SEPTEMBER 25, 2018

By Dr G Gokul Kishore

WHEN major issues are discussed with request for redressal, the agenda gets lengthier. Without using up the reader's time, let us take a look at some of the issues which need to be addressed in the second year of GST in this fourth part of this series .

Payment of dues under earlier laws - Making GST law more progressive

Central indirect tax laws had / have five years as extended period of limitation within which duties / taxes can be demanded along with interest and penalty. Central Excise & Service Tax Department's audit of assessee's records for the past period will continue to be relevant for a few more years. If the ECC code or other registration under erstwhile laws is not active, payment of excise duty or service tax to be made is an issue whenever there is an audit objection or demand notice issued by the department. Demands arising out of assessment or adjudication proceedings under erstwhile laws are covered under Section 142(8)(a) of CGST Act. The provision seeks to achieve twin objectives. First, it empowers the Department to recover amounts confirmed in such demand notices pertaining to earlier laws as if they are arrears under GST law. Secondly, it expressly bars input tax credit of such amount paid towards taxes under earlier laws. Clause (b) of said sub-section (8) of Section 142 is corollary for refunds - when refund is payable under the earlier laws, the same will be paid in cash and ITC of refund (rejected, if any) shall not be admissible. Similar provisions can be seen to cover situationof revision of return and consequential liabilities.

Legislative intention is unambiguous. GST law cannot be seen as deliverer of all credits when the tax itself is not paid under such law. Taxes paid under earlier laws, if given as credits under GST law, will have the effect of distorting GST revenues which are finely balanced in the new Constitutional scheme of cooperative federalism in the fiscal sphere. Noble or economically logical objectives indeed, but when such earlier taxes can be recovered as if they are arrears of GST invoking recovery provisions under GST law, then nobility or logic vanishes. If, for recovery of earlier taxes, GST law will apply, then full play should be provided for all purposes whether it is for demand and recovery or for refund or for ITC.

GST law is a tax law in a continuum -it has just replaced a few earlier laws. For the business, tax on commodity or service is the same except the change in governing law, attendant provisions and compliance mechanism. It is, therefore, logical and reasonable to expect that GST law should provide for utilization of ITC ledger for payment of dues / arrears of earlier taxes (CGST for Central Taxes and SGST for State Taxes) besides providing the option of both cash refund and refund by way of credit to ITC ledger even if the levy belongs to legacy law. This will be seamless credit system in true sense. Nowhere, credit gets lost or becomes a cost. GST is professed to be non-inflationary but by such provisions as discussed above, certain taxes paid become cost to business in the absence of ITC and business has no way but to pass on the same in the form of increase in price for goods or services. As amendment in law is sought, circulars issued by CBIC on this subject are not discussed. Second year of GST should be used to brainstorm and make the GST law more progressive, less inflationary and more business friendly.

Works Contract - Accord legal sanctity to sui generis model

The time-tested principle evolved by judiciary for works contract isone of executing a work i.e. service during the provision of which goods are also used / incorporated by the service provider and there is a transfer of property in goods involved in such works i.e. the rights in goods which are used in the works pass on to the service recipient. Works contract is the most commercially recognized species of composite supply involving both service and goods. In the Service Tax regime, by having differential rates for original works and repair works, every item of commercial transaction like AMC was provided tax treatment taking into account the practices prevalent in the industry. The first shock for tax practitioners in GST regime was reconciling the concept of works contract as related only to immovable property [Section 2(119) of CGST Act] and rest of the contracts where both goods and services are involved to be evaluated applying the definitions of composite supply and mixed supply.

The congenital traits of the concept of introducing immovable property can be partly attributed to excise legacy where what was immovable was not goods and hence not excisable. These excise concepts have somehow played a role while drafting GST law. One of the most substantive pieces of evidence is excluding plant and machinery from immovable property for ITC purpose and also using the words ‘factory premises' along with ‘pipelines' in Section 17 of CGST Act. Works contract is a contract for works and nature of theend result of such work should not ideally matter. Whether the works result in immovable property or otherwise, as long as the essential ingredients of works contract are satisfied, the transaction should be treated as works contract under GST law also. GST law cannot artificially define works contract and try to restrict the same to immovable property and exclude all cases of works contract like services provided under annual maintenance contracts. Pushing every service provider into the vortex of composite and mixed supplies with no clue about what is principal supply, what is naturally bundled, etc., cannot be the intention of a tax law like GST which is otherwise revolutionary in the fiscal realm.

With the reduction of rate of GST on most of the goods from 28% to 18% and the default rate of tax on services being 18%, therisk of mixed supply might have got mitigated but the unnecessary evaluation and investigation as to the transaction being composite supply or not, still casts a heavy burden on the trade. With a few advance rulings placing reliance on cross-fall breach clauses in contracts, the onus on the industry to re-draft the contracts to be GST-efficient has again gained currency. The conclusion we wish to make (in this part) is that the provisions on works contract and composite supply could have been drafted better without importing alien concepts. We could have provided the sui generis model of works contract as evolved over the years legal sanctity by incorporating the same in GST law. Second year of GST should be dedicated to repair the adverse fallout and re-construct such provisions.

…to be continued

(The author is an Advocate and Joint Partner, Lakshmikumaran & Sridharan, New Delhi. The views expressed are personal)

See:  Part -I ,  Part - II, Part - III