FEBRUARY 05, 2021

By Dr G Gokul Kishore

THE common refrain after the advent of GST is that the Union Budget will become a lackluster affair as it will be shorn of Central Excise and Service Tax and with GST coming within the domain of GST Council, such Budget may hardly have anything to say on GST. However, Budget 2021 has proved otherwise. As the focus of this series is reforms in GST, this 97th part seeks to examine a few amendments in CGST Act and IGST Act as proposed in Budget 2021 from this perspective.

Input Tax Credit - Quarantining everyone

Seamless input tax credit (ITC) being the key pillar of GST appears to have come full circle so soon. From the start, credits are looked with suspicion and those who avail, with disdain. A few bad men in the town have made the city full of suspects in the eyes of the department. In this series, host of credit restrictions, brought now and then, have been analysed with the pious hope that they will be relaxed. Considering the pandemic induced economic issues, during pre-Budget appeals, there was a demand to liberalize ITC provisions. However, the trade has to be reminded at all times that ITC is just a concession extended by a large-hearted tax administration to select few on chosen goods or services subject to fulfilment of conditions only the brave can face. Now, one more condition has been proposed in Section 16(2) of CGST Act, 2017 by Finance Bill, 2021. The supplies received by the person entertaining the desire of availing ITC should have been reported by his trustworthy business partner i.e. the supplier in his GSTR-1 and the same should be reflected in GSTR-2A or GSTR-2B at the desirer's end.

The GST portal, it is claimed, is robust enough that what is reported in GSTR-1 will invariably find its way in GSTR-2A or GSTR-2B as well and if does not, then it is not the fault of the system but of the actors involved. Compelling a taxpayer to faithfully report his supplies through his buyers by holding their ITC at the mercy of the system, is not a well-informed measure, if ITC is considered as something earned by the buyer by paying the tax to his seller, having received both the supplies and tax invoice. Dependence on system to police and nab the unscrupulous has made the honest in the industry suffer. With settled law on tax credit not being a vested right, in favour of the tax administration, the taxpayer should be prepared for more such measures in the near future. Whether an earned credit can be denied based on inaction, deliberate or otherwise, of another person and that too, on system-triggered issues, may be agitated before judiciary and till such time, taxpayers may have to avoid over dependence on ITC. The questions as to whether such amendments will qualify as a reform in the first place, and even if it is yes, whether it is in the right direction, may need to wait for an answer.

Vaccinating supply from judicial challenge

Lot of discussion has taken place before and is dominating columns now, on the issue of taxability of supplies by clubs or associations to own members. The draftsmen believed that by providing an enlarged definition of business to include such transactions and by categorizing it as supply of service in Schedule - II, the impact of landmark judgments on this issue assigning primacy to doctrine of mutuality, can be nullified. But Section 7 was left unamended exposing the weakness of the attempt to tax clubs and associations. Now, this definition of supply is being vaccinated to protect it from a judicial challenge by not only inserting a new clause to expressly tax such transactions or activities undertaken by such bodies for its members but also by giving a second shot through an explanation. This explanation is as per the template to make adverse rulings and judgments ineffective. Doctrine of mutuality has to now surrender before the tax administration's never-quenchable revenue thirst. The industry may have to represent to the GST Council so that such retrospective amendment is not implemented.

Because the legislature has the supreme power to make laws which includes the power to make laws with retrospective effect, exercise of such power requires circumspection and restraint. Neither the GST Council nor the legislature can be led by any rationale as may be advanced by the bureaucracy which drafts such back-dated laws. If the effect of judgments of Constitution Bench of the Supreme Court can be nullified through retrospective amendments, then faith of the taxpayer in the judiciary will be shaken. The judgments, howsoever, supreme the court might be and whatsoever be the strength of the bench, can be effectively neutralized through such amendments when the taxman's interpretation is not accepted by the court. The confidence that people have in the organs of the State will erode, if not already, as laws of today can be recast without much difficulty whenever there is an adverse judgment. Respecting divergent interpretation should be inculcated by the tax administration rather than entering into a mortal combat with members of industry through such amendments. The GST Council may have to take note of the feedback for appropriate recommendations.

Exporters also to face fury of ITC backlash

The fact that ITC is sought to be blocked from all quarters is evident from the proposed amendment to Section 16 of IGST Act whereby in respect of zero-rated supplies, only specified class of persons and / or specified class of goods or services will be eligible for the option to pay IGST on export goods and claim refund of such tax paid. Generally, tax is paid on export goods by liquidating and cashing ITC when the same is more. If the notification to be issued restricts such payment option to only select categories of exporters or specified goods or services, then other exporters will have to export without payment of tax only. They may claim refund of unutilized ITC but for effectively availing such facility, turnover of export goods should exceed supplies in domestic market. Payment of IGST by debiting credit ledger and obtaining refund provides some liquidity to exporters which will get squeezed once such amendment comes into force.

The rationale for such amendment is not known, but certainly there cannot be claim that this is a reform in the right direction. The trade-friendly face of GST law is getting morphed and by such exercise, while the exchequer may be able to restrict refunds and thus arrest revenue outflow, significant number of exporters will suffer. Revisiting such amendment may be too big a wish one can ask for, but GST Council being comprised of Finance Ministers who are political leaders, may feel the pulse of the trade and industry and recommend measures to contain the adverse effects of such proposed amendment.

[The author is an Advocate, Gokul & Subha Advocates, Chennai. Views expressed are strictly personal.]

See Part 96.