OCTOBER 16, 2018

By Dr G Gokul Kishore

THIS festive season in India. From Dusshera to Diwali, there is celebration in the air. Gifts during festivals may hold magic for the recipients but they interest the taxman for entirely different reasons. We shall discuss the fallacy of tax treatment of gifts, the anathema towards payment of interest using credits and the hollowness in treating transportation arranged by supplier of goods as composite supply.

Gifting away the net worth

Input tax credit (ITC) restriction in Section 17(5) of CGST Act in respect of goods disposed as free gifts and the apparent conflict between this provision and Section 16 providing for credit on goods used for furtherance of business were discussed in one of the earlier parts in this series. A related provision pertains to deeming gifts of value more than Rs. 50,000/- provided to employees as taxable supply under Schedule I of CGST Act. If gifts to employees are to be taxed, then fixing a notional value of Rs. 50,000/- seems arbitrary. No company will engage in diversion of its assets adopting a modus operandi of gifts through employees. Gifts in most cases are bought out items and not manufactured items of the tax payer. If the employment terms of contract provide for gifts to employees or as a policy a company gives gifts to employees during particular occasions (festival, foundation day, etc.), the same is a matter of policy of the organisation. It can hardly be the prerogative of the taxman to question whether gifts should be given, the value of gifts or unilaterally deem gifts to be taxable.

There is no place in GST law to fix notional value like Rs. 50,000/- when the law itself is founded on concepts of transaction value, open market value and the like. ITC is barred on gifts but taxing the same in specified situations results in double jeopardy for companies. Reconciling this provision with the position of absence of liability in respect of gifts to unrelated parties irrespective of value may be easier for the taxman but not for the taxpayer. If the gifts were to be made part of compensation structure but identified separately, entry in Schedule I will not be attracted. Treating a transaction as supply or not based on whether it is in kind (non-monetary) or otherwise is not sound tax policy. Therefore, second year of GST should be used to re-examine this provision and allow gifts to remain a token of love or reward for loyalty.

Utilisation of ITC to pay interest

Interest in case of reversal of wrongly availed input tax credit is required to be paid by cash. Electronic credit ledger cannot be used for such payment. There may be an iota of rationale in not allowing utilization of ITC for payment of penalty but bar on such utilization for payment of interest is inexplicable. ITC represents tax expense incurred by the taxpayer and has accrued to him and is ready for use by offsetting against tax liability. ITC is not a largesse but it is a vested right at least according to certain rulings. There is no reason why ITC cannot be allowed to be used for payment of interest. May be, the reason could be when credit is wrongly availed or tax is short paid, interest is payable and the same is in a manner penal in nature and for payment of such penal interest, utilization of ITC is not the intention of the credit scheme itself.

When provisions have been included in GST law for adjustment of refund against outstanding liabilities, it is only fair that the assessee is allowed to set off his liability against credit standing to his account.

Tax administration has successfully argued in courts that interest is automatic and payable without any demand. Interest is perceived as a logical consequence of any delayed payment in which case it is compensatory. If interest is in the nature of piggy-back of tax liability, then the mode of payment to discharge tax liability should be extended to such consequential liability of interest as well. Grant of refund of ITC in cash in the case of inverted tax structure indicates that there is an implied recognition of ITC being treated on par with cash at least in certain situations. Payment of pre-deposit by utilization of Cenvat credit was always allowed by CESTAT. If, for pre-deposit for filing appeal, credit is utilizable, then insisting on cash payment for interest reveals a sadistic mentality. Differentiating modes of payment for discharging various liabilities may sound irrational and given the fact that the present government lays so much thrust on digital payments and cashless economy, there cannot be a tax administration which will accept only cash for interest payment. This needs to change and we hope second year of GST will be used for the same.

Bundling transportation with supply of goods

Definition of composite supply in the CGST Act contains an illustration whereby when goods are packed and transported with insurance, then supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is the principal supply. One of the essential ingredients of composite supply is that the constituent supplies should be naturally bundled. A supplier may sell his goods on ex-works basis or FOR destination sale basis or ex-works basis but arranging transportation at the request of the buyer. For such supplier, transportation can hardly be said to be naturally bundled with supply of goods. In most cases, the buyer has option to either arrange for transportation himself or request the seller to arrange the same. When the buyer requests the supplier to arrange for transportation and reimburses freight cost, the supplier cannot be treated as transporter. The supplier at best can be termed as facilitator of transportation service but the same arises from the familiarity of the seller with the local transporters.

Attempts to tax transportation in respect of commodities along with principal supply of goods has been part of excise legacy and the revenue administration has had mixed results in the courts. Lengthy debates on primary freight and secondary freight along with expressions like 'place of removal' and 'place of delivery' consumed the time of efforts of everyone in the earlier regime and all of them are attributable to the anxiety to tax transportation even after introduction of service tax on transportation. The illustration noted above does not reflect commercial realities or practices. As there is a tax differential between goods and transportation, once again industry is compelled to divorce or disown all liabilities related to transportation, wherever possible, only to defend itself from the higher tax cost on freight due to treatment as composite supply. GST commenced with the goal of being neutral vis-à-vis business decisions but such legally untenable definitions have the potential of widening the gulf between the taxman and the taxpayer. A re-look at such provisions is sine qua non in the second year of GST.

(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 , Part VI