The Hon’ble Karnataka High Court in the present case decided on the question of law whether the Electronic Credit Ledger (“ECL”) can be blocked by revenue authorities under Rule 86A of the CGST Rules, 2017 (“CGST Rules”), without granting a pre-decisional hearing and without the fulfillment of necessary conditions under the provision. The Hon’ble High Court set aside the earlier judgment of the Learned Single Judge that had upheld the revenue authorities decision to block the ECL, noting several procedural lapses, including the failure to grant a hearing and the improper reliance on findings from another authority without independent inquiry.
The appellant, engaged in the business of lead and lead scrap, had their ECL blocked under Rule 86A of the CGST Rules, on the basis of a field report issued by the investigation wing. This field report alleged that some suppliers were non-existent or not conducting business. Based on this internal report, the adjudication officer mechanically blocked the appellant’s ECL without conducting any independent verification or inquiry into the appellant’s specific transactions. The Learned Single Judge upheld this blocking of the ECL, leading to the present Writ Appeal.
The Hon’ble High Court set aside the earlier order of the Learned Single Judge on essentially two points as follow:
As per the judgment of the Gujarat High Court in Samay Alloys India (P) Ltd., even though Rule 86A of the CGST Rules does not specifically provide for a pre-decisional hearing, such a requirement must be inferred due to the serious civil consequences involved. A post-decisional hearing would not be sufficient. The High Court emphasized that compliance with the principles of natural justice is a sine qua non, and while Rule 86A does not explicitly provide for or prohibit it, there is a need to read this requirement into the rules.
The Hon’ble Court pointed out that providing a pre-decisional hearing would not have resulted in immediate or instantaneous utilization of the ITC by the appellants, unlike bank accounts from which money can be withdrawn quickly. The process of utilizing ITC takes time, allowing the revenue authorities to supervise and monitor the proceedings, including the ECL, even during the pre-decisional hearing process.
Rule 86A requires the officer to have “reasons to believe” that fraudulent or ineligible Input Tax Credit (ITC) has been availed. Such “reasons to believe” must be formed through the proper officer’s own independent inquiry and not based on borrowed satisfaction from another authority’s findings. The ECL was blocked by the proper officer due to the fact that he felt compelled to obey the command of another officer. The Hon’ble High Court observed that it was not the manner in which the law expects the power under rule 86A to be exercised. The Hon’ble Court held that when a thing is directed to be done in a particular manner, it must be done in that manner or not at all is the well-established principle of administrative law.
Even Circular No. CBEC-20/16/05/2021-GST/1552, dated 02.11.2021 (“Circular”) outlines the process and requirements for blocking the ECL. The Circular mandates that before disallowing the use of credit, the concerned officer must apply their mind and consider all the facts, including the nature of the fraud or ineligible ITC.
Blocking an ECL restricts the assessee’s ability to utilize the ITC for up to one year. Such action directly impacts the liquidity of businesses and can cripple operations, especially in sectors like scrap dealing, where cash flow and credit utilization are critical. Hence, such a measure must be taken with extreme caution and only when there is concrete evidence of fraudulent transactions. In this case, the absence of such evidence warranted setting aside the blocking of the ECL.
The onus lies on the revenue to show that the appellants had deliberately availed fraudulent or ineligible ITC however, in the instant case, the ECL of the appellants had been blocked by the respondents without verifying the genuineness of the transaction and a bonafide purchaser cannot be denied ITC on account of a supplier’s default and the recipient cannot be made to suffer denial of ITC for the wrong doings of the supplier.
In this case, the blocking of the ECL was mechanical and lacked the required independent inquiry and fulfillment of conditions for invoking Rule 86A of CGST Rules, rendering the action illegal. The Hon’ble Court noted that the ECL was blocked solely based on communication from another officer (from the investigation wing), without any tangible material to form a belief that the ITC in the appellant's ECL was on account of any fake invoice.
The Hon’ble High Court emphasized that the power of disallowing debit of amount from the electronic credit ledger must not be exercised in a mechanical manner. Careful examination of all the facts of the case is important to determine cases fit for exercising power under Rule 86A. The remedy of disallowing debit of amount from electronic credit ledger, being extraordinary by nature, has to be resorted to with utmost circumspection and with maximum care and caution.
The Hon’ble Karnataka High Court directed the revenue authorities to reconsider the matter, ensuring compliance with the principles of natural justice and conducting an independent inquiry before taking any further action under Rule 86A
W&B Comments: The ruling highlights the original intent behind the use of Rule 86A of the CGST Rules, which allows the blocking of ITC and provides the department a manner in which the power under the rule should be utilized. While the rule is intended to curb fraudulent practices, the power must be exercised with caution and grounded in independent inquiry. Various High Courts across the country, have consistently ruled that there is no legal basis for blocking future credits under Rule 86A where the conditions under the rule have not been meet. The present ruling reinstates the necessity of principles of natural justice, even though they are not mentioned in the language of the rule itself. The Hon’ble Karnataka High Court has stated that the department’s usual practice of mechanically blocking the ECL based on departmental orders should not be followed. This decision will be helpful for all assessees where the department has invoked Rule 86A without adhering to the proper procedure and law.
In the present case, the Hon’ble Calcutta High Court addressed the issue that whether the GSTR-9 annual return for the FY 2017-18 could be completely disregarded by the adjudicating authority and demand could be passed thereon without considering the GSTR-9 filed by the assessee.
The appellant, Ankit Kumar Aggarwal, made errors in GSTR-3B filings from October 2017 to March 2018 by omitting input and output cess. These discrepancies were later corrected in the GSTR-9 annual return. The Hon’ble Calcutta High Court ruled that the adjudicating authority must consider GSTR-9 and not dismiss such errors if they are subsequently corrected.
The Hon'ble High Court observed that two crucial aspects warranted sending the matter back to the adjudicating authority:
1. The Hon’ble Court recognized that GSTR-9, filed within the extended deadline due to COVID-19 notifications, holds importance and should be reviewed to reflect the true tax liability.
2. The appellant's claim that the error was revenue-neutral (i.e., no loss to the tax authorities) was also acknowledged by the court, supporting the need for a reassessment.
The Hon’ble High Court directed the Assistant Commissioner of State Tax to reconsider the submissions, provide a personal hearing, and make a fresh decision.
W&B Comments: This ruling highlight the growing judicial recognition of rectifiable GST filing errors. It reinforces the importance of accurate reconciliation between GSTR-1, GSTR-3B, and GSTR-9. Courts have consistently allowed taxpayers to correct mistakes in initial filings, focusing on substantive justice over procedural lapses. This trend reinforces the need for businesses to properly reconcile their monthly returns and file the GSTR-9 appropriately. In recent cases, courts have emphasized the importance of allowing corrections in GST filings when discrepancies arise between GSTR-1, GSTR-3B, and GSTR-9. Hon’ble Madras High Court in Abhi Technologies[1] directed the refund of IGST despite errors in GSTR-3B, stressing that procedural mistakes should not deny legitimate export incentives. In the Amarjyothi Carrying Corporation,[2] the Hon’ble High Court emphasized that errors in GSTR-1, which were correctly reported in GSTR-3B and GSTR-9 (annual return), should be reconsidered by the authorities.
