FEBRUARY 23, 2018

By Akella A S Prakasa Rao, B.E.(Hons), LLB

THIS article is an attempt to highlight some of the issues being faced by the industry, which need to be taken on priority by the GST council in the coming meeting.

1. Duty paid challan is not a document recognized under GST for availing ITC. This is the reason that in case of reverse charge payment, there is a need to raise a self-invoice to pay GST, so that the self- invoice is the reference document, which can be uploaded as and when the GSTR-2 will be implemented. However, in the current scenario, the industry needs clarification on the following issues:

a. When the assessment were ordered provisional for imports, the assesse will pay the import duties on provisional basis and avails the input credit of IGST, if applicable by referring to the Bill of entry filed. However, on finalization of the assessments, the differential duty is paid based on challan only. The reference documents continues to be the same Bill of Entry filed at the time of provisional assessment. Now how to avail the ITC of the IGST portion of the differential tax paid on finalization. Will the GSTN recognise the same BoE as there is no way the challan can be referred to in GSTN portal for availing the ITC as challan is not recognized as one of the documents for availing ITC.

b. The same above controversy re-surfaces in a case, where the import is made availing any of the end use based exemption notifications like import for UN sponsored programmes, Public Funded Research Institutes etc. However, subsequently the importer is unable to fulfil the conditions imposed thereon and decides to divert the imported goods for other purposes by paying the import duties with applicable taxes and interest thereon. Such payments will be done based on challan by drawing reference to the same Bill of Entry, which was already referred to earlier at the time of import using the exemption notification. Nevertheless, how to avail the ITC of the IGST paid at the time of such diversion?

c. Which duties needs to be paid, if the SVB proceedings initiated in case of related party imports effected in pre-GST ear, result in payment of differential taxes post GST? If any differential duties are paid at the finalization of provisional assessments ordered under SVB by way of challan, how to avail the ITC thereon?

A possible solution for all the above issues could be to include duty paid challan as a notified document for availing the ITC under GST.

2. In certain cases, the overseas customer on receipt rejects the good son quality reasons and the goods are to be re-imported. But on export of the goods, the export incentives claimed during the pre-GST era. Customs is right in asking for reversal of all export incentives availed at the time of export. However, how to make such payments post-GST will be an issue for industry. The reason being if the assesse pays the export incentives like CVD, SAD with interest as these are the benefits availed as export incentive and then he will not be able to avail the ITC on such payment post-GST. In some cases, Customs are allowing the re-import treating them as fresh import on payment of BCD+IGST, if the IGST payable results in higher revenues for them or citing ICEGATE is not accepting payment of erstwhile taxes. Industry needs clarity in all such cases, what should be the correct way in such cases, as CAG should not rake up this issue after some years.

3. When an assesse in DTA bills his goods to a customer in India, but ships the goods directly to the overseas party on the instructions of his Indian customer, what would be the treatment of GST is leading to disputes. Ideally, in this case, if merchant export route is followed then the assesse would be charging the Indian customer with concessional rate of 0.1% of GST (IGST if the transaction is inter-state and 0.05% of CGST +0.05% of SGST in case of intra-state sale) and the goods are directly shipped to the overseas customer of the Indian customer. But for some business reasons, such merchant export option is not followed. In such cases, the assesse may have to charge the full rate of IGST or CGST+SGST to the billing customer in India and would ship the goods to the overseas customer. Subsequently the Indian customer has to raise an export invoice on his overseas customer to complete the transaction as per the Bill to Ship to model. The sale by the assesse is not export for the reason that he is not paid in forex, but gets paid only in Indian Rupees. No export incentive is claimable by him as no forex is accruing to him. However, it may be helpful solution in case he has unutilized ITC, which he needs to liquidate as he can charge full GST instead of concessional GST of 0.1% if he follows merchant export method.

4. In the same above example, if the assesse is an SEZ unit, SEZ unit can bill a customer in DTA, export the goods directly to overseas customer of the DTA unit, and claim the same as export in the hands of SEZ. This is permissible under SEZ law. However, in this case also, one can follow the merchant export option by charging concessional IGST on the Indian customer and ship directly to the overseas customer. Thereby we can clearly see that the DTA customer is having clear disadvantage in all such cases, when compared to an assess in SEZ. Does this lead to any legal controversy in future is something to watch.

5. Most of the times, the export invoice is generated and the goods will be delivered at port of shipment. But due to some practical issues, the export will take place with some delay. Now for claiming the IGST paid on exports as refund, the IGST shown in the export invoice and the actual IGST paid at the time of shipping bill will not be the same due to exchange fluctuation. This is resulting in delay in the processing of IGST refunds.

6. GST is being touted as one tax one nation, but the implementation is not holding that spirit. Different state governments are prescribing different dates for implementation of e-way bill provisions in their respective jurisdictions in case of intra-state and inter-state. This leads to lot of practical issues. Some of the issues are as under:

a. If in the supplying state e-way bill provisions are notified and in the receiving state they are not notified, then whether to issue the e-way bill? The answer would be yes, as the supplier has to raise the e-way bill along with invoice.

b. But in the same example, if the situation is that the supplying state did not implement, but the receiving state has already implemented, in such a scenario the receiver has to raise the e-way bill in his state as the supplier will not do.

c. If both the states have implemented, the local authorities in the receiving state are insisting that the e-way bill in the receiving state is also necessary even though the goods are accompanied by the e-way bill from the originating state.

d. If the e-way bill provisions are not implemented in both supplying/receiving state, then the in-transit state authorities are insisting that the goods should accompany some e-way as their state has already implemented the provisions.

