AUGUST 07, 2018

By Shailesh Sheth, Advocate and founder - M/s. SPS LEGAL

"CHEERS, dear taxpayers! The spirit lifting forecasts have finally come true!" The forecasts released by the various 'taxperts' since the beginning of the month were unanimous in predicting that the 'barren GST land' would receive much needed 'relief showers' ranging from moderate to heavy to very heavy on or about 21 st July, 2018! The forecasts, however, also cautioned that certain areas may continue to face the 'dry spell' ! Nevertheless, the showers were expected to be mostly 'bountiful' covering major areas. Lending credence to these forecasts were the forty-six (46) proposed amendments to the Central Goods and Services Tax Act, 2017 ('CGST Act') released by the GST Council on 9th July, 2018 for the public debate, consultation and suggestions. Considering the contours and coverage of these proposed amendments, the taxpayers were justified in looking forward to a very 'wet monsoon' indeed!

Now, going by the recommendations and the decisions announced by the GST Council at it's 28th Meeting held on 21st July 2018 and later, effectuated by the various Notifications issued by the Central Government on 26th July, 2018, it is certainly 'raining reliefs' for the taxpayers! The forecasts, thus, initially appear to have 'hit the mark'!

This article provides an 'aerial survey' of the extent, nature and the impact of the 'downpour' as well as the continued problem of 'dry spell' in some areas.

A. Areas blessed with the heavy downpour:

The GST Council - the 'Lord Indra' of the 'GST regime'- has blessed certain areas of the barren GST land with 'heavy showers'! The nature and impact of the same are briefly discussed below:

I. Amendments recommended in the CGST Act and the allied enactments:

At the outset, it may be clarified that the Council had earlier issued the draft of 46 amendments proposed to be made in the CGST Act and invited the suggestions from the stakeholders. There are unconfirmed reports that the Council, at its meeting, has approved all the proposed amendments. However, the Press Release issued by the Ministry is non-committal on this and highlights only 17 amendments as recommended by the Council which, incidentally, are part of the 46 proposed amendments. One may therefore will have to wait for the Bill that may be moved during the monsoon session in the Lok Sabha to have an idea about the actual contours, contents and the scope of the proposed amendments. Here, certain significant amendments as recommended by the Council as highlighted in the Press Release are only discussed.

1. Composition dealers - "Enjoy the satisfactory rains!"

Recommendations:

a. The upper limit of turnover for opting for composition scheme is proposed to be raised from Rs. 1 crore to Rs. 1.50 crore. It is also proposed that the present limit of turnover may be raised on the recommendation of the Council.

b. It is proposed to allow the Composition Dealers to supply services (other than restaurant services), for upto a value not exceeding 10% of turnover in the preceding financial year or Rs. 5 lakhs, whichever is higher.

Comments:

Section 10 (1) of the CGST Act prescribed the annual eligibility turnover limit of Rs.50 lakhs for a taxpayer opting for the Composition Scheme. However,under the proviso to sub-section (1), the Government is empowered, on the recommendation of the Council, to increase the said limit to Rs. 1 crore. Vide Notification No. 8/2017-CT dated 27.06.2017, an increased eligibility limit of Rs. 75 lakhs (Rs. 50 lakhs for the specified 9 NE/Hilly States) was thereafter prescribed. Subsequently and pursuant to the recommendation made by the Council at its 22 nd Meeting held on 6th October, 2017, the eligibility limit was raised to Rs. 1 crore for all the States and Union Territories including the special category States of Jammu & Kashmir and Uttarakhand. For other Special Category States, this threshold was raised from Rs. 50 lakhs to Rs. 75 lakhs. [Not. No. 45/2017-CT and 46/2017-CT both dated 13.10.2017 refers].

Liberalizing the Scheme further, the Council, at its 23 rd Meeting held on 9th and 10th November, 2017, had made the following major recommendations:

- Uniform rate of tax of 1% under the Scheme for the manufacturers and traders;

- For traders, the turnover to be computed only for the supply of the taxable goods;

- Supply of services by a Composition taxpayer upto Rs. 5 lakhs per annum to be allowed by exempting the same;

- Annual turnover eligibility for the Composition Scheme to be increased to Rs. 2 crore and thereafter, eligibility for composition to be increased to Rs. 1.50 crore.

