OCTOBER 23, 2018

By Dr G Gokul Kishore

MOST of the Indian laws are completely indigenous. Importing tax provisions as present in the laws of major jurisdictions like EU or Australia has been the trend for sometime now. In income tax, OECD model convention, Australian Fringe Benefit Tax, South African GAAR to name a few, were adapted in the Indian Income Tax Act with the ostentatious purpose of augmenting revenue, plugging tax avoidance and base erosion. GST law as enacted now in India borrows generously from VAT/GST law of EU and other countries and consequences lie both in terms of difficulties in administration and reconciliation of alien concepts with uniqueness of Indian business practices.

Agreeing to the obligation to be taxed

The provision relating to toleration of an act being deemed as service has been carried forward from service tax to GST though the idea, as such, is foreign. Entry 5(e) of Schedule-II to CGST Act treats or deems agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act as supply of service. Mere agreement being deemed as supply when actual supply has not materialized mirrors the ingenuity of taxman to garner some revenue even at the stage when the parties contemplate of a business transaction. Tax administration can defend the provision on the ground that if such obligations are agreed between parties for which consideration is identified, then taxman gets the jurisdiction to tax.

The issue gets complicated when there is no consideration and when the administration starts looking at every penal clause in a contract or agreement through the prism of the above entry on toleration of an act. Clauses on penalties, compensation and damages are integral part of a contract and Section 73 of the Indian Contract Act forms the basis to provide remedies consequent to breach. Section 15 of CGST Act seeks to include late fee or penalty in the value of supply if the same is related to delayed payment of consideration for such supply. Penalty imposed by a party not related to payment towards supply is not included in value of supply and, therefore, is not subject to GST. The original intention appears to be to keep penalties or damages out of the levy.

Nomenclature of such penalty may vary - it may be termed as penalty, it may be titled damages or it may go by the name of compensation. Contract is a result of consensus ad idem and, therefore, intention of the parties determines the nature of recovery and tax is a mere consequence if at all applicable. Tax administration cannot appropriate to itself jurisdiction to tax any amount only based on legally fictitious entries whereby certain activities are deemed as supply even without making an effort to understand the intention of the parties or nature of the amount paid. The eagerness to get a share of penalties is evident from the exemption granted to liquidated damages paid to government [Notification No. 12/2017-Central Tax (Rate)]. The true import or implications of the entry on toleration are yet to be tested in court of law and till such time, taxpayers will have to bear the burden of yet another hostile provision intruding into every receipt arising in the course of business.

A recent ruling by Advance Ruling Authority, Punjab [In Re: KPH Dream Cricket Pvt. Ltd., Ruling dated 20.08.2018 - 2018-TIOL-206-AAR-GST contains interesting observations on the entry relating to toleration of an act. We will refrain from commenting on the fundamental legal infirmity of the ruling as the same has been pronounced 'in public interest' despite the applicant withdrawing the application. The issue involved was treatment of complimentary ticket to cricket matches and the question has been answered in the affirmative i.e. the same is a taxable supply. The AAR after considering the term 'forbearance' appearing in the definition of consideration in CGST Act, Section 7(1)(d) and the entry on toleration of an act in Schedule-II has concluded that in respect of such entries, requirement of consideration is not relevant. The ruling is dated 20th August, 2018 and amendment (with retrospective effect from 1st July 2017) to CGST Act omitting said clause (d) in Section 7(1) received Presidential assent on 29th August, 2018. Therefore, in part, the basis of the ruling has become unsustainable and, therefore, appellate authority may take a different view. It is not clear why the authority did not consider the fact that the cost of complimentary tickets is generally considered while determining price of tickets.

In the second year of GST (and in subsequent years) we may witness many more intellectually stimulating arguments and orders before the government decides not to tolerate and amends the provision.

Constitutional validity of taxing advances

From Point of Taxation Rules [read with 'to be provided' in Section 65(105) of Finance Act, 1994] in service tax regime, GST law carries forward the legacy of taxing advances paid by recipient to supplier of goods or services. Taxable event is supply under GST law. When supply is merely intended, an advance amount is received by the supplier to secure a commitment from the buyer. The taxman has, strictly speaking, no jurisdiction to tax.

In the earlier regime, taxable event was deemed to include payment of advance leaving the larger question of legal propriety unanswered. The present GST provisions do not stand on a better wicket either. Section 7 of CGST Act defining scope of supply includes 'supply agreed to be made' for a consideration. But the basic question on vires of provisions in CGST Act expanding the scope of supply to cover agreeing to supply and deeming payment of advance amount as taxable event remains when the definition of 'goods and services tax' as provided in clause 12A of Article 366 of the Constitution simply defines it as tax on supply of goods or services or both. GST law is not income tax law to bring receipt of money in its ambit. Treating agreement to supply as supply and deeming advance payment as taxable event before the occurrence of the actual event of supply manifests, the urge to earn revenue and fares poorly vis-a-vis the Constitutional basis of taxation particularly when Article 246A seeks to empower Parliament and State Legislatures to make laws with respect to GST on goods or services or both where supply takes place.

The preamble to CGST Act reveals the objective as to levy and collect tax on intra-State supply of goods or services or both. While preamble is non-justiciable, it may not be a good law if the substantive provisions are contradictory to the intention as expressed through the preamble.

It may be relevant to note that money is out of the ambit of GST as per definition of goods contained in Section 2(52) of CGST Act. But this will be interpreted as transactions in money and not the money received as advance towards supply of goods or service. If the supply is unascertained, yet advance is paid, can it be treated as towards any supply at all or can it be called as mere money transfer? Constitutional issues require serious and more elaborate discussion which will be undertaken separately. We express the hope that the second year of GST can be used for remedial action on issues highlighted in this series but for the present question, one may have to wait for a few more years to find an answer.

(To be continued…)

[The author is an Advocate and Joint Partner, Lakshmikumaran & Sridharan, New Delhi. The views expressed are strictly personal]

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