JUNE 18, 2018

By Atul S Chhabra, FCA, Ex IRAS

ON Certainty as a Cannon of Taxation, Adam Smith said, "the tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the amount to be paid ought to be clear and plain to the contributor and to every other person." Clearly to anyone following GST Laws in India, this is a utopian wish, which to some extent, rightly cannot be expected in the first year of an "emerging" law. While Unjust Enrichment and Anti Profiteering are accepted doctrines in any Indirect Tax Law, some recent changes to Rules with retrospective effect have the effect of "unjust impoverishment" and one wonders where to go for "anti-impoverishment" provisions for a Sector coming under Inverted Rate Structure?

Background on Inverted Rate Structure

Every student of Law knows that Law is the "intent" of the legislature expressed in enacted laws- both State and Centre in the case of GST. Even prior to enactment of the GST Act, the Report of Joint Committee of Empowered State Finance Ministers on Refund Process had intended that while chances of accumulation of ITC might be minimal, in case it accumulates on accounted of Inverted Duty Structure i.e. GST on Output Supplies being less than GST on Input Supplies , the same may be refunded in Cash subject to due audits etc. It is pertinent to note that absolute amount of GST on Input Supplies was to be compared with GST on Output Supplies as per the recommendations. ITC accumulated on Capital goods was clearly recommended for Carry Forward only and not Cash refund. The Report also recommended for refund for Service Provider of accumulated ITC in case of partial reverse charge. This implied that Input Supplies was used in broader sense to cover both Input Goods and Input Services on similar footing in so far as the eligibility for Refund was concerned since with increasing share of Services in the economy, there is no basis to discriminate between Goods and Services on Revenue account.

Statutory Provisions

The Statutory provisions enshrined in section 54 were in line with those recommendations since Section 54(3) gave the right to claim refund of any unutilised "Input Tax Credit" at the end of any tax period.

Section 2(63) defines "Input Tax Credit" as credit of "Input Tax".

Section 2(62) defines "Input Tax" in relation to a registered person as Central Tax, State Tax, Integrated tax or Union Territory Tax charged on any supply of Goods or Services or both made to him and includes IGST charged on Imports and includes such taxes paid under Reverse Charge basis also.

Proviso to Section 54 also states that no refund of unutilised Input Tax Credit shall be allowed except in cases other than:

(i)……….

(ii) Where the credit has accumulated on account of rate of tax on Inputs being higher than the rate of tax on output supplies (other than NIL rated or fully exempt supplies) except supplies of goods or services or both as notified by the Government on the recommendation of the Council.

Rule 89(5) of the CGST Rules the computation machinery provision, as originally enacted prescribed the formulae for allocating the ITC between Inverted Rated Supply Turnover and Total Turnover. The formulae allocated the "Net ITC" in the turnover ratio. "Net ITC" was to have the same meaning as under sub-rule (4) implying "Input Tax Credit availed on Inputs and Input Services during the relevant period other than Input Tax credit availed for which Refund is claimed under sub-rules (4A) or (4B) or both.

Analysis of the Provisions

Conjoint reading of the Section and the Rules led to a "reasonable" interpretation that the "intent" of the legislature was that once the twin eligibility thresholds under Clause (ii) of the Proviso viz. Rate on Inputs being higher than rate on output supplies and not being specifically notified on the recommendations of the Council, the computation provision under Rule 89(5) kicks in and allows the difference between GST on Inputs and Input Services and GST on Output as the amount due for refund. This besides being in line with the recommendations of Joint Committee of Empowered State Finance Ministers on Refund Process was also in line with the substantive provision of Section 54(3) which mandates refund of " Unutilized Input Tax Credit" and not just refund of " Unutilised tax on Inputs".

Twist in the tale

While the Refund Process was slowly stabilising, Notification No. 21/2018-CT dated 18.04.2018 is issued amending the variable "Net ITC" Rule 89(5) to mean Input Tax Credit availed on Inputs during the relevant period (other than Input Tax credit availed for which Refund is claimed under sub-rules (4A) or (4B) or both.)

The amendment implied that the unutilized Input Tax Credit availed on Input Services will no longer be eligible for refund even if the Output Goods/Services attract a rate lower than the rate on the Input Services.

This amendment went against the basic tenet for allowing ITC in GST to remove cascading effect so that the taxes on Input Goods and Services do not form part of the Cost which forms part of the Tax base at the next stage of the Value addition. If a part of the ITC on the Revenue Expense side is not refunded, it will have to become part of the Cost which would form part of the Price of the Output and would further attract Tax.

Besides, this also put the ITC of Input Goods on a higher pedestal as compared to ITC of Input Services without any reasonable basis of such discrimination between a person who, for instance, outsources his work like Lump sum Contract for Maintenance (thus getting more ITC on Services) and a person who purchases the consumables himself (thus getting more ITC on Goods). Will this discrimination stand the test of classification to be reasonable and to have a nexus with the object of classification under Article 14 of the Constitution? Does this make the Good and Simple Tax more Simple?

Bouncer

While the Industry under Inverted Rate structure was coming to terms with the impact of the 18th April Notification, comes a bouncer vide Notification No. 26/2018-C.T dated 13th June, 2018 by which the amendment in Rule 89(5) vide Notification No. 21/2018- CT dated 18.04.2018 is retrospectively made effective from 1st July, 2017, the date of enactment of the GST Acts. While the power to give retrospective effect to Rules is there in Section 164(3) is explicitly there, how is the Industry supposed to retrospectively change its prices to include the non-refundable Services ITC as part of its Cost and charge its customers retrospectively?

Chapter 11 of the Manual of Parliamentary Procedures states that "Where rules etc. are to take effect retrospectively (in cases where parent Act or the Constitution empowers retrospective operation), an explanatory memorandum has to be added in the form of a note explaining that interests of no person shall be adversely affected"

Earlier, 2 nd Report (4 th Lok Sabha) of the Committee on Subordinate Legislation at para 10 recommended the following (reproduced in its 21 st Report, 2011)

"…. Normally all rules should be published before the date of their enforcement or they should be enforced from the date of their publication. The Ministries/Departments should take appropriate steps to ensure the publication of rules before they come into force. However, if in any particular case the rules have to be given retrospective effect in view of unavoidable circumstances , a clarification should be given either by way of an explanation in the rules or in the form of foot-note to the relevant rules to the effect that no one will be adversely affected as a result of retrospective effect being given to such rules"

In the Gazette Notification No. 397 published in Part II of the Extraordinary Gazette, incorporating the Notification No.26/2018-CT there is no such explanation. Clearly, such recommendations of the Standing Committee of our law makers are somewhat lost in the labyrinth. Surely, the Good and Simple Tax is proving to be quite a puzzle for those involved in Pricing of Products under Inverted Rate Structure in the quest for of "Anti Impoverishment" provisions on the lines of Anti Profiteering Provisions in the GST Law.

(The views expressed are strictly personal.)