In order to set these doubts at rest, a clarification may be issued that only one e-way bill is sufficient in case of supply and either the consignor or consignee or transporter can generate the same provided either the receiving or the supplying state has notified the e-way bill provisions in their respective state.

7. Clarity on the employee payments in relation to catering services, transport services, crèche service etc, is needed, wherein many organization charge a nominal sum from the employees to provide such services. The clarification needs to be given with retrospective effect or else, it should be confirmed that the intention of the government is to charge GST on such recoveries. The issue is if such expenses are to be taxed under GST, since the employer and employee being related parties, GST needs to be charged on the open market value and not on the nominal sums collected. Earlier it has been clarified that those benefits, which are subject to income tax under the head salaries are not to be taxed under GST. However, this is not adequate to cover all cases of such benefits like rent free accommodation, garden allowance, company lease car, newspaper allowance, telephone expenses reimbursement, fuel reimbursement, pick up and drop facility, canteen facility etc.

8. The controversy surrounding the in-bond sale is not settled even after the recent proposed amendment in budget under Customs Act, 1962 as Sec 7(2) of IGST Act remains unaltered. Trade is not ready to invite issues later during the audit and hence insist that they would like to issue IGST invoice for sale of in-bond goods as ITC is readily available though it may result in temporary cash flow issues.

9. The manufacturer's warranty is always factored in the cost of goods sold and appropriate taxes are paid thereon. At the time of warranty services, the customer need not pay any further consideration. The goods to be replaced under warranty can also be issued based on delivery challan as not amounting to taxable supply. But the trade does not want the OEMs to supply them the spares replaced under manufacturer's warranty, but they prefer to be compensated with cash for such replacements done from their duty paid stock. The reason for such practice in the field is that change of model, slow moving parts etc. But under GST, there are issues, to continue with such practices. The details are as under:

a. If the parts are replaced at the time of warranty services out of the duty paid stock by the dealer, the dealer may not be charging the customer but may charge back on the OEM. In such a scenario, as per the Supreme Court decision in the settled case law in the matter of Md. Ekram Khan and sons Vs Commissioner of Trade Tax, UP (2004) 136 STC 515, the transaction may need to be subjected to GST as there is transfer of goods from the servicing dealer to the customer and receipt of consideration from the OEM to the servicing dealer. But there is no clarity whether the erstwhile judgment will hold good in GST also.

b. In addition, when the servicing dealer is replacing the worn out part under warranty from his duty paid stock, since he is not recovering any consideration from the customer, he may have to forego the ITC availed on his duty paid stock as it is a free replacement. If the OEM is replenishing the servicing dealer for the part replacement done at his end under warranty, the OEM may have to forego the ITC on such replenishment, as there is no consideration paid by the servicing dealer to the OEM.

c. If the extended warranty is charged as a separate line item at the time of sale, it should be subjected to GST under service head. In such a case, if any parts are replaced as part of the extended warranty service, the treatment of such parts will also be subjected to issues as discussed above.

d. If the extended service is also forming part of the sale consideration of the product at the time of initial sale, then it has to be treated as composite contract and needs to be subjected to GST as such extended warranty is always optional and not naturally bundled with the sale of goods.

10. There are multiplicity of returns to befiled under GST. Instead, the authorities are contemplating to bring in one single return to take care of all compliances. A suggestion in this regard is to enable GSTN portal for raising of invoice on the portal by all assesses. The advantages are as under:

a. The invoicing format will be uniform across all industries reaffirming the concept one tax and one nation under GST.

b. There will be no classification disputes as the tariff heading number will be auto-generated by the portal from the Masters to be maintained at their end. For inclusion of the trade names of the goods, Artificial Intelligence can be roped in and the system will learn on usage by assesses.

c. There will be no issues with regard to place of provision, as the system can determine the GST applicable - whether it be IGST or CGST+SGST. Inter-state and intra-state disputes can be avoided.

d. There is no need to file GSTR-1 return of sales.

e. There is no need to file GSTR-2 return of purchases.

f. There is no need of matching the invoices, as the GSTN will do the matching.

g. The e-Way bill also can be auto-generated once the assesse decides to move the goods and identifies his transport mode.

h. The number of invoices generated in the country under GST is less than the number of e-way bills that need to be generated once the provisions are notified across India. This way the load on the GSTN can reduce.

The above suggestion can be implemented in phases also. To start with the assessee may be asked to furnish his classification number and over a period of time, the trade names will get consolidated in the GSTN and the system can suggest the alternatives to the assesee to choose from. Similarly the GST applicable also can be done in phased manner. A step in this direction will certainly be helpful in achieving the twin objectives of one single return and matching of credits.

(The author is currently working with a leading biopharmaceutical company. The views in the article are author's personal and do not reflect the views of the organization he is working for.)