DECEMBER 23, 2019

By S Narayanan, Advocate

I. Ocean freight – for imports

IN terms of Notification No. 8/2017-I.T. (Rate) and Notification No. 10/2017-I.T. (Rate) importer is required pay Integrated Goods and Services Tax (IGST) on ocean freight at the rate of 5 % on RCM basis. If the value of ocean freight is not determinable, then Government has prescribed value to be taken as 10 % of CIF value.

The above levy of GST of 5 % is despite the fact that on the import of very same goods Customs duty is also levied including the value of Ocean freight. This leads to double taxation on the same value causing immense financial repercussions and affecting the price and the market as a whole.

Suggestions

The said levy of 5% on Ocean freight should be omitted and notifications referred above may please be amended with retrospective effect from 1.7.2017.

II. Input tax credit on Motor vehicles

As per Section 17 (5) (a) of CGST Act, 2017, ITC credit on Motor vehicle is allowed, only when they are used for making the certain restricted taxable supplies, namely :—(A) further supply of such motor vehicles; or (B) transportation of passengers; or (C) imparting training on driving such motor vehicles;

If the Motor vehicle is purchased for hiring or renting or leasing of the said vehicle then credit is not allowed which is not correct. This is due to the reason that unless Motor vehicle is purchased and held as a capital asset, no one can do the said business of "hiring or renting or leasing of motor vehicle or any other business of rendering taxable services", which means the essence of mitigating the cascading effect is not met with under GST law, thereby putting undue pressure on the trade by loss of such ITC credit on Motor vehicles.

Suggestions

Section 17 (5) (a) has to include another sub clause by way of a proviso tagged to the main clause which states - (5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely may be by proviso or adding another sub rule as – "17 (5) (ac) "

Unless, the Motor vehicles are meant for use of "hiring or renting or leasing of motor vehicle or any other business of rendering taxable services ".

So that persons who purchase Motor vehicle for providing taxable services of hiring or renting or leasing of motor vehicle " can get ITC credit of tax suffered on such capital goods viz. Motor Vehicles.

III. Body building/Mounting activity on chassis supplied by customer

Body building activity is specifically regarded as "job work activity, when such body is built on the chassis supplied by Customer, though technically such body building activity comprises of use of own material for making the body and then carry out assembly or mounting of chassis belonging to the customer, which could be regarded as " composite supplies".

Srl No. 26 (ic) of parent Notification No. 11/2017- CT ( Rate) dated 28.6.2017   prescribe rate of tax of 18 %  (9+9) in the Job work notification No. 20/2019 – CT ( Rate ) dated 30.9.2019 referring as " Services by way of job work in relation to bus body building".

The body building for all these years has never been isolated and distinguished between body builder of bus (for carrying passengers) and body builder of truck (for carrying goods). Further there are cases where special purpose equipment are also mounted on the chassis supplied by customer which when mounted falls under CTH – 8705. The body built for passengers would fall under CTH – 8702 and body built on truck chassis would fall under 8704 and which can happen on Trailer or Semitrailer belonging to Customer.

As on date there is no uniformity in the levy of such tax on body built on various Motor Vehicles and the recent  Notification No. 26/2019- Central Tax (Rate) dated 22nd November, 2019  also do not take care of the issue which reads as -   "Explanation- For the purposes of this entry, the term "bus body building" shall include building of body on chassis of any vehicle falling under chapter 87 in the First Schedule to the Customs Tariff Act, 1975."

Suggestion

Hence, it is suggested that the said Serial No. 26 (ic) of Notification No. 11/2017- CT (Rate) dated 28.6.2017  may suitably be amended as under –

" Services by way of job work of building of body or assembly or mounting of equipment on chassis supplied by customer, of any vehicle falling under chapter 87 in the First Schedule to the Customs Tariff Act, 1975 ".

The above will bring uniformity in application of rate of tax at 18 % for job work carried out on any chassis , no matter whether it is meant for carrying passengers or goods or for making special purpose vehicle either on truck chassis or bus chassis or on trailer or semi-trailer.

IV. Woven and Non-Woven Bags and sacks of polyethylene or polypropylene strips or the like

In the 38 th Meeting of the GST Council, New Delhi 18 December, 2019, the Council also considered the rate of GST rate on Woven and Non-Woven Bags and sacks of polyethylene or polypropylene strips or the like , whether or not laminated, of a kind used for packing of goods ( HS code 3923/6305) in view of the requests received post the changes recommended on such goods in last meeting and recommended to raise the GST to a uniform rate of 18%(from 12%) on all such bags falling under HS 3923/6305 including Flexible Intermediate Bulk Containers (FIBC). This change shall become effective from 1st January, 2020

The Government introduced Notification No. 14/2019- CT (Rate) dated 10.9.2019 (effective 1.10.2019) , wherein Sr. No. 80AA in Schedule II  has been introduced reducing the rate of tax from 18 % GST to charge 12 %.

