Winds of change - GST law is no exception
SEPTEMBER 28, 2021
By Mr Ketan Tadsare and Mr Dhruv Bhattacharya
PAST few days have seen multiple changes to the GST law through GST Council's recommendations as well as CBIC's clarifications. These range from change in tax rates, clarifying scope of export of service, intermediary service, reducing the scope of charging interest on Input Tax Credit ('ITC'), refund of unutilized ITC on export of goods and others. In all, these changes are welcome changes and provide an opportunity to businesses to leverage on their existing best tax strategies.
It is for this reason we have put together our thoughts in this article where we break down and analyze all these benevolent changes, their impact and how better these can benefit the business.
No interest on ineligible ITC 'availed'
The GST Council in its 45th meeting held on September 17, 2021 recommended that interest on wrongful/ineligible ITC be charged only when the same is utilized. Presently, the provisions of Section 50(3) of the Central Goods and Services Tax Act, 2017 ('CGST Act') denotes mere availment of wrongful/ineligible ITC to trigger interest charge, even when the same is yet to be utilized. Such charging of interest was seen inappropriate for many reasons including the fact that wrongful/ineligible availment of ITC does not really cause any damage to revenue. It is only when such ITC is utilized, the revenue is at loss. The charge of interest is thus warranted only when the aforesaid credit is utilized. Notably the recommendations are made for retrospective effect from July 01, 2017 and thus will provide respite to many.
This issue is not anew and it carries legacy from erstwhile regime. The Hon'ble Punjab and Haryana High Court in Ind-swift laboratories vs. UOI - 2009-TIOL-440-HC-P&H-CX categorically noted in the context of Rule 14 of the CENVAT Credit Rules, 2004 that liability to pay duty does not arise when credit is availed but arises only when the same is utilized. While this decision was reversed by the Supreme Court - 2011-TIOL-21-SC-CX, better sense prevailed on the legislature which amended Rule 14 to charge interest only when the credit is wrongly 'availed and utilised'. The stage for such a development was set by Hon'ble Supreme Court in the case of Pratibha Processors vs. Union of India - 2002-TIOL-273-SC-CUS wherein it held that 'interest is compensatory in nature'.
Present recommendation of the GST Council is also in line with some of its previous recommendations with regard to Section 50(1) of the CGST Act which provides for charging interest on delay in discharging GST liability. The GST Council earlier recommended that such interest be charged only on that part of GST liability which a taxpayer pays after utilizing ITC (i.e., net cash liability). The recommendations aimed at reducing the interest charge to a point where it causes actual loss to the revenue.
These recommendations were made effective through amendment in Section 50(1). The amendment however lacked the retrospective effect as recommended by GST Council, owing to 'technical issues', and although CBIC clarified that it would not press for recovery of interest for prior period, it did not stop the authorities from initiating disputes. The issue was settled only when Hon'ble Madras High Court in Maansarovar Motors Private Limited vs. Assist. Commissioner - 2020-TIOL-1846-HC-MAD-GST identified the intent of GST Council and discarded all the revenue claims for interest that pertained to ITC. Given this background, it is also important to see if the recommendations of GST Council with regard to Section 50(3) are indeed given retrospective effect as recommended or another legal battle needs to be fought in regard thereto.
Scope of 'Intermediary', 'Export of Service' and its impact on cross border transactions between Group companies, sister concerns, subsidiaries, etc.
In past more than a decade, India has become a hub for process outsourcing i.e., Business Process Outsourcing ('BPO'), Knowledge Process Outsourcing ('KPO'), Legal Process outsourcing ('LPO'), back-office support etc. and the provisions of intermediary have all along proved to be an obstacle to this sector.
Having been treated as 'intermediary', specific provisions of place of supply for intermediary services [Section 13(8)(b)] are invoked by revenue, which provide that a place of supply for such services would be the location of supplier of services - which inevitably is in India. Consequently, these services despite having been provided to an overseas recipient are excluded from the scope of 'export of service'.
Needless to say, it has also spiked multiple catenae of legal disputes, mostly resulting in favor of revenue and depriving due export benefits. Some of such recent incidences are ruling by Authorities for Advance Ruling in Vserv Global P Ltd. - 2018-TIOl-263-AAR-GST affirmed in 2019-TIOL-37-AAAR-GST and Mayank Vinodkumar Jain - 2021-TIOL-73-AAR-GST.
Now, in order to remove ambiguity caused in the interpretation of the scope 'intermediary services', the nature and scope of such services was examined by the CBIC in Circular F.No. 161/17/2021-GST dated 20.09.2021. The clarification lays down certain primary requirements for a service to qualify as an intermediary service. These requirements firstly envisage an intermediary service to be a transaction where minimum three parties are involved viz. facilitator, supplier, recipient. It thus eliminates a bipartite transaction from scope of intermediary service.
Secondly, an intermediary service envisages mutual existence of two distinct supplies - a 'main supply' between supplier and recipient and supply of 'facilitating' service by a facilitator a.k.a. 'intermediary'. The clarification then expressly provides that, a person involved in supply of main supply on principal-to-principal basis to another person cannot be treated as intermediary and that an 'intermediary' must not be involved in making the main supply per se. The clarification then also excludes sub-contracting from scope of intermediary, given that sub-contractor functions on principal-to-principal basis.
