AUGUST 12, 2019

By Abhishek Ranjan

THE Kerala floods of 2018 was one of the worst natural disasters faced by the country in the last few years. It resulted in a great loss of life and property in the State of Kerala. The State Government was in need of extra funds to rehabilitate and reconstruct. The GST Council in it's 30th meeting (held on 30th September 2018) discussed the issue of levy of cess to help the State of Kerala. The first and foremost apprehension of the members of the GST Council was that the levy of any such cess would lead to distortion of the concept of 'ONE NATION, ONE TAX'. However, the GST Council in it's 32nd meeting (held on 10 January 2019) allowed the State of Kerala to levy cess @1% on intra-state supply of goods or services, fora period of two years.

The State of Kerala introduced the Kerala Flood Cess ('KFC/cess') vide the Kerala Finance Act, 2019 ('the Act'). As per Section 14 of the Act, the KFC is to be levied on such intra-state supplies of goods or services or both made in furtherance of business by a taxable person as provided for in Section 9 of the Kerala State GST Act, 2017 ('Kerala GST Act'), which is the charging Section for GST levy in the State of Kerala.

The purpose as envisaged and mentioned in the Act for the levy of the cess was to reconstruct, rehabilitate and compensate flood victims. Further, the cess is not leviable on-

- persons who have opted for composition scheme under GST in the State of Kerala;

- exempted supplies; and

- B2B supplies made in furtherance of business .

If one applies the golden rule of interpretation to the above exclusions contained in Section 14 of the Act, it becomes clear that KFC is not leviable on the B2B supplies made by the supplier in furtherance of his/her business . Now, if one looks at the definition of business as contained in the CGST Act, 2017 / Kerala GST Act, 2017, it is evident that the same has been given widest amplitude and it is very difficult to comprehend a situation wherein a particular B2B supply can be categorized as not in furtherance of business of the supplier.Thus, in effect, the cess is only to be levied on the intra-state B2C supplies made in furtherance of business i.e. supplies made by the registered persons to unregistered persons.

It is to be noted that the phrase 'in furtherance of business' was not present in Clause 14 of the Kerala Finance Bill, 2019 ('Bill'). In view of the author, even after the usage of the said phrase, Section 14, can only be interpreted to mean that cess is leviable only on B2C intra-state supplies. Any other interpretation to the wordings of Section 14 would not be appropriate.

The KFC Rules, 2019 were notified and the proposed date of the commencement of the levy was postponed twice. The levy has commenced from 1 st August, 2019.

At the time when everything seemed settled for the smooth levy of the cess, the Kerala State GST Department released FAQ dated 29.07.2019 on KFC ('FAQ'). The FAQ contains a proposition which can lead to unexpected surge in the litigation related to the levy of the cess. The same will be analysed in the latter part of this article. Firstly, let us analyse the implications of the amendments made, a day after the release of the FAQ, in the KFC Rules vide the KFC (Third Amendment) Rules, 2019.

Rule 3(4) and the format for the form KFC-A (monthly return for KFC) has been amended which requires the supplier to also furnish information with respect to intra-state supplies not in furtherance of business to registered persons. It is pertinent to note that the KFC (Third Amendment) Rules did not amend Rule 2 of the KFC Rules which deals with levy and collection. Rule 2(1) of the KFC Rules states that KFC shall be levied on intra-state supplies of goods or services or both made by a taxable person to an unregistered person in respect of supplies specified in Table under sub-clause (2) of clause 14 of the Kerala Finance Bill, 2019. Rule 2(1) and 2(2) still refers to the table specified under the Kerala Finance Bill, 2019 wherein it was specified that cess @1% shall be levied on the services taxable @5% GST. However, the table as appearing in the Act mentions that Nil cess shall be levied on the services taxable @5 %.

Although it is a settled position of law that rule being in the nature of delegated legislation must be read in the context of the primary/legislative act and not the vice-versa. Hence, in case of a conflict between a substantive provision of an Act and delegated legislation (rule), the former shall prevail and the rule cannot travel beyond the Act. [refer Supreme Court's decision in the case of ITW Signode India Ltd. vs. CCE, 2003-TIOL-38-SC-CX-LB and Delhi High Court's decision in the case of Intercontinental Consultants & Technocrats Pvt. Ltd. vs. UOI 2012-TIOL-966-HC-DEL-ST , 2018-TIOL-76-SC-ST ]. However,the Department may still contend on the basis of the existing wordings of Rule 2 that cess shall be payable even on the services which are taxable @5% GST. If such a stand is taken by the Department, then this would result in large number of disputes with the assessees whose services are taxable @5% such as restaurants, canteens, vehicle rentals, etc.

Now coming to the FAQ, the answer to question no. 12 states that intra-state B2B supplies when not made in furtherance of business would attract levy of the cess. As discussed earlier, it is practically difficult to think of a situation wherein B2B supply made by the supplier would not be in furtherance of his/her business. Further, query no. 18 is also relevant and reproduced hereunder:

18. Whether purchase of motor vehicles for own use of a taxpayer is eligible for exemption from levying Kerala Flood Cess?

Ans. - No. Since the supply is not in furtherance of business.

Moreover, answer to question no. 19 again reiterates that if the supply is made to a registered person but not in furtherance of business, Kerala Flood Cess is to be levied.

The amended form KFC-A and the FAQ referred above, gives an impression that cess is required to paid even on those B2B supplies which are not used not in furtherance of business by the registered recipient. In view of the author, the Act does not prescribe for levy of cess on the B2B supplies which are not in furtherance of business of the recipient. Thus, the amendments in the KFC Rules and FAQ would not empower the State Government of Kerala to levy cess even on the intra-state B2B supplies.

Moreover, if the view expressed in the FAQ, is accepted, it would result in a situation wherein the suppliers of B2B supply will be required to ascertain at the time of supply as to whether the recipient is going to use the same in furtherance of business or not. Let us take an example where a car dealer in Kerala supplies car to a registered recipient in Kerala. Now, as per the FAQ, the levy of KFC will be determined on the basis whether the registered recipient will use it in furtherance of business or not. In the said scenario, it is not practical for the supplier to ascertain the usage of the same. Even if legal arguments are kept out of the discussion, such an onus cannot be put on the supplier for any kind of levy under the GST, especially when the same has been campaigned as a step in the ease of doing business in India.

In view of the author, the Act did not empower the State to levy cess on B2B supplies which are not used by the recipient in the furtherance of business. Further, if the view expressed in the FAQ is followed then the registered persons may also be required to pay cess under reverse charge for any supply covered under Section 9(3) of the Kerala State GST Act, 2017, not used in furtherance of business. It needs to be seen as to whether the GST Department of Kerala asks the suppliers to ascertain the usage of the goods/services supplied by them to registered recipients and pay cess accordingly. If the Department insists on such an exercise, it would certainly result in chaos.

Therefore, the Kerala State should revise the FAQ and align the KFC Rules with the provisions of the Act so that the KFC does not get fame as the levy which was introduced for the welfare of the flood victims but unwittingly opened the floodgates for litigation.

[The author is Principal Associate, Lakshmikumaran and Sridharan, New Delhi and the views expressed are strictly personal.]