APRIL 29, 2020

By S Narayanan, Advocate

Facts in Brief :

CGST Amendment Act, 2018 effective 1.2.2019 [Notification No. 2/2019-C.T., dated 29-1-2019] brought forth certain amendments and the issue pertinent to matter under reference is Explanation to Section 17(3) inserted, which reads as - For the purposes of this sub-section, the expression "value of exempt supply " shall not include the value of activities or transactions specified in Schedule III, except those specified in paragraph 5 of the said Schedule.

As the said explanation has been inserted in one of the clauses "dealing with restrictions", use of words "shall not", apparently appears and sounds, as if, the intent is to provide relief in allowing ITC credit. But, how the said Explanation impacts, is dealt with as under.

Schedule III issued u/s 7(2)(a) inter-alia refers "activities or transactions specified in Schedule III", shall be treated neither as a supply of goods nor a supply of services, which means, such value will not suffer any tax in GST, which in our humble opinion, may come under "Non-GST outward supplies", as activities mentioned at Schedule III, though may be "Supply of Services" in ordinary sense but it is not to be reckoned as "Supply" under GST law.

It needs no mention that such value of "Schedule III activities or transactions", will not be covered either as" taxable supply "u/s 2 (108) of CGST Act, 2017, or under" zero-rated supply "u/s 2 (23) of IGST Act, 2017, or can it be regarded as "non–taxable supplies" u/s 2 (78) r/w 2 (47) of CGST Act, 2017 [which is also covered in inclusive definition of "exempted Supply"].

One may note that the terminology "Non - GST outward supplies" has been used in Form GSTR-1 [See Rule 59(1)] at Column ( 8) which indicates as "Nil rated, exempted and non - GST outward supplies" and at at Column 3.1(e), in Form GSTR-3B [See Rule 61(5)] as well. The said word "Non- GST outward supplies" has not been defined, anywhere in the Act or Rules in GST law.

As per Section 17(2) r/w Rule 42 (1) r/w 43(1)(a) of CGST Rules, 2017, the amount of input tax on inputs and input services or capital goods intended to be used exclusively for effecting "exempt supplies" will not be available and so is the case under the said provisions, if it is used for "Non–business purpose".

Issue in question

By inserting Explanation to Section 17(3 ), it excludes the value of "activities or transactions specified in Schedule III" from the scope of "value of exempt supply". It, therefore, appears that by removing the restrictions imposed under Section 17, to deny either full or pro rata ITC credit, in respect of "activities or transactions specified in Schedule III", the intent of legislature is to expand the scope of benefit of ITC in affording the said benefit in such cases.

In the above situation, unless the said "activities or transactions specified in Schedule III' [which in our opinion is covered by "Non - GST outward supplies"], is included in the formula provided in Rule 42/43 of CGST Rules, as the case may b e, as forming part of taxable supplies for limited purpose of these Rules (like zero rate supplies are to treated as "taxable supplies"), the benefit of ITC will not flow only by mere insertion of Explanation to Section 17(3).

Suggestion:

The Board may clarify the Government's intention in inserting Explanation to Section 17(3) of CGST Act, 2017, if it is otherwise and if the intent is to allow benefit of ITC for "activities or transactions specified in Schedule III", then in Rule 42(1) and 43(1) of CGST Rules, 2017, after the words "partly used for effecting taxable supplies including zero rated supplies" the words "and the value of activities or transactions specified in Schedule III" needs to be included, so that it goes parallel to the Explanation inserted in Section 17(3) of CGST Act, 2017.

[The views expressed are strictly personal.]