AUGUST 10, 2018

By Shailesh Sheth, Advocate

III. Catering/Hospitality Sectors and Textile Sector - "Lightning Strikes, unexpectedly!"

The Council has also made substantial recommendations concerning the Catering/Hospitality sectors and the textile sector. At first glance, the recommendations may appear to be quite beneficial for the sectors, but on careful analysis of the same, some adverse - may be, unintended - consequences thereof are observed. These are discussed below:

1. Catering/Hospitality sector:

Recommendations:

The council has made the following recommendations concerning these sectors:

- Rationalise entry relating to composite supply of food and drinks in restaurant, mess, canteen, eating joints and such supplies to institutions (educational, office, factory, hospital) on contractual basis at GST rates of 5%; and making it clear that the scope of outdoor catering under entry 7(v) is restricted to the supplies in case of outdoor/indoor functions that are event based and occasional in nature.

- Prescribe GST rates slabs on accommodation service based on the transaction value instead of the declared tariff which is likely to provide major relief for the hotel industry.

Comments:

The aforesaid recommendations of the council are implemented through the amendments in various items of Entry 7 of Notification No. 11/2017-CT(Rate) dated 28.06.2017 made vide Notification No. 13/2018-CT(Rate) dated 26.07.2018 effective from 27.07.2018.

At the outset, one must appreciate the decision of the Council to prescribe the 'transaction value' instead of 'declared tariff' as the basis for the GST rate slabs for the accommodation services. Undoubtedly, this will provide a major booster-dose to the Hotel Industry and will help it tide over the lean season when the offering of the hefty discounts on the 'Rack Rate' is more a 'norm' rather than an 'exception'.

Suitable amendments in this regard are made in items (ii), (vi) and (viii) of Entry 7 of the Notification No. 11/2017-CT(Rate) ibid Notification No. 13/2018-CT(Rate) ibid.

Coming to other amendments, a careful study of the amended entries will reveal that the concept of 'Outdoor Catering' appears to have lost its relevance. The term 'Outdoor catering', though, was used in the unamended item (v) of Entry 7, was not defined in the Notification or in the CGST Act. The concept is, however, now being sought to be explained more realistically by applying the criteria of 'event based and occasional nature' of the service, as is understood in the popular parlance and in the process, reaffirming the applicability of GST@18% on such service. The Outdoor Caterers sector which was pinning very high hopes on this particular meeting of the Council for the reduction of tax burden on it justifiably feels having been badly let down and discriminated against other players!

From the conjoint and harmonious reading of the substituted item (i) with Explanation 2 thereto and the substituted item (v), it will also be observed that the food, drink, etc. supplied by even the small or mid-sized hotels, restaurants etc. at the functions held at the banquet halls located in their premises will attract GST@18%. This may be an unintended fallout of the latest round of the amendments and the small and mid-sized hotels, restaurants, etc. may feel dismayed. "So next time, think hard before deciding to celebrate Birthday or Anniversary at the banquet hall of your favouritesmall or mid-sized hotel or restaurant!"

There is yet another negative fallout of these amendments. The benefit of rate of 5% to the canteen contractors is subject to the non-availment of ITC. Thus, the ITC chain will be snapped, and the service will become 'input-taxed'. Now, take a case where such canteen contractor supplies the food, etc. to a factory under a contractual agreement charging 5% GST. The owner of the factory, let us assume, also recovers part of the cost (whether actual or not) of providing canteen facility, from the employees and considering the same as taxable, also charges GST@5% in terms of the substituted item (i). However, the factory owner will not be entitled to avail the credit of the GST@5% charged to him by his canteen contractor. Under these circumstances, there will be a double taxation in case of the same supply.

- Textile Sector:

Recommendations:

The Council has made the following recommendations for the distraught Fabrics Sector facing the problem of accumulated ITC due to inverted tax structure:

- Allow refund of ITC accumulated on account of the inverted tax structure to the fabrics manufacturers.

- Refund of accumulated ITC shall be allowed only with prospective effect on the purchases made after the notification is issued.

Comments:

Notification No. 5/2017-CT(Rate) dated 28.06.2017 provides for the non-grant of the accumulated ITC on account of the Inverted tax structure in case of the specified goods. Fabrics falling under various headings of the GST tariff attracting GST@5% and having Inverted tax structure were specified in the notification.

