AUGUST 08, 2018

By Shailesh Sheth, Advocate

II. Reduction of GST Rates:

One of the most important and much-talked-about items on the large agenda of the Council was the rationalization of tax rates on many goods and services. The issue was grabbing the media headlines months before the Council's meeting - its first in the second year of GST - and the expectations were building up. The Council, assisted by the Fitment Committee, had, thus, a delicate task on hand of balancing the revenue considerations and meeting the taxpayers' heightened expectations! One, therefore, must give credit to the 'benevolent' Council for its largely 'bold and beautiful' recommendations on this sensitive issue!

1. Reduction in GST Rates from 28% to 18% - "It rains 'cats and dogs'!"

The Council has rationalized the highest tax rate bracket of 28% further by drastically pruning the list of items covered under this bracket. Some of these nearly 90 items which have received this 'shower' of major 'rate-cut' include Refrigerators, freezers, water coolers, milk coolers, washing machines, vacuum cleaners, food grinders/mixers, juice extractors, water heaters, shavers, hair dryers, paints and varnishes, SPVs like crane, lorries, fire fighting vehicles, etc. [For details, refer Not. No. 18/2018-CT (Rate) and 19/2018-CT (Rate) both dated 26.07.2018].

A quick glance at the list of the items taken out of the highest tax bracket may left one wondering whether these items should have been there at all in the first place ? Call it a 'socialist bent of mind' or 'fanaticism for the revenue considerations', but, sadly, even after all these decades, we have yet not been able to differentiate between the necessity, comfort and luxury when it comes to taxation! Fortunately, the Council, has been pragmatically and practically taking out more and more items from the list since February, 2018 and trying to put more and more money in the purses of housewives! The latest recommendations only take the endeavors of the Council a notch further! Skeptics and Critics may say that the step is taken as a run-up to the slew of State assembly elections due in near future and Mega 2019 general elections! Whatever may be the 'trigger-point' for this benevolent gesture, the taxpayers are not complaining!

2. Reduction in rates/full exemption - "Relief continues unabatedly …!"

Aside from curtailing the list of high tax rate bracketed items, the Council has also recommended a substantial reduction in tax rates or a full exemption for many daily-use items. The items which are beneficiary of reduced tax burden include Handloom dari , phosphoric acid (fertilizer grade), bamboo flooring, Brass Kerosene pressure stove, Zip and slide fasteners, solid bio-fuel pellets, amongst other items. On the other hand, full exemption is extended to certain items including Stone/Marble/Wood dieties, Phool Bhari Jhadoo (raw material for Jhadoo) Sanitary Napkins, to name a few.

It was widely expected that the 'Handicraft items' hither to subjected to 18% or 12% will receive a special attention from the Council and the expectations are not belied. The Council has recommended a substantial reduction in tax rates - 18% to 12% or 12% to 5%, as the case may be - for a large number of handicraft items including Handbags/Pouches/Purses, Jewellery box, Art wares of stone, Glass and ferrous/non-ferrous metals, handmade carpets, handmade textiles floor coverings and tapestries, to ran, etc.

[For details, refer Not. Nos. 18/2018-CT (Rate) and 19/2018-CT (Rate) Ibid].

Sanitary Napkins and withdrawal of tax - "It has rained but the thirst may remain...!"

Here, the withdrawal of 'tampon tax' - a specie of 'pink tax' - levied on 'Sanitary Napkins' merits some discussion as it involves some intricate tax policy issues.

A tampon tax is a popular term used to call attention to the fact that tampons - and other feminine hygiene products used to manage menstrual flow - are subjected to unjustified GST or VAT, that is at odds with the tax exemption status granted to other products considered basic necessities. The issue of the levy of 'tampon tax' in various countries including US has been a subject matter of heated and intense debate and has led to strong protests from women-groups and their sympathisers. Kenya and Canada abolished this levy in 2004 and 2015 respectively. Since then, the women have began protesting against this tax in various countries and their 'cries' have become shriller and shriller!. Only a couple of days ago, Federal Treasurer of Australia, Scott Morrison has announced the plans to abolish the 10 per cent GST on tampons and sanitary pads. Mr. Morrison, in an interview with The Sunday Telegraph, called the tax an 'anomaly' and 'a source of frustration and angst' for the women.

Now, India has joined the list of handful of countries that has abolished the 'tampon tax' and the year-long vehement protests of the activists have apparently borne the fruit! Interestingly, after India announced the withdrawal of this tax, the protests against the tax, started in 2015, have gained further momentum in UK.

While undesirability of the tampon tax cannot be disputed, the moot question is 'whether the removal of tax will lead to any substantial price reduction? 'As the inputs going into the manufacture of sanitary napkins will continue to be taxed, the exemption will distort the ITC chain. The product, therefore, will join a long list of the goods/services which are 'input-taxed'! The manufacturer will have to bear the input-tax burden, substantially limiting their capacity to pass on the benefit of exemption! The domestic manufacturers are also bracing themselves for the anticipated onslaught of imports as the favourable price differentiation due to levy of tax would no longer exist. The whole exercise, therefore, may come to naught and turn out to be counter-productive!

