OCTOBER 03, 2018

By Dr G Gokul Kishore

IN this fifth part, we shall discuss two major issues - one which has already assumed litigious dimension and the other, may assume in future, if the second year is not used to contain the adverse repercussions.

Persons earning forex for country deserve better treatment

Foreign companies selling products or services in India use the services of commission agents or marketing agents or indenting agents in India. Such agents, in certain cases, not only provide services from the Indian market but also from other countries in the region. In this article, we are not concerned with markets other than India. Typically, these agents termed as 'intermediaries' in GST law undertake a variety of activities for the foreign principal. The same may extend from identification of buyers to providing advice on market per se , market development, liaison with buyers, negotiation of terms with buyers on behalf of principal and assistance in payment realisation and claim settlement. Such services being provided to the principal abroad, the agent in India gets paid in foreign exchange.

Right from Service Tax regime, the issue as to whether services provided by such Indian agents to foreign principals amount to export of service or not lingers. Advocates of taxing such activity based on situs of service have been at loggerheads with those who rely on service tax / GST being consumption-based destination tax. The fruits of services provided by agents are enjoyed by the companies in foreign territory and, therefore, services are consumed in non-taxable territory. All along, for something to be considered as export, the standard test used to be receipt of consideration in foreign exchange which gets satisfied in all such cases.

Statutory provisions as contained in Section 2(6) of IGST Act define what is export of service and, therefore, legislature has hardly provided any room for argument on logic or otherwise. Out of the five ingredients or conditions mentioned in the definition, we are concerned only with the stipulation of 'place of supply' being outside India. Section 13(8)(b) of IGST Act is the axe uprooting all logic which states that place of supply in respect of intermediary service is the location of such supplier of service or the intermediary. The intermediaries or agents being located in India, place of supply will be in India. Once place of supply is not outside India, the services provided by intermediaries, despite satisfying all other four conditions, become disentitled to be nomenclatured as export. Disqualified as export, these services have to bear the burden of GST. The intermediaries may well provide services to foreign companies located in non-taxable territory, may well earn foreign exchange for the country, may forge trade relations with partners in two countries - but tax law is founded on the objective of revenue maximisation and not on broader policy objectives and, therefore, intermediaries have to incur tax cost additionally. Second year of GST should be used to amend such provisions as, otherwise, businesses may be compelled to come up with ingenious and tax-efficient structuring and the department may have to tackle revenue loss.

Cross-utilization of ITC - Restrictive amendments

One of the major amendments in the CGST Act that has not attracted the attention it deserves pertains to amendment to provisions on cross-utilization of input tax credit. Probably because, the amendment is not yet notified and is yet to come into force. The current regime prohibits cross utilization of ITC of CGST for payment of SGST and vice versa and except this bar, credit of one type of tax can be utilized for payment of different type of tax. As per the amendments made to Section 49, ITC of SGST shall be utilised for payment of IGST only when ITC of CGST is not available. Similarly, the newly inserted Section 49A provides that ITC of CGST / SGST / UTGST shall be used for payment of IGST / CGST / SGST / UTGST only after the ITC on IGST is fully exhausted. Essentially, these amendments seek to compel the taxpayer to utilize ITC on IGST first before using credits of other types of taxes. Once IGST credit is exhausted, to offset output liability of IGST, credit of CGST shall be used first and only if there is no balance in such account, SGST credit should be used.

The genesis of these amendments appears to be in continuation of VAT incentives for residual period by way of refund of SGST. Most such refunds are modelled on refund of SGST paid in cash after utilization of ITC as in the case of budgetary support scheme which has replaced the area-based exemption under excise. By ensuring that SGST credit is used as last resort after exhausting ITC of other types of taxes, cash pay-out for SGST gets squeezed and refund amounts get restricted significantly. It is not known how such constriction will make a major impact on the exchequer as certain States like Gujarat provide for refund of ITC also (SGST credits used to offset liability).

Members of industry not availing any incentive will also be impacted by such amendment. Tweaking of systems to change the priority rule for ITC utilisation may be easier but procurement pattern resulting in ITC of various types of taxes needs to be re-examined for containing any possible adverse effect on credit v/s cash position for effecting tax payments. The government has missed the opportunity of re-visiting the provisions insofar as the demand seeking utilization of CGST credit availed in one registration to discharge liability in other registration of the same company. CGST is essentially tax revenue accruing to the Union Government and, therefore, not permitting utilisation of CGST credits across various registrations of same company, is not a progressive idea. One may argue that ITC ledger is registration-specific and such suggestions are not workable. We have created GST law and IT systems. If we believe that these measures will facilitate the trade and make GST more industry-friendly, then these ideas are not utopian, rather they require positive consideration and implementation.

…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 , IV