Considering the difficulties faced by the sector and also with a view to boost the job creation and compliance in the sector, the council made the above recommendations. The announcement was greeted with cheers by the sector. However, the joy was short-lived!

The recommendations are implemented vide Notification No. 20/2018-CT(Rate) dated 26.07.2018 inserting a proviso in the Notification No. 5/2017-CT(Rate) ibid that reads as under:

"Provided that,-

(i) nothing contained in this notification shall apply to the input tax credit accumulated on supplies received on or after the 1st day of August, 2018, in respect of goods mentioned at serial numbers 1, 2, 3, 4, 5, 6, 6A, 6B, 6C and 7 of the Table below; and

(ii) in respect of said goods, the accumulated input tax credit lying unutilised in balance, after payment of tax for and upto the month of July, 2018, on the inward supplies received up to the 31st day of July 2018, shall lapse.".

While the provision for the grant of refund of the accumulated ITC is on expected lines, what came as a rude shock to the sector is the provision relating to the lapsing of the balance ITC lying in the credit ledger after payment of tax for and upto the month of July 2018!

Needless to say, the provision for lapsing of ITC inserted in the Notification in an unobtrusive manner is arbitrary, discriminatory and lacks authority of law. It is in total disregard of the principles of law laid down by the Hon'ble Supreme Court in Eicher Motors Ltd vs. UOI - 2002-TIOL-149-SC-CX-LB and Samtel India Ltd vs CCE - 2003-TIOL-40-SC-CX.

It is sincerely hoped that wiser counsel would prevail and this soon-to-be controversial provision will be withdrawn.

IV. 29th Meeting and MSME Sector-"The wait just got longer...!"

Immediately after its marathon 28th meeting, the Council announced that it will again meet on 4th August 2018 and take up the cause of the MSME sector. In the intervening period, suggestions were invited from all the stakeholders including the various federations/ associations representing the SME/MSME sector. It is understood that notwithstanding the time constraints, large number of concrete and pragmatic suggestions having far-reaching implications were made by the sector.

However, in an anti-climax, the Council took only the following two decisions at its 29th meeting:

- To provide GST incentives for digital payments via RuPay card and BHIM App on pilot basis:

- Constitution of a GOM for MSME sector under Union Finance Minister of State to consider issues pertaining to the sector.

The next meeting of the council is likely to be held on 29th/ 30th September, 2018 at Goa.

For the SME/MSME sector which was looking forward to some substantial reliefs to be announced by the Council at its sector-centric meeting,the wait has just got bit longer!The constitution of GOM for MSME Sector proves to be a 'blessing in disguise' as the GOM is having members representing all political parties. The GOM can, therefore, be expected to come out with some substantial recommendations at its next meeting which shall lift the present sombre mood of the Sector!

V. Parched lands awaiting the showers!

While the various recommendations of the Council made at its 28th Meeting are quite noteworthy, many aspects of the GST law are apparently left out which otherwise require urgent attention of the Council. Some of these areas are:

a. Definitions (particularly, the expressions like aggregate turnover, business, exempt supply, job work, non-taxable supply, services, works contract, to cite a few).

b. Concept of supply (S.7)

c. Job work

d. Valuation (S.15)

e. Treatment of ITC on capital goods

f. Apportionment of credit and blocked credits

g. Interest on delayed payment of tax

h. Refund of tax

i. Advance Rulings

j. Appeals and Revision

k. Transitional Provisions

l. Repeal and Saving

While the concluding part to this article series was being written, the Government has moved the Bills in the LokSabha proposing various amendments in the CGST Act and the allied enactments. A quick glance at the amendments proposed in the CGST Act shows that almost all of the 46 proposed amendments announced earlier have been incorporated in the Bill including the amendments which touch upon some of the above areas. However, still much remains to be done and it appears that the task can only be taken up by the new Government post-general elections in 2019. It is, therefore, going to be a long wait, indeed!

To sum up…

All said and done, the 28th Meeting of the Council has turned out to be a quite 'productive ' from the perspective of the taxpayers who must be rejoicing in the bountiful or moderate showers, whatever they perceive it to be! While certain areas of the barren GST land have, no doubt, still remained 'dry' and 'thirsty', the showers of the 'goodies' sprinkled by the Council, nevertheless, are satisfying and blissful!

The good of the people is the chief law - Cicero

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

Editor : The three-part series stands concluded.

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