DECEMBER 26, 2018

By Shailesh Sheth, Advocate  

"The life of the law has not been logic;it has been experience." - [Oliver Wendell Holmes]

THE heightened expectations and anxiety of the taxpayers and the tax professionals that precede every meeting of the GST Council ("the Council") would easily bring to mind a similar atmosphere generally experienced on the eve of the presentation of the Union Budget! In this sense, every meeting of the Council certainly partakes the character of a 'Mini Budget' in offing in the GST arena!

The 31 st Meeting - incidentally, 5th and the last in the calendar year 2018 - of the Council held at New Delhi onDecember 22, 2018 was naturally not free from this charged atmosphere! The formidable challenges posed by the slowdown on the economic front;the growing disillusionment of the taxpayersover the GST policy front and the strong resentment of the tax professionals over the GST implementation front would mean that the Council had its task cut out this time! The Council was certainly under pressure to take some tough calls which would provide, at least, a 'leg up' - if not, 'booster dose' - to the economy, satisfy the wide-ranging aspirations of the taxpayers and also address the issue of procedural nightmares haunting the GST implementation since its introduction.

Now, going by the recommendations and decisions announced by the Council as released through as many as 5 (five) Press Releases, one has to concede that the Council has done a decent - if not an 'outstanding' - job! These recommendations can broadly be categorized as those:

a. relating to rate structure (Fiscal initiatives);

b. relating to procedural matters (Policy initiatives);

c. relating to the proposed amendments in GST laws (Legal initiatives);

d. relating to the restructuring of the Composition Scheme and threshold exemption limit, amongst other matters (Economic initiatives);

e. relating to the revenue trends under GST and the bottlenecks therein (Revenue initiatives).

Let us briefly study the scope and implications of some major decisions of the Council under the above 5 (five) broad heads, as reflected in the press releases.

I . Revamping of the rate structure (Fiscal initiative):

a. Reduction in rates for certain goods or services - Policy failure or dawning of wisdom or strategic retreat…!

Council's recommendations:

As was already on the cards, the Council has decided to further curtail the list of 28% bracketed items or services and substantially reduce this peak rate on selected items or services. The recipients of this largesse include items like pulleys, transmission shafts and cranks, gear boxes, etc., 32" TVs and Monitors, re-treaded or used pneumatic tyres of rubber, power banks, digital cameras and video camera recorders, amongst other items, where the peak rate is being reduced to 18%. For the parts and accessories for the carriages for disabled persons, the rate is being drastically reduced from 28% to 5%.

On the services front, the only beneficiary of the reduction in peak rate is cinema tickets above Rs. 100 where it is being reduced to 18%.

Aside from the above, the prevailing rates of 18% or 12% are being reduced to 12% or 5% or Nil, as the case may be, in respect of the specified goods or services. The list includes the goods such as articles of natural cork, marble rubble, natural cork, walking sticks and fly ash blocks, music books, amongst other itemsand the services such as cinema tickets upto Rs. 100 , third party insurance premium of goods carrying vehicles, Haj travel, amongst other services.

(For the broad details of the items/services covered under the list, the Netizens may refer to the Press Release).

The reduction in rates will be effectuated vide Notifications which are expected to be issued on January 1, 2019.

Comments:

Pruning the list of 28% rated goods/services - Wheel comes the full circle…!

The Council has continued its sincere resolve to prune the list of 28% bracketed items/services and further rationalize the overall rate structure. The curtailment of list of maximum taxed items would now leave hardly 28 odd items in the list which are considered as 'sin goods' or luxury items with only exception of cement. The Infrastructure and Real Estate Sectors mayfeel disappointed as 'cement' continues to remain in top tax bracket.

It may be recalled here that nearly 228 items were in the highest tax bracket when GST was rolled out on July 1, 2017. Thus, almost 90% of the number of items have been taken out of the list in a span of just 1½ years! Is this a policy failure, lack of foresight or dawning of wisdom or a strategic retreat? In his post-meeting comment, the FM asserted that "the 28% bracket is gradually moving to sunset….."But then, whether this rate ought to have seen the 'sunrise' at all or not is a moot question! As I have repeatedly said that there was no rhyme or reason or logic or rationale in placing certain items under this crushing tax burden. Take, for instance, the items, viz. parts and accessories for the carriage for disabled persons on which the rate is now being reduced to 5% from 28%. It simply defies logic as to how these items could have been put under the 'top tax list' in the first place? And as if this was not enough, it took the 'fitment Committee' 18 months to realize this folly!

