Tax Vista Your weekly tax recap Edn. 109 - 18th July 2022 By Dr. G. Gokul Kishore

 

 

GST rate and exemptions - Notifications issued

Notifications have been issued last week to bring into effect the changes in GST rates and exemptions from today (18th July, 2022). The changes are based on the recommendations of the GST Council as made in the recent meeting. As noted in Tax Vista dated 4th July, 2022, tax rate on several agricultural and educational items has been hiked. Infrastructure sector has been given a blow by placing most of the works contract services under 18% rate. One of the widely discussed amendments relate to removal of the condition on foregoing brand name on pulses or edible items for claiming exemption and levying 5% GST on pre-packaged and labelled items which are required to carry mandatory declarations under Legal Metrology Act and rules. The consequences of this amendment may be far-reaching and the GST Council may be compelled to partially roll-back this move. Realising the seriousness, TRU has issued clarification in the form of FAQs on this amendment. If food items like pulses, rice, wheat, flour, etc., are pre-packaged and labelled containing quantity upto 25 kg or 25 litres, they would be covered under the definition of 'pre-packaged commodity' and therefore, GST would be applicable. This means more than 25 kg packs will not be subject to GST. While the retailer would effectively pay tax on goods purchased in packages containing up to 25 kg or 25liters, he need not pay any GST if the same is subsequently sold in loose quantities. The FAQs further reiterate that since Legal Metrology provisions are not applicable in respect of sale to industrial and institutional consumers, the present amendment will not have any impact on such sales. Medical sector has been given a raw deal by imposing tax on hospital room rent exceeding Rs. 5000 per day except ICU, etc. While GST is an indirect tax, the burden of any tax hike or withdrawal of exemption is borne by the ultimate consumer and in most cases, it is the common man who will feel the heat. Just after Covid when the economy is recovering and when the government takes pride that GST revenues are significantly higher, the present round of changes will impact everyone adversely. GST is no more a good and simple tax and claims to this effect stand exposed.

 

International inbound roaming is export of service - HC allows refund

IGST paid on telecom services - international inbound roaming services and international long distance services provided to foreign telecom operator - would be available as refund as the same is covered under export of service. Allowing taxpayer's petition seeking refund of more than Rs. 100 crores and dismissing department's petition, Bombay High Court has held that in this case, place of supply is location of the foreign operator (FTO) and not the place of the subscriber of the foreign telecom operator. The department argued that the subscriber uses such services while in India and therefore, place of supply would be in India.

 

According to the Court, Section 13(3)(b) of IGST Act on place of supply based on place of where the services are actually performed is not applicable in this case since the services are not provided to individuals but to FTOs. As per Section 13(3)(b), place of performance will be the place of supply when services supplied to an individual, represented either as the recipient of services or a person acting on behalf of the recipient, require the physical presence of the recipient or the person acting on his behalf, with the supplier. In this case, the subscriber's physical presence is required, as per the department. However, the High Court noted that the relationship between the FTO and its subscriber is on principal to principal basis and not on principal and agent basis and the subscriber is not an authorized representative of the FTO. It is the FTO which is the service recipient and not the subscriber of FTO and consideration is paid by FTO to the service provider in India and based on such reasoning, it held that Section 13(2) would be applicable which reckons location of recipient as the place of supply [2022-VIL-486-BOM].

 

The department will most likely challenge the High Court order in the Supreme Court. Considering the precedent cases under service tax and the reasoning contained in this order, department's efforts may not be fruitful. For such unnecessary litigation and delay, interest will be payable from government funds. It is not known as to why such issue which was settled under service tax regime has been given a fresh lease of life. Rejection of refund in this case appears to be more triggered by the quantum involved rather than the merits of the issue.

 

Refund of legacy tax - Transitioning as credit to GST to keep issue alive, not detrimental

In a well-reasoned order, Madras High Court has held that if refund under VAT law is admissible, then the same shall be granted even when the taxpayer had transitioned the amount as credit through TRAN-1 form. The factual background is important since such transition was made only to keep the claim to the amount alive and the taxpayer admitted that the same was not permissible for transition through TRAN-1 form. The issue pertained to non-production of C-forms and payment of certain amount. The forms were later produced and the amount was adjusted leaving a part amount unadjusted when GST was implemented. As per Section 142 of TNGST Act, refund is admissible in such cases and the High Court directed the department to grant the same. The Court further held that Section 74 is not invokable in this case as the present case was not one of evasion of tax but only determination of correctness of availment of ITC and the taxpayer had disclosed the intention in its communication with the department. The department argued that the taxpayer ought to have waited as refund could not be sanctioned due to technical issues. To this, the Court said that such issues cannot be to the detriment of the taxpayer and department cannot expect the taxpayer to wait "till its house has been brought to order" [2022-VIL-485-MAD].

