SEPTEMBER 10, 2018

By K Srinivasan, IRS

AMENDMENT.1

Classification of certain specified activities or transactions (which qualify as a supply under the CGST Act) either as supply of goods or supply of services is supposed to be dealt under Schedule II.

However, it is observed that clause (d) of sub section (1) of Section 7 of CGST Act, being part of the subsection defining the term 'supply' leads to a situation where an activity listed in Schedule II would be deemed to be a supply even if it does not constitute a supply as per clauses (a), (b) and (c) of sub-section (1).

Hence, a new sub-section (1A) in section 7 has been inserted and clause (d) of sub-section (1) of Section 7 of the Act, omitted by the Amendment Act, 2018.

Let us see below, how the other sub sections of Section 7, reads now

(1A) Certain activities or transactions, when constituting a supply in accordance with the provisions of sub-section (1), shall be treated either as supply of goods or supply of services as referred to in Schedule II.

(2) Notwithstanding anything contained in sub-section (1), - (a) activities or transactions specified in Schedule III; or (b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services.

(3) Subject to the provisions of sub-sections (1), (1A) and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as- (a) a supply of goods and not as a supply of services; or (b) a supply of services and not as a supply of goods.

It is a consequential amendment by including sub-section (1A) in addition to sub-sections (1) (2) and (3) of Section 7 of the CGST Act, due to insertion of a new sub-section (1A).

Amendments 2, 3 & 4

It is sought to ensure that there is no double taxation of transactions where the activities of merchant trade transactions where

a) the goods do not enter India and are directly dispatched to customer outside India

b) high sea sales transactions

c) sale of goods stored in customs bonded warehouse

are specified as activities which do not amount to supply of goods' thereby resolving the ambiguity that existed earlier with regard to the treatment of such transactions.

This proposal also links up with recent changes to taxability and valuation of supply of goods occurring in the course of high sea sales and in-bond sales, before clearance for home consumption.

It was observed that in case of supply of goods as high seas sales, before being cleared for home consumption, IGST was being levied twice, once under the Customs Tariff Act, 1975 (read with the IGST Act) and then for a second time, on clearance for home consumption under the IGST Act.

Since double taxation needs to be avoided, Circulars were issued to state that IGST would be payable only once at the time of clearance of goods for home consumption.

However, it is imperative that such situations are squarely mentioned as 'no supply' in Schedule III.

It is consequently added to Schedule III as an additional Para 7 after Para 6 namely, Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into the taxable territory designated as 'no supply.

It was observed that in case of supply of such goods when sold while in warehouse but before being cleared for home consumption, IGST was being levied twice, once under the Customs Tariff Act, 1975 (read with the IGST Act) and then for a second time, on clearance for home consumption under the IGST Act.

It is consequently added to Schedule III as an additional Sub-Para (a) of a new Para 8, as Supply of warehoused goods to any person before clearance for home consumption.

(b) Supply of goods by the consignee to any other person, by endorsement of documents of title to the goods, after the goods have been dispatched from the port of origin located outside India but before clearance for home consumption, designated as 'no supply'.

(ii) The Explanation shall be numbered as Explanation 1 and after Explanation 1 as so numbered, the following Explanation shall be inserted, namely:-

Explanation 2.- For the purposes of this clause, the expression "warehoused goods" shall have the meaning as assigned to it in the Customs Act, 1962 (52 of 1962)

- The above amendments are carried out in the Principal CGST Act and have been deemed to come into effect with effect from the 1st day of July, 2017.

COMMENTS

Dropping clause (d) of sub section (1) of Section 7 of CGST Act, with reference to amendment 1 referred to above, is perfect. New sub-section (1A) inserted in section 7 has smoothened it all very well too, by the Amendment Act, 2018.

However, with reference to amendments 2, 3 and 4 referred to above, mere additions of Para 7 and 8(a) to Schedule III alone will not cure the problem of a double taxation of the activities of merchant trade transactions where

a) the goods do not enter India and are directly dispatched to customer outside India

b) high sea sales transactions

c) sale of goods stored in customs bonded warehouse

are specified as activities which do not amount to supply of goods

But it should also provide the much-needed technical linkage to the mother provision Section 7(2) of the IGST Act which is still in force and will continue to be in force, unaltered.

It would appear logical and as also behooves the Government, therefore, to add similar wording as 'notwithstanding anything contained in Section 7(2) of the IGST Act', in every amendment involving Schedule III to CGST Act namely Para 7 and 8 (a) involving levy of IGST on such supply of goods that do not enter India and are directly dispatched to customer outside India, such supply of goods occurring in the course of high sea sales and sale of warehoused goods, before clearance for home consumption to be a 'no supply, if the intended aments were to survive the test of Law.

However, proposed enablement of ITC by suitably amending Section 17(3) of the CGST Act by not treating the above supply of goods occurring in the course of high sea sales and sale of warehoused goods, before clearance for home consumption as an exempt supply, is a change made with great insight and forethought on the part of the Government, deserving rich appreciation.

The said amendments not only saved the above transactions from double taxation of IGST but also amply spared any consequent ITC reversals that may have made deep incursions into merchant traders' general pool of ITC, in the opinion of the Author.

(The author is Assistant Commissioner, GST, Chennai and a Master Trainer, GST. The views expressed are strictly personal.)