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Burden of GST: who should bear?


DECEMBER 05, 2017

By Narendra Kumar Singhvi

WITH introduction of GST regime from July 1, 2017, most of the indirect taxes have been replaced with the Goods and Service Tax. To keep GST a good and simple tax, the Government is taking appropriate steps and have eased down the procedural requirements in the initial phase of its implementation. However, regular amendments to these requirements have kept the assesses busy with modifying their systems suitably to cope up with such amendments.

The introduction of such new law comes with increased possibility of litigation proceedings, not only between department and assesses, but also between parties to a transaction involving supply of goods/ services. This relates to the liability of a person to pay tax as to whether one or the other party to a contract for supply bears the burden of tax.

GST, like its predecessors Service Tax and VAT, has been conceived as an indirect tax, based on the principle of destination-based consumption. The taxable event attracting levy of GST is the supply of goods or services and thus, the levy of GST is not on the object, i.e. goods or services, but on the supply thereof. The burden of an indirect tax, as it is understood in economic sense, is to be borne by the consumer of the supply on which it is levied. However, whether such economic concepts are germane to the relevant legal provisions is a question, which needs deliberation.

As a general rule of law, be it Service Tax or VAT, the liability to pay tax is on the supplier, i.e. service provider/ seller. Section 68(1) of the Finance Act, 1994 provides for liability of payment of Service Tax on the service provider. Similarly, under VAT Acts, the liability to pay tax is on the seller. The liability to pay tax, as it exists in law, is on the supplier. However, as these taxes are economically considered as indirect taxes, disputes arise as to the person, who should bear the burden of tax. In other words, whether it is the supplier or the recipient, who should bear the burden of tax.

It may be noted that the liability to pay tax to credit of the government arises out of provisions of law and can never be shifted. As noted, it is the supplier, who is liable to pay tax to the government and such legal liability cannot be shifted by way of a contract. At this stage, the economic concept of these taxes being indirect taxes is completely irrelevant and thus the legal liability of the supplier to pay tax stands firm. In its recent decision in Union of India v. Bengal Shrachi Housing Development Limited - 2017-TIOL-414-SC-ST, the Supreme Court held that Service Tax may be an indirect tax in economic theory but that in given circumstances, it may not be passed on by the service provider to the service recipient would not make such tax any the less a Service Tax. This judgment has made the legal position explicit that the liability to pay tax to the government is in hands of the supplier only.

Thus, while the legal liability to pay taxes lies on the supplier, the parties to an agreement are free to fix the burden of tax amongst any one of them. The agreement may provide that the burden of tax will be borne by any one of the parties. Where, thus, the burden is to be borne by the recipient, the supplier may pay tax to the government to discharge its legal liability and pass on the burden thereof to the recipient. The determination of the question as to who will bear the burden of tax ultimately, thus, depends on the agreement of the parties.

The problem, however, arises where the agreement between parties does not provide for such clauses. Section 64A of the Sale of Goods Act, 1930 provides for such situations and entitles the seller to recover the tax amount from the buyer. The provisions of Section 64A are also subject to any contrary intention appearing from the agreement of the parties. The principles of Section 64A have been applied to disputes concerning Service Tax also in various High Court decisions. The provisions of Section 64A will apply with equal force to transaction of supply of goods under GST regime and such principles can be applied to transactions of supply of services also . The absence of such provisions in the GST Acts, however, is likely to result in unwanted litigation.

(The author is Principal Associate, Lakshmikumaran & Sridharan and the views expressed are strictly personal.)

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