In line with this approach, the Hon’ble Calcutta High Court’s observation in the present case may offer relief to businesses that have made genuine errors but corrected them in their annual filings, aligning with a broader trend in GST litigation.
[1] 2022 (5) TMI 1136
[2] 2024 (3) TMI 1030
In this present case the petitioner was served with a notice for conducting audit after cancellation of registration. It filed writ petition to challenge the audit notice issued after cancellation of GST registration & subsequent assessment order and submitted that Section 65 of CGST Act, 2017, applies only to registered persons. It was also contended that since the foundation of the proceedings was contrary to the mandate of the CGST Act, any assessment order passed in pursuance thereof, deserves to be quashed.
The petitioner argued that since they had cancelled their GST registration, they were no longer liable to undergo an audit under Section 65 of the CGST Act, which applies only to registered persons. The petitioners also placed reliance on Tvl. Raja Stores v. The Assistant Commissioner (ST).[1] However, the respondents contended that the cancellation of registration does not absolve the petitioner from their tax liabilities accrued during the registration period.
The Hon'ble High Court examined Section 65(1) of the CGST Act, which empowers authorities to audit any registered person for a specified period. It also considered Section 29(3), which clarifies that cancellation of registration does not discharge liabilities incurred before cancellation to deny the applicability of the Tvl Raja Stores case relied upon by the petitioners. The respondents asserted that the audit was valid as it pertained to the period when the petitioner was registered. The judgment highlighted that despite cancellation, liabilities for the period of registration persist under the CGST Act. It was noted that the audit process was duly followed, including issuing a show cause notice and considering the petitioner’s objections. It cited precedents and legislative intent to affirm that audit rights extend to periods when the entity was registered, regardless of subsequent registration cancellation.
W&B Comments: This instant case provides much needed clarity on whether an audit can be initiated against an entity whose registration has now been cancelled. The Hon'ble Rajasthan High Court has expressly clarified the interpretation of Section 29 of the CGST Act and has concluded that regardless of the present status of the registration of the taxpayer, it does not absolve or eliminate the requirements to remit the existing tax dues. And since the audit is pertaining to a period when the petitioner did indeed hold a valid registration, conducting an audit for that period is well within the rights of the department.
[1] MANU/TN/6752/2023
In the present matter the petitioner filed a writ petition before the Hon’ble Allahabad High Court against a show-cause notice and subsequently an order under section 74 of the Goods and Services Tax (GST) Act, 2017 (GST Act), for the months of June, July, August and September 2020–21 for availing wrong ITC. The Revenue authorities contended that the taxpayer has wrongly claimed the ITC by using forged tax invoices, without proving actual physical movement of goods or genuineness of the transaction. In addition, the taxpayer has failed to discharge the burden of proof. The taxpayer was required to give details, i.e., number of the vehicle used for transportation of goods, payment of freight charged, acknowledgement of taking delivery of goods and payment, etc.
The petitioner argued that the tax payer is entitled to ITC as the conditions prescribed under Section 16 have been complied with and that the tax has been charged by the selling dealer. The petitioner is no way in control over the actions of the selling dealer and ITC cannot be denied on the grounds that the selling dealer has not shown the purchases in his returns or deposited the tax.
The Hon’ble High Court dismissed the writ petition filed by the taxpayer on the basis that the petitioner has failed to prove and establish the actual physical movement of goods and genuineness of transactions between the selling dealer and thereby has opened himself to litigation and scrutiny. The Hon’ble High Court relied on the Hon’ble Supreme Court’s judgment in the case of M/s Ecom Gill Coffee Trading Private Limited[1] where the Hon’ble Supreme Court held that the onus lied upon the petitioner to prove the validity of a transaction beyond reasonable doubt in order to be eligible to claim ITC. The Hon’ble High Court also relied upon its own ruling in a similar case of M/s Shiv Trading v State of Uttar Pradesh[2] to strengthen its stance. It laid down the view that mere payments or invoices are not sufficient to discharge the burden of proof.
W&B Comments: The Court reiterated that claiming ITC under Section 16 of the U.P. GST Act requires strict adherence to statutory conditions, similar to previous rulings like State of Karnataka v. M/s Ecom Gill Coffee Trading Pvt. Ltd. However, this judgment further clarifies that merely presenting tax invoices and e-way bills is insufficient; dealers must also provide comprehensive proof of the physical movement of goods. The decision underscores that the burden of proof remains firmly on the dealer, highlighting both the continuity in legal principles and the increasing emphasis on thorough documentation for ITC claims.
This ruling serves as a critical reminder to dealers of the importance of maintaining detailed and complete records to substantiate ITC claims, as the failure to do so can lead to the disallowance of ITC and potential legal hurdles. The High Court’s decision to dismiss the writ petition reinforces the principle that ITC is a statutory concession, not an inherent right, and must be claimed in full compliance with the law.
[1] 2023 (3) TMI 533
[2] Writ Tax No.1421/2022
In the present matter, the Indian Medical Association filed a Writ Petition before the Hon’ble High Court of Kerala, seeking a declaration that the retrospective amendment to Section 7(1)(aa) is unconstitutional and violative of Articles 14, 19(1)(g), 265, and 300A of the Constitution of India.
The petitioner, an association of medical professionals, argued that its members pool resources, and the common funds are utilized for various schemes for the benefit of the members. It was contended that the doctrine of mutuality should apply in this case, as the association merely constitutes a group of individuals serving themselves, and under the doctrine of mutuality, there is no service rendered by one person to another. Consequently, the petitioner asserted that the activities conducted by the association do not constitute a supply of goods or services, and therefore, no GST is payable on the activities of the petitioner association.
The Hon’ble High Court, placing reliance on Karnataka Bank Ltd v. State of Andhra Pradesh[1], observed that amending the definition of the term ‘person’ to include any Society, Club, or Association falls squarely within the legislative competence and does not necessitate a constitutional amendment. The Court dismissed the petitioner’s reliance on State of West Bengal v. Calcutta Club[2], noting that while Article 366(29A) does not expressly provide for the levy of service tax on incorporated associations, the legislature is empowered to alter or remove the basis of a judicial decision by appropriate amendments. Thus, the Court held that the impugned insertion of Section 7(1) (aa) is within the legislative authority of the State.
However, the High Court further noted that the doctrine of mutuality was a well-established principle in the context of taxation on the supply of goods and services by clubs or associations to their members prior to the amendment to Section 7. The Court held that the amendment could not have been given retrospective effect and that its application is limited to the date it was notified, i.e.,01.01.2022.
W&B Comments: In the Calcutta Club judgment, the Hon’ble Supreme Court held that transactions between a club and its members are essentially transactions with oneself, thereby not constituting a “service” as contemplated under the law. Consequently, it was held that an incorporated club rendering services to its members was not liable for service tax. Furthermore, a plain reading of Article 366(29A) indicates that the provision does not extend the scope of taxation to include an incorporated association or body of persons. However, the present case underscores that the amendment to the statute, redefining the term ‘person’ to include societies, clubs, or associations, falls within the legislative competence of the State and is not ultra vires the Constitution. This represents a novel approach to interpreting the provision of services rendered by an association to its members. Nonetheless, the Hon’ble High Court has emphasized that the supply of services by an association or club has traditionally been governed by the doctrine of mutuality. Accordingly, the Court held that it is impermissible to apply the amendment to Section 7(1)(aa) retrospectively, and that such an amendment should only have prospective effect from the date of its notification.
