RECENT DEVELOPMENTS IN GST

NOTIFICATIONS

CIRCULARS

(I) Circular
No. 135/05/2020-GST dated 31^st March, 2020

The government had issued the
Master Refund Circular No. 125/44/2019-GST dated 18^th November, 2019
rescinding all the earlier Circulars on refund and subsuming all the
clarifications relating to refund under the Master Circular. Thereafter, the
above Circular No. 135/05/2020-GST dated 31^st March, 2020 is issued
to further clarify certain points contained in the Master Circular and also
certain issues being raised by trade and industry.

(a) Bunching of refund claims across financial year:

Paragraph 8
of the Master Circular clarified that refund application may be filed for a tax
period, or by clubbing various tax periods within a financial year.
Subsequently, the Hon’ble Delhi High Court in the case of M/s Pitambra
Books Pvt. Ltd. had stayed the rigour of paragraph 8 of Circular No.
125/44/2019-GST on the ground that government is not empowered to withdraw
benefits or impose stricter conditions than postulated by the law.

Vide paragraph
2 of the above Circular No. 135/05/2020-GST dated 31^st March, 2020
the CBIC has clarified that the prohibition of refund application for multiple
tax periods falling under the same financial year has been removed. The effect
is that now the applicant can file an application containing tax periods of
more than a year. For example, the refund application for the quarters January
to March, 2020 and April to June, 2020 can be filed in a single refund
application.

(b) Refund of ITC accumulated on account of reduction in GST rate:

Paragraph 3 of the above Circular
No. 135/05/2020 has clarified that in case of a reduction in the rate of GST
for a particular supply, the accumulated ITC will not be available as refund
under the inverted duty structure. For example, registered person ‘A Ltd.’ has
bought goods ‘X’ attracting GST at 18%. Thereafter, the rate of GST for goods
‘X’ was reduced to 5%. Thus, while selling the goods ‘X’, ‘A Ltd.’ has
discharged the GST at 5%. On account of the reduction in rate of GST, there is
accumulation of ITC in the hands of ‘A Ltd.’

The relevant
portion of section 54(3)(ii) which provides for refund in case of inverted duty
structure is reproduced below:

(ii) where the credit has
accumulated on account of rate of tax on inputs being higher than the rate of
tax on output supplies (other than nil rated or fully exempt supplies),…

On a plain reading of the above
provision, one can interpret that the above example of ‘A Ltd.’ will fall under
the category of inverted duty structure as the 18% rate of GST on inputs, i.e.,
product ‘X’, is higher than the 5% rate of GST on output supply of product ‘X’.

However, the CBIC has clarified
in the above Circular that the input and output being the same in such cases,
though attracting different tax rates at different points in time, they do not
get covered under the provisions of clause (ii) of sub-section (3) of section
54 of the CGST Act.

If the interpretation of CBIC is
adopted, it would mean that the inverted rate structure will apply only in case
of manufactured goods, or inputs used for provision of services. The inverted
rate structure will not apply in the case of mere trading of goods.

It can be argued that the above
interpretation given by CBIC is narrowing the provision of the inverted rate
structure, which may not have been contemplated by law, especially on a reading
of the definition of ‘Input’ u/s 2(59) of the CGST Act. Such interpretation
will have far-reaching effects as the accumulated ITC will be held up as
working capital for no fault of the registered person. This issue requires
reconsideration by the authorities.

(c) Change in manner of refund for claims other than zero-rated
supplies:

Rule 86(4A)
and Rule 92(1A) have been inserted vide Notification No. 16/2020-CT
dated 23^rd March, 2020 to change the manner of refund for claims
other than zero-rated supplies. In case of refund claimed for other than
zero-rated supplies, the Circular has clarified that refund shall be given in
the same proportion as the debit entry in the cash and credit ledger in order
to avoid the unintended encashment of credit balances. The excess debit in the
credit ledger will be re-credited to the claimant on Form GST PMT-03.

(d) Guidelines for refund of ITC after introduction of new Rule 36(4):

Paragraph 36 of the Master Refund
Circular No. 125/44/2019-GST clarified that the refund of ITC availed in
respect of invoices not reflected in Form GSTR2A will be admissible provided
copies of such invoices are uploaded.

However, in
the wake of the insertion of sub-rule (4) to Rule 36 of the CGST Rules, 2017 vide
Notification No. 49/2019-GST dated 9^th October, 2019, the CBIC has
now clarified that the refund of accumulated ITC shall be restricted to the ITC
as per those invoices the details of which are uploaded by the supplier in Form
GSTR1 and are reflected in the Form GSTR2A of the applicant. Accordingly,
paragraph 36 of the Circular No. 125/44/2019-GST, dated 18^th
November, 2019 stands modified to that extent.