While an ideal GST system requires that the exemptions are kept at bare minimum so as to not create distortion in credit chain, exemptions in some cases - sanitary napkins is one example-, may be inevitable. Since it will neither be practical nor desirable to exempt the inputs going into the manufacture of such exempted products, the only pragmatic way to ensure the continuation of credit chain and lifting of tax burden is to accord 'zero-rated goods' status to the deserving products like sanitary napkins. This would enable the manufacturers to recoup the input-tax by way of refund and would also make the product really cheaper and affordable.

Unfortunately, at present, neither IGST Act nor CGST Act contains any provision where under the Central Government can notify domestic supply of any goods or service as 'zero-rated supply'. It is felt that such empowering provision must find the place in the statute and it is sooner the better. India is not going to get rid of the 'exemption-raj' for a foreseeable future and the issue of distorted credit chain due to exemption may continue to plague the GST regime for quite some time. The relief granted through exemption may then become 'illusory' in many cases with all the three stakeholders, the government (policymaker), the trade/industry (taxpayer) and the consumers (the intended beneficiaries) simultaneously 'crying foul'!

Exemption to select service sectors - "A rainbow relief…!"

The benevolent gaze of the Council has not forgotten the service sector either. The sectors viz. Agriculture, Food Processing, Education, Social Security, Banking, to name a few, are amongst the few chosen ones which have been granted the benefit of reduction in tax rates or full exemption.

[For details, refer Notifications Nos. 13/2018-CT (Rate) to 17/2018-CT (Rate) all dated 26.07.2018].

B. Areas that received the moderate showers:

As against the above areas that received heavy downpour, certain areas of 'GST land' were fortunate to, at least, received the moderate but satisfactory rains as discussed below:

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

1. Widening the scope of 'Input Tax Credit' - "Sporadic but still welcome…!"

Recommendations:

The Council has recommended the widening of scope of the Input Tax Credit (ITC) so as to include within its scope:

- Most of activities or transactions specified in Schedule III to the CGST Act;

- Motor vehicles for transportation of persons having seating capacity of more than 13 (including driver), vessels and aircraft;

- Motor vehicles for transportation of money for or by a Banking company or financial institution;

- Services of General Insurance, repairs and maintenance in respect of Motor vehicles, vessels and aircraft on which ITC is available;

- Goods or services which are obligatory for an employer to provide to its employees, under any law for the time being in force.

Comments:

The amendments proposed to S. 17(5) of the CGST Act are on the similar lines as recommended by the Council. Post-amendments, as and when carried out, the ITC will not be a vailable only in respect of Motor vehicles for transport of persons having approved seating capacity of not more than 13 persons (including the driver), vessels and aircraft when these are used for personal purposes. It is also being made clear that services of general insurance, servicing, repair and maintenance of such ineligible motor vehicles, vessels and aircraft will also not be available. Similarly, the renting or hiring of such ineligible motor vehicles, vessels and aircraft is also being placed under 'exclusion clause' and ITC will not be available thereon.

The benefit of ITC is being extended to those goods or services or both, the provision of which is obligatory for an employer to provide to its employees under any law for the time being in force. While the gesture is welcome, the benefit of ITC in such cases needs to be extended even where there is a contractual obligation on the employer to provide such goods or services or both to the employees. There is no justification for restricting the benefit only to those cases where there is a legal obligation, like, mandatory provision of canteen facility in terms of the Factories Act, 1948 where number of workers are 250 or more.

2. Non-payment to supplier within 180 days - Interest waived - "Taxpayers never had it so good…!"

Recommendations:

It is recommended that in case the recipient fails to pay the due amount to the supplier within 180 days from the date of invoice, the ITC availed by the recipient will be required to be reversed, but liability to pay interest shall not exist.

Comments:

Second Proviso to Section 16(2) of the CGST Act, at present, provides that if recipient fails to pay the supplier the value of supply along with the tax payable thereon within 180 days of the date of issue of invoice, the ITC availed on the relevant supply along with interest thereon as prescribed, shall be added to the output tax liability of the recipient.

Third proviso to Section 16(2) further provides that on payment made by the recipient, he shall be entitled to avail the re-credit but the burden of the interest shall be borne by him.

In an 'interesting' gesture, the Council has recommended that the liability to pay interest shall not exist in such cases. The proposed amendment to S. 16(2) is on the same lines. The rationale behind the amendment states that since the recipient shall be eligible to avail ITC of the said amount, the liability to pay interest is too onerous and needs to be removed.

3. Consolidated Credit/Debit Notes - "Cool monsoon winds continue to blow!"

Recommendations:

The Council has recommended that the registered persons may issue consolidated credit/debit notes in respect of multiple invoices in a financial year.

Comments:

At present, in terms of Section 34 (1) and 34 (3) of the CGST Act, the Registered person is required to issue credit note or debit note, as the case may be, invoice-wise. This has resulted into an enormous compliance burden on the taxpayers, particularly on the large business houses. Any breach of this provision also entail legal and financial consequences. There was, therefore, a consistent demand for the dilution of the rigour of this provision and to allow the taxpayers to issue consolidated Credit/Debit Notes.