 

Invoking provisions relating to suppression and evasion is a boring routine resorted to in cases where normal time-limit is not available or just because the officer is trigger-happy. When the refund claim was not processed by the department and when the taxpayer himself admitted regarding inadmissibility of transitional credit which was duly informed to the department, allegation as to intent to evade has to fail.

 

Template notices and orders quoting wrong provision - High Court quashes

The law gives power to the person who is clueless on how to use it. The outcome is disastrous as pointed out repeatedly in this column. Many SGST officers do not know what a show cause notice is and what is adjudication. Most of them think that summary of SCN and SCN are one and the same. Drafting of SCN or adjudication order is a major challenge for them and therefore, a few lines are written attempting to convey something. Quoting wrong provisions is a routine. It is surprising that some of these notices and orders, when challenged in High Courts, are defended by departmental counsels.

 

In a recent order, the Jharkhand High Court has set aside summaries of SCN, SCNs and summaries of adjudication orders on the ground of non-application of mind by the adjudicating authority and violation of natural justice. Penalty of 100% amount (equal to tax) was imposed without invoking Section 74 but under Section 73 which provides for 10% penalty only. There was no proof of service of adjudication orders as only summaries were uploaded. The department contended that the GST portal provides the format and therefore, notices can be issued only in such template. The issue is mismatch of ITC between GSTR-2A and GSTR-3B and the department felt that nothing needs to be elaborated. In fact, it alleged that the taxpayer had plenty of time to rectify but the same was not done. There is no great principle involved in such order but the same is briefly mentioned here to only highlight the plight of taxpayers [2022-VIL-482-JHR].

 

Automatic recovery of late fee without notice is not illegal

GST authorities have debited taxpayer's electronic credit ledger to realize short payment of late fees for delay in filing GSTR-3B return. The same was challenged as not proper since no show cause notice was issued before taking such recovery action. It appears such debit is automatic i.e. the portal has a check on the quantum of late fee payable and if it is short paid, then it debits the credit ledger of the taxpayer. There is no statutory provision for such mode of recovery or debit of credit ledger by any software program or portal or authorities. However, the Jharkhand High Court has held that such realization is not illegal particularly when short payment of late fee is not disputed. This order needs review / revision. It is well-settled that consent cannot confer jurisdiction to recover tax or appropriate amounts belonging to the taxpayer when the provision therefor is absent. The department has not cited any provision before the High Court but has argued that there is no necessity for initiating any proceeding under Section 73 or 74 of JGST Act. If system can make automatic recovery and the same is found to be correct, taxpayers can only become more pious and pray so that such recoveries are not undertaken [2022-VIL-474-JHR].

 

Providing complimentary ticket to unrelated parties is not liable to GST

Providing complimentary tickets to sports event by the organizer is not covered under the term "consideration" and such activity is not "supply" under GST. In a detailed ruling, the Appellate Authority for Advance Ruling (AAAR) has rejected the stand taken by the lower AAR in this regard. The AAR had held that such activity would be covered under the entry relating to agreeing to the obligation to tolerate an act or situation. One of the key points that weighed in favour of the taxpayer is the amendment to Section 7 of CGST Act whereby clause (d) of Section 7(1) was omitted retrospectively from 1-7-2017. This clause referred to Schedule II. The net result of this amendment removed the ambiguity of treating something as a supply by mere mention in this schedule since the schedule merely categorizes certain transactions as either supply of goods or that of services. The AAAR has, however, rejected the argument of the taxpayer on availability of input tax credit since extending complimentary / free tickets would be in the nature of non-taxable supply and therefore, ITC in relation to the same cannot be availed. It further held that providing such free tickets to unrelated parties is not a supply but if they are given to employees who are treated as related person vis-à-vis the employer, the same would be taxable even in the absence of consideration as per Schedule I. In the latter case, ITC would be available.