This will again have far-reaching
effects as the claimant will now be given refund of only those invoices which
are appearing in the GSTR2A.

(e) New requirement to mention HSN / SAC in Annexure-B:

Annexure-B, which is a ‘Statement
of Inward Supplies’ to be filed along with the Refund Application, will now
have an extra column of HSN / SAC code of inward supplies to help authorities
in distinguishing ITC on capital goods from ITC on inputs and input services.

A difficulty may arise in cases
where the declaration of HSN / SAC is optional and the supplier has not
mentioned the HSN or SAC. The applicant may self-determine the HSN / SAC while
filing the application.

(II) Circular No.
136/06/2020-GST dated 3^rd April, 2020

The above circular is issued for
explaining the various measures taken by the government to provide relief to
the taxpayers on account of the impact on the industry due to the spread of
Covid-19.

(III) Circular No. 137/07/2020-GST dated 13^th April,
2020

Vide this
Circular certain further issues arising due to the lockdown are addressed. The
Circular clarifies on issues such as adjustment of tax, or refund of excess
payment of tax on account of cancellation of supplies, or advances being
returned by the supplier. One important clarification in the Circular is
regarding the time limit for filing the refund applications. Where the
limitation of two years from the relevant date for filing the refund
application u/s 54(1) is exhausting between 20^th March, 2020 and 29^th
June, 2020, the refund application can be filed up to 30^th
June, 2020.

ADVANCE RULINGS

(i) RCM liability on salary to directors – Recent important AR

(Advance Ruling No.
Raj/AAR/2019-20/33 dated 20^th February, 2020 in the case of Clay
Crafts India Private Limited.)

The issue before the Rajasthan
AAR was about the liability of the company to Reverse Charge Mechanism (RCM) on
salary paid to directors. The applicant company has six directors and all of them
are discharging their duties as directors. In addition, they are also working
at different levels in the company, such as, in charge of production,
procurement of raw materials, quality checks, dispatches, accounts, etc. For
the above duties they are paid salaries and are also subject to the TDS and PF
laws applicable to any other normal employee. In short, the argument of the
company was that the salaries paid for the above duties are under an
employer-employee relation where the company is the employer and the directors
are employees. The company contended that the salary paid is exempt under Entry
No. 1 of Schedule III to the CGST Act, 2017. The said Entry provides that
services by an employee to the employer in the course of, or in relation to, his
employment is neither supply of service nor supply of goods. The applicant
company also cited judgments of the Hon. Supreme Court and others where it is
held that the director can be an employee of the company.

The issue for decision before the
AAR was whether salary payment to directors will attract any liability under
RCM on the ground of services supplied by the directors to the company.

The AAR referred to the
definition of ‘consideration’ in section 2(31) of the CGST Act and the wordings
in Notification No. 13/3017-Central Rate dated 28^th June, 2017.
Entry No. 6 of the said Notification provides for RCM liability on categories
of supply of services mentioned in Column (2) of the Table. The description in
Entry No. 6 is reproduced below:

‘Services supplied by a director
of a company or a body corporate to the said company or the body corporate.’

In view of the above provision,
the learned AAR held that the payment of salary is not covered by Entry No. 1
of Schedule III  as contended by the applicant
company and held that it is one kind of payment for services provided by the
director and hence liable to RCM.

The above AR may lead to raising
of inquiries from various authorities regarding discharge of liability for RCM
on salaries paid to directors, which till now was widely believed as not
liable. Looking into the overall provisions of the law, it is well understood
that Entry 1 in Schedule III is separate and has an overriding effect on other
provisions of the Act. Further, on the ground that it is a contractual
arrangement (as employer and employee) and the director’s salary is assessed
under the Income-tax Act under the head ‘Salary’ as also under the EPF Act and
certain provisions of the Companies Act, etc., it can very well be contended that
such salary payment to director/s is covered under Entry 1 of Schedule III.
Once it is covered by Entry 1 of Schedule III, it is neither a supply of goods
nor a supply of service; hence there should be no liability for RCM on salary
paid to whole-time directors.

However, the learned AAR holds
that the RCM provision is clear enough to cover all categories of services and
therefore impliedly holds that entry in RCM is the overriding entry.

The above AR suggests that the
RCM liability will arise for all kinds of services specified in the
Notification. For example, RCM liability will arise even on commission paid to
directors, or rent paid to directors for any premises, etc. Similar litigations
are also pending under the erstwhile Service Tax regime.