the date on which the supplier receives the payment" shall be the date on which the payment is entered in his books of account or the date on which the payment is credited to his bank account, whichever is earlier."

….

13: Time of supply of services: (1) The liability to pay tax on services shall arise at the time of supply, as determined in accordance with the provisions of this section. (2) The time of supply of services shall be the earliest of the following dates, namely:- (a) the date of issue of invoice by the supplier, if the invoice is issued within the period prescribed under sub-section (2) of section 31 or the date of receipt of payment, whichever is earlier; or (b) the date of provision of service, if the invoice is not issued within the period prescribed under sub-section (2) of section 31 or the date of receipt of payment, whichever is earlier; or (c) the date on which the recipient shows the receipt of services in his books of account, in a case where the provisions of clause (a) of clause (b) do not apply:

….
Explanation: For the purposes of clauses (a) and (b)- (i) the supply shall be deemed to have been made to the extent it is covered by the invoice or, as the case may be, the payment ; (ii) ‘the date of receipt of payment' shall be the date on which the payment is entered in the books of account of the supplier or the date on which the payment is credited to his bank account, whichever is earlier.

…."

A cursory look at the provisions extracted above would make it clear that deeming fiction is used to determine time of supply at the time of receipt of "payment" by the supplier of goods or services. It is well settled principle of law that the deeming fiction can cover the obvious, the uncertain and the impossible.

Since the GST returns are to be filed for the tax period [defined in Section 2(106) of CGST Act, 2017] and on harmonious reading of Section 37 (Furnishing the Returns) and Section 49(8) [dealing with payment of GST] of the CGST Act, 2017 the supplier of goods or services who has received the advance for future supply would also liable to pay GST on such advance amount.

However, the scheme is not the same in case of procurement of goods by way of imports. Before we move on to examine this aspect further, it is pertinent to reproduce few provisions of the Customs Act, 1962 and Customs Tariff Act, 1975.

Customs Act, 1962:

Section 2 (25): "imported goods" means any goods brought into India from a place outside India but does not include goods which have been cleared for home consumption;

Section 12: 1) Except as other provided in this Act, or any other law for the time being in force, duties of customs shall be levied at such rates as may be specified under the Customs Tariff Act, 1975 or any other law for the time being in force, on goods imported into, or exported from, India.

(Emphasis supplied)

Customs Tariff Act, 1975

Section 3 (1): Any article which is imported into India shall, in addition, be liable to a duty (hereafter in this section referred to as the additional duty) equal to the excise duty for the time being leviable on a like article if produced or manufactured in India and if such excise duty on a like article is leviable at any percentage of its value, the additional duty to which the imported article shall be so liable shall be calculated at that percentage of the value of the imported article.

In case of any supply of goods where goods are imported into the territory of India, provisions of Integrated Goods & Services Tax Act, 2017 ("IGST Act") shall be applicable.

Now, let's move to certain provisions of IGST Act, 2017. By virtue of Section 7 of IGST Act, 2017 (dealing with determination of supply whether interstate) and more particularly sub section (2) of Section 7 of IGST Act, 2017 stipulates that supply of goods imported in to territory of India shall be treated as a supply of goods in the course of inter state trade or commerce. Similarly, proviso to Section 8(1) of IGST Act, 2017 states that goods imported in to territory of India shall not be treated as intra state supply.

Section 5 of the IGST Act, 2017 is charging section for levy of IGST. As per the proviso to Section 5(1) of IGST Act, 2017 the levy of IGST on imported goods shall arise at the point when duties of customs are levied under Section 12 of the Customs Act, 1962. Section 12 of the Customs Act, 1962 prescribes that customs duty shall be paid on imported goods at the time of import of goods. In other words, IGST on imported goods shall be paid only at the time of import of goods as per the Customs Act, 1962 and at no other point.

Section 12 of Customs Act states that the duties shall be levied at the time when the goods are imported into the territory of India. This implies that unless there is physical movement of goods into the territory of India, no tax under the Customs Act or under the IGST Act shall be levied and collected. In other words, the incidence of tax shall arise at the time of bringing the goods into India i.e. physical movement of goods into the territory of India.

The purpose of this article is to bring to the notice of readers that generally the advance for future supply of goods or services takes place in case of domestic transactions as well as import of goods or services.

As per the provisions of CGST Act, 2017 as discussed above, the time of supply for consideration received in advance would also entail the liability to pay GST in case of domestic transactions. However, the same situation does not prevail in case the advance is paid for future supply of goods in case of import of goods.

Therefore, if a comparison is drawn between the schemes under two enactments, it is clear that there is a disparity in treatment of goods procured domestically and goods procured by way of imports. In the opinion of the authors, the situation is creating disparity in discharge of GST liability in case of domestic transaction and transactions of import of goods.

The incidence of GST, in respect of domestically procured goods shall occur at the time of receipt of advance, however, for the goods imported, the incidence of tax shall occur at the time of physical movement of goods into the territory of India. This is resulting in an unfair treatment of the persons who procure goods domestically and putting the procurers of goods by way of import at a higher footing. This is more so in view of the fact that in most commercial contracts for supply of goods these days, there is a clause for payment of advance by the recipient of goods to the supplier of goods. The extent of advance payment can vary from contract to contract depending upon the nature of supply, mutual understanding and negotiation between the parties. If the legislature imposes tax on advance payments, people would be dissuaded to procure goods domestically and would rather, prefer to import the same. This would severely hit the object of "Make in India".

It is contended that this scheme is prejudicial to those who procure goods domestically without having any rational basis for such a differential treatment, which is violative of Article 14 of the Constitution of India. Article 14 stipulates that similarly situated persons shall be accorded similar treatment by law [AIR India vs. Nergesh Mirza, (1981) 4 SCC 335]. It forbids classification without any rational basis and substantial connection with the object sought to be achieved [R.K. Garg vs. Union of India,- 2002-TIOL-1706-SC-IT-CB. In other words, the classification must not be arbitrary and/or evasive. Briefly put, following are the concomitants to determine whether the law is arbitrary and/or discriminatory [State of West Bengal vs. Anwar Ali Sarkar, [1952] 1 SCR 284] :

i. Whether the classification is founded on any intelligible differentia?

ii. Whether the basis for differential treatment has any rational nexus with the object sought to be achieved?

It is submitted that in the aforesaid situation, the class of persons i.e. domestic procurers and import procurers, remain the same. Both are the procurers situated within the territory of India. There is absence of any special circumstances. Therefore, it is submitted that such differentiation by the Government is arbitrary and therefore, negates the equality [Ajay Hasia vs. Khalid MujibSehravardi, (1981) 1 SCC 722].

Accordingly, it needs to be challenged before the Courts of Law.

After mint:

Recently, the Central Government has issued Notification No. 40/2017-Central Tax dated 13.10.2017 wherein a partial relief from payment of GST on advances is given to those suppliers of goods whose turnover is not exceeding Rs. 1.5 Crore or is not likely to exceed Rs. 1.5 Crore.

(The views expressed are strictly personal.)