News Update

GST - Rule 89 - Refund of ITC - 14/2022-CT - Benefit that gets accrued by way of legislation cannot be denied/curtailed moreso when it is clarificatory in nature: HCGST - Refund of ITC - Production of shipping bills - Transmission of energy could not have been visualized when Rule 89(2) was incorporated in the Statute book: HCGST - Requiring petitioners to produce shipping bills, as proof of export cannot be made applicable to electricity as export can only be through transmission line, but not through rail, road or water for which documents can be made available: HCEconomy Needs Synergetic Inputs to fix twin Deficits of Inflation & Rupee fall43 injured in fire at Durga Puja pandals on UPAgriculture Income & ITR 7OPEC+ debate cutting production by 1 million barrels per day; Crude price up by 3%I-T - 6 months' limitation for deciding refund claims is to be followed strictly: HCBrazil’s Presidential elections: Neither candidates get 50% votes; Bolsonaro to face Lula in second round of pollI-T- Customs duty paid for yacht can be allowed as it is not used by assessee for its own personal use and has operated yacht for benefit and use of entities paying operating fee : ITATLanka reduces tax rate on sanitary napkins amid fiscal crisisI-T - No addition on account of bogus sundry creditors can be made, if AO fails to substantiate non-availability of vendors: ITATXiaomi expresses despair over attachment of Rs 5500 Cr assets in IndiaST - No service tax is payable on amount collected towards liquidated damages: CESTATTruss says her Chancellor decided himself to reduce UK’s rate for top tax bracketCX - There is no reason to deny refund when assessee has availed drawback of only the customs duty portion and not of excise duty: CESTATSexual assault case against founder of, China’s one of biggest e-commerce giants, settled in USCX - After 1.4.2011, appellant cannot avail credit on outdoor catering services, thus credit availed for period 1.4.2011 to 30.4.2011 which is part of SCN is not eligible for credit: CESTATIsrael, Lebanon about to hammer out deal on maritime tangled borderCus - First Appellate Authority was correct in allowing appeal thereby ordering provisional release of goods in question and since there is no change in facts, same is followed in case on hand as well: CESTATBurkina Faso’s junta leader agrees to dethrone himselfUkraine war - France’s spirited support being questioned; 2% arms support found lowest in EUDeath toll from Hurricane Ian mounts beyond 80 thus far in Florida & Carolina put togetherMexico braces up for Hurricane OrleneSP’s supremo Mulayam Singh Yadav is in ICU at Gurugram MedantaGovt reduces export duty on petro goods; makes Special Additional Excise Duty NIL for ATF; Rs 3.5 per litre on diesel & Rs 8000 per tonne for petrol125 die in Indonesian stampede after fans invade football ground and police hurl teargas; 180 injuredAnti-hijab fire spreads across Iran; Rallies organised throughout countryKing Charles III not to attend COP27 in Egypt on advice of Truss GovtUS, Venezuela swap prisoners - 7 Americans for 2 relatives of President MaduroUS, Japan & Australian Defence Ministers vow to work against Chinese military ambitionsWIPO’s Global Innovation Index - India walks up to 40th rankFM says IBC law cannot be allowed to lose its teeth and object
Challenges swamping government related supplies

SEPTEMBER 20, 2022

By Gulzar Didwania, Punita Bhuchar Rana & Aman Deep Singh

TYPICALLY, government establishments in India have all along been entrusted with the mammoth task of creating and preserving utilities for public at large, including and not limited to education, infrastructure, sanitation, public transportation, health care, safety, etc. The sudden push towards privatisation is essentially more an aftermath of a huge fiscal deficit that needed to be circumvented, coupled with high outflow towards capital investment, thus, reinstating economic growth. While privatisation of few more government establishments is on the cards, stabilisation and growth of existing entities also needs to be augmented, more from an economic liberalisation standpoint.

One of the major roadblocks for such establishment has been addressing tax-related issues, more specifically indirect taxes, where due to multiplicity of tax treatments on various supplies made by the government, there is significant leakage of input tax credits (ITC) as most procurements made by the government are covered under the ambit of GST. In this article, we have attempted to highlight some of the real challenges faced by government organisations in availing ITC which in turn is resulting in an increase in the overall cost of making the supplies. The same are discussed below:

ITC availment time 'limitation' and onerous GSTR-2B compliance

The GST law forbids availment of ITC after a specified period. Typically, the government follows cash-based accounting wherein expense is recognised only when cash is paid, which impedes ITC availment, as -

-  Substantial delay in making payment to the supplier because of budget limitations, certifications, etc., results in ITC not getting accounted for until payment is made, and such delay in accounting ITC, combined with the time taken in Form GSTR-2B reconciliation often leads to the expiration of the ITC availment time limit.

