OCTOBER 09, 2018

By Dr G Gokul Kishore

IN this sixth part, we shall focus on three major issues of input tax credit on motor vehicles, implementation of TDS provisions and interest on credit reversals consequent to retrospective amendments made recently to CGST Act.

ITC on motor vehicles - Shifting the gear

Input tax credit on motor vehicles has been restricted all along right from Cenvat credit days. The rather exhaustive provisions contained in Section 17 (5) of CGST Act have been recast as per the recent amendments, particularly in respect of credit restriction on motor vehicles. The earlier omnibus grouping of ‘other conveyances' with motor vehicles has been amended to provide for separate provisions in respect of vessels and aircraft also. The provisions as on today (pre-amended)seek to bar ITC in respect of all motor vehicles except in the three specified situations of further supply of such vehicles, transportation of passengers or goods and imparting training.Post amendment, credit is sought to be restricted in respect of motor vehicles having seating capacity less than 13 persons. The exceptions continue without any major change. The issue as to whether services in relation to motor vehicles are eligible for credit has been set at rest by express inclusion of provision to bar services like insurance, repair, maintenance etc., of such vehicles. From the prescription of criterion like seating capacity, it appears that the intention is to extend credit in respect of vehicles like buses, which are invariably used for transportation of passengers and therefore fall under the exception clause. The smaller vehicles being capable of personal use are therefore kept in the restricted list as the credit scheme under GST seeks to bar such facility in respect of goods and services used for personal consumption.

The amendments acknowledge the fact that the tax administration is wary of goods and services which can be put to dual use (business and personal) and the present enforcement mechanism is not sufficient to tackle such challenge. One can refer to similar restriction placed on goods and services used for construction of immovable property even when such construction activity is liable to GST. The legacy of course can be traced Cenvat credit restriction on items like cement, TTD bars, angles and channels which are perceived as capable being used for non-business purpose also. Capacity constraint of tax administration cannot be a valid reason for denial of credit on acquisitions which are used in the course or furtherance of business.

If credit can be availed on office stationery in GST regime, there is no reason why credit should be denied on motor vehicles which are used by employees or otherwise used for business purpose. The second year of GST can be used for revisiting such provisions and devising pragmatic solutions like extending credit upto a certain percentage, deeming the same as business use.

Deducting revenue and increasing compliance

Deduction of tax at source (TDS) under GST law has been implemented from 1 st October 2018. The obligation to deduct is on specified recipients like government departments and PSUs and, therefore, the provision is not applicable to a vast majority of transactions. In keeping with the tradition of being proactive, SOP was brought out and placed in GST Council's portal right from the first day.TDS provisions are applicable if contract value exceeds Rs. 2.5 lakhs. The SOP does not cover the issue of applicability of TDS in respect of open contracts /PO which does not have a pre-agreed value. The view appears to be that in such contracts TDS is deductible whenever payment is made even though, with respect to a particular vendor, the total value of supplies may never exceed the threshold of Rs. 2.5 lakhs. The relevant time or aspect for TDS is making of payment. The SOP clarifies that for supplies made before 1st October for which payment is received after 1st October, such deduction is not required. For such supplies, the vendor would have charged GST before 1st October and, therefore, deduction of tax by the recipient does not arise.

There may be situations like those in which the invoice for a supply is raised for a value less than Rs. 2.5 lakhs and after two or three tax periods, a supplementary invoice is raised for Rs. 4 lakhs or so. The SOP appears to indicate that TDS is to be deducted on the total value including the first invoice. If such stand is adopted, it may amount to excess deduction / payment and the supplier has to undergo the torturous process of claiming refund. Leaving aside such procedural issues, it appears that TDS provisions as such may not serve any useful purpose for the government. The provisions have been introduced to track suppliers and transactions which may go unreported. But,in almost all the cases involving supplies by or to government, process of tender is involved and GST registration is mandatory for most of the supplies and hence apparently no objective is served. By requiring even municipalities and panchayats to obtain registration for TDS purpose, the compliance burden is set to increase exponentially without any commensurate benefits to the exchequer.

Debt claim relating to drafting errors

As part of the recent amendments to the CGST Act, retrospective effect has been given to transitional provisions relating to cesses paid under the erstwhile regime. Reversal of credit of such cesses has become mandatory but the issue as to whether interest is required to be paid needs to be appropriately addressed. It is settled position of law that offences cannot be created retrospectively. It follows that interest cannot be demanded particularly when liability is created by backdated law only to correct drafting mistakes.

It would be a very novel case of interest which is compensatory and penal - that is compensating the department for its lapses by penalising the assessee. Of course, adhering to the provisions, department would start issuing notices demanding interest in such cases of reversal of cesses, forcing the taxpayers to approach the court of law. The analysis as to whether interest is leviable, whether it is compensatory or penal and whether Court should decide the issue or leave it to the legislators would be played out yet again. As always, we only hope that this issue will be resolved, this year, before it assumes serious proportions.

(…to be continued)

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

See Parts Part -I ,  Part - II , Part - III , Part - IV , Part - V