[1] (2008) 2 SCC 254
[2]2019 (29) GSTL 545 (SC)
In the present matter, a Writ Petition was instituted before the Hon’ble Gauhati High Court, raising the issue of whether Input Tax Credit (ITC) can be denied to purchasing dealers when the selling dealer fails to remit the collected tax to the authorities.
The Hon’ble High Court observed that the facts of the instant case were analogous to those in the case of On Quest Merchandising India Private Limited v. Government of NCT of Delhi & Ors.[1] as decided by the Delhi High Court. The provisions under scrutiny in the current petition were found to be substantially similar to those challenged in the aforementioned Delhi High Court case, wherein it was unequivocally held that a purchasing dealer cannot be penalized for the default of the selling dealer, particularly when the selling dealer has failed to deposit the tax collected.
The Hon’ble Gauhati High Court relied heavily on the precedent set by the Delhi High Court, which held that Section 9(2)(g) of the Delhi Value Added Tax Act, 2004, could be read down, and that demands raised against purchasing dealers involved in bona fide transactions could not be sustained unless there was evidence of collusion. It was determined that actions against purchasing dealers should be contingent on proof of such collusion.
W&B Comments: The subject of ITC in instances of non-remittance by the selling dealer remains contentious. The provisions of Section 9(2)(g) of the Delhi VAT Act bear a significant resemblance to those of Section 16(2)(c) of the GST Act. In light of multiple judgments affirming the constitutional validity of provisions that restrict ITC claims, this judgment offers substantial relief to bona fide purchasers. Notably, this is one of the first judgments to acknowledge and apply the principles established in the On Quest Merchandising case, which provided significant protection to bona fide purchasers under the Delhi VAT regime. This precedent is likely to be beneficial in addressing similar issues under the GST framework in the future.
[1] 2017 SCC OnLine Del 11286
In the present case, the Petitioner’s bank account was provisionally attached vide order dated 19.05.2023. The singular submission of the Petitioner was that according to the provisions of Section 83(2) the validity of attachment of property is only up to 1 year from the date of the order. And since that period has hence expired, the order may be directed to be set aside on completion of one year from said date.
The respondents submitted that there were internal discussions on the extension of the period of provisional attachment. However, there was no finality to such discussions and there was no passing of fresh orders of extension. The Hon’ble Telangana High Court thus held that an order for provisional attachment ceases to have validity upon expiry of the period of 1 year from the date of issuance of order.
W&B Comments: The Court’s decision underscores the importance of adhering to the statutory time limits imposed under Section 83(2) of the CGST Act, 2017, which restricts the validity of a provisional attachment order to one year. The ruling emphasizes that, despite internal discussions on the extension, the failure to pass a fresh order within the stipulated timeframe results in the automatic cessation of the attachment's validity. This judgment aligns with prior decisions that aim to prevent the potential abuse of the provisional attachment power, reinforcing that such measures must strictly comply with the procedural safeguards outlined in the law to protect taxpayers' rights.
In the favourable ruling of K-9 Enterprises vs. State of Karnataka [TS-573-HC(KAR)-2024-GST], on the GST Department’s power to blocking of Electronic Credit Ledger (ECL) under Rule 86A of the CGST Rules, the Division Bench of the Hon’ble Karnataka High Court held that the same requires “reasons to believe” and strict compliance with the provision. The Hon’ble Court emphasized that pre-decisional hearings are mandatory for blocking the ECL and the ITC cannot be blocked solely based on communications from other officers.
The GST enforcement authorities have been issuing multiple notices to several IT companies regarding remittances made by the Indian head offices to their foreign branches for services received from these branches. These transfers are being treated as ‘import of services’ for which authorities are demanding payment of IGST under RCM (Reverse Charge Mechanism). This has led to a wave of avoidable litigation and concerns for IT businesses with international operations regarding cross-border financial transactions within the same company.
Infosys SCN of Rs. 32,000 crores
Last month’s buzzing issue was when DGGI (Directorate General of Goods and Service Tax Intelligence) issued the show cause notice dated 30.07.2024, demanding ₹32,400 crore tax dues for five years, from FY 2017-18 to FY 2021-22, for services that Infosys received from its overseas branches. The notice stated that the adjudication proceedings are being initiated against Infosys due to non-payment of IGST for services that it has received from its overseas branches between July 2017 to FY 2021-22. As the company creates overseas branches to service clients as part of its agreements, those branches and the company are treated as ‘distinct persons’ under the IGST Act. Further it was stated in the notice that in lieu of receipt of supplies from overseas branch offices, the company has paid consideration to the branch offices in the form of overseas branch expenses. Hence, as per DGGI, Infosys was liable to pay GST under the RCM on supplies received from branches located outside India.
Later, after the representations made by Infosys to the department, the tax demand amounting to Rs. 3,898 crores for FY 2017-18 was dropped by the department. It was a clear case of mechanical issuance of show cause notice without application of mind. Ultimately, this back-and-forth by the department led to significant reputational damage to the company. Presently, the demand of Rs. 28,502 crores for FY 2018-19 to FY 2021-22 still looms over the company. The industry was expecting to receive some sort of clarification or relief from the GST Council in its 54th Meeting; however, no such relief was provided by the Council.
Mechanical issuance of notices by the Department
Interestingly, the IT companies have frequently been targeted by the department for issue of non-compliance with the GST provisions. The issuance of show cause notices has become quite prevalent in the IT industry, with the department issuing summon or initiating adjudication proceedings against the companies in even the smaller state jurisdiction offices across the country. For example, prior to the DGGI notice, in April this year only, Infosys faced a penalty amounting to Rs 1.46 lakh for the availment of ineligible input tax credit.
It's not just Infosys that has been targeted. In March, a show cause notice amounting to Rs. 387 crores was issued against LTIMindtree, the country’s sixth largest IT major, by the department for alleged non-payment of IGST on export turnover towards services provided to clients abroad. The company received a similar notice for another GST registration from the same authority. Over the past six to seven weeks, top IT companies, such as Tata Consultancy Services, Infosys, Tech Mahindra and LTIMindtree, have faced numerous penalties and tax orders from the GST departments across the country. These companies and their subsidiaries have got at least 21 penalty notices from GST offices in Punjab, Uttar Pradesh, Delhi, Visakhapatnam, Rajasthan, Bhubaneswar, Chennai, Bengaluru, and Mumbai. While the penalties and tax amount might not be significant – ranging from few thousands to some crores of rupees, which are very small amounts for these cash-rich firms – in almost all these cases, IT firms have declared the intent to contest the notices.