But due to lack of definition given in said notification of what is to be regarded as " Woven and Non-Woven Bags and sacks of polyethylene or polypropylene strips or the like" nor is there anything in Customs tariff to explain the said concept, some were charging 12 % while others were charging 18 % and trade had different views prevailing in the market, creating imbalance to manufacturers as to whether charge 12 % or 18 % and needless to mention different rates cannot be charged for different customers as per law.

Suggestions

As the Government is going to issue notification to rationalise and have a uniform rate of tax of 18 % for Woven and Non-Woven Bags and sacks of polyethylene or polypropylene strips or the like, whether or not laminated, of a kind used for packing of goods (HS code 3923/6305), it is suggested that the said uniform rate of 18 % be applied from 1.10.2019 (retrospectively) so that the problem of confusion in rates in the intervening period from 1.10.2019 to 31.12.2019 can get eliminated and there will be uniform assessment all over India and it will also obviate unwarranted litigation.

V. Provisions of Section 17 (5) (g) goods or services or both used for personal consumption

Section 17 (5) of CGST Act, 2017 prescribes the clause where registered person cannot avail ITC credit and as per the said provisions Section 17 (5)(g) ITC credit is not available for goods or services or both used for personal consumption.

The goods or services or both used for personal consumption is a very subjective term and more so in particular where an employee is using the said goods or services and there are spate of litigation on this account, in particular in the context of employee using the service.

It is our humble submission that when the employee has taken up the employment with the employer, he is committed to carrying out the work right from the time he leaves is home till such time he reaches home back from office or outdoor duties. Hence, when such an employee is bound by office duties for company purpose including the compulsion to eat in canteen the defined food in the allotted time or travel by designated bus/car, then everything done by employees, needs to be regarded as " in relation to business " and not for personal consumption. Hence, ITC credit on expenses incurred by the Company which is only for business purposes needs to be allowed, to mitigate the cascading effect of taxes, in particular of canteen, rent a cab, tour operator viz. bus service and health insurance of any type, travel , lodging and boarding on Company's tour, which cannot be attributed to personal consumption and no matter whether the said services are obligated by any act or not, ITC credit needs to be allowed. There could be many Companies where the workers strength may be less than 250 and some companies may not have workers but is run by only office staff and officers and managers.

But to the extent employee recovery is made, out of such expenses incurred by the Company, the tax needs to be paid by the Company, which will mean that the Input tax credit availed stands compensated to the Government.

Likewise, if the Company facilitates any service on behalf of the employee by sourcing from third party service providers which is not related to business on back to back basis recover the same from employees, the same should not be taxed, as Company is not in the business of providing such services and ITC credit will also not be available to the Company.

Suggestions

Hence, it is suggested that a proviso can be inserted to said Section 17 (5)(g) stating as –

Section 17 (5) (g) - " goods or services or both used for personal consumption"

Provided that in respect of services facilitated by the Company for employees viz. canteen, rent a cab, tour operator viz. bus service, health insurance of any type, travel, lodging and boarding on Company's tour, credit is allowed, whether the said services are obligated by any act or not, being for business purposes.

VI. Job work definition u/s 2 (68) of CGST Act, 2017

Section 2 68) "job work" means any treatment or process undertaken by a person on goods belonging to another registered person and the expression "job worker" shall be construed accordingly.

Since the word " registered person" has been used in the said definition and it leads to be conclusion that job work carried out by " unregistered person" will not be regarded as " job work" u/s 2 (68), in which case, their supplies would be either covered as " pure supply of services" or " composite supplies" and in which case, it would create anomaly in Notification No. 11/2017- CT ( Rate) dated 28.6.2017  , which deals with job work and not composite supplies

Suggestion

Hence, the word "registered person " can be omitted and the definition would stand corrected as -

Section 2 68) "job work" means any treatment or process undertaken by a person on goods belonging to another person and the expression "job worker" shall be construed accordingly

And to keep the intent of Notification to charge 12 % on job charges carried out by registered person and 18 % for job work carried out by unregistered person, suitable amendment can be made in said Notification No. 11/2017- CT ( Rate) dated 28.6.2017  as amended.

