Eligibility of Form-C for Diesel, Natural Gas etc. after GST - An unwanted dispute between the Industry and the Government

 

Sunil Kumar, Chartered Accountant & Kritika Kalra, Law Intern

 

 

1. INTRODUCTION

 

Don't you think that because of GST implementation few issues which were otherwise clear under the erstwhile regime have come to the fore' An industry-wide issue, that whether post-GST a manufacturer can purchase diesel/natural gas etc. against Form-C, is an evident example of this.

 

This is a major issue of great concern for the entire manufacturing industry. After GST, Ministry of Finance of Government of India and few States have issued Circulars[1]in which they have clarified that after GST Form-C will not be allowed for interstate purchase of petroleum crude, natural gas, motor spirit, high spirit diesel and air turbine fuel (‘Non-GST goods’), unless purchase is intended to be used in manufacturing, processing, reselling of the aforesaid goods or intended to be used in the telecommunications network or in mining or in the generation or distribution of electricity or any other form of power.

 

Post issuance of these clarifications, the State VAT authorities started denying issuance of Form-C to the manufacturers of goods other than Non-GST goods (i.e. Goods on which CST Act not applicable). After being aggrieved by the denials of the State VAT authorities, the manufacturers knocked the door of the High Courts.

 

In this article, we have analysed the legal background of the issue, the petitions filed by various petitioners and views taken by various High Courts on this issue.

 

2.           LEGAL BACKGROUND

 

Section 8 (1) of the Central Sales Tax Act 1956 (‘the CST Act’) provides the rate of tax on the interstate sale to a registered dealer of goods which are mentioned under Section 8(3)(b) of the CST Act. The rate on interstate sales of such goods is 2 percent (‘Concessional Rate’)[2]. 

 

Section 8 (3) (b) of the CST Act provides three situations in which Non-GST goods can be procured against Form-C. These situations are as under:

 

a)            Trading: Registered dealer purchasing the goods for resale.

 

b)           Manufacturing: Registered dealer purchasing the goods for use by him in the manufacture or processing of goods for sale.

 

c)            For other specified use: Registered dealer purchasing the goods in the telecommunications network or in mining or in the generation or distribution of electricity or any other form of power.

 

Before the GST law, the definition of goods under the CST Act was as under:

 

"Goods" includes all materials, articles, commodities and all other kinds of movable property, but does not include newspapers, actionable claims, stocks, shares and securities

 

Since Non-GST goods were not subsumed in the GST law, therefore, the definition of goods was amended by ‘The Taxation Laws (Amendment) Act, 2017’[3] to include only Non-GST goods within its purview. The amended definition of goods under the CST Act is as under:

 

Goods’ means

(i) Petroleum products;

(ii) High-Speed diesel;

(iii) Motor Spirit (Commonly known as petrol)

(iv) Natural gas

(v) Aviation turbine fuel

(vi) Alcoholic liquor for human consumption

 

As per the first limb of Section 8 (3) (b) of the CST Act, any dealer who purchases the Non-GST goods from outside the State and re-sells the same, is eligible to issue Form-C.

 

As per the second limb of Section 8 (3) (b) of the CST Act, any dealer who purchases the Non-GST goods from outside the State is eligible to issue Form-C if such goods are used in the manufacturing or processing of the Non-GST goods only. In other words, towards goods purchased for the manufacture or processing of the goods other than the Non-GST goods, the Form-C cannot be issued.

 

The third limb refers specific transactions i.e. Non-GST goods purchased for use in 'telecommunication network, mining, generation or distribution of electricity or any other form of power'.

 

3.           ANALYSIS

 

As per above, we can drive the following two conditions under which Non-GST goods can be purchased against Form-C:

 

a)            The purchaser must be registered under the CST Act; 

b)           The transaction must be covered under any limb of Section 8 (3) (b).

 

Registration under the CST Act

 

Section 8 of the CST Act provides that concessional rate would be available if goods are purchased by a registered dealer. Therefore, registration is an inevitable condition for claiming the benefit of the concessional rate. This condition raises the following two very basic questions:

 

Whether a supplier who is not engaged in the business of Non-GST goods can take registration under the CST Act'

 

What will happen to those suppliers who were registered in the pre-GST regime under the CST Act?

Will they be again required to apply for the registration?

 

Section 7 (2) of the CST Act provides that if a dealer is liable to pay tax under the Sales Tax law then he can apply for registration under the CST Act. Importantly, this section categorically provides that a person can apply of registration irrespective of the fact that he is not liable to pay tax under the CST Act. The important point is that whether the person is liable to pay tax under the Sales Tax law or not.

 

‘Sales Tax law’ has been defined to include any law which provides for the levy of taxes on the sale or purchase of goods. GST law levies tax on the supply of goods and supply per se include the sale. Therefore, it can safely be concluded that GST law is a ‘Sales Tax law’ under the CST Act. To conclude this, we can say a person who is selling goods under the GST law is eligible for obtaining the registration under the CST Act.