It can be observed that this surge in notices is also a fallout of the expansion of Indian IT services firms into smaller cities. For instance, between July and September so far, TCS has received six notices from five of its locations; Chennai, Goa, Visakhapatnam, Uttar Pradesh, Bengaluru. The highest order is from Visakhapatnam for Rs. 1.17 crore. Similarly, Infosys has also received six notices from Odisha, Chennai, Punjab, Bengaluru. While TechM has got seven notices, LTIMindtree has got two in the same time period.
The domestic entity and foreign affiliate of a same company are treated as separate persons under the GST laws and are thus separate legal entities. Therefore, as per Entry 4 of Schedule 1 of CGST Act, “the import of services by a personfrom a related person or from any of his other establishments outside India, in the course or furtherance of business.” is a supply under GST. The levy comes from the concept of deemed supply between related parties, invoking valuation method under Rule 28(1) of CGST Rules. The department has time and again questioned the invoice values, alleging it to be incorrect open market value, leading to violation of valuation rules and consequential issuance of demand notices.
The IT industry representatives sought clarification from the government on the valuation mechanism issue for this import of services, which led to the 53rd GST Council Meeting recommending clarification regarding the valuation of supply of import of services from the foreign affiliate to its domestic entity (related parties) where recipient is eligible to full input tax credit.
Consequently, the clarificatory Circular No.210/4/2024-GST dated 26.06.2024 (“Circular”) was issued to clarify that in cases where the foreign affiliate is providing certain services to the related domestic entity, for which full input tax credit 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) of CGST Rules.
If we go into the merits of the proposed GST demands, there is a clear violation of the Circular by the department literally within the next week after its issuance. It is a settled position in law that the circulars issued by CBIC are binding on the department, hence the non-compliance of the Circular can also be contested by the companies. It can also be argued by the IT industry that as situation is completely revenue neutral – given that the ITC is fully eligible against the self-invoice issued by the domestic entity and payment of tax under RCM – the mechanical issuance of the demand notices appears to be just an extension of the legal proceedings to harass taxpayers.
GST authorities have deadlines for issuing notices, during which they must scrutinize companies’ returns. As the timelines for adjudication approaches, the department issues demand notices without adequately checking the nature of the services involved. Most notices in the case of IT Companies also originate from State tax offices, which, stemming from the previous VAT regime, have a different - or ‘flawed’—understanding of the GST provisions. All these factors have led to a surge of notices issued before the due date.
The due date for passing orders related to notices issued under Section 73 for FY 2019-20 was 31.08.2024. Consequently, the number of GST orders increased significantly towards the end of the period. This pattern is likely to continue for IT companies, as the deadline for show cause notices under Section 73 of the CGST Act for FY 2020-21 is 30.11.2024. Section 73 provides the adjudication process for the bonafide taxpayer, while Section 74 is invoked in case of fraud, willfull misrepresentation and/or suppression of facts, offering an extended limitation period to the department. The due date for issuance of show cause notices under Section 74 for the FY 2017-18 expired on 05.08.2024. However, for the FY 2018-19 & FY 2019-20, the department has time till 30.06.2025 and 30.09.2025 respectively to issue show cause under Section 74. Therefore, the companies can anticipate receiving further notices from the GST department under Section 73 for FY 2020-21 onwards and under Section 74 for FY 2018-19 onwards. It is also a possibility that the IT companies may be audited in smaller locations (state registration) where fewer large firms are present. The simple logic behind it is that if the number of assessees in a particular state is low, the likelihood of large firms being audited in that state increases.
During the same period, various foreign airlines received notices amounting to Rs. 10,000 crores approx., including British Airways, Emirates, Lufthansa, Singapore Airlines operating in India, for non-payment of GST under RCM on the import of services. However, during the 54th GST Council Meeting, it has been recommended by the GST Council to exempt import of services by an establishment of a foreign airlines company from a related person or any of its establishment outside India, when made without consideration. The notification effecting this exemption is yet to be implemented.
It's interesting how the GST Council has created two classes of services: one for the import of service in the foreign airlines industry, which will be exempt under GST and the second for all the other industries importing services from their foreign entity, which will be under constant scrutiny and dispute by the department even after the issuance of the Circular. Such differentiation classification lacks nexus and reasonable justification and hence, is violative of Article 14 of the Constitution of India.
In such a situation, it may not be a smart move for the companies to subject themselves to the adjudication process as the industry has a strong case on merits. The proposed demands are completely without jurisdiction and authority of law, thus, challenging these demands in Writ Petitions would be a more strategic move. It will be appropriate to invoke the Writ jurisdiction of High Court under Article 226, without any hinderance qua the alternate remedy, as these demands are in violation of the fundamental rights provided under Article 14, 19(1)(g) and Article 265 & 300A of the Constitution of India.
If the companies decide to engage in the long drawn adjudication under Section 73/74 and the subsequent appellate process under Section 107 of the CGST Act, they will have to be cautious that these demands might become contingent liability in their books of accounts. Over that, the mandatory requirement to pay 10% of tax demand as pre-deposit for filing the first appeal, along with additional the pre-deposit payment for the stay in case of second appeal, will also hamper the working capital of the companies. The declared contingent liability may also create a deterrence for foreign investors from investing, leading to difficulty in receiving fundings. This will particularly be challenging in the current economy, where the Indian IT ecosystem is facing a setback. While the established IT giants will be able to handle these finical burdens, but for the Start-ups, these demand notices may heavily impact their pockets if they decided to navigate through the adjudication and appellate processes.
To protect the working capital impact from adverse effects adjudication and appellate process, seeking an interim stay from High Courts would be advisable, more so in light of the recent precedents. Therefore, filing a Writ Petition to contest the legality and validity of the notices is the appropriate course of action for the companies at this time.
Apart from that, companies may also explore the option of making representations before the CBIC and the GST Council, in the hopes that they will consider industry practices and may receive similar relief qua exemptions provided to the airline industry.
Published in ET Legal World :- https://legal.economictimes.indiatimes.com/news/opinions/analysis-of-gst-demands-against-it-industry-and-way-forward/113625254
In an effort to simplify and harmonize the Goods and Services Tax (GST) framework, the 53rd GST Council meeting proposed significant amendments to Sections 73 and 74 of the Central Goods and Services Tax (CGST) Act, 2017. These amendments, including the insertion of a new Section 74A, aim to standardize the time limits for issuing demand notices and orders, regardless of whether fraud or willful misstatement is involved. Additionally, the Council recommended extending the time limit for taxpayers to avail of reduced penalty benefits.
The different time limits for issuance of show cause notices and adjudication of demands have led to confusion and legal disputes. There have been instances where notices issued under Section 74 (fraud cases) beyond the three years but within the five-year limit have been challenged. If the charges of fraud or suppression were not sustained, these notices had to be dropped as time-barred, resulting in legal uncertainty and numerous court cases. Garg Rice Mills v. State of Punjab [2024] challenged the legality of extending the due date for issuing notices under Section 73, arguing it was time-barred. In Titan Company Ltd. v. Joint Commissioner of GST & Central Excise [2024] where the department has issued show cause notices by bunching up notices for multiple assessment years, for a period for the time limit is already exhausted, the Hon’ble Madras High Court emphasized that the limitation period is applicable separately for each assessment year. The challenge in K. R. Pulp Papers Ltd. v. Goods and Services Tax Council [2024] regarding the extension of time for issuing notices reflects issues similar to those addressed by the proposed amendment.
