NOVEMBER 06, 2018

By Dr G Gokul Kishore

DEEPAVALI week should bring cheers to everyone. But the industry is complaining of lack of festive season demand though the government is happy that GST revenue has crossed the one lakh crore mark for the second time since introduction. Let us celebrate by serving our discerning readers three sumptuous but sugar-free issues in this tenth part.

Charitable trusts - CSR obligation of tax administration?

As per the first entry in Notification No. 12/2017-Central Tax (Rate), services by an entity registered under Section 12AA of Income Tax Act are exempted from GST. This exemption is only for charitable activities and such activities are defined exhaustively in the notification itself. This definition specifies public health related work like care or counselling of terminally ill persons or persons with severe physical or mental disability, activities meant for advancement of religion, spirituality or yoga, educational or skill development programmes catering to abandoned/ orphaned children, prisoners, etc., and preservation of environment. Draftsmen have been given the mandate of drafting inclusive definitions in respect of provisions relating to liability and exhaustive definitions when it comes to exemptions and, therefore, this exemption is no exception. This exemption and the definition are part of legacy carried forward as similar entry was provided in Notification No. 25/2012-S.T., in service tax regime.

Except in a few cases where large corporate houses establish trusts and register the same under Section 12AA of IT Act, a vast majority of such trusts are independent entities and work at the grassroots, catering to the genuinely under-privileged. As the threshold for tax liability under GST is very low, such trusts and NGOs, obtain GST registration sans exemption to most of their social welfare activities undertaken on collection of nominal fee. Activities are sustained through donations and such fee revenue is meagre. Exemption being extremely narrow and restricted, GST is paid even on such welfare programmes with attendant compliances like issuance of invoice in the name of beneficiaries, reporting the same in GSTR-1 as outward supply and eventually in GSTR-3B. The supplies are B2C in nature and, therefore, credit chain gets broken or completed in taxman's parlance. This is not to raise the pitch for exemption as GST, in principle, is based on least exemptions and maximum seamless credit. But there is definitely a case for re-visiting such an exemption entry and possibly widen the scope to include more activities. When CSR obligations are imposed on companies, let the tax administration also consider such broadening of relief to welfare activities as its CSR.

Credit lost in transit

These are days of publicity and tax administration issues press releases frequently to pat itself on the back on achievements on GST front. Taxpayers expect it to gracefully acknowledge and amend mistakes as well. One of the most obvious drafting errors is non-inclusion of capital goods along with inputs in Section 140(5) of CGST Act. This has effectively meant that in respect of capital goods on which supplier had paid excise duty and which were in transit on 30th June, 2017 but reached the buyer on or after 1st July, 2017, no credit could be taken / brought forward. The goods were eligible for credit under the earlier regime of Cenvat Credit Rules and are eligible to ITC under CGST Act as well. The cardinal sin committed by the buyer was his omission to ensure that the goods reach his place before midnight of 30th June, 2017. The very same goods, if received at 11.59 pm on 30th June, 2017 were eligible for credit but because the truck reached the buyer's premises at 12.01 am on 1st July, 2017, such goods became ineligible for credit. A delay of two minutes could cost you crores if the law is lacunar.

Absence of transitional provision for capital goods in transit at the time of implementation of GST was pointed out earlier but unfortunately no steps were taken. The taxpayer had to approach the High Court and being writ remedy, the Court felt it was not possible to provide any relief RSPL Ltd. v. UOI, Judgment dated 16-10-2018, Gujarat High Court - 2018-TIOL-2886-HC-AHM-GST. The argument of the department before the Court was that capital goods are slowly moving items and based on the same, the Court observed that such goods may take longer time for delivery and installation and legislature was not inclined to keep the issue of migration of credits open for indefinite period of time.

Credit is not a vested right. Credit is a concession. But denial of validly earned credit based on time of receipt of goods only because a new law was implemented in between, over which the taxpayer has absolutely no control, is unreasonable. Isolated purchases could have been planned so that the goods are not received during the transition period but when plants are under installation and commissioning or when large-scale expansion is implemented, receipt of goods is continuous. Purchases, receipts and business transactions cannot cease merely because new law is implemented. What was eligible for credit the previous day cannot become ineligible next day when essential conditions like receipt of goods, duty paid invoice, etc., are satisfied. The administration should instil confidence in taxpayers by retrospectively amending Section 140(5) of CGST Act to extend credit on capital goods which were in transit at the time of implementation of GST.

Advance Rulings - No place for place of supply

As per Section 97(2) of CGST Act, advance ruling is available on classification, valuation, ITC, registration, time of supply, activity whether amounts to supply and applicability of notification. Place of supply is not expressly covered for applying for advance ruling. But the Authority for Advance Ruling has divergent view. In a ruling dated 27-6-2018 (in Re: Fichtner Consulting Engineers), Tamil Nadu AAR - 2018-TIOL-129-AAR-GST held that they lack jurisdiction to consider the issue of place of supply. The question involved was place of supply when design was provided by engineering firm in Tamil Nadu to recipient in the same State and such design pertained to project in a different State. West Bengal AAR in its ruling dated 21-3-2018 (in Re: Global Reach Education Services) - 2018-TIOL-06-AAR-GST held that facilitation of admission / recruitment by Indian entity for foreign universities on receipt of foreign exchange was not export of service and the same would be an intermediary service and, therefore, place of supply would be in India.

Karnataka AAR in its ruling dated 21-3-2018 (in Re: Gogte Infrastructure Dev. Corp.) - 2018-TIOL-29-AAR-GST was of the view that since place of supply is where services are actually performed in respect of accommodation and restaurant service, such services provided in hotel to employees and guests of SEZ units cannot be treated as supply to SEZ units and, therefore, the same would be intra-State supply. Gujarat AAR held that it lacked jurisdiction to enter into question of place of supply where the issue was - providing result of testing of pharma products to foreign parties (in Re: Lambda Therapeutic Research Ltd., Ruling dated 30-8-2018) - 2018-TIOL-178-AAR-GST.

Advance Ruling Authority is a quasi-judicial body comprising two members, both of whom are from the tax department, without adequate training in law or justice dispensation. A fundamental question like jurisdiction is being subjected to divergent interpretation when the provision is unambiguous and exhaustive. These days rulings are delivered in large numbers. It is time the provisions on advance rulings are clarified by way of circular. If the intention is otherwise i.e. place of supply can also be answered by AAR, appropriate amendments may have to be considered.

(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 , Part IX