As for the cement, the continued inclusion thereof in the list is being justified solely on the ground of 'revenue considerations'. It is rather strange that on one hand, there so much talk about and thrust on the creation and expansion of the infrastructure and construction of the affordable houses for all and on the other hand, 'cement', a crucial raw material, continues to bear the brunt of 28%!

It is obvious that the 'theory of equivalence' that initially guided the 'rate policy' has not borne the desired fruits and on the contrary, has boomeranged! Fortunately, the Council has been quick to grasp the situation and has been on 'overdrive' and in a 'damage control' mode. The drastically curtailed list of 28% rated goods bears testimony to this fact! Interestingly, contrary to the beliefs and expectations of the taxpayers, the list of 28% bracketed items turned out to be quite a bloated one when GST was introduced in the country. All along, the taxpayers had been led to believe that only sin goods, luxury items, automobiles and auto parts would be subjected to 28% rate. Now, in a short span of 1½ years, the drastically curtailed list covers only sin goods, luxury items, automobiles and auto parts with only undesirable continued inclusion of cement. The wheel has thus come full circle for the coverage of goods under 28% rate! While the taxpayers may have to live with the pruned list for some more time, it, at least, now wears a very reasonable look!

"Government's view of the economy could be summed up in a few short phrases. If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."
[Ronald Reagan]

b. GST on Solar Power Generating Plant and other renewable energy plants - Darkness persists…!

Council's recommendations:

The Council took the note of the disputes regarding GST rates where specified goods attracting 5% GST are supplied along with services of construction of solar power generating plant, etc. The Council has accordingly, recommended that in all such cases, the 70% of the gross value shall be deemed as the value of supply of said goods attracting 5% rate and the remaining portion (30%) of the aggregate value of such EPC contract shall be deemed as the value of supply of taxable service attracting standard GST rate.

Comments:

The issue of taxability of a composite contract for the design, supply, installation, erection and commissioning of 'solar power generating plant' has remained a disputed one since the advent of the GST regime. There are conflicting Advance Authority Rulings on this issue and other related issues. The Netizens may, in this regard, refer to the following Rulings :

1. Maharashtra AAR InRe: Giriraj Renewables Private Limited - 2018-TIOL-12-AAR-GST

2. Maharashtra AAR InRe: Fermi Solar Farms Private Limited - 2018-TIOL-17-AAR-GST

3. Karnataka AAR InRe: Giriraj Renewables Private Limited -2018-TIOL-43-AAR-GST

4. Karnataka AAAR InRe: Giriraj Renewables Private Limited -2018-TIOL-16-AAAR-GST

5. Andhra Pradesh AAR InRe: Dinesh Kumar Agrawal - 2018-TIOL-55-AAR-GST

The Council appears to have taken due note of the dispute surrounding the issue. The Council, with a view to pave the way for the resolution of the issue, has recommended that in case of such EPC contracts, 70% of the aggregate value shall be deemed to be 'value of supply of goods' attracting 5% rate and the balance 30% shall be deemed to be 'value of supply of services' attracting standard GST rate. The recommendation, at a first glance, appears to be quite simple and attractive. However, on a closer scrutiny, one may find that it raises more questions than it answers! The contract for 'design, supply, installation, erection and commissioning' of Solar power generating plant involving 'supply of goods' and 'supply of services' may be undertaken as a composite, indivisible EPC Contract for a lumpsum consideration. Such contract would be covered by the definition of 'Works Contract' as per Section 2 (119) of the CGST Act, 2017 and would also answer the description of 'Composite supply' as defined vide Section 2 (30) of the said Act. Consequently, the entire contract may have to be considered as 'supply of service' in terms of Entry 6(a) of Schedule II to the Act.

The question then arises here is whether it is permissible in law to artificially divide such composite EPC Contract into 'supply of goods' and 'supply of services' and attribute 'value' on 'deemed basis' to each component and levy the GST at the applicable rate accordingly? Is there any statutory provision in the Act or the Rules made thereunder that provides for or authorizes such methodology of valuation of a composite contract? Will not such methodology of valuation and taxation run foul of Entry 6(a) of the Sch.II to the CGST Act, 2017 and make the entry redundant? Can the 'measure of tax' override or influence the 'character or nature of tax'? Can the philosophy of taxation of 'works contracts' and the mechanism provided under the erstwhile VAT and Service Tax regime be adopted mechanically under GST regime?

The issue requires serious consideration lest the solution turns out to be worse than the problem itself!

"Laws are like medicines, they usually cure the disease only by setting up another that is lesser or more transient."
[Otto Von Bismarck- Speech in the Prussian Upper House,
                                                                                                     March 6, 1872]

(...To be continued)

(The author is founder SPS Legal and the views expressed are strictly personal.)