Under the current provisions, Sections 73 and 74 of the CGST Act govern the issuance of demand notices and orders for tax, interest, and penalties:
The GST Council has recommended the following key changes:
The proposed amendments to Sections 73 and 74 of the CGST Act, along with the introduction of Section 74A, represent a significant step towards simplifying the GST framework. With the amended provisions, the proper officer can determine fraudulent intent during proceedings. The recommendation is only to align the time limit of both provisions, however, it will bring a genuine taxpayer and a fraudulent one at par which is inconsistent with the legislative intent. A similar provision is also included in the Central Excise Bill, 2024. The time limit for taxpayers to avail reduced penalties is proposed to increase from 30 to 60 days, providing more time for compliance. It must be noted that Taxpayers with cases from financial years before 2024-25 will not benefit from the new common timeline and will be subject to the existing time limits. Taxpayers with notices already time-barred under the current law will not gain retroactive benefits from the new provisions. Taxpayers against whom fraud, suppression, or willful misstatement is proven will still face the prescribed penalties and consequences.
53rd GST Council meeting recommended an amendment to Rule 142 of the Central Goods and Services Tax (CGST) Rules. This amendment introduces a mechanism for adjusting amounts paid towards a demand through Form GST DRC-03 against the pre-deposit amount required for filing an appeal.
Under GST, appellants must pay 100% of admitted tax and a percentage of disputed tax as pre-deposit when filing appeals. This is typically done at the time of filing of Form GST APL-01 on the GST portal. Issues arise when taxpayers make payments during audits or face technical problems with APL-01 hence making them resort to Form GST DRC-03. Earlier the CBIC has clarified in CBIC-240137/14/2022-Service Tax Section-CBIC, dated 28.10.2022 that pre-deposits are neither duty nor arrears, and that DRC-03 is not a valid form for making pre-deposits. Later, vide CBIC-240137/14/2022-Service Tax Section-CBEC dated 18.04.2023 it was clarified that aforementioned restriction was exclusively intended for the cases of appeals belonging to the Central Excise/Service Tax only and not for appeals under GST. The Courts have also been addressing cases where appeals were rejected due to payment of pre-deposit made through Form GST DRC-03 in the case of technical error on the portal (Manjunatha Oil Mill v. Assistant Commissioner (ST) (FAC) [2024] 159 taxmann.com 514). These situations underscored the need for clearer guidelines and flexibility in the appeal process to address genuine technical challenges.
Rule 142 of the CGST Rules outlines the process for issuing demand notices and recovering dues from taxpayers. Form GST DRC-03 is used by taxpayers to voluntarily make payments towards tax, interest, penalty, and other amounts before or after the issuance of a show-cause notice. There is no provision for adjusting amounts paid through Form GST DRC-03 against the pre-deposit required for filing an appeal. This often leads to duplication of payments and financial strain on taxpayers.
The recommended amendment to Rule 142 and the issuance of a circular aim to address this issue by prescribing a mechanism for such adjustments. Accordingly, vide the Circular No. 224/18/2024 - GST dated 11.07.2024, a new mechanism is provided. Notification No. 12/2024- CT dated 10.07.2024, vide which sub-rule (2B) of Rule 142 and Form GST DRC-03A have been inserted to the CGST Rules, provides mechanism for cases where an assessee to pay tax, interest and penalty under relevant provisions (Section 52, 73, 74, 76, 122, 123, 124, 125, 127, 129, 130 of CGST Act) inadvertently through Form GST DRC-03 under sub-rule (2) of Rule 142.
Such assessee will have to file an application in Form GST DRC-03A, electronically on the GST portal, and the amount so paid and intimated through the Form GST DRC-03 will be adjusted as if the said payment was made towards the said demand on the date of such intimation through Form GST DRC-03. The amount so paid shall also be liable to be adjusted towards the amount required to be paid as pre-deposit under Section 107 and Section 112 of the CGST Act, if and when the taxpayer files an appeal against the said demand, before the appellate authority or the appellate tribunal, and the remaining amount of confirmed demand as per the order of the adjudicating authority or the appellate authority, as the case may be, will stand stayed as per Section 107 (6) and Section 112 (9) of CGST Act.
As the abovementioned functionality for filing of an application in Form GST DRC-03A, is currently unavailable on the GST portal, the assesses will have to intimate the proper officer about the same, and on such intimation, the proper officer shall not pursue any recovery till the time the said functionality of Form GST DRC-03A is made available on the GST portal.
Once the functionality of Form GST DRC-03A is made available on the GST portal, the assessee will have to file the application in Form GST DRC-03A, on the portal at the earliest, and on doing so, the amount paid vide Form GST DRC-03 will be adjusted against the pre-deposit under section 107 or section 112 of the CGST Act.
The recommendation to amend Rule 142 of the CGST Rules and introduce a mechanism for adjusting payments made through Form GST DRC-03 against pre-deposit amounts for appeals is a progressive step towards refining the GST framework. The amendment specifically addresses and provides a mechanism for adjusting amounts paid through Form GST DRC-03 against the pre-deposit required for filing an appeal. Therefore, taxpayers who have not utilized Form GST DRC-03 to make such payments will not benefit from this adjustment mechanism. They will need to follow the standard procedures and use the prescribed forms, such as Form GST APL-01, for making pre-deposits.
In the present case of M/S Trelleborg India Private Limited, a Writ Petition was filed before the Hon’ble Karnataka High Court challenging the notices/endorsement in Form GST DRC-01 issued for different tax periods to a non-existent entity i.e., M/s. Trelleborg Sealing Solutions (India) Private Limited.
The Hon’ble High Court observed that the aforementioned entity was amalgamated with the Transferee Company M/s. Trelleborg Industrial Products Private Limited resulting in the creation of a new entity M/s. Trelleborg India Private Limited. It was the contention of the respondents that the tax liability would stand transferred to the transferee company. It was also observed by the Hon’ble High Court that the scheme of amalgamation was approved by NCLT, Bengaluru vide the order dated 13.06.2017, subsequent to which an application for cancellation of registration was passed in Form GST REG-19 and the registration was cancelled on 29.11.2021.
The Hon’ble Karnataka High placed its reliance upon the Hon’ble Supreme Court’s decision in Principal Commissioner of Income Tax vs. Maruti Suzuki (India) Limited[1] wherein it was held that once an amalgamating entity ceases to exist upon an approved scheme of Amalgamation, the question of continuing the proceedings as regards the non-existent company cannot be permitted. A similar view was also taken by the Karnataka High Court in M/s. Rajdisle Private Limited v. The Income Tax Officer and Another[2]. Accordingly, the proceedings initiated by virtue of show cause notices/endorsement were set aside.
W&B Comments: Historically, under the Income Tax regime, initiating assessment proceedings against a non-existent entity has been deemed held to be jurisdictionally flawed and substantively illegal. However, under GST regime, it is the first case providing a precedent for taxpayers whose entities have ceased to exist due to amalgamation or other reasons. This judgment will be beneficial for addressing similar issues under GST.
