TIOL - COB( WEB) - 934
AUGUST 22, 2024

By Shailendra Kumar, Founder Editor

IF one navigates through the titillating media headlines today, it is almost irresistible to conclude that the Goods and Services Tax (GST) has begun engendering chills and thrills for both the taxpayers as well as the taxmen! The distorted silhouettes began lengthening with 'unplugged' abuse of input tax credit (ITC) worth thousands of crores. The drumbeats of industrial-scale misuse of ITC reverberated so loudly in the hallowed precincts of Parliament that the full-house of the GST Council became a bundle of nerves and hastily embraced ad hoc 'putty measures' a la Rule 36(4) and Rule 86B. These rules indeed yielded some tactile dividends but they also injected a chunky dose of distortions in the original design of the GST architecture, which had consecrated ITC as its vertebrate! Unfortunately, a series of decisions of the Council kept on punching holes in this 'vertebrate' by granting exemptions and also notifying certain transactions as non-supply! Rather than knitting bridges for the ITC and expanding the tax-base with lower tax rates, the Council preferred to cling on to higher tax rates and kept on exempting a panoply of services under political pressure a la SPVs of Railways; supply between insurers and co-insurers and many others. A case of veering off the track! A major lightning rod of concerns for the GST purists and global economists!

A string of clarificatory circulars was issued to further rupture the thread of ITC. The latest one is Circular No 210/4/2024-GST, dated 26th June, 2024. In para 3.7, the CBIC has clarified that "in cases where the foreign affiliate is providing certain services to the related domestic entity, and where full ITC is available to the said related domestic entity, the value of such supply of services declared in the invoice by the said related domestic entity may be deemed as open market value in terms of second proviso to rule 28(1) of CGST Rules. Further, in cases where full input tax credit is available to the recipient, if the invoice is not issued by the related domestic entity with respect to any service provided by the foreign affiliate to it, the value of such services may be deemed to be declared as Nil, and may be deemed as open market value in terms of second proviso to rule 28(1)".

This Circular 210 was eloquently highlighted by the Infosys Ltd in its intimation to all stock exchanges about much-vilified Rs 32,403 Crore pre-show cause notice issued by the Karnataka VAT and then DGGI of the Central Government. Why two notices i.e DRC-01A? Before I explain this mess, let me take you back to the Infosys intimation letter to BSE Ltd dated 31st July. The letter further states that the GST payments are eligible for credit or refund against export of IT services. I believe that the company is right in stating so but when full ITC is available, why did the GST Council mandate CBIC to issue such a clarification which snapped off the thread of ITC which resulted in avoidable litigation. Had Infosys paid GST under RCM, and taken credit, there would have been no room for such notices and further litigation. The point, I am trying to drive home, is that fracturing the high-duty chain of ITC to provide working capital relief to a business entity is a terrible idea of tampering with the GST original design which ought to be eschewed under all circumstances. A pass-through tax system is designed for a particular purpose and if multiple purposes are entwined, this is the beginning of a distortionary voyage. Alas! No amount of consequent polishing by inserting provisos and explanations can help it regain its original skin a la our I-T Act, 1961 and also the Central Excise Act, 1944.

Let me now quickly trek to the bare facts of the Infosys case. Like all other IT companies, Infosys has a network of overseas subsidiaries and also branch offices. While executing an overseas service contract, it involves its overseas subsidiaries and branches for on-site service delivery. In the case of subsidiaries, it receives invoices and pays GST under RCM and takes credit. In the case of overseas branches, it follows a different practice - no invoice, only book entry of expenditure incurred on them. In the year 2020, the Bangalore unit of DGGI rolled out a probe for not paying IGST on import of services from branch offices which are distinct entities as per Section 8 of the IGST Act, 2017. The period covered was FY 2017-18 to FY 2021-22. In February 2024, the DGGI came to know that the Karnataka State GST authorities had already investigated a similar case of non-payment of IGST on import of services under RCM and a show cause notice was also issued in May, 2023. To avoid duplication of investigation, the DGGI transferred the case to the State authorities in May, 2024, along with all the vital documents. On July 24, 2024 the State authorities sought more information from the DGGI as the case was going to be time-barred on 5th August. When the DGGI officers visited the State office to hand over the information sought, they came to know that the State authorities had taken a decision to lob back the case to the DGGI. And they did it on 30th July. For the DGGI, it was a case of catching the falling knife! Since the time-barring deadline was inching closer, the DGGI issued the DRC-01A which was the fodder for sensational headlines in all newspapers. On 1st August, DGGI came to know that the State authorities had already issued DRC-01A on 23rd July but concealed that information which resulted in a serious goof-up of issuance of two DRC-01A in the same case! Realising the faux pas, the State authorities quickly withdrew their notice and that made another bout of newspaper headlines, perplexing the mandarins in the North Block!

The incident of double notices, of course, provided incendiary meat-balls to all newspapers to write editorials, lamenting the GST authorities and describing it as 'tax terrorism'! Though the Infosys may get relief for one FY in view of the Circular 210 but the charges for other FYs may stick on various grounds detailed in the show cause notice. What is of greater import in this context is that this case demonstrates poor coordination between the State and Central authorities. Strangely, when the draft copy of Circular 210 was in circulation for months and the same was being discussed in the GST Law Committee where the State of Karnataka was also represented by a senior officer, why did the State authorities issue DRC-01A on 23rd July when the Circular 210 was issued on 26th June? When the bone of contention was covered by the pertinent Circular and the Karnataka officer was a party to it, why was the proposal to issue pre-notice approved? Secondly, why was it put in a rabbit hole, and not disclosed to the DGGI, which embarrassed itself by issuing another DRC-01A! I guess that it was perhaps the fear of dropping a huge demand! Whatever it was, the lesson to be learnt from this case by the CBIC is that they need to wake up from their cozy slumber and build a robust system of keeping track of such goof-prone actions! Alas! The tracker built by the Infosys for the CBIC either let down the DGGI or the agency failed to properly check the uploaded DRC-01A in an unholy haste? Whatever it was, the irony is that this case earned a bulky bout of infamy for the GST. And the CBIC needs to do more pro-active monitoring of field cases which are going to be covered by issuance of a clarificatory circular. If a decision has been taken by the Council and the CBIC is aware of its ramifications on the on-going investigations, the issuance of notices should be abandoned to avoid making headlines which sully its image among the stake-holders. Another lesson needs to be learnt to plug pain-triggering enzymes is - CBIC should insist on better coordination with the States and should also stop taking over cases closer to time-barring deadlines. Ideally, an IT-based system should be in place so that reliance on manual communication is minimised!

Let me now canoe to another storm in a teacup which grabbed top headlines in almost all newspapers - GST on grants to educational institutions. The DGGI offices across India have issued show cause notices to dozens of IITs and Universities for receiving grants from governments and government-funded bodies but not paying taxes. Since research qualifies as supply of service (SAC 9981), DGGI has demanded tax on considerations minus subsidy from dozens of institutes. The rationale is - since grants are granted with a well-defined nexus with the projects and their outcomes, and recipients are not at liberty to use such grants for purposes other than the ones envisaged in the agreements, such grants are to be construed as consideration against the supply of research service. Secondly, all these institutions are paying GST on grants received from non-government entities and PSUs but not paying tax on grants received from bodies like CSIR, DRDO and ICMR. As per the GST Notification No 12/2017, exemption was sanctioned to grants received only from governments like Central, State and local bodies. Since NHAI, DRDO, CSIR and others do not qualify the threshold of a government body, the DGGI has legitimately demanded tax on all such grants.

However, DGGI has been skewered by all sorts of experts for issuing such SCNs to educational institutions - a sort of sentimental outpourings! When the law mandates taxation of all such grants, it would not be fair to lambast investigating agencies for doing their jobs. However, what may be a more salubrious mechanism to wall off negative reporting in the media is - the CBIC needs to pay greater attention to the recently-evolved mechanism of preventive agencies making a reference to the Board, and after the policy wing examination, the legal opinion may be streamed back to all Central and State preventive outfits to take a call before initiating investigations. This will help avoid issuance of frivolous SCNs and unnecessary litigation could be nipped in the bud. The Government is hunkering down to finalise a New National Litigation Policy and such internal procedure to carry the views of the policy wing or even the GST Law Committee would save the preventive agencies and the governments from negative publicity which ends up eroding the goodwill nourished by the Union Ministers to attract investments into the economy.

The CBIC, on its part, needs to pull its socks up and prepare a laundry list of all such services, including deemed services, and give enough publicity to make taxpayers aware of tax liabilities. A good number of cases booked by the preventive agencies is emblematic of lack of awareness even among most compliant taxpayers. To enhance the index of tax compliance, what taxpayers under GST need today is the helping hand from the top policy-makers who can interpret and list out services which are taxable by implication or interpretations. Leaving poor taxpayers to hinge on the advice of their legal counsel is akin to leaving a child to learn swimming alone in the pool while the counsel entertains himself as a keen onlooker! And as soon as a leakage is detected, whamming them with SCNs, hallelujah, does not serve the long-term interests of the nation nor the goodwill of a new tax system introduced for its much-hyped merits!

A time has come for the behemoth CBIC to switch over to a new leaf and regularly, come out with draft discussion papers on a range of contentious issues for public feedback. Similarly, it should also undertake regular research works relating to different market practices in various sectors. For instance, had it done such a study focused on IT Industry with the help of NASSCOM, it would not have come under criticism for its probe against Infosys Ltd. Ideally, like all other government departments, both CBIC and CBDT should come out with annual reports for the citizens to scrutinise and assess their annual activities. This is where the political leadership can add new elements to the much-ballyhooed slogan of 'citizens' empowerment'! Let's hope that the CBIC and the State GST authorities together work like a Trojan to wear a new skin to make GST truly a simple tax to fathom and comply with! Indeed, optimism is a heady feeling! Merci for sustaining such hope from GST! Ciao!