JULY 23, 2019

By Dr G Gokul Kishore

THE hunger for revenue can never be satiated. Development needs, in part, play a key role in pushing the government and the revenue department to somehow tax every payment received. This is part of exchequer's DNA and it is no surprise that the same traits can be seen in GST regime like those witnessed in pre-GST era. Let us try to substantiate this assertion in this 47th part.

Interest subvention - Revenue is interested

Our understanding till date is where there is a supply, GST is payable. However, there appears to be another school of thought that where there is a receipt, there must be a supply and therefore, GST is payable.

For purchase of vehicles of a particular manufacturer, a company is chosen as preferred lender. The lender charges rate of interest which is lower than market rate so that customers prefer both the vehicle and the preferred lender. To sustain such model, the manufacturer pays certain amount to the lender as interest subvention or subsidy. The manufacturer is benefitted as it is his vehicles which get promoted through this process of cheaper loan facility. The lender is benefitted as he is assured of his interest income as received from the customer as well as the subsidy received from the manufacturer. But the revenue department is not benefitted as interest is treated as exempt under Notification No. 12/2017-Central Tax. While exemption cannot be denied for actual interest received from the customer for extending loan, admissibility of exemption to the subvention or subsidy amount is doubtful.

The lender approached Authority for Advance Rulings with elaborate arguments as to how the subvention amount is recognized in their books of account as interest and how it is amortized over the loan tenure even if the same is received at one-go from the manufacturer. It was further argued that interest is interest whether it is received from the customer to whom loan is given or a portion is received from third person like manufacturer and the character does not change and, therefore, exemption as applicable to interest should apply to such subvention amount as well. The AAR did not agree and reading the agreement between the manufacturer and lender, it stated that the lender has agreed to do an act and the same is classifiable as 'other miscellaneous services' [SAC 9997 92] and liable to GST at the rate of 18%, SI. no. 35 of 11/2017-CTR [In Re: Daimler Financial Services, TN AAR Ruling dated 15-4-2019] - 2019-TIOL-212-AAR-GST.

All agreements subject to GST?

All agreements require parties to perform certain acts and they do agree to perform the same and that is why they enter into agreements. The AAR in this case referred to the terms like agreeing to provide vehicle loan at lower interest rate, provide better customer service and the like. If agreeing to do an act is the determining factor for taxability, then all agreements entered between parties will be subject to GST as consideration is invariably part of commercial contracts. The AAR had noted that the lender was promoting sale of vehicles of the manufacturer by offering such loan products but chose to classify under such miscellaneous head. The department argued that it was business support service but the same was not considered. Assuming that the subvention amount was not interest per se but a consideration for sales promotion, then the classification could have been otherwise.

The issue before AAR was not whether there was a supply involved and what was the classification. The question referred was whether exemption would be available treating the subvention amount as interest as it effectively represents part of the interest amount otherwise payable by the customer but paid by the manufacturer to the lender. It appears that the AAR could not appreciate the true nature of interest, treatment given in books, etc., for examination of applicability of exemption to such amount. The applicant pleaded that consideration can be received from third persons also and in this case part of the interest was received from the manufacturer. This was rejected by the AAR on the ground that the buyer was not under obligation to pay such amount.

Reforming AAR

Exemption cannot be denied merely because part consideration is paid by third person. The amount paid by manufacturer is for use of lender's money by the buyer of vehicle. The correlation between the amount paid by the manufacturer and the loan amount borrowed by the buyer is obvious. The lender may incidentally provide better customer service or insurance product but such terms in the agreement do not conclusively mean that such lender is promoting sale of vehicles. The entire transaction revolves around the funds lent as loan and the interest cost, part of which is borne by the manufacturer.

Lack of training for members of AAR has been pointed out in earlier parts. Knowledge of commercial practices and accounting treatment are key when law is applied on a tricky element like interest subvention. Considering the depressed revenue collections, pro-revenue rulings will be welcomed by the department. But the GST Council will appreciate the fact that such bodies have been created to assist taxpayers and not to maximize revenue. Reforming AAR by either creating separate hierarchy within the department thus insulating from revenue bias, including Judicial members, etc., can help the government reaffirm its commitment to taxpayers.

Are all receipts and payments liable to GST?

In the commercial world, there are established practices of certain payments, reimbursements, recoveries, etc., by all suppliers from vendors, customers and other parties to cater to various situations. By looking at all such payments and receipts through the prism of either tolerating an act or agreeing to do an act, the department can only clog the courts as taxpayers will be compelled to seek judicial remedy when such an unreasonable interpretation is adopted. Another dimension to such trend can be seen in Circular No. 105 whereby CBIC has sought to give life to legacy issue of 'discount being considered as a consideration' for perceived service of sales promotion (discussed in Part-44 ).

While the government is keen on off-loading legacy baggage, it appears tax administration is keen on migrating even legacy issues to the new regime as well. From the negative list era under service tax, clauses in law like 'toleration of an act or situation' have become the preferred ammunition as they are capable of unrestricted interpretation to encompass every receipt so as to be taxed. Subjecting all receipts and payments to tax can neither be the objective any tax law nor is the desirable method of interpretation and implementation. This clause requires proper amendment to circumscribe its application. We hope the GST Council and tax administration take notice before audit objections and notices flood and drown the taxpayers.

[…To be continued]

[The author is an Advocate. Views expressed are strictly personal.]

See Part 46.