-  Government, typically, initially makes only part payment owing to retention policies, deficiencies in supplies, etc., and later, maybe in the succeeding month or year, depending upon the nature of work, pays the retained amount resulting in ITC commensurate to the retained amount getting lapsed due to its recording in the books after the ITC availment time limit expiry. Also, such part payment practice calls for very burdensome record-keeping of Form GSTR-2B data to track partly availed and partly not availed invoices, leading to the near-impossible ITC reconciliations and eventually the unavailing of ITC commensurate to retained payments, even if the retained amount is paid within the limitation period.

The cost of loss of genuine ITC merely as a result of following cash-based accounting and part payment practices is a major concern for the government which is already functioning on narrow margins. GST laws need to be aligned with the manner of accounting and payment being followed by the government, at large.

Also, the intention behind mandating GSTR-2B ITC reconciliation was to weed out fake invoicing and ensure payment of GST by the supplier by encouraging the reporting of invoices in Form GSTR-1. In the case of supplies made to the government, such intention is anyways met by provisions relating to tax deducted at source (TDS) whereby the government deducts TDS and brings the transaction into the tax net. Removing such GSTR-2B compliance requirement on the government, the intention behind which is anyways being met by the TDS provisions, is the need of the hour to ensure no blockage of working capital so as to contribute more to society by supply of public goods and services and thus, achieving public sector growth.

Taxing revenue sharing in concessions

For speedy development of infrastructure, a non-budgetary system of public-private partnership model is being adopted by the government, such as rail infrastructure development under the Rail Yojana wherein private party finances, constructs and operates such infrastructure for a defined period. Such arrangement is very much prevalent in the development of public infrastructure wherein fees/tariffs generated from such infrastructure is apportioned between the government and the concessionaire to enable the concessionaire to recover its investment, operating and maintenance expense.

Of late, concessionaires have been asked to discharge GST on the revenue share accruing to them by treating apportioned fees/tariffs as consideration for infrastructure support services provided to the government. Such demand is detrimental in seeking private investments in the concession route to construct infrastructure in the future and to complete all pending projects, particularly when the intended position is that concessionaire is only an investor getting a return on its investment through revenue apportionment.

Keeping in mind such underlying intended position, a specific GST exemption must be notified for such revenue of the concessionaire to settle the position beyond doubt that the fees/tariffs apportionment is mere return on investments made by the concessionaire.

Unreasonable RCM Levy

Majority of the services supplied by the government and a few supplies of goods attract a levy of GST under reverse charge mechanism. Such a tax levy mechanism breaks the ITC chain as supplies liable to GST under RCM are treated as an exempt supply for ITC availment in the hands of the supplier.The table below explains the same in the hands of the government, as a supplier-

  Particulars GST under RCM GST under FCM
Inward Taxable Value (A) 100 100
  GST @18% (B) 18 18
  ITC (C) 0* 18
  Net Cost (D=A+B-C) 118 100
  Payment made to Vendor/ Net Cash Outflow (E=A+B) 118 118
Outward Taxable Value (F) 150 150
  GST @18% (G) 0** 27
  Cash Tax Liability (H=G-C) 0 9
  Payment received from Customer (I=F+G) 150 177
  Net Cash Inflow (J=I-H) 150 168

* ITC not available owing to supply liable to pay GST under RCM

** Liable to GST under RCM in the hands of recipient

From the above table, it is apparent that GST paid on procurements adds to the cost on account of being ineligible owing to supplies liable to GST under RCM. Such ITC chain break is inimical to GST's fundamental feature of seamless chain of ITC.

RCM was primarily intended to check tax evasion and widen the scope of levy of tax on supplies made by various unorganised sectors by shifting the burden of tax payments to the recipient. It makes no sense to apply such a levy mechanism to government supplies, especially if it makes such supplies expensive.

Recently, GST on all taxable supplies of the Department of Posts has been levied under forward charge supplies which were hitherto liable to GST under RCM. Ideally, this should be done in respect of all government supplies which are liable to GST under RCM at present to ensure an uninterrupted and seamless ITC chain.

Given that the government plays a major role in the Indian economy and also to ensure there is no loss to the exchequer, it is imperative for the GST Council to take corrective measures to address the above challenges in future.

[The authors are - Gulzar Didwania, Partner, Punita Bhuchar Rana, Director & Aman Deep Singh, Deputy Manager, Deloitte Haskins & Sells LLP. The views expressed are strictly personal.]

(DISCLAIMER : The views expressed are strictly of the author and doesn't necessarily subscribe to the same. Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the site)