Here it is also important to note that Section 174 of the State GST Acts have not repealed the CST Act. Further, it is nowhere written under the GST transition provisions that after GST the registration under the erstwhile laws will be cancelled.

 

Therefore, we can safely conclude that a person who is engaged in the sale of goods under the GST law can obtain registration under the CST Act. This position is also confirmed by a recent Punjab and Haryana High Court decision in case of Caparo Power Limited[4].

 

Transaction must be covered under Section 8(3)(b)

 

For availing the benefit of the concessional rate the second condition is that the transaction must be covered under any of the three scenarios mentioned in Section 8 (3) (b) of the CST Act.

 

If a person is a dealer of Non-GST goods then there is no ambiguity. He can purchase the Non-GST goods against Form-C under the first limb of Section 8 (3) (b).

 

If a purchaser is a manufacturer of Non-GST goods he can claim the benefit under the second limb of Section 8(3) (b) of the CST Act. This is because the second limb provides that the registered dealer who intended to use goods for manufacturing or processing of goods for sale can avail benefit of Non-GST goods. The expression ‘goods’ coming in later half clause will include Non-GST goods only. Therefore, a person who is manufacturer of goods other than Non-GST goods will not be able to procure goods against Form-C under the second limb of Section 8 (3) (b).

 

Interestingly, recently Rajasthan[5] and Chhattisgarh[6] High Courts have held that a manufacturer of goods other than Non-GST goods (say cement), is entitled to purchase HSD against Form-C. In these judgments, the High Courts have held that Section 9(2) of the State GST Acts provides that GST on Non-GST goods will be levied from the date to be notified by the Government. The Government has not yet notified any date. Therefore, Non-GST goods will be dealt with under the CST Act. The Rajasthan High Court has further held that the Circular issued by the Ministry of Finance[7],which clarifies that Non-GST goods can only be purchased for manufacturing of Non-GST goods, cannot supersede the provisions of Section 9(2) of the State GST Acts.

 

There is no doubt that Non-GST goods are dealt with under the CST Act, but the High Courts have not appreciated the fact that Section 8 (3) (b) provides some specific conditions. These rulings have not clearly ruled out the condition which is specified in Section 8 (3) (b).

 

In case of Caparo Power Limited, the Punjab and Haryana High Court has held that for generating and distributing electricity the petitioner is entitled to purchasing natural gas against Form-C. The High Court held that the assessee is entitled to Form- C because it is generating and distributing the electricity, therefore, it would get covered under the third limb of Section 8(3)(b) for availing the benefit of concessional rate. Recently, the Supreme Court has upheld this decision of Punjab and Haryana High Court[8].

 

The Rajasthan and Chhattisgarh High Court have heavily relied on Punjab and Haryana High Court ruling. However, in our considered view, the rationale laid by Punjab and Haryana High Court in case of Caparo Power Limited cannot be applied for a manufacturer of goods other than Non-GST goods which are subject to GST. This is because in these cases the petitioners were not using the Non-GST goods for the generation and distribution of the electricity[9] rather they were using Non-GST goods for manufacturing goods other than Non-GST goods. In simple words, the Punjab and Haryana High Court has granted benefit under the third limb of Section 8 (3) (b). In our considered view, the department may challenge these rulings before the Supreme Court.

 

4.           ALTERNATIVE VIEWS

 

Can a manufacturer of goods other than Non-GST goods claim the benefit of the lower rate under the third limb of Section 8 (3) (b)?

 

If a person is manufacturing goods other than Non-GST goods and purchasing Non-GST goods (say diesel) for generating electricity for its factory. Cannot he avail benefit under the third limb of Section 8 (3) (b)' The third limb simply provides that for generating and distributing the electricity or any other form of power. A view of this type is also possible but the counter of this would be that third limb only covers the industry-specific situation (Telecommunication industry, mining industry and, electricity generation and distribution industry). Therefore, the manufacture of goods other than Non-GST goods will not be entitled for purchasing the Non-GST goods against Form-C.

 

Whether the expression ‘goods’ which is given in the later part of second limb of Section 8 (3) (b) should not be given the wider meaning?

 

Under the erstwhile regime, the definition of goods under the CST Act did not cover newspapers. Therefore, the similar issue arose for the newspaper industry (that whether the newspaper industry can purchase its inputs against Form-C). The Supreme Court in case of Printers (Mysore) Limited[10] held that the expression goods occurring in the later half clause of Section 8 (3) (b) includes newspaper. The rationale behind this conclusion was linked with the freedom of the press under the Constitution. Therefore, the principle of this ruling cannot be adopted in the instant scenario.

 

5.           CONCLUSION

 

Whatever the position the Courts will take on this issue, if answer comes negative that industry is not entitled for the benefit of Form-C, it will give a negative message to the trade and Industry. This would also impact the prices of the goods and services because Non-GST goods have a direct impact on the entire industry. Just because tax laws have been changed, this should not take away the entitlements which industry was otherwise getting.

 

(The views expressed are strictly personal)