[1] [TS-429-SC-2019]
[2] [W.P. No. 14156/2024]
The present Writ Petition was filed before Hon’ble Andhra Pradesh High Court challenging orders of the Deputy Commissioner, Special Circle, Visakhapatnam-II dated 10.05.2024 requesting the Executive Engineer, Operation Division, Vizianagaram to stall the payment if any payable to the petitioner.
It was contended that that Respondent No. 1 initiated the impugned proceedings without the electronically generated the Document Identification Number (DIN). Issuance of such proceedings without generating the DIN/unique identification number generated through BO portal was contrary, not only to Circular No. 122/41/2019-GST, dated 05.11.2019 issued by the Central Board of Indirect Taxes, but also to Circular No. 2 of 2022 dated 01.08.2022 issued by the Government of Andhra Pradesh. The Hon’ble High Court observed that the Respondents did not dispute the contentions of the petitioner that any such communication contrary to the aforementioned circulars is invalid and shall be deemed to have never been issued. Accordingly, the impugned proceedings were set aside with the at liberty to the department to proceed in accordance with law of completion of the Assessment proceedings.
W&B Comments: The failure to adhere to administrative requirements has been a recurring issue, as seen in this case. The CBIC Circular No. 122/41/2019-GST dated 05.11.2019, Circular No. 128/47/2019 dated 23.12.2019, and Instruction No. 03/2022-23 (GST Investigation) dated 17.08.2022 mandate the use of the DIN system to ensure transparency and accountability in communication with taxpayers. The Hon’ble Jharkhand High Court in ESL Stell Ltd.[1] has previously ruled that show cause notices and refund rejection orders lacking a DIN are invalid, rendering subsequent proceedings null and void. This case reinforces the necessity for the department to generate a DIN for all relevant communications as stipulated by the circulars.
[1] 2024(83) G.S.T.L.339(Jhar.)
The present case a Writ Petition was filed before the Hon’ble Kerala High Court praying for directions to expeditiously establish the GST Appellate Tribunal in the State of Kerala in accordance with the provisions of Section 112 of the CGST Act, 2017.
The Hon’ble Kerala High Court addressed two main issues raised by the petitioner. First, regarding the Appeal under Section 112 of CGST Act 2017, the Hon’ble Court observed that the process of establishing the GST appellate tribunal was already initiated and the selection process for the same is presently ongoing. As such the High Court was pleased to pass directions to complete the entire selection process within a period of four months.
Second, the petitioner raised their contention regarding service of notices under Section 169 of the Act, which provides for various methods by which any decision, order, summons, notice or other communication can be served to the taxpayer. The petitioner prayed that Section 169 of the CGST Act 2017 to be rectified by replacing the word “or” with “and”. This change would ensure that notices and orders are served through at least three alternative modes, thereby enhancing compliance with the principles of natural justice. The Hon’ble High Court rejected the second prayer on the basis that such relief is not appropriate for public interest litigation and should be addressed through individual grievance procedures.
W&B Comments: The government had notified the appoint the president of GST Appellate Tribunal and vide Finance bill 2024 it has been proposed that the period of 3 months for filing appeal will start from a date yet to be notified. However, there are innumerable orders pending for appeals before GST Appellate Tribunal but there is no clear timeline specified by the government as to when the GST Appellate Tribunal will become functional, thereby resulting in blockage of working capital of the taxpayers by way of pre-deposits. The present directions of the Hon’ble Kerala High Court directing the government for establishment of GSTAT within specified timeframe of 4 months is a welcome move, more so when the dockets of the High Courts across the country are flooded with the writ petitions in absence of GST Appellate Tribunal. In the event, GSTAT does not become functional within the specified time frame of 4 months, it will be interesting to see whether the Union Government will seek a review of the present order or challenge the same before the Hon’ble Supreme Court.
In the present case, two Wrtit Petitions were filed before the Hon’ble Madras High Court, (i) the petitioner claims that show cause notice dated 28.12.2023 was only uploaded on the GST portal but not actually communicated to him, as such he was unaware of the proceedings and couldn’t participate in the same in the course of which order dated 11.04.2024 was issued. (ii), the petitioner also claims he received a notice for discrepancies in sales and purchase turnover, the petitioner informed the respondent that the sales turnover was reported in the subsequent month despite which order dated 23.12.2023 was issued. The petitioner contended that proceedings were initiated based on return scrutiny under Section 61 of applicable GST acts, which require a notice in Form GST ASMT-10. As such by non-issuance of the notice the entire proceeding is vitiated and such absence prejudices the taxpayer. The respondent state contended that scrutiny, audit, or inspection are not prerequisites for adjudication under Sections 73 or 74 and that the procedures under Sections 61 and 73 operate independently. It was further contended that any procedural defects that do not cause prejudice to the assessee can be overlooked under Section 160 of applicable GST Acts.
It was held by the Hon’ble Madras High Court that issuing a notice in Form ASMT-10 is mandatory when discrepancies are found during return scrutiny. However, non-issuance of this notice vitiates only the scrutiny process, not the adjudication under Section 73, as the latter can be based on other credible information. In the instant case it was found that, the absence of notice under Section 61 did not invalidate the adjudication proceedings under Section 73.
Accordingly, order dated 11.04.2024 was conditionally set aside on payment of 10% of the disputed tax and is remanded to subsequent adjudication as it was passed ex parte & order dated 23.12.2023 was set aside it was passed without considering the petitioner’s reply.
W&B Comments: The Hon’ble Calcutta High Court in Amex Service[1] had emphasized that the proper officer must issue Form GST ASMT-10, outlining discrepancies noticed during return scrutiny, before passing any order under Rule 99 and Section 61. The present decision by the Hon’ble Madras High Court further explores the circumstances under which Section 61(1) can be invoked, clarifying that while procedural lapses like omission of Form GST ASMT-10 are critical, they do not necessarily invalidate the adjudication if the taxpayer has had a fair chance to address the issues.
[1] 2024(6) TMI 663
The 53rd GST Council meeting, held recently proposed retrospective amendment to Section 140(7) of the Central Goods and Services Tax (CGST) Act, 2017. This amendment, effective from July 1, 2017, seeks to address the issue of transitional credit for Input Service Distributors (ISD) concerning invoices for services provided before the appointed date and also received by ISD before the appointed date. There was a gap in the GST provisions as Section 140(7) only addressed case where the invoices were received by the ISD on or after the appointment date. This lead to the assessee covered in the first situation being unable to transition the credit due to them from the previous regime.
The GST law allowed Input Service Distributors (ISDs) to distribute pre-GST Input Tax Credit (ITC) for services received before July 1, 2017, even if invoices were received after. However, no mechanism existed for transitional credit on pre-GST services invoiced to ISDs post-implementation. The Bombay High Court in Siemens Healthcare Pvt. Ltd. in Writ Petition No. 986 of 2019 ruled that legitimate pre-GST ITC should not lapse due to procedural gaps. The matter was adjourned for a recommendation from the GST Council. The Gujarat High Court also adjourned a similar case in Samsung India Electronics (P.) Ltd. [2024] 162 taxmann.com 321 (Gujarat). To address confusion and the issue of multiple litigation, the GST Council has now recommended a retrospective amendment to Section 140(7) to allow transitional credit for invoices related to services provided before the appointed day (01.07.2017) and received by ISD before that date.