The recommendation relating to the uniform rate of 1% for the manufacturers and the traders was later implemented vide Not. No. 1/2018-CT dated 01.01.2018 amending Not. No. 8/2017-CT Ibid.

Simultaneously, Rule 3 of the CGST Rules, 2017 was amended w.e.f. 1st January, 2018 vide the CGST (Amendment) Rules, 2017 issued vide Not. No. 3/2018-CT dated 23.01.2018 to, inter alia, provide for the computation of turnover of only taxable supplies of goods for the traders under the scheme.

As can be seen, the above recommendations of the Council were implemented quite belatedly, that is, almost 1½ month after the Council Meeting! The other recommendations had to wait to be implemented as the same entailed the amendments in Section 10 of the CGST Act and could have been done only by the Parliament.

Now, after a long wait, the Council has taken up the task of completing the unfinished agenda. The Council has recommended the proposed amendments to Section 10 of the CGST Act so as to raise the eligibility limit to Rs. 1.50 crore and to allow the composition dealers to supply services (other than restaurant services) upto a value not exceeding 10% of turnover in the preceding financial year or Rs. 5 lakhs, whichever is higher.

The amendments proposed to Section 10 effectuate these recommendations of the Council. It is, however, interesting to note that the original recommendation of the Council envisaged the eligibility limit to be raised to maximum Rs. 2 crore and then to prescribe an operative lower limit of Rs. 1.50 crore as against the presently prescribed limit of Rs. 1 crore. However, the amendment proposed seeks to raise the maximum eligibility limit only to Rs. 1.50 crore as against Rs. 1 crore prescribed vide proviso to Section 10 (1) of the Act.

Equally interesting is to note that every taxpayer, irrespective of whether he is a manufacturer, restaurant or trader, is proposed to be allowed to supply services of a value not exceeding 10% of his turnover in the preceding financial year or, Rs. 5 lakhs, whichever is higher. This is a significant step taken by the Council and shall immensely benefit the small Composition taxpayers.

2. Unregistered suppliers and RCM - "Floodgate closed!"

Recommendations:

The levy of GST under RCM on receipt of supplies from the unregistered suppliers is proposed to be made applicable to only specified goods in case of certain notified classes of registered person, on the recommendations of the Council.

Comments:

The much-trumpeted provisions of Section 9 (4) of the Act relating to the levy of GST under RCM in case of the supplies from the unregistered persons are presently under suspension till 30th September, 2018 (Not. No. 8/2017-CT (Rate) dated 28.06.2017 as last amended vide Not. No. 12/2018-CT (Rate) dated 29.06.2018 refers).

It is now proposed to omit sub-section (4) of Section 9 of the Act and insert a new one. For the ease of reference, the amendment as proposed and the rationale as explained behind it is reproduced below :

[Emphasis provided]

The Council has recommended a very restricted implementation of this measure. The Press Release issued by the MOF gives an impression that the levy under RCM in case of supplies from the unregistered persons may apply to only specified goods in case of specified class of persons, on the recommendation of the Council. In other words, the levy in this manner is not proposed to be made applicable in case of supplies of services from the unregistered persons.

However, from the careful reading of the sub-section (4) proposed to be substituted/inserted in Section 9, it will be observed that it covers the supplies of goods or services or both received by a specified class of registered persons from an unregistered person. There is, therefore, an apparent dichotomy between the proposed Section 9 (4) and the contents of the Press Release. What is also shocking is the fact that the 'rationale' behind the proposed amendment as explained is on the similar lines as Press Release!

In other words, while the 'rationale' and 'press release' are in tandem, the same are at complete variance with the proposed sub-section (4) of Section 9 of the Act!