The Council has now positively responded to this demand of the taxpayers and has recommended that a taxpayer be permitted to issue a consolidated Credit/Debit Notes in respect of multiple invoices issued during the financial year. The proposed amendment to S. 34 are on the similar lines.

Interestingly, the rationale behind the proposed amendments acknowledges that issue of invoice-wise credit/debit note cause 'avoidable compliance burden for taxpayers' and that issuance of consolidated credit/debit note is in line with the best international practices.

4. Simplified GST Returns - "Sending the blessings skyward…!"

Recommendations:

The Council has approved the new return formats and associated changes in law. The recommendations of the Council on the return formats and business process are briefly detailed below:

- All taxpayers excluding small taxpayers and a few exceptions like ISD, etc. shall file one monthly return. The return is simple with two main tables, one, for reporting outward supplies and one for availing ITC based on ITC uploaded by the supplier. Invoices can be uploaded continuously by the seller and viewed and locked by the buyer for availing ITC. The process has been described as 'UPLOAD - LOCK- PAY' for most taxpayers.

- Taxpayer will have facility to create his profile based on nature of supplies made and received.

- Nil return filers will be given a facility to file return by sending SMS.

- The Council has approved quarterly filing of return for the small tax payers having turnover below Rs.5.00 crore as an optional facility. The quarterly return shall be similar to main return with monthly payment facility but two kinds of registered persons - small traders making only B2C supply or making B2B plus B2C supply. For such taxpayers, simplified returns have been designed called Sahaj and Sugam (since then the drafts of these returns are released in public domain inviting suggestions).

- The new return design provides facility for amendment of invoice and also other details filed in the return. Payment will be allowed to be made through 'the amendment return' saving the interest liability for the taxpayers.

Comments:

Needless to say, the multiple and complicated returns and the cumbersome return filing process has been the 'Achilles' heel' for the GST regime right from its inception! The situation was further aggravated due to the ill-prepared GSTN portal. The simplification of GST returns and the reduction of the compliance load of the taxpayers was high on agenda of the Council. The recommendations made by the Council as aforesaid shall substantially ease the compliance burden of the taxpayers, notably small and medium taxpayers. The unexpected bonanza in the form of quarterly return for the taxpayers with a turnover below Rs.5.00 crores as an optional facility will certainly be latched upon by the eligible taxpayers. Though, such taxpayers will continue to make the tax payments on a monthly basis - and understandably so -, the prescription of filing quarterly return will certainly lead to 'ease of doing business' for them.

5. Miscellaneous recommendations - "Fair and frank….!"

Recommendations:

Aside from the above major recommendations, the Council has also made a few other recommendations which are summarized below:

- Commissioner to be empowered to extend the time limit for return of inputs and capital goods sent on job work, upto a period of one year and two years, respectively;

- Supply of services to qualify as exports, even if payment s received in Indian Rupees, where permitted by the RBI;

- Place of supply in case of job work of any treatment or process done on goods temporarily imported into India and then exported without putting them to any other use in India, to be outside India;

- The order of cross utilization of ITC is being rationalized;

- Recovery can be made from distinct persons, even if present in different State/Union territory.

Comments:

The recommendation to empower the Commissioner to extend the time limit for return of inputs or capital goods sent for job work is a significant one and will save lot of hassles for the taxpayers.

As per Section 2 (6) of the IGST Act, receipt of payment in convertible foreign exchange is one of the requirements for a supply of service to be qualified as 'export of services'. Now, the receipt in Indian Rupees is also proposed to be allowed for being treated as exports, if permitted by RBI. This will facilitate the trade with Nepal and Bhutan.

The recommendation on the rationalization of the cross utilization of the ITC may however, come as a 'dampener on spirit'! A careful look at the amendments proposed to be made in Section 49 (5) (c) and (d) would reveal that the amendment provides that the credit of State tax/UT tax can be utilized for payment of Integrated Tax only when the balance of the ITC on account of Central Tax is not available for payment of Integrated Tax. It is stated that the amendment is required since the GST common portal has placed the restriction in the utilization of ITC of State Tax/UT Tax towards payment of Integrated Tax.

A new proviso to sub-section (5) is also sought to be inserted to specify that a taxpayer would be able to utilize credit on account of CGST, SGST/UTGST only after exhausting all the credit on account of IGST available to him. This is being done to minimize fund settlement on account of IGST.

Therefore, the high expectations of the taxpayers that they would be allowed to freely cross utilize the ITC of CGST, SGST/UTGST and IGST for the payment of any tax may not immediately materialize. Interestingly, however, a new sub-section (5A) is proposed to be inserted in Section 49 to vest the Government with an enabling power to prescribe any specific order of utilization of ITC of any of the taxes viz. Integrated Tax, Central Tax, State Tax or Union Territory Tax for the payment of the said taxes. It may, therefore, be worthwhile to wait and watch!

…to be continued

See 'GST - Enjoy the bountiful showers, dear taxpayers !' - Part-I

(The author is and founder M/s. SPS LEGAL and the views expressed are strictly personal.)