Section 140(7) deals with the transition of input tax credit for Input Service Distributors. An ISD is an office of the supplier of goods and/or services that receives tax invoices towards the receipt of input services and distributes the credit of central tax, integrated tax, state tax, or union territory tax paid on said services to a supplier of taxable goods and/or services having the same PAN. The original provision allowed ISDs to claim credit for services received under the pre-GST regime, provided the invoices were received before the appointed date and the corresponding credit was admissible under the existing law.
The proposed amendment to Section 140(7) is significant for several reasons:
The retrospective nature of the amendment, effective from July 1, 2017, has several implications:
The proposed amendment will ensure smoother compliance by providing a clear legal basis for claiming transitional credit for pre-GST services invoices received by ISDs. ISDs across various sectors that had received services before the appointed day but had not received the corresponding invoices by that date will benefit. The transitional credit can significantly improve their cash flow and reduce tax burdens. On one hand, where the burden of litigation will come down, Tax authorities will need to process additional claims for transitional credit. Moreover, Only Input Service Distributors (ISDs) are eligible to claim the transitional credit under this amendment. Entities that are not registered as ISDs cannot benefit from this provision. The notification specifically applies to invoices related to services provided before the appointed day but received by ISD before that date. Invoices received by ISD on or after 01.07.2017 are not covered.
Read Full Article:- https://www.republicworld.com/initiatives/amendment-in-section-1407-of-the-cgst-act-transitional-credit-for-input-service-distributors
The 53rd GST Council Meeting reiterated that the interest component on loans granted between related persons or group companies remains exempt from GST under Notification No. 12/2017 – Central Tax (Rate). This clarification is crucial for companies engaging in inter-company loans.
Under the Goods and Services Tax (GST) regime in India, transactions between related persons or between group companies can be deemed as supplies even if there is no consideration exchanged. This is established under Schedule I of the Central Goods and Services Tax (CGST) Act, 2017. In related-party loans, there is often no processing fee or service charge beyond interest due to existing familiarity and information sharing within the group. This differs from independent lenders, who typically charge processing fees to cover administrative costs and credit assessments. The exemption for the interest component was introduced to address confusion and demands for clarification during GST audits, which led to tax notices.
In order to ensure uniformity, it has been clarified vide the Circular No.218/12/2024-GST dated 26.06.2024 that supply of services of granting loans / credit / advances, in so far as the consideration is represented by way of interest or discount, is fully exempt under GST. Therefore, it cannot be said that any supply is being provided between the related parties in the form of processing / facilitating / administration of loan, by deeming the same as supply of service as per Section 7(1)(c) read along with entry 2 of Schedule I of the CGST Act, 2017. Consequently, no leavy of GST on the same will be liable.
Accordingly, in regards to the proportionate reversal of input tax credit pursuant to this exempt service is not applicable in terms of Explanation (b) to the Rule 43(5) of CGST Rules, 2017. Therefore, it will have no effect on the common credit as well.
Interest Deductibility:
Deemed Dividend:
Thin Capitalization Rules:
Advanced Pricing Agreements (APAs):
Withholding Tax:
Foreign Exchange Management Act (FEMA) Compliance:
Transfer Pricing and BEPS:
Read Complete Article :- https://www.outlookindia.com/hub4business/taxability-of-loans-between-related-persons-or-group-companies-impact-assessment-wrt-53rd-gst-council-meeting
The 53rd GST Council Meeting addressed several pivotal issues concerning the Goods and Services Tax (GST) regime, aiming to streamline processes and provide clearer guidelines. One significant clarification that emerged from the meeting pertains to the valuation of the supply of import of services by a related person when the recipient is eligible for a full input tax credit. This clarification is expected to simplify compliance and provide much-needed certainty to businesses engaged in cross-border transactions within related entities.
In the context of GST, the valuation of goods and services is crucial for determining the tax liability. However, complexities arise when dealing with related party transactions, especially in cross-border services, where the value declared on the invoice may not always reflect the true market value. The issue becomes more intricate when the recipient of such services is eligible for a full input tax credit (ITC). In such cases, the concern shifts from the actual payment of tax to the accurate declaration of the value of services.
GST authorities have been issuing notices under Section 150 of the CGST Act to companies for discrepancies in input tax credit claims, prompting scrutiny of annual returns against monthly filings. Although businesses clarified that some notices lack verification, imposing undue compliance burdens the officials maintained that mismatches cannot be overlooked.
Moreover, there have been concerns against some registered persons, seeking tax on a reverse charge basis for certain activities performed by their related persons based outside India. These activities are being considered as import of services despite no consideration being involved. There has been a long-standing demand that the same treatment that is given to domestic related parties or distinct persons, as clarified in Circular No. 199/11/2023-GST dated 17.07.2023, should also be given to a foreign entity providing services to its related party in India, particularly when the recipient in India is eligible for full ITC. Vide the Circular No. 199/11/2023-GST dated 17.07.2023, only the inter-state transactions between the distinct persons under Section 25 of the CGST Act. The Circular had clarified that the value of supply of services between the head office and brand office should be determined as per the open market value under Rule 28(1), and in cases where full input tax credit is available to the Branch officer, the value declared in the invoice by the head officer is deemed to be the open market value. However, there remained ambiguity regarding services provided to an Indian branch office from their foreign head office.
The Council recommended clarification that in cases where a foreign affiliate provides services to a related domestic entity, and the domestic entity is eligible for full input tax credit, the value of such services declared in the invoice by the related domestic entity may be deemed as the open market value. This recommendation aligns with the second proviso to rule 28(1) of the Central Goods and Services Tax (CGST) Rules, which deals with the valuation of transactions between related persons. for instance, a foreign affiliate provides IT services to its related domestic entity in India. The domestic entity declares the value of these services as ₹10,00,000 on the invoice. Hence, the declared value of ₹10,00,000 is deemed to be the open market value. The domestic entity pays GST on ₹10,00,000 and claims the same as input tax credit, resulting in no net tax liability.
Council further recommended that when the related domestic entity issues no invoice for services provided by the foreign affiliate these services' value may be declared as Nil. For instance, when a foreign affiliate provides consultancy services to its related domestic entity in India and no invoice is issued by the domestic entity for these services then the value of these services is deemed to be Nil. The domestic entity pays no GST on this transaction and no input tax credit is claimed.
In line with the GST Council recommendations, the CBIC vide the clarificatory Circular No.210/4/2024-GST dated 26.06.2024 clarified that earlier Circular No. 199/11/2023-GST dated 17.07.2023 regarding the supplies of services between distinct persons in cases where full ITC is available to the recipient, is equally applicable for the import of services between related persons.
