Swachh Bharat Abhiyaan - Garbage Compactors treated as luxury goods under GST - An irony
JANUARY 08, 2018
By S Narayanan, Advocate
I Applicability of GST on the Ethyl Alcohol viz. ENA/ Rectified Spirit
In GST, Notification No. 1/2017-CT (Rate) dt. 28.6.2017 refers at Srl. No. 25 - HS code as 2207 and giving description as "Ethyl alcohol and other spirits, denatured, of any strength" at Schedule - I attracting 2.5 % CGST (Total of 5 %).
The 101st constitutional amendment 2016 reads as -
i) 12A) "goods and services tax" means any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption;' and
ii) In the List II - State List, the substitution of for entry 54 refers as "Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption". (copy enclosed in Annexure - II )
Despite the said changes in Central Excise Tariff since 1.3.2005 the Ethyl Alcohol viz. ENA/ RS was a matter of subject levy of Central Excise covered by exemption and was never a matter of State subject levy at any point of time all over India and it is rightly so, because the said product is not a liquor for human consumption.
State Government of Maharashtra have issued Notification dated 24.8.2007 in which it has been stated that "Undenatured ethyl alcohol of any alcoholic strength (including neutral and extra neutral alcohol) when removed for use in production of alcoholic liquors for human consumption" attracts 20 %.
When the amended List II - State List, by substitution of entry 54 only refers to "alcoholic liquor for human consumption", which means that "potable alcohol which is ready for consumption is only covered by State List and that when Ethyl Alcohol is required to be converted in to "potable alcohol", such Ethyl Alcohol before conversion, remain a subject matter of levy under GST. The clarification is required to be provided by the Government in this regard so that trade at large is not affected.
II Applicability of GST on Special Purpose Vehicle viz,. Garbage Compactor supplied to Municipality - HS code - 8705
There is an industry segment located in Pune and other areas who are engaged in Manufacturing of Mechanized Machines integrated to Chassis for Collection & Transportation of Garbage, Sewage, Road Sweeping (which are called as "Special purpose vehicle" falling under Chapter Heading 8705) and Major Customers for them are Municipal Corporations all over India so that the key functions of garbage collection and road sweeping can be carried out which has been enshrined as duties and responsibilities entrusted under Article 243W of Constitution. Ironically, the said product falling under HS code 8705 as Special purpose vehicle attracts highest rate of tax in GST at 28 %, as luxury goods
Under Central Excise Regime such Garbage Compactors was fully exempted from Payment of Central Excise Duty for so many years vide Notification No. 6/2006 CE dt. 1.3.2006 as amended at (Srl No.283), subject to the condition that no Cenvat Credit is availed, which exemption was historically afforded for years i.e from 1986 till 30.6.2017.
Post GST with effect from 1st July 2017, there appears to be an unintended omission on the part of GST Council and the legislature, in not affording the said exemption at NIL rate for such "Special Purpose Vehicles" and it attracts highest slab of 28% GST, which is totally detrimental to the interest of said Industrial sector supplying to Municipalities, who is actively supporting the twin cause of the Indian Government "Swachh Bharat mission" and "Make in India".
Hence, it this aspect that desires due consideration and correction to be made by GST Council and in the form of legislation to prescribe NIL rate of tax in GST.
III The scope of "pure services" under Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017 for services rendered to Municipalities for carrying the function on their behalf what is entrusted under Article 243 W of Constitution.
The Municipal Corporations float the tender for providing Services for Operation & Maintenance of Machines for certain given period using their own Machines and the operation of machine viz Garbage Compactor, Road seeping machine etc.,. The key and predominant job in the said contract awarded, is to carry out key functions of garbage collection and road sweeping. In the said process incidental activity of maintenance of such machines becomes integral part of the contract, for which use of consumables and spare parts becomes inevitable, for the contractor who is awarded such contract which is called as "Operation and maintenance contract".
Post GST with effect from 1 st July 2017, the Services is covered under Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017 and the Government has taken due care to afford exemption at NIL rate for "Pure Services" for such activities carried out on behalf of Municipalities under Article 243 W of Constitution, as per Serial No. 3 - (Chapter 99).
But the said notification the word "Pure Services" excludes "Works Contract Services or other Composite Supplies involving supply of any goods". As the use of consumables and spares are inevitable for rendering services to the Municipalities for function on their behalf what is entrusted under Article 243 W of Constitution the said exemption deserve omission of words "other Composite Supplies involving supply of any goods".
It seems there appears to be an unintended omission on the part of GST Council and the legislature in not affording the said exemption to Operation & Maintenance and maintenance of machines which are meant for key functions of garbage collection and road sweeping and hence there is a dire need to exclude from the exception the words" other Composite Supplies involving supply of any goods "in Srl. No.3 of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017 or else no one can claim exemption and the tax gets suffered on the said activity carried out on behalf of Municipalities under Article 243 W of Constitution. This is also detrimental to the interest of the Municipalities as well as the Industry, who are actively supporting the twin cause of Indian Government "Swachh Bharat Mission and Make in India"
IV On the aspect of classification of parts and final product in particular HS code 82 84/85/87/86 /90 and there can be other HS codes as well.
It is noticed that in many a cases, the parts and final product have been so classified in such Schedule of Notification No. 1/2017- CT (rate) dated 28.6.2017 that the parts attracts higher rate of duty of 28 % whereas final product attract 18 %/12 %.
This gives raise to imbalance in the ITC credit getting accumulated in the books and the same cannot be loaded in the sale price of the product as well, which virtually becomes cost ineffective and becomes an uphill task for the persons carrying out works contract activity in a particular State where he ends up in having accumulated balance of ITC credit which will lapse.
As the said incongruence happens in the business of "B to B" transactions where the Government intention is to keep revenue neutral situation to mitigate the cascading effect of taxes, it is suggested that such imbalance can be eliminated by adding the words "parts and accessories thereof" in the rates prescribed under all HS codes against main goods, so that automatically the parts will attract same tax as that of the main goods, which will, to a large extent eliminate unwarranted litigation on classification and rates.