FEBRUARY 12, 2018

By Rohini Mukherjee

WITH a view to provide relief to taxpayers selling old and used motor vehicles, the GST Council in its 25th meeting held on 18.01.2018 recommended a reduction in the rate of GST on used motor vehicles. This recommendation was given effect to by issuance of Notification No. 8/2018 - Central Tax (Rate) dated 25.01.2018 which prescribes a CGST rate of 9% on old and used motor vehicles. This exemption is subject to no input tax credit being availed on these motor vehicles.

Additionally, the Notification specifies that the tax rate should be computed on the value that represents margin of the supplier on supply of such goods to be arrived at as under:

A. In case where a registered person who has claimed depreciation under section 32 of the Income-Tax Act,1961: Difference between the consideration received for supply of such goods and the depreciated value of such goods on the date of supply and where the margin of such supply is negative, it shall be ignored; and

B. In other cases: Difference between the selling price and the purchase price and where such margin is negative, it shall be ignored.

It is possible that the margin arrived at in the above manner is in the negative. In such a case, the value is to be ignored thereby implying that such value would be nil.

For example:

Sale price of motor vehicle: Rs.80,000/-

Depreciated value as per Section 32 of Income Tax Act, 1961: Rs.1,00,000/-

Margin: - Rs.20,000/- (in the negative)

In line with the Notification, as the margin is in the negative, the same is to be ignored.

Accordingly, in effect, the value would be nil.

While it has been established that there would be cases where the effective rate of GST becomes nil, a connected issue is whether such a supply as in the illustration above would qualify as an "exempt supply" under GST law.This is relevant for examination as a natural consequence of the supply qualifying as an exempt supply would be that the input tax credit attributable to such supply would not be available as mandated under Section 17(2) of the CGST Act, 2017.

"Exempt supply" has been defined under the CGST Act, 2017 inter alia to mean a supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under Section 11.

A perusal of the Notification indicates that it has been issued in exercise of the powers under Section 11. The Notification states that the exemption is from so much tax as specified in Schedule IV of Notification No. 1/2017 -Central Tax (Rate) [basic tariff notification] as is in excess of the amount calculated at the rate specified in the Table in the Notification on the value that represent margin of the supplier on supply of such goods.

The above implies that the Notification exempts tax in excess of the rate specified in the Notification computed on the value which is the margin. The manner of computation of the margin is prescribed in the Notification. In the illustration discussed above, in effect, the Notification exempts the motor vehicle from the whole of the CGST. Accordingly, the whole of the CGST is exempt. If this line of interpretation is adopted the supply would qualify as an exempt supply and accordingly, warrant restriction on input tax credit to the extent attributable to such supply.

As an alternative argument, it is possible to contend that it is only by virtue of the value becoming nil that the tax is in effect nil and it is not a case that the Notification is specifying the rate of CGST as nil.

However, such a line of interpretation may be prone to litigation and would invite scrutiny from authorities.

There would be categories of credits that would be common to the business as a whole including this exempted supply in question. Examples of such credit would be services as audit service and legal service. In all such cases, the input tax credit to the extent attributable to this exempted credit category is restricted. There may be several instances where this is the only exempted supply made by the taxpayer.

The restriction of input tax credit results in increased compliance at the end of taxpayers of reversing the credit attributable to this exempt supply. This category of supply (sale of old and used motor vehicles) is commonplace for any business and is likely to exist in most of the businesses. Complying with the requirement of reversal in such a case will result in significant compliance at the end of taxpayers. The government may consider making suitable amendment in the law to exclude the credit attributable to this category of exempted service for the ease of doing business. Such an amendment can be on the same lines as the recent amendment in the Central Goods and Services Tax Rules, 2017 by notification 03/2018-CT dated 23.01.2018 clarifying that the aggregate value of exempt supplies shall not include the value of deposits, loans or advances on which interest or discount is earned.

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