This clarification has several important implications for businesses and tax authorities:
The clarification regarding the valuation of the supply of import of services by a related person where the recipient is eligible for full input tax credit marks a significant step towards simplifying GST compliance for related party transactions. By deeming the declared or Nil value as the open market value, the GST Council and the clarificatory Circular No.210/4/2024-GST dated 26.08.2024 has provided businesses with a clear and pragmatic approach to valuation. This reduces the administrative burden and aligns with international best practices, fostering a more business-friendly environment in India. Additionally, it will also be beneficial for the taxpayers who may have missed out on issuing invoices on service imports from foreign related parties. Going forward as well the companies may review the position on taxability and valuation towards import of services from foreign affiliates considering these clarifications.. As businesses adapt to these clarified rules, they can look forward to greater certainty, reduced disputes, and a more streamlined compliance process under the GST regime.
You can also read this article on:- https://outlookmoney.com/outlook-money-spotlight/gst-council-clarifies-valuation-rules-for-import-of-services-by-related-entities-with-full-input-tax-credit-9035
To acknowledge the long-standing demand of the stakeholders of the real estate industry, the Goods and Services Tax (GST) Council, in its 53rd meeting, exempted statutory collections made by the Real Estate Regulatory Authority (RERA) from GST, clarifying that they fall within the scope of entry 4 of No.12/2017-CTR dated 28.06.2017. This decision has far-reaching implications for the real estate industry, regulatory bodies, and homebuyers.
Entry 4 of Notification No. 12/2017-Central Tax (Rate) dated June 28, 2017, provides an exemption to services provided by the Central Government, State Government, Union territory, or local authority where the consideration for such services does not exceed Rs. 5,000. RERA, a regulatory authority established under the Real Estate (Regulation and Development) Act, 2016, collects fees and charges from real estate developers and agents. These collections are statutory in nature, meaning they are mandated by law and not in the form of commercial transactions.
The GST Council's decision to exempt these statutory collections acknowledges RERA's role as a regulatory body, rather than a commercial entity. This exemption aligns with the broader intent of the GST framework to exclude statutory payments from the purview of GST, thereby preventing additional tax burdens on regulated entities.
Notification No. 13/2017- Central Tax (Rate) dated 28.06.2017, Entry 5, provides that where the services have been provided by the government bodies to a business entity, the recipient (business entity) is liable to pay GST under Reverse Charge Mechanism (RCM). Pursuant to this notification, the department initiated the recovery of GST on services like approvals and licenses provided to body corporates, including the license fees for availing benefit under government schemes like Advance Authorisation and Export Promotion for Capital Goods (EPCG). These demands also extend to the real estate industry where the developers are mandatorily required to obtain various approvals and permissions from local bodies in relation to construction of real estate projects and are required to pay the statutory fees for the same. Notices have been issued by the Directorate General of Goods and Services Tax Intelligence (DGGI) for recovery of GST under RCM on these charges paid by developer to the local government entities.
The nature of these fees is similar to the statutory collections by RERA. However, the exemption of GST on the statutory collections by RERA paid by the corporate bodies creates an unreasonable classification by creating a different class without any reasonable nexus. While this move by the GST Council is commendable, it highlights differential treatment of different statutory fees by government bodies. The creation of this unreasonable difference of category of class for other statutory fees collected by the government bodies from the business entities thus leads to violation of Article 14 of the Constitution of India.
This recent exemption of GST on statutory collections by RERA might set a precedent for other sectors and regulatory authorities to seek a similar exemption, as other statutory levies, such as license fees for telecom spectrum, mining activities, and operating casinos, remain subject to GST. It will be interesting here to see if the other taxpayers will take inspiration from the RERA exemption and dispute their demand on the similar grounds in their own cases. But, ultimately one may expect that the dockets of the Courts would be increased in case of GST demands on other statutory fees / charges.
The exemption of statutory collections made by RERA from GST, as announced in the 53rd GST Council Meeting, is a significant development for the real estate sector. It reduces the compliance burden on developers, encourages regulatory compliance, and promotes a more transparent and accountable industry. Homebuyers stand to benefit from potential cost savings and a more robust regulatory environment.
While the decision is a positive step, it requires careful implementation and monitoring to realise its intended benefits fully. The GST Council's move aligns with the broader goal of fostering a transparent and efficient real estate sector, ultimately contributing to the growth and development of the industry.
By exempting RERA collections from GST, the GST Council has demonstrated its commitment to supporting regulatory bodies and promoting fair practices in the real estate sector. This decision paves the way for a more streamlined and efficient regulatory framework, benefiting all stakeholders involved. In light of this exemption, future relaxation for municipal and other taxes is anticipated that will further ease the Real Estate sector.
The 53rd GST Council Meeting introduced a noteworthy recommendation: the insertion of Section 11A in the Central Goods and Services Tax (CGST) Act. This new section aims to grant the government the power to regularize instances of non-levy or short-levy of GST due to prevailing general trade practices. This development has significant implications for businesses, regulatory authorities, and the overall GST framework in India.
There were multiple instances where certain taxpayers, following prevalent trade practices, failed to pay or underpay GST on specific supplies, such as corporate guarantees, online gaming, and employee secondment. As a result, GST authorities have responded by issuing bulk notices to recover taxes in the past leading to widespread litigation. It was a pleading of various industries including the insurance and other industries that while a new valuation mechanism or changes in the levy rate resolves certain issues going forward, the “as-is, where-is” basis is necessary for the past periods as the new tax position ought to be applied prospectively given that the differential tax cannot now be recovered from the customers. As the GST is a destination-based tax, and non-passing of the tax burden to the ultimate consumer would be contrary to the fundamental principle of GST law.
While the GST Council has time and again recommended regularising demands for the past periods on “as-is, where-is” basis, there was no legal mechanism provided in the CGST Act for such approach. It was thus essential to provide legal sanctity to the “as-is, where-is” basis in the GST law, which is in line with the pari materia provisions such as Section 11C of the erstwhile Central Excise Act, 1944 and Section 151A of the Customs Act, 1962.
However, the exclusion of online gaming from the purview of this legislation, leaves room for the community to pursue legal actions on the ground of the arbitrary and discriminatory classification, arguing it violates the right to equality under Article 14 of the Constitution of India.
Section 11A is designed to provide a legal mechanism for addressing situations where GST was either not levied or short-levied due to established trade practices. Based on the GST Council's recommendations, the proposed section empowers the government to make decisions that regularize such instances.
The recommendation to insert Section 11A in the CGST Act marks a significant step towards a more pragmatic and business-friendly GST regime. The provision addresses a critical gap in the current framework by granting the government the power to regularize non-levy or short-levy of GST due to general trade practices. It offers relief to businesses, reduces litigation, and promotes voluntary compliance, all while ensuring that the government can still collect due revenue.
As the GST Council moves forward with this recommendation, it is essential to establish clear guidelines and procedures for implementing Section 11A. The government can ensure that the provision achieves its intended objectives and contributes to a more stable, transparent, and efficient GST ecosystem in India.
This new provision underscores the GST Council's commitment to continually refining and improving the GST framework, aligning it with the practical realities of the business environment. With careful implementation and monitoring, Section 11A has the potential to significantly enhance the overall effectiveness and fairness of the GST regime.
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