FEBRUARY 11, 2019

By Dr G Gokul Kishore

ABSENCE of provision and absence of qualification in a provision where the same are required, impact both the taxpayers and the tax administration. An open-ended provision restricting seamless credit and absence of express provision for rectification of statutory form have been subject-matter of two important rulings. Both are discussed in this 24 th part as they, in part, set the agenda for the second year of GST.

No ITC shelter for accommodation

One of the two words which came to be used by almost everybody in GST regime is 'seamless' (the other one is 'subsume'). This is being used to denote that input tax credit under GST law is without any seams or discontinuities or interruptions. It appears that this term has close relationship with supply chain rather than the person taking credit itself. Tax paid will be available as credit throughout the supply or value chain till the goods or services reach the ultimate consumer. Under GST, credit system is generally perceived as liberal and broad-based as well. However, the negative list of goods and services on which credit is not available as provided in Section 17(5) of CGST Act seeks to disprove the above notion. One of these restrictive entries relates to goods or services used for personal consumption. This entry has been included to merely state the converse of Section 16(1) which seeks to extend credit on goods or services used or intended to be used in the course or furtherance of business. One may not have any second opinion as to barring credit of tax paid on something which is not used in business but for personal consumption of the buyer.

The issue moves to first level of complication when the purchases are made by the person engaged in business but the beneficiary is employee. Even here, special dispensation has been carved out so as to provide credit on goods or services provided by employer to his employees as per statutory requirement. The issue gets complex when services used by employee are for his consumption and are provided by employer which are not statutorily mandatory but necessary for business purpose. A recent advance ruling has reinforced the need for the tax administration to take a re-look at the above provision on personal consumption and consider amending it with appropriate provisos so that credit is available in such situations.

The Maharashtra AAR in its ruling has held that tax paid on accommodation used by top managers of the taxpayer-company would not be available as credit in view of the above-mentioned restriction on personal consumption related services [In Re: Posco India Pune Processing Center, Ruling dated 7-9-2018 - 2019-TIOL-25-AAR-GST. The taxpayer had argued that such accommodation in hotel was part of CTC and the same was a perquisite and business expenditure as per Income Tax Act. The top managers being expat employees had to stay in rented accommodation and as per policy, such charges were paid by the company. The AAR was of the view that residential renting is not taxed under GST and if the MD and GM were staying in any other residential place (other than hotel), the applicant would have paid rent without GST. It held that providing residential accommodation in hotel was not for furtherance of business of the taxpayer / applicant.

The reasoning of AAR may have merit if literal interpretation is adopted but credit provisions are required to be purposively interpreted. The clause restricting credit on services used for personal consumption cannot be omnibus in application so as to deny credit on procurements made by taxpayer the moment the same are used by employees. It is settled law that the tax officer cannot sit in the armchair of the businessman and examine commercial prudence. Also, a businessman is not required to opt for the method which would be more acceptable to the department. If Income Tax Act can consider the same as business expenditure, GST law cannot adopt a contrary position to hold that the same is not a business expense. Alignment of GST law with such other laws and amending the provision on personal consumption should be priority areas for the tax administration in the second year of GST.

Form TRAN-2, being an admission, rectification to be admitted

A return or form filed as per statutory requirement is not an edifice cast in stone. But the draftsman appears to have a different belief. For most of the returns and forms, no provision was made in CGST Act and later revision of TRAN-1 was provided. As per latest amendments, revision and rectification of monthly returns will also be enabled. Though not expressly stated, based on principles of evidence, admission and relevancy of statements, Calcutta High Court held that the petitioner should be provided opportunity to correct TRAN-2. It held that neither CGST Act nor CGST Rules forfeits the right of a person making an admission to substantiate that such admission was made by mistake or was untrue. The department was given liberty to seek explanation as to why such revision is required [Optival Health Solutions v. UOI, Order dated 7-2-2019].

The above order seeks to lay down the proposition that a return or statement filed by a taxpayer is an admission of certain facts and such taxpayer is entitled to prove that such admission was made by mistake and such facts need to be taken into consideration to determine the evidentiary value of such admission (contents in return or statement). A taxpayer filing a return has the liberty of explaining the same at his option. It is felt that the department cannot close such option except, may be, by providing limitation within which such rectification or revision can be made.

An important take-away from the above order is that opportunity to rectify mistakes in returns or statements can be exercised if the taxpayer opts for the same. This means opportunity to correct mistakes in returns is a legal right even if the statute does not expressly provide for the same. That an assessment or casting of liability on an assessee based on wrong facts is not in the interest of either the assessee or the department is a natural inference. While the department may or may not agree with an asseesse's claim, it certainly cannot deny him the opportunity to present the corrected facts. Rule 120A of CGST Rules providing for one-time revision of TRAN-1 needs revision besides addition of new rule to enable revision of TRAN-2. Similar provision for revision should be incorporated in CGST Act and CGST Rules wherever the same is absent now.

(…To be continued)

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

See Part XXIII