SEPTEMBER 14, 2019

By Apeksha Bansal

KERALA Flood Cess ('KFC') has come into effect from 01.08.2019.

In this article, we shall be focusing on Rule 3(6) of Kerala Flood Cess Rules, 2019 (hereinafter referred to as 'KFC Rules' ) which prohibits the refund of KFC once paid along with the returns to the government.

Rule 3(6) reads as under:

"There shall be no refund of the Kerala Flood Cess paid along with the returns".

In this regard, the author has taken a few illustrative situations that are impacted by the said rule -

- Post-supply discounts :

In light of Rule 3(6) of KFC Rules, 2019, a question arises as to what would happen when discounts are provided by any taxable person after the supply is made to an unregistered person. Whether the taxable person would be eligible to claim refund or adjustment of KFC paid earlier on the full amount?

- Return of goods:

In this case, KFC along with the GST would have been paid at the time of first supply. Post return of the goods, when fresh supply of the same goods will be made to another customer, the goods will again attract GST and KFC.

In the absence of refund of KFC which was paid earlier, the taxable person may ultimately end up paying KFC twice to the government.

- Excess KFC paid in the return:

Where the taxable person has inadvertently paid excess KFC while filing the return to the government, whether refund of such KFC will also be restricted?In this case as well, the taxable person may end up paying KFC without any liability towards the government.

Authority of the Government to retain KFC:

The common question, in all the above situations,which now arises is as to whether the government can infact retain KFC which was collected for the supply which subsequently got cancelled or where excess KFC was inadvertently paid by the taxable person.

Article 265 of the Constitution of India specifically provides that no tax shall be levied or collected except by authority of law. Therefore, the authority to levy any tax must be derived from the Statute.

Under the erstwhile tax regime as well, the courts have observed that the realization of excess amount of tax or money from an assessee or withholding any amount wrongfully without the authority of law is bad under Article 265 of the Constitution and the same should be refunded. (refer Supreme Court's decision in Sandvik Asia Limited Vs. Commissioner of Income Tax-I, Pune - 2006-TIOL-07-SC-IT and HMM Limited and another v. Administrator, Bangalore City Corporation and another - 2002-TIOL-450-SC-CT

In the above-mentioned cases, the moot point is whether one can argue that the levy of KFC is on intra-state supplies of goods and services.Here, there is no taxable event i.e. supply to the extent of KFC paid to and collected by the government and hence, government has no authority to retain the amount.

GST Credit Notes:

Another doubt which arises as to whether the taxable person is allowed to issue GST credit notes in order to claim adjustment of KFC so paid to the government.

Neither Kerala Finance Act, 2019 nor KFC Rules contain any specific provision for issuance of GST credit notes and adjustment/reduction in KFC liability due to any reason.

Disclosure in FORM No. KFC - A ('KFC Return'):

Further, KFC Rules specifically require that details of KFC disclosed in KFC return should be matched with the corresponding details disclosed in GSTR-1.

In GSTR-1, the taxable person is required to report the details of intra-state supplies (net of debit notes and credit notes) made to an unregistered person under Table 7A.  The value of supply to an unregistered person reported in GSTR-1 is the amount reduced to the extent of credit note issued.

For eg. If the value of supply to an unregistered person is of Rs. 100/- and GST charged is Rs. 18/-. Later, credit note is issued for the value of Rs. 50/- and GST portion of Rs. 9/-. Then, in GSTR-1, the value of supply is to be disclosed as Rs. 50/- i.e. after reducing the amount to the extent of credit note.

While filing KFC return, it is uncertain as to whether the value of supply should be disclosed as full Rs. 100/- or Rs. 50/- (net amount).

In case one takes a view that it should be net amount to match with GSTR-1, then counter-argument can be that outward liability has been adjusted by way of credit notes which is an indirect method of obtaining refund of KFC earlier paid. In the presence of specific bar on refund of KFC paid, the amount which should be disclosed as the value of supply in KFC return is not clear.

Further, in case, one takes a view that full Rs. 100/- should be disclosed as value of supply, then it would lead to a mis-match between KFC return and GSTR-1 and result into non-compliance.

Therefore, on the concluding note, it is necessary for the government to realize above difficulties which might be faced and act upon it by issuing appropriate rules or clarification to settle the ambiguity and to avoid litigations in the future.

(The author is Principal Associate, Lakshmikumaran & Sridharan, New Delhi and the views expressed are strictly personal.)