OCTOBER 15, 2020

By Dr G Gokul Kishore

SEMBLANCE of growth can be perceived when one considers the epidemics of earlier centuries with the present Covid-19 pandemic. Though the war is on to control it, the lesser fatality numbers and the resilience of everyone to carry on with near-normal or new-normal routine does indicate 'growth' as mentioned above. In these difficult times, GST Council meetings are dominated by Compensation Cess issue and certain procedural relaxations while weighty issues wait. However, in this 88th part, an important recent decision of GST Council is discussed.

Six digit HSN / SAC mandatory for large taxpayers

In the 42 nd meeting of the GST Council, one of the innocuous but important decisions taken pertains to mandatory mentioning of 6 digit HSN code / SAC in tax invoices for goods or services supplied by taxpayers with turnover of more than Rs. 5 crores. This prescription will be implemented from 1st April 2021 and GSTR-1 will also be covered under such requirement. It has been further recommended that the government will be empowered to notify 8-digit HSN code on notified supplies by all taxpayers.

At present, there is no Tariff Act for GST unlike Central Excise or Customs. Notification No. 1/2017-Central Tax (Rate) providing for GST rates in respect of goods under various schedules mentions 4 digit classification code with stray mention of 6 or 8 digit code. The notification adopts Customs Tariff Act, 1975 when it refers to 'tariff item', 'sub-heading', 'heading' and 'chapter'. The Rules for Interpretation of First Schedule to Customs Tariff Act has also been embraced for interpretation of the entries in the schedules in this GST rate notification. It further seeks to adopt even chapter notes and section notes of Customs Tariff.

Tariff in GST without Tariff Act

Legislation by reference is one of the commonly accepted and used methods of law-making. For various definitions and procedures like search and seizure, tax laws do not labour to define or prescribe separately but adopt the same from other statutes. However, notification being a piece of subordinate legislation cannot use such device unless the parent Act permits such reference. Section 9(1) of CGST Act is the basis for prescribing CGST rates but such provision does not contain any reference to Customs Tariff once such rates are notified. Tax rates materially and prejudicially affect taxpayers and interpretation of the entries relating to such rates cannot be left to either absence of statutory basis or such presumptive umbilical cord of other indirect taxes.

In respect of services, the classification codes have been left to the mercy of an annexure to Notification No. 11/2017-Central Tax(Rate) providing for GST rates for supply of services. While the notification contains only 4 digits for all the services, the annexure provides 6 digit codes apparently based on UN CPC. But, for such purpose also, there is no statutory basis as noted above in the case of goods. A similar argument was taken in the case of Mohit Minerals Pvt. Ltd. v. Union of India - 2020-TIOL-164-HC-AHM-GST and the department, it appears, did not contest the same.

GST Tariff under contemplation?

The recent decision of the GST Council may point to providing a statutory basis for classification of goods and services. This may mean a GST Tariff Act is under contemplation. In this series, in Part-32 published on 8 April 2019, under the title "De-cluttering rate notification - Time to enact GST Tariff”, the need to frame GST Tariff Act was emphasized. The immediate trigger at that time was the carve out of a sub-regime for real estate with numerous entries being inserted in Notification No. 11/2017-Central Tax (Rate) along with conditions and definitions. May be, the authorities have now realized the requirement but an apprehension may arise as to whether the tax administration will resort to mere amendment of CGST Rules making 6 digit as mandatory. However, this cannot be implemented as the rate notifications do not provide for 6 digits for all the goods. Also, the GST Council has recommended 8-digit HSN code for notified supplies made by all taxpayers. This further fortifies the notion that a full-fledged GST Tariff with 8 digits for goods, mostly adopting Customs Tariff entries and 6 digits for services providing statutory status to the present annexure to rate notification on services, may be implemented.

While software and system changes can be implemented by taxpayers to accommodate more digits, particularly considering the fact that new system will come into force from next financial year only, a new round of classification disputes cannot be ruled out. Though the disputes may not be of the same magnitude as witnessed in the Central Excise regime of yesteryears, differences in interpretation due to greater number of description and entries will certainly multiply. Multiple rates of GST will also remain for a few more years before rationalization of rates is seriously considered. At this juncture of great revenue loss, such tinkering of rates will be the last thing in the minds of all concerned.

Harmonizing supplies involving goods and services

An interesting dimension in the new GST Tariff dispensation will be harmonization of classification involving composite supplies and mixed supplies when both goods and services are involved though the CGST Act has unambiguous provisions but with sufficient ambiguity in interpretation. This is more pronounced in case of Works contracts. While a classification code or Tariff Act may not be the panacea for interpretational differences, at least such code should not open the floodgates of disputes as the ultimate sufferer of such chaos will be the taxpayers who were promised the moon and the stars at the time of introduction of GST. Let us hope the GST Council, CBIC and others concerned take a considered decision on GST Tariff.

See  Part 87

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