This is, indeed, quite unfortunate! This particular provision has been one of the most dreaded provisions of the Act and the Council is literally compelled to put it under suspension. Ideally, this provision should be 'buried for good'! But, if this is not possible or is considered inadvisable for any reason, the least that can be expected is a clarity about the nature and coverage of the proposed provision. It is hoped that the final version of the proposed amendment will reflect the recommendation of the Council!

3. Scope of 'No supply' under Schedule III widened - 'Disaster averted'…!:

Recommendations:

The following transactions are proposed to be treated as 'No supply' (no tax payable) under Schedule III:

a. supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India;

b. supply of warehoused goods to any person before clearance for home consumption; and

c. supply of goods in case of high seas sales.

The proposed amendments to the Act released by the Council includes the amendments proposed to Schedule III on the above lines.

Comments:

These are, indeed, pragmatic and much-needed recommendations of the Council. The issue of levy of GST in all the aforesaid three situations has remained highly debatable and disputed one. In fact, it is a moot question whether presently, the transactions involving movement of goods caused by a registered person from one non-taxable territory to another non-taxable territory can be subjected to levy of GST in terms of any provisions of the IGST Act, 2017 at all!

Likewise, the double taxation in case of supply of goods as high seas sale and sale of warehoused goods, before being cleared for home consumption, is also absolutely unjustified and ill-conceived besides lacking the sanctity in law. One may feel amused to note that the 'rationale/remarks' relating to the proposed amendment nonchalantly admits the 'double taxation' in case of such transactions.

Incidentally, the Gujarat AAR has, in the case of Pon Pure Chemical India Pvt. Ltd ., vide its ruling dated 30.10.2017 - 2018-TIOL-52-AAR-GST rejected the application of the Applicant on the issue of the taxability of 'high seas sale' citing 'lack of jurisdiction' as a reason.

On the other hand, on the same issue, the Maharashtra AAR , in the case of BASF India Ltd., has, vide its ruling dated 21.05.2018 - 2018-TIOL-82-AAR-GST, held as under:

- IGST is not leviable on high seas sale relying on S.7(2) and S.5(1) of the CGST Act read with Circular No. 33/2017-Cus dated 01.08.2017 issued by the CBEC;

- ITC is required to be reversed as such sale held as 'non-taxable supply' falls within the scope of 'exempt supply' as defined vide S.2(47) of the CGST Act.

Whereas, such controversial and at times, conflicting rulings of the different Benches of the AAR on the same issue are being witnessed more too often, the proposed amendments will, mercifully set at rest, at least, one controversy! Moreover, since all the three issues are susceptible to legal challenge, the timely intervention by the Council will avert any further disaster!

While one may have to await the final text of the proposed amendments, what is imperative is to extend the benefit of these amendments retrospectively. These issues are, at present, already mired into litigation and having acknowledged the legal position, the Council will do well to recommend retrospective effect to the proposed amendments so as to put an end to the raging controversies!

4. 'Exempt supply' to not include certain 'No supplies' - ITC remains undisturbed - "Umbrella protection provided!"

Recommendations:

It is recommended that the value of exempt supply for the purposes of Section 17(3) of the Act shall not include the activities or transactions, other than the specified activities or transactions, covered by Schedule III.

Comments:

Aside from widening the scope of Schedule III as above, it has also been proposed to provide that except the specified activities or transactions covered by Schedule III, other activities or transactions (including the above proposed-to-be-included 3 types of transactions) declared as 'no supply' under Schedule III shall not be taken into consideration while computing the value of exempt supply in terms of Section 17 (3) of the Act. An amendment to this effect to Section 17(3) is proposed on these lines in terms of which the transactions involving sale of land and sale of building (other than under-construction) which are covered by Schedule III shall only be considered and other transactions or activities covered by Schedule III shall not be taken into account.

This is a welcome gesture and will also nullify the adverse impact of the ruling of the AAR in BASF's case (supra). At the same time, the inclusion of 'sale of land', not to speak of sale of completed building, for the purpose of computation of the value of exempt supply so as to arrive at the 'blocked credit' defies any logic!

(To be continued…)