 

The ruling discusses the concept of consideration at length drawing the understanding from judgments under Contract Act, Australian GST ruling, ECJ rulings, etc. It held that even if the consideration is non-monetary i.e. where payment is in kind, it should not be vague or illusory and there should be an element of reciprocity. It said that if the argument by the AAR is accepted, then every kind of activity or transaction whether for gift or charity or for any other purpose will be covered under supply. Reliance was also placed on CBIC Circular No. 92 which clarified the obvious - giving goods free (samples) is not a supply taxable under GST law [2022-VIL-62-AAAR]. It is very rare to see such a ruling with good reasoning, better discussion and placing proper reliance on jurisprudence - Indian and foreign besides departmental clarification.

 

Interest charged by state entity relating to payment towards land, includible in taxable value

A government entity created for promotion of industrial investment, provides / sells land to entrepreneurs on payment of part consideration for the land. The balance amount is paid over a period of time along with interest. The entity sought advance ruling as to whether such interest amount is liable to GST. The AAR has held that interest is liable to be included in taxable value as per Section 15 of CGST Act and therefore, the same is taxable. According to it, the service provided is "fixation of annual instalments with an interest @ 16% p.a. for delayed payment of 75% total consideration." The ruling also reproduces Schedule III entry on sale of land not being subject to GST. The ruling is neither clear as to the service provided nor for the reasoning given to arrive at the conclusion. Sale of land on behalf of the government is a transaction distinct from extending finance to purchase the land. Notification No. 12/2017-Central Tax (Rate) provides for exemption to service of extending loan where consideration is in the form of interest. Proper discussion of this entry would have made the ruling understandable [2022-VIL-181-AAR].

 

Agreement without specific terms - AAR denies exemption

Agreements should be very clear and as far as possible, take into account tax implications. This is one of the basic lessons reiterated from the time of migration to GST. If the agreement is not specific in terms, then implications can be substantial. A recent advance ruling validates this point.

 

The applicant intended to take vacant land for fish farming and sought advance ruling on applicability of exemption under Notification No. 12/2017-Central Tax (Rate) to renting of vacant land to be used for rearing live animals (in this case fish farming). The AAR examined the lease agreement and noted that it has general clauses only and there is no specific mention as to the usage for which the vacant land would be put to. Therefore, it can be used for any other purpose also and exemption would not be admissible in such case. While the applicant can be faulted for having drafted the agreement in an imperfect manner, the AAR could have sought other evidence like exchange of mails or letters to prove that the land would be used for the intended purpose as covered in the exemption notification. Denying the exemption without appreciating all the evidence or providing opportunity to the applicant to produce the same is not the correct method of determination of the question [2022-VIL-186-AAR].

 

Transfer of airport management to SPV is exempted from GST

Transfer as used in Notification No. 12/2017-Central Tax (Rate) in relation to transfer of business as going concern for the purpose of exemption does not necessarily mean permanent transfer and temporary transfer is also included. The case pertains to advance ruling on exemption to transfer of airport operations to private party (SPV). The concession is for fifty years and there is no sale per se involved. For the purpose of "going concern", the AAR has relied on the relevant accounting standard which emphasizes the capability of being run in the foreseeable future and such transfer is along with property, goods, employees, etc. It has specifically observed that for a transaction to be covered as transfer of business, it is not necessary that all assets and liabilities should be transferred and even if some assets are retained also, if the SPV is able to run the business, then it would be treated as transfer of business. After examining the concessionaire agreement, the AAR has held that the arrangement in the case before it would be covered as transfer of going concern.

 

The concession fees including the annual / monthly fee paid by the SPV is part of the consideration for transfer of business and therefore, exempted from GST, as per the ruling. Reimbursement of expenses towards salary cost for certain employees has been held as not covered under the exemption and would be treated as consideration for manpower supply liable to GT of 18%. Readers may refer to the ruling for reasoning (para 18.8) [2022-VIL-193-AAR]. Involvement of high stakes could be one of the reasons for seeking advance ruling as otherwise, the surprises from the GST authorities may erode the balance sheet completely.

 

 

(The author is an Advocate, Gokul & Subha Advocates, Chennai. The views expressed are personal. The author has published books on cross-border taxation and investigations & appeals under GST. He has edited R.K. Jain's GST Law Manual - 15th Edition - Feb., 2022. E-mail - gokulkishore@gmail.com)