AUGUST 18 , 2020

By Dr G Gokul Kishore

FOR a tax reform of the magnitude of GST, three years of implementation of law is valuable as it provides the opportunity to look back at the experiences, difficulties faced by both the tax administration and the taxpayers, amendments made and a realistic assessment as to whether the new tax regime is headed in the right direction or a change in course is desirable. This 86th part is dedicated to share a few thoughts on the course adopted so far.

Retrospective amendments - GST is too young to bear

GST law is too young to bear the onslaught of retrospective amendments to both the parent statute and the rules. After a decade or so, when judiciary interprets a particular provision in a manner different from what was in the mind of the draftsman, a case can be made out for retrospective amendment so that the objective sought to be achieved is indeed achieved. But, when the law is at infancy and yet to crawl, leave alone walking to the court, back-dated amendments will only weaken the body of the statute and organic growth. Law should be allowed to grow and evolve through jurisprudence. Amendments should be aimed at strengthening the law. Administering back-dated amendments in large doses at a tender age will not contribute to a healthy law.

Transitional credit is one area where the tax administration has amended the law retrospectively from 1st July 2017 itself insofar as time limit for filing the relevant declaration to claim pre-GST credit is concerned. By such move, legally available credits have been made to vanish in several cases. Had GST not been implemented, all those whose pre-GST credits disappeared due to one reason or another, would have been using such credits to offset their tax liabilities. By prescribing a form and that too, an online one and at the initial stage of development of the portal, pre-GST credits have been effectively liquidated by the government wherever the taxpayer was ignorant or unfortunate. In either case, it is because of change in law, the taxpayer lost his validly earned credits. Arguments on whether credits can be availed endlessly without time limit may not be valid as no new credit is availed at the time of transition and the credits are simply entered in a new book which is the electronic credit ledger under GST law. To prescribe a time limit for such entry in new book and to compel taxpayers to forego wherever there is an omission is not the GST that the industry wished for.

The time is not lost yet. It will be in the best interest of everyone if the GST Council takes note of the ongoing litigation on transitional credit, retrospective amendment made to Section 140 of CGST Act and recommend measures which will provide reassurance to the industry that their hard earned credits will be protected and the move to deprive the same on technicalities like time-limit or other procedures will be withdrawn. By appropriating the pre-GST credits, tax revenues will not swell under GST and by allowing the same, they will not be dented either. This is an opportunity to walk the talk that the government trusts the taxpayers and wishes to change its course away from the adversarial system.

Ocean freight and ITC refund

Two other issues actively litigated despite taxpayers having favourable judgments from the Gujarat High Court pertain to fastening the GST liability on the importer in respect of ocean freight and not reckoning input services for refund of ITC accumulated on account of inverted tax structure. The parent provision viz., Section 5(3) of IGST Act itself does not permit shifting tax liability to any other person other than recipient under reverse charge. The tax department, by seeking to recover tax, through an entry in Notification No. 10/2017-Integrated Tax (Rate), from the importer who is not the recipient of service, has neither done its drafting homework properly nor got a rationale to support such move. If the intention has been to somehow recover the tax from any person who is, in any way, related to the transaction, then the provisions in IGST Act should have been drafted accordingly. It could not be because, reverse charge mechanism itself is derogatory to the fundamental principle of taxing the supplier and not the recipient. Section 5(3) confers an exceptional power and it cannot be exercised to lay down the rule in all cases.

Members of trade in States other than Gujarat are confused as to whether to pay GST on ocean freight or refuse to pay relying on Gujarat HC judgment. Within three years, this issue has become a major audit point as well. In no time, it will go out of control with thousands of show cause notices. GST law is so young that it cannot withstand such an assault at such an early age. GST Council can intervene and avert such ominous change in course.

ITC refund in case of inverted tax structure has been a clear case of drafting blunder. If the intention is to restrict the refund only to the extent of inputs, retrospective amendment to rules should have been sufficient. However, Section 54(3) of CGST Act does not afford adequate statutory backing to such subordinate legislation and, therefore, this issue has been held in favour of the taxpayer by the Gujarat High Court - 2020-TIOL-1273-HC-AHM-GST. Instead of hair-splitting arguments as to whether the judgment is correct or not, tax administration should focus on the factors that contribute to such litigation.

A bold decision is required from CBIC to accept the Gujarat HC judgment (supra) and restore the status quo ante insofar as the rules are concerned by statutorily including input services for computation of refund of unutilized ITC so as to avoid further confrontation. It may open up past claims also but when retrospective amendment can be made to the law to deny legally earned credits, the same can be adopted for the benefit of taxpayers as well. This could also signal that the undesirable change in course has been realized, correction of the same is being made in the right direction and is aimed at facilitating taxpayers and not at increasing the friction.

Part - 85

[The author is an Advocate practising independently. Views expressed are personal.]