SEPTEMBER 24, 2019

By Dr G Gokul Kishore

THESE are days of relaxation of things which are mandatory. We do not opt to be an exception. Relaxing the self-imposed requirement of an introduction, we begin this 56th part by taking a look at major recommendations of the GST Council made after the meeting held on 20th September, 2019.

Rescinding of circular by Constitutional body

Circular No. 105 issued by CBIC has gained enviable popularity as evidenced by number of articles published in recent times. The attempt to resuscitate the legacy issue of treating discounts as consideration for sales promotion activities and seeking to levy tax through this circular was discussed in Part - 44. The long arm of law was sought to be stretched by interpreting the special discount amount meant to be passed on to the consumer through the distributor / dealer as part of consideration to be included in the taxable value at the hands of the dealer. Though the circular was apparently intended to clarify GST treatment of discounts, it ended up laying a very fertile ground for the department to seek inclusion of most of the discounts in the taxable value. The industry was literally stunned and all promotions and offers were put under fresh round of scrutiny.

The GST Council has now recommended rescinding of this circular. The demand behind the withdrawal is perceptible as the press release uses the term 'ab initio'. This means the circular will be treated as never issued. One may wonder whether the time of Constitutional body as powerful as GST Council is required to be used for roll back of a clarification issued by the tax administration. But then, all is not well that ends well because the rescinded circular also clarified that ITC need not be reversed when post-supply discount is given through commercial credit notes without adjusting the original tax paid. This part was favourable to the taxpayers and this needs to be separately clarified now.

Dispute resolution body in dispute - Extending the limitation

Tax laws are drafted by bureaucrats. It is but natural that officers ensure that the provisions enable dispute resolution bodies to be dominantly manned by officers. Such bodies like tribunals are seen as extension of tax department or part of it and, therefore, induction of external talent from the Bar or the Bench is generally not preferred. Though the Supreme Court had, in the past, emphasised the need to have either more or equal number of judicial members vis-à-vis technical members in tribunals, yet GST law has been drafted to the contrary. The outcome is obvious. The provisions relating to constitution of appellate tribunal have been challenged in High Courts. Reportedly, Madras High Court has passed on order last week holding the same ultra vires. [See - 2019-TIOL-2188-HC-MAD-GST. Amidst such fluid situation, notifications have been issued for constitution of National Bench of GSTAT and also State and Area Benches only recently.

As appellate orders at the departmental level are trickling in, taxpayers have to invoke writ jurisdiction of High Courts in the absence of appellate tribunal though appellate remedy is available under the law. There was no option but to extend the limitation for filing appeals before the tribunal and such extension has been recommended by the GST Council now. Implementation may be through order to remove difficulty or an ordinance but the former is a convenient method available with the administration. As per Section 112(8) and Section 112(9) of CGST Act, if 20% of the tax amount in dispute (in addition to the 10% pre-deposit paid before lower appellate authority) is paid as pre-deposit, recovery proceedings for the balance amount shall be deemed to be stayed till disposal of the appeal. Therefore, on payment of 30% of the tax amount in dispute, appellants can relax for one or two years now till the time GSTAT are properly constituted, legal challenge is overcome and regular listing and hearings commence.

ITC restriction on recipients on default by supplier

In Part - 48, nudge theory in improving tax compliance was discussed. GST Council has relied on it by recommending restrictions on availment of input tax credit by recipients when outward supply details are not filed. As the provision referred is Section 37, it appears that on default in filing GSTR-1 by supplier, his customer will not be able to avail credit. The extent and nature of such restriction need to be seen. In the CGST Amendment Act, 2018, new Section 43A providing for new outward supply return further provides for restricting ITC upto 20% if such return has not been filed. It is not clear as to the provisions from where the government will derive powers to restrict ITC when the return is under Section 37. May be, for implementing this decision also, an order to remove difficulty will be issued.

Credit restriction, in the interim, will compel taxpayers to pay the tax by cash to this extent. When liquidity crunch is being acknowledged as a major issue for industrial slowdown, compelling cash payment for tax appears to be a retrograde step. The tax administration may defend such move on the ground that the credit withheld will be available subsequently when the supplier files the outward supply return. But then, curtailing an entitlement for no fault on his part, deprives recipient of a source of fund for tax payment.

Annual Returns - MSMEs get relief

As widely expected, MSME taxpayers with turnover upto Rs. 2 crores have been provided relief from the burden of filing annual returns. Though this has been stated as optional, most of the taxpayers will avail the same. The waiver is for two financial years and this should be welcome. Coverage of composition taxpayers also under such waiver is a logical extension. Annual returns essentially provide clues to the department on possible revenue leakage whether due to difference in interpretation of provisions or otherwise, particularly when books of account are reconciled with statutory returns. Such examination in greater detail may yield tangible results only if the transactions are too many and varied. Small taxpayers who are mostly retailers hardly have any ITC availment on capital goods every year. On inputs and input services also, quantum of credit availment is generally minimal. For retailers selling goods to consumers, related party transactions or job work are just not relevant. Therefore, waiver of annual returns for such small taxpayers is understandable but a further step could be to not just simplify the form but provide a different form altogether for such taxpayers.

Risk profile to gain momentum

To curb fraudulent availment of input tax credit, GST Council has recommended placing reasonable restrictions on passing of credit by risky taxpayers including risky new taxpayers. This means risk profile of taxpayers will play an important role in their ability to pass on the credit. Recipients will not be able to avail ITC or may have to satisfy additional conditions when procurements are from taxpayers considered as risky by the department. The norms to classify a taxpayer as risky need to stand judicial scrutiny. Otherwise, writ petitions will flood High Courts to test the 'reasonableness'. It may be on the lines of AEO programme implemented by Customs. However, the intention in Customs is to facilitate faster clearances for those with proven track record whereas in GST, checking fraudulent ITC is the objective. In the former it is a facilitation measure while in the latter it is an anti-evasion effort.

The decisions of this meeting of the GST Council have been in the nature of addressing a few major issues. Many more remain as highlighted in the earlier parts of this series besides the need to lay the roadmap of long-term vision for implementation.

To be continued…

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

See Part 55