JANUARY 28, 2019

By Dr G Gokul Kishore

WE commence the discussions in this 22 nd part of the current series waiving the unwritten rigour of an introduction.

Electricity distribution - Circular set aside by High Court

Hundreds of writ petitions seeking various kinds of relief under GST law have been filed in High Courts so far. Courts have granted interim relief in a few, allowed taxpayers' petitions in some cases and were not impressed in providing any relief in certain others. A recent judgment of Gujarat High Court merits brief discussion.

Services relating to transmission and distribution of electricity have been under exemption regime right from service tax regime. CBEC had issued Notification No. 11/2010-S.T., dated 27-2-2010 to exempt services provided for transmission of electricity. As services relating to distribution was left out, Section 11C notification was issued to cover the past period by Notification No. 45/2010-S.T., which sought to exempt services relating to transmission till 26-2-2010 and distribution of electricity till the period 21-6-2010. In the same year, CBEC issued a circular 131/13/2010 dated 7-12-2010 to clarify exemption to renting of electricity meter. Surprisingly, this 2010 circular used the word ‘supply' to state that such supply of meters for hire to consumers being an essential activity having direct and close nexus with transmission and distribution of electricity, was covered under the exemption. Post-GST, similar exemption has been continued through Notification No. 12/2017-Central Tax (Rate).

Rationality could not last long. Pushed by revenue considerations, GST was clarified as payable by CBIC through Circular No. 34/8/2018-GST dated 1-3-2018 in respect of application fee for new connection, rental charges for meter, testing fee for meters / other equipment, labour charges for shifting of meters or lines and charges for duplicate bill. Having clarified meter hire as exempted in 2010, volte-face by CBIC on the same in the latest circular had to fail judicial scrutiny. The circular has been struck down by Gujarat High Court as ultra vires Section 8 of CGST Act and Notification No. 12/2017-Central Tax (Rate) in so far as the clarification relates to various charges recovered by electricity distribution companies from consumers [Judgment dated 19-12-2018 in Torrent Power Ltd. v. UOI - 2019-TIOL-419-HC-AHM-GST.

The High Court held that meter hire is part of composite supply with transmission and distribution being the principal supply and the latter being exempt, the former shall also be exempt. It may be a matter of ordinary prudence that without meter, electricity distribution may not be feasible or without applying for service connection, electricity cannot be received or consumed. Having made the taxpayer spend his resources for litigation arising out of an irrational interpretation, CBIC should examine all those circulars (out of the 87 issued so far) where tax liability has been clarified against the taxpayer adopting similar interpretation. It is not only important for the tax administration to be pro-active in clarifying issues but such clarification should also be legally sustainable.

New return filing procedure - Penal clauses

GST Council in the meeting held on 22-12-2018 decided to implement new return filing system from 1st April, 2019 on pilot basis. As per new Section 43A inserted in in CGST Act by CGST (Amendment) Act 2018, procedure for furnishing details of outward supplies for the purpose of availing input tax credit by the recipient is to be prescribed. This new provision speaks about modifying details provided by suppliers in the monthly returns by taxpayers. Procedure for availing ITC and verification of the same will also be prescribed. As some amount of time is left, one is not too concerned about these changes at this point of time.

Certain sub-sections under the new Section 43A, however, give rise to a few thoughts which should be a cause of concern. Sub-section (4) seeks to restrict ITC available to recipient to maximum of 20% of otherwise eligible credit amount if the supplier fails to provide outward supply details. It is not clear whether provisions do not exist to claim balance 80% as credit if the supplier furnishes outward supply details at a later date or we are not able locate the same. Sub-section (5) reckons the tax amount as furnished by suppliers in respect of their outward supplies as the tax payable under GST law. Sub-section (6) makes the supplier and recipient jointly and severally liable to pay tax or pay the ITC availed where details of supplies have been furnished but relevant return has not been filed. If the supplier defaults in filing return, even recipient is made liable for payment of tax liability. Procedure will be prescribed for recovery of such tax or ITC amount.

If one wonders as to what is sought to be conveyed through all these labyrinthine provisions, guidance will be hard to come by. The remarks column in the document placed in public domain at the stage of draft bill on amendments is so frugal that it says the new section is being introduced to enable new return filing procedure. Optimism on appropriate clarification well before implementation of these provisions is the only succour that taxpayers can hope for now.

More ominous provisions can be seen in sub-section (8) which empowers the government to prescribe procedures, safeguards and threshold of tax amount relating to outward supplies which can be furnished by a taxpayer who has defaulted in payment of tax for more than two months. This provision refers to sub-section (3) which pertains to outward supply details provided for availing ITC by recipient. It appears that if tax is not paid for more than two months, then the supplier will be under restriction to declare his sale details in the relevant form/return which will consequently restrict credit availability to the recipient. Notification to be issued will reveal whether such disqualification will get automatically lifted on subsequent compliance or there will be a separate departmental adjudication process.

We cannot refrain from drawing parallel with Rule 12CC of Central Excise Rules and Rule 12AA of Cenvat Credit Rules (as they existed then) read with Notification No. 5/2012-CE (NT). These provisions empowered the department to, in suspected cases of evasion, withdraw monthly duty payment facility, bar utilization of credit for payment of tax, etc. Deterrent though these provisions might have been, they were perceived as draconian. One hopes tax administration will not issue similar notification in the second year of GST and prove us wrong in comparing such provisions of GST law with pre-GST laws.

(…To be continued)

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

See Part XXI