OCTOBER 30, 2018

By Dr G Gokul Kishore

EXTENDED time limit for filing GSTR-3B for September got over on 25 th October. The extension came on 21 st October by which time most of the taxpayers had filed their return. Relaxation used to come at the last moment but this time, due date has been extended after the due date itself. Belated generosity seldom serves the purpose however noble the intention might be. Issues arising out of prescription on outer time limit as 30 September for issuance of credit notes in relation to previous financial year's supply, unresolved issue of place of supply in cases of ex-factory sale to buyer from a different State and interpretation of the term ‘original works' have been highlighted in this part.

Credit notes – Time-limit not in sync with commercial practices

Section 34 of CGST Act talks about credit notes and debit notes. The concept of credit notes in GST law apparently seeks to recognize the commercial practices like price variation post-supply and return of damaged goods. Sub-section (2) of Section 34 requires reporting of such credit note in the month in which it is issued but not later than September for the previous financial year or date of filing annual return, whichever is earlier. As the last date for filing annual return is 31 st December, in most cases, the relevant date will be September for which GSTR-3B return is filed by 20 th October. Being accommodated in GST law, such credit note is one which has tax effect i.e. either increase or reduction in tax already paid is sought and recipient reverses proportionate credit as well. Commercial credit notes are not relevant as they do not get reported in GST returns.

For supply made in March, 2018, credit note as per CGST Act cannot be reported beyond September 2018. This means law provides six months for issuance of such credit note. Everyone knows that in several cases, due to various trade issues, credit notes are issued well after six months from the date of supply. By use of date of filing of annual return also, it appears the intention is to give a closure to the practice of varying price at the earliest. Law cannot compel industry to vary price within a time-limit which is the consequential effect of the above provision. Price itself is tentative in many cases of supply and gets finalized over a period of time.

Taxman may raise the question – if credit notes are allowed to be reported in any year, then neither annual return will have relevance nor will the reporting process in the GST regime be efficient. The answer may lie in providing the facility of issuance of revised invoice (presently provided in specified situation only) in, say three years, with the same requirement of reversal of proportionate credit by recipient and by using appropriate notes in the annual returns. Correlation of relevant monthly returns within three years along with annual returns is not an impossible task. Second year of GST should be used to align the law with routine business practices and amend provisions which compel business to change its commercial practice in the name of compliance .

Place of supply or places of supply?

Place of supply provisions in IGST Act occupy a very dominant place as GST being destination-based consumption tax, seeks to identify or prescribe the consumption point to treat the same as place of supply. Section 10(1) of IGST Act specifies several situations of supply of goods to determine place of supply and it includes the provisions to cater to scenarios involving movement of goods or otherwise. In respect of cases where movement of goods is involved, sub-section (1) states that place of supply will be the location of the goods at which movement of such goods terminates for delivery to recipient. During the initial months of GST, the issue as to what will be the place of supply in cases of ex-factory sale where, strictly speaking, movement gets completed at factory gate (though actual movement has not commenced) for delivery to recipient (buyer) when carrier / transporter takes over, was debated but the same appears to have been lost in the stampeding crowd of other issues.

The latest amendments to GST law do not cover the above issues. If the supplier or supplier's State insists on treatment of ex-works supply to buyer from different State as local supply, then credit will be lost if such buyer does not have registration in the same State. Contract with the buyer and that of the transporter along with address and GSTIN of the buyer in the invoice will evidence the fact that such supply involves inter-State movement of goods. Providing a situation where credit chain can get broken and compelling the industry to substantiate movement through corroborative evidences are not hallmarks of a progressive legislation like IGST Act. Adoption of different interpretation by the department cannot be ruled out and States under revenue pressure may favour an argument which will enrich their coffers. For the same supply, there will then be multiple places of supply based on the interpretation perceived as favourable by different actors. Tax administration should consider amending Section 10(1) of IGST Act to remove this ambiguity.

Replacement whether original works

Differential tariff structure for original works and others has been carried forward from the earlier law to GST law. Notification No. 11/2017-Central Tax (Rate) providing for rate of GST on services and Notification No. 12/2017-Central Tax (Rate) use the term ‘original works' to provide lower rate of GST or exemption in specified cases. The latter notification defines original works as all new constructions under which two categories have been mentioned – (a) all additions and alterations to abandoned or damaged structures on land that require to make them workable and (b) erection, commissioning or installation of plant, machinery or equipment or structures. The term ‘original works' is used for works contract which pertains to immovable property alone in GST law.

By use of the word ‘new constructions', the intention appears to be to restrict the scope of original works to those where construction is involved and the same is new. However, construction for this purpose includes installation of plant or machinery or equipment or structure as well. This may indicate that replacement of part-assets which form part of plant or machinery may not get covered as original works even if the same involves erection and installation. In fact, repair work is not original work as the same does not involve creating something new but merely substitution of used / damaged asset is involved. Compared to service portion, value of goods will be more, in general, in new or original works. As the asset ages, service portion overtakes goods. Therefore, lesser percentage was attributed to services in original works and more in other works in service tax regime. It is difficult to comprehend the rationale for maintaining such distinction in GST regime. May be such provisions need to be re-visited.

(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 , Part VII , Part VIII