It is interesting to note here that the present clarification is accompanied by another CBIC Circular No. 161/17/2021-GST dated September 20, 2021 which was issued in light of the ambiguity caused in interpretation of Explanation 1 under Section 8 of the IGST Act which defined the phrase 'distinct person' read with Section 2(6)(v) of the IGST Act which excluded a transaction between distinct person from the definition of export of services. The Circular which distinguishes a 'branch' / 'agency' / 'representational office' from 'subsidiary/group company/ sister concern' for the purpose of definition of 'export of service' and clarifies that a transaction between subsidiary/sister concern/group concern etc. of a foreign company, which is incorporated in India under the Companies Act, 2013 and establishments of the said foreign company located outside India, which are incorporated in the respective jurisdiction would not be excluded from the scope of export of service. The need for such clarification arose given that similar transaction between a branch and its principal located in different countries are treated as mere establishment of distinct entity and thus excluded from the scope of 'export of service'. The anomaly in the interpretation was yet another obstacle for sectors such as BPO/KPO/LPO, IT etc.
These two clarifications together restrict the unwarranted wide interpretation to intermediary service and simultaneously affirms cross border transaction between group companies, sister concerns, subsidiaries (as opposed to mere branch) to be indeed in the form of 'export of service' subject to fulfillment of other conditions. Resultantly, many services exporters in India seem to have been set free from long fought struggle for its due recognition as an 'exporter of service' and fetch corresponding benefits.
And although the confusion surrounding intermediary seems to be done away with, there continues to exist another statutory loophole for scope export of services as per GST vis-à-vis Foreign Trade Policy 2015-2020 ('FTP'). FTP borrows definition of export of service from Foreign Trade (Development and Regulation) Act, 1992 [read with Paragraph 9.20 & 9.51 of the FTP] and is wide enough to cover supply of service from India into the territory of other country, in India to service consumer of other country, by an Indian supplier to its commercial presence in other country and by an Indian supplier through its natural person present in other country. A collective emancipation of Indian service exporters can only be achieved if the definition of Service exporter under GST is amended to equal the scope as provided in FTP. It is only then these laws will operate in tandem and extend the due support perceived by legislators.
ITC on Debit Note
The CBIC has issued its Circular No. 160/16/2021-GST dated September 20th, 2021 to provide much awaited clarifications that benefit taxpayers at large. Section 16(4) of the CGST Act was amended with effect from 01.01.2021. The intent of such an amendment was also provided in the Memorandum explaining the Finance Bill, 2020 which was to delink the date of issuance of debit note from the date of issuance of the underlying invoice for the purposes of availing credit. As a result of the amendment, an assessee could take ITC in respect of a debit note for supply of goods /services within due date of furnishing of the return for the month of September following the end of the financial year to which such debit note pertains (as opposed to the invoice pertaining to the debit note - as was present in the unamended provision).
The Circular clarifies that date of issuance of debit note would determine the relevant financial year for the purposes of Section 16(4) and that such amendment would also be applicable in respect of a situation where Debit note was issued prior to January 01, 2021 and ITC could be availed in view of the stated amendment vide filing GSTR 3B for the month of September 2021.
The clarification was much needed, especially in light of rulings that didn't interpret the amendment to Section 16(4) in its correct spirit. For instance, in I-tech Plast India Pvt. Ltd., the Advance Ruling authority - 2021-TIOL-127-AAR-GST while interpreting the amended provision inter alia held that such a provision has not brought about any drastic or far-reaching change in the interpretation of Section 16(4) and that the “financial year to which a Debit note pertains”, is invariably the financial year in which the original invoice (related to the said debit note) was issued.
With such a clarification, it is hoped that confusion in relation to time period within which ITC can be taken in respect of debit note will go away.
Other Miscellaneous clarifications
As regards the issue of whether carrying physical tax invoice is mandatory during transportation of goods when e-invoice is generated, it has been clarified that there is no need to carry the physical copy of tax invoice where invoice has been generated by the supplier as per Rule 48(4) of Central Goods and Services Tax Rules, 2017 and production of QR code having an embedded Invoice Reference Number ('IRN') electronically for verification purpose before the proper officer would suffice. A similar clarification was issued by GSTN last year.
Further, the scope of the proviso to Section 54(3) of the CGST Act has also been clarified which restricted refund of unutilized ITC when exported goods are subjected to export duty. It is clarified that the term 'subjected to export duty' used in proviso to Section 54(3) of the CGST Act means where the goods are actually leviable to export duty and suffering export duty at the time of export.
Therefore, goods in respect of which either NIL rate is specified in Second Schedule to the Customs Tariff Act, 1975 or which are fully exempted from payment of export duty by virtue of any customs notification or which are not covered under Second Schedule to the Customs Tariff Act, 1975, would continue to be eligible for refund of unutilized ITC.
The GST law even after four years of its implementation is evolving and is likely to continue to evolve. As a matter of fact, law cannot be a 'constant' in that it becomes rigid and irrelevant. No doubt, despite years of legacy, many laws around the world keep changing with the norms of morality, righteousness and expectations of mankind. GST law is no exception to it. If anything, these recent changes have evidenced this evolution which will be better suited for Indian taxpayers. It is a good sign that this relatively nascent law is evolving to catch the winds of change.
[This article has been authored by Mr. Ketan Tadsare and Mr. Dhruv Bhattacharya. The authors are Associate Partner and Associate Director respectively at Taxcraft Advisors LLP.]
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