The levy of tax on ‘actionable claims’ has seen substantial litigation under the Sales Tax / VAT regimes. The primary reason for that was that the definition of goods under the Sales Tax / VAT regimes excluded actionable claims. Similarly, under the GST regime, too, actionable claims are generally excluded from the purview of taxability. Therefore, it is important to understand what constitutes an ‘actionable claim’.
The definition of actionable claim is provided u/s 3 of the Transfer of Property Act, 1882 as under:
‘actