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Tax Vista Your weekly tax recap Edn. 74 - 15 November 2021 By Dr. G. Gokul Kishore |
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Transitional credit of education cess - Notice not valid as amendment not yet notified
Transitional credit continues to be in transit. The types of litigation, amendments, notices, etc., seen in this arena keep all the stake-holders on tenterhooks. Tax credit of education cess is loathed by the tax department and therefore, though initially not provided, by retrospective amendment to CGST Act, transitional credit of such cesses was sought to be restricted. But, the CBIC has been caught napping as the relevant provisions of the amending statute have not yet been notified and therefore, the amendment has not come into effect. On this ground, show cause notice issued to the taxpayer seeking recovery of such cess credit has been quashed by Bombay High Court. Explanation 3 in Section 140, the backdated amendment of which has been brought into force, was found to be not sufficient to sustain the SCN termed as issued without jurisdiction by the Court in the absence of such amendments to Explanations 1 and 2 not having been notified [2021-VIL-780-BOM].
Another notification will now be issued to rectify the lapse and fresh notice will follow. Tax credit is perceived as a largesse by the government and cess credit is even inferior. Ultimately, all the taxes and cesses which are not allowed as credit become cost to be loaded in the price of supplies having inflationary effect and other economic consequences. Economic fallout of tax policies is something discussed perfunctorily and when the law is made and implemented, it is revenue consideration which reigns supreme.
Cancellation of registration - Casual approach and confusion
Cancellation of registration is a power under GST law used frequently without proper examination or without realizing the consequences that such act has on the livelihood of taxpayers. The situation becomes worse when either notice is not served or order is passed without hearing the taxpayer. In a case of this nature, Allahabad High Court has allowed the petition by the taxpayer directing the authorities to consider the matter afresh after quashing the order cancelling registration. In this case, show cause notice was uploaded in the portal which was not decipherable - it contained mostly special characters and the matter was not visible. Later order was passed cancelling registration without hearing the taxpayer. There was no proof of service of physical copy of the SCN or order. The order, it appears, was not even uploaded in the portal. Still worse, the GST portal showed the registration as active for almost two years after cancellation.
The High Court noted that cancellation of registration has serious consequences on the rights of taxpayers and even takes away the right to conduct business besides upsetting ITC availment. As valuable right to do business has been curtailed violating principles of natural justice, the order states that the taxpayer should not be relegated to alternative remedy (of appeal) [2021-VIL-777-ALH].
VIL has reported another similar order last week in which registration was cancelled without hearing the taxpayer. The High Court has extracted the format of SCN and has held that the notice issued was not in this format as the date and time fixed for hearing were absent. The order was set aside by the Court [2021-VIL-789-ALH].
It has been routinely highlighted in this column that the provision on power to cancel registration should be amended so as to provide sufficient safeguards to the taxpayers. An officer of the State cannot be allowed to defeat the fundamental right guaranteed under Article 19(1)(g) of the Constitution in such casual and perfunctory manner.
Insurance premium recovery by employer from employee is not a supply
Despite criticism of AAR as not being neutral or judicious, certain rulings indicate there is consistency in the rulings. Maharashtra AAR had earlier taken the stand that recovery of insurance premium from employees, particularly parental insurance, is not a supply under GST and the same has been followed in a recent ruling as well. In this case, the applicant-company had taken group insurance policy (mediclaim) for employees. Amount towards premium was being recovered either in full or in part when employee has opted for additional benefits under top-up plan and parental insurance to include dependent parents / parents-in-law. The applicant argued that providing such insurance is not mandatory under any law and not providing insurance cover to employees will not affect their business and it is the insurance company which provides the service. The AAR has accepted the same and has held that activity of recovery of cost of insurance premium cannot be treated as an activity done in the course or furtherance of business and applicant has been held as not rendering insurance service and therefore, the activity would not constitute supply under CGST Act [2021-VIL-411-AAR].
It appears that on insurance premium recovery, companies are able to come out of GST whereas on canteen service, they find it difficult to navigate. In fact, in respect of canteen, employers recover part amount only in most cases and do not avail ITC as well. The department is not only pursuing them for payment of tax but also has started questioning valuation adopted for such canteen service. All kinds of recoveries from employees need to be properly clarified by CBIC instead of compelling the taxpayers to seek rulings or pushing them into litigation.
Merchant export - Concessional GST rate not available if goods are not directly exported
Merchant export - a time-tested business practice of yesteryears - has been literally done away with in GST regime. After being clueless in the initial months of GST, Notification No. 41/2017 - Integrated Tax (Rate) dated 23-10-2017 was issued to provide for concessional rate of 0.1% when registered taxpayers supply goods to merchant exporters. This notification prescribes several conditions. The merchant exporter (registered recipient) should move the goods from the supplier's place directly to the port of export or ICD, etc. If such exporter procures export goods from several suppliers, then they shall be moved to a registered warehouse for aggregation and from such warehouse, these goods should be transported to the port of export.
Draftsmen of this notification did not foresee a situation of movement of packing materials by a supplier to another supplier for stuffing the export goods and then further transportation of the packaged goods to the port. Due to such short-sightedness or over-cautiousness to prevent any imaginary leakage of revenue, the word "directly" has been used for movement of goods. This has been relied on by the Authority for Advance Rulings (AAR) to deny the concessional rate to supplier of HDPE drums who sent them to another person for filling the export product. Both were procured by the merchant exporter but the word "directly" became the spoiler for the parties. This should be an issue affecting many in the trade. An amendment to this notification to expressly provide for exception to packaging materials under the relevant condition is required. Considering the priority attached to exports, this may take several months or even years [2021-VIL-402-AAR]
Conduct of test / exam with school having minor role is not exempt from GST
Applicants who opt for advance ruling should not rejoice even when ruling is in their favour as appellate rulings may turn against them. In an appellate ruling of this nature, the Appellate AAR has held that when the applicant performs almost all the tasks like setting of question paper, printing of question paper, fixing dates for test, assessment / evaluation, leaving almost no role or minor role for schools, exemption in respect of services relating to conduct of examination by educational institutions would not be available to the applicant-entity conducting the test. The AAAR stressed that in view of such facts, the test / exam was not conducted by schools (educational institutions) but by the entity / applicant. Literature addressed to parents indicating that the service was being provided not only to schools, offering of discount by applicant, etc., were also facts which were held as against the applicant. The appellate ruling holds that the schools are facilitating the applicant in the conduct of the test.
Earlier, the AAR had held that the applicant was entitled to exemption after relying on Supreme Court judgment in Doypack Systems [1988-VIL-02-SC] wherein the words "in relation" was held as having a wide meaning. The department in its appeal had argued that the applicant was conducting benchmarking test and not a typical examination relating to education upto higher secondary and it was a case of diagnostic assessment and personalized learning [2021-VIL-62-AAAR].
Transportation of fresh eggs by rail is exempt from GST
Transportation of specified goods by rail is exempted under Notification No. 12/2017 - Central Tax (Rate) and agricultural produce is one among such goods. The question before AAR was - whether eggs are covered under the term "agricultural produce" and transporting eggs through rail will be considered as exempted. The definition of this term in the notification covers produce out of rearing of animals for food, etc. The condition for exemption is that either no further processing is done or only such essential processing is done to make the item marketable for primary market. The AAR has held that fresh eggs in shell on which no further processing is made would be covered under "agricultural produce". The department argued that the exemption is meant for farmers doing animal husbandry also, but the AAR said such condition on type of person being eligible for exemption is absent in the notification [2021-VIL-409-AAR]. It may be difficult to digest egg being related with agriculture but when statute defines in this manner, it has to be taken as it is.
Exemption to goods or services intended for public welfare - Amendments required
Certain applicants are fortunate before AAR. Even if not-so-convincing argument is taken, the AAR rescues the applicant by relying on alternative submissions made or by own reasoning. The applicant is engaged in operation and maintenance of metro rail and the service recipient is metropolitan development authority. Such authority makes payment to the applicant and the applicant argued that such payment is reimbursement of expenses towards salary / wages, canteen, contribution to provident fund, etc. and nothing is supplied and no consideration is involved to attract GST. The AAR, however, ignored such reimbursement or no-supply theory after taking note of the fact of provision of consultancy services by the applicant. Therefore, it held that in this case, pure services are provided to government entity in relation to municipal function as per Article 243W of the Constitution which are exempt under Notification No. 12/2017 - Central Tax (Rate). The applicant, it appears, has tried to even contend that the amount may be covered under exemption where the amount received is in the form of grants but this has not found favour with the AAR [2021-VIL-416-AAR].
Such exemption entries may need to be re-visited considering the stakes involved and such works being meant for public welfare. Another case which highlights extension of exemption to goods supplied under government's welfare programmes is provision of nutritional food by registered societies to anganwadis. It appears there is no entry in exemption notification to cover such supply of goods and an amendment is much needed even if the goods are described by a specific name [2021-VIL-415-AAR].
Valuation for IGST on imported goods - AAR has no jurisdiction
Question before AAR is whether subsidy received from government is liable to be included for arriving at taxable value for payment of IGST on imported goods. The AAR has probably proceeded on incorrect footing that the question relates to determination of liability to pay tax whereas it can be considered as covered under "determination of value of supply". However, this is of academic interest only since the application has been rejected on the ground that on imports, IGST is payable as per value determined under Customs Act and Customs Tariff Act and therefore, AAR does not have jurisdiction. As per proviso to Section 5(1) of IGST Act, IGST on imported goods shall be levied and collected as per Section 3 of Customs Tariff Act and on the value determined under Customs Tariff Act and at the point when customs duties are levied as per Customs Act. Customs Tariff Act refers to value determined under Section 14 of Customs Act. May be, the applicant has to go to Customs AAR now [2021-VIL-412-AAR].
Compensation received on cancellation of coal blocks not liable to Service Tax
CESTAT orders in respect of damages or compensation received due to breach of contract have been consistently holding that such amounts are not liable to service tax. The typical argument of the department that such amount is a consideration for agreeing to the obligation to tolerate an act or situation is not accepted by the Tribunal. In yet another order deciding this issue in favour of the assessee, CESTAT has held that compensation received as per law consequent to cancellation of coal block would not be liable to service tax. The compensation was received from new allottee through government as per special statute enacted for this purpose and cancellation was ordered by the Supreme Court. The order is forthright in holding that tolerating presupposes that the person had choice to tolerate whereas in the present case, the appellant had no choice. There was no agreement for such toleration and the cancellation was not as a result of contract but due to order of the Court. As per the Tribunal order, amount received as compensation or liquidated or unliquidated damages cannot be termed as consideration [2021-VIL-600-CESTAT-KOL-ST].
On this issue, the stage is set for big litigation. Amounts received as damages are considered as liable to GST by the department. These are substantial and they arise mostly in situations which are not under the control of the party receiving it - by operation of law or breach of contract by the other party. An interesting question would be whether abstinence from action is toleration or any positive act seeking compensation would be non-tolerance and not a supply.
(The author is an Advocate, Gokul & Subha Advocates, Chennai. The views expressed are personal. Two books authored by him have been published - Cross-border Transactions under Tax Laws & FEMA (July 2021) and GST - Investigation, Demands, Appeals & Prosecution (August 2021))