OCTOBER 22, 2019

By Dr G Gokul Kishore

CERTAIN major issues were highlighted in Part-59 for inclusion in the deliberations by the committee of officers constituted recently with the core objective of suggesting measures to improve GST collections. This part seeks to add more issues in this list.

Intermediary services - Tweaking the exemption

The contradiction between policy objective of export promotion and incentivising those who earn foreign exchange and that of tax revenue maximization and the need for re-defining place of supply in respect of intermediary services were discussed in Part - V (3 rd October, 2018). Acknowledging this issue partly, exemption has been granted recently to intermediary services when they facilitate supply of goods between foreign supplier and foreign buyer [Notification No. 20/2019-Integrated Tax (Rate) dated 30-9-2019]. When the GST Council decision was announced, it was widely expected that the demand of the industry has been heard and intermediary services will be granted exemption. It is the service for which exemption is being granted no matter whether such intermediary provides services in respect of goods or services. It is ironical that in a common law for goods and services, exemption has been provided for services involving goods but not for services in relation to services.

The rationale for such differential treatment is difficult to understand. Probably, to overcome the adverse advance rulings in respect of IT and ITES service providers, such exemption has limited its scope to facilitation of services. However, the larger issue of intermediaries earning valuable foreign exchange for the country deserving better treatment has been missed. Place of supply for this service has been an anomaly and has been defined in a manner prejudicial to service providers. One may wonder whether committee of officers tasked with revenue maximisation will ever consider suggestion on widening exemption. The larger mandate of the committee includes recommendations on policy measures and relevant changes need in the law besides measures to improve voluntary compliance. This issue of either exempting intermediary services in toto or re-defining place of supply for this service should be considered by the committee.

Ocean freight - RCM should be abolished

From service tax days, the issue of charging tax under reverse charge mechanism on the importers in respect of ocean freight has been carried on to GST regime as well. The issue is disputed and pending in various High Courts with a stay in the case of Mohit Minerals - 2018-TIOL-2749-HC-AHM-GST. The legal validity of taxing importer by deeming him as recipient of service while the transportation service is provided by foreign shipping line to the exporter located in foreign country, is quite doubtful. The eagerness to garner revenue somehow is so obvious that even when freight cost is included in the assessable value in respect of CIF imports for customs purposes, the same freight is sought to be taxed again as a service.

Considering the huge number of petitions pending in several High Courts, a decision either way is bound to be challenged in the Supreme Court, unless an amendment is brought to the relevant provisions. It is a matter of great surprise that within two years of GST and given the emphasis on non-adversarial approach by tax administration, litigation has been allowed to proliferate. This article is not intended to discuss the contentions raised in writ petitions but the request is to cease using the power to deem an importer as recipient when IGST Act itself does not support the same. Otherwise also, ease of doing business cannot be advanced by levying IGST twice on the same element of freight and burdening importers with such additional cost. The entry in the relevant notification casting burden under reverse charge on importer should be omitted or amended appropriately. It is hoped that such a major issue will not escape the attention of the committee of officers.

CSR expenditure - Allowing ITC

Certain companies are governed by mandatory provisions on corporate social responsibility as per Companies Act, 2013. They need to incur prescribed percentage of their profit towards social welfare projects. In most cases, companies comply with CSR obligations through social services. If they incur expenditure on goods used in such projects, then input tax credit may require reversal as the same is not admissible on goods which are supplied free. On expenses incurred towards services, the issue is ambiguous. Ambiguity is only for taxpayers as the tax administration will seek reversal of ITC on all such expenses. As deduction in respect of such expenses is not allowed under Income Tax Act, there is a strong case to allow ITC on the same.

Generally, the statutory scheme credit provisions under indirect tax law seeks to disallow double benefit by restricting credit if depreciation under IT Act is also claimed. If, for CSR expenses, no deduction is allowed, benefit of ITC should be allowed since for a company, it will be a cost otherwise. It is strange that to translate the seamless and liberalized credit regime into reality, we need to plead by drawing attention to the merits. Nevertheless, with the reputation of CBIC being responsive with pro-active clarifications, we can expect the committee of officers to take note of views expressed in public domain through TIOL and address the same.

Returns - Clarity needed

Returns in GST system was part of grand scheme with elaborate processes of filing, amending tables, reporting invoices, acceptance by counter-party, credits to be claimed based on matching principle, etc. All these had to be pushed back when the realisation came that it is indeed too complex and neither the administration nor the trade was prepared for the same. Then after two years, new returns were to be introduced from this month but they have been postponed to next April. But, a hybrid version of returns is in vogue now. Hybrid because GSTR-1 on outward supplies needs to be filed and the details get reflected in GSTR-2A of the counter-party. But, matching concept and generation of mismatch report are not implemented. Therefore, ITC is availed based on invoice, receipt of supply and payment of value plus tax. Non-reflection of data in GSTR-2A despite satisfaction of all the conditions for availing ITC has become a tool for the tax administration to seek ITC reversal. The recent amendment to restrict credit upto specified percentage when invoices are not uploaded when the parent Section 43A has not been brought into force has further obscured the scenario. It will be immensely helpful if the committee recommends comprehensive measures so that the system of returns is streamlined till the time new returns are implemented.

[To be continued…]

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

See Part 59