VII. Payment of 5 % of eligible credit of common input and input services to be paid for use for non- business purpose – Under Rule 42 (1)(j) of CGST Rules, 2017

RULE 42 of CGST Rules, 2017 deals with – " Manner of determination of input tax credit in respect of inputs or input services and reversal thereof Provisions of Under Rule 42 (1)(j) of CGST Rules, 2017 " and more specifically Rule 42 (1)(j) refers as -

" (j) the amount of credit attributable to non-business purposes if common inputs and input services are used partly for business and partly for non-business purposes, be denoted as ‘D 2 ', and shall be equal to five per cent. of C 2"

When Section 16 r/w Section 17 of CGST Act, 2017 defines the use of input/input services for taxable and exempted supplies and partly for the purpose of any business and partly for other purposes, according to which registered person total turnover appearing in the balance sheet gets spread over amongst the said type and the ITC credit automatically gets apportioned to what is entitled, not entitled and entitled partly, the need for 5 % reversal for common input/input services do not sound to reason of a good law. The said provision not only appears to be vague but also the measure of 5 % adhoc prescribed in law appears to be phenomenal having large financial implications.

Once the taxable and exempted turnover and turnover of non GST supplies have been taken in to account for said Rule 42 reversal, then nothing remains. Hence, the question of said computation and payment of 5 % reversal of common input/input services do not arise.

Suggestion

It is suggested that as the said 5 % pro rata reversal of common input/input services on adhoc % age basis will inflict injury on the assessee, the said provisions should be omitted in Rule 42 of CGST Rules,2017, as it has immense financial burden.

VIII. Refund of ITC credit under inverted duty structure – S. 54 of CGST act, 2017 r/w Rule 89 (5) of CGST Rules, 2017 .

As per provisions of Section 54 (3) which deals with refund on account of inverted duty structure, reads as – "Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period", it does not cover input services, which is causing immense financial repercussion .

The matter needs consideration since the amount of input services credit which goes in to the cost of the product and so is the sale price is also substantial taking in to account that none of the business can run without taking assistance of services, which is inevitable. Further, many of the input services attracts 18 % tax and there will be a great imbalance in not allowing to claim refund of unutilised balance of credit under the said inverted duty structure, if input services credit is not taken in to consideration, in the formula provided.

Suggestions

Hence, in the provisions of Section 54 (3) (ii) of CGST Act, 2017 and the rules made thereunder viz. Rule 89 (5), the words "input services" needs to be inserted after inputs, which is given below:

Section 54 (3) (ii) of CGST Act, 2017

(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period :

Provided that no refund of unutilised input tax credit shall be allowed in cases other than -

(i) zero rated supplies made without payment of tax;

(ii) where the credit has accumulated on account of rate of tax on inputs and input services being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council

Rule 85 (5) of CGST Rules 2017

[(5) In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula:-

Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) x Net ITC ÷ Adjusted Total Turnover} - tax payable on such inverted rated supply of goods and services .

Explanation : - For the purposes of this sub-rule, the expressions -

(a) Net ITC shall mean input tax credit availed on inputs and input services during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both; and

(b) [" Adjusted Total turnover" and "relevant period" shall have the same meaning as assigned to them in sub-rule (4).]

IX. Restriction of issue of credit note on or before 30th Sept of subsequent financial year

As per Section 34 (2) of CGST Act, 2017 which deals with issue of credit note states that such credit note has for previous financial year needs to be issued not later than September following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier.

There are cases where the price revision negotiation takes place even beyond the period of September next year due to which the benefit of posting of credit note in GSTR 1 return is not possible and thus the benefit of reduction in the tax becomes a loss.

Suggestion

Hence it is suggested that in Section 34 (2) the period of issue of credit note can be extended up to 31 March of next financial year, instead of " September following the end of the financial year".

X. Restriction of availment of ITC credit based on debit note/supplementary invoices issued – Section 16 (4) of CGST act, 2017

As per Section 16 ( 4) of CGST act, 2017, a registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.

As the negotiation of price variation cannot be done in the same year or even up to 30th Sept in all the cases, due to the reason that there are multiple meetings and parameters are to be looked in to before Customer gives price increase, on the one hand registered person has to pay the differential tax (regardless of the time when such debit note of supplementary invoices are raised ), but when it comes to availment of ITC credit, if the said debit note or supplementary invoices are not raised on or before 30th Sept, relating to previous financial year transactions, then ITC credit is not available to the customer, with the result there is a financial loss.

Suggestion

Hence it is suggested that in Section 16 (4) the period of issue of debit note can be extended up to 31 March of next financial year, instead of "September following the end of the financial year".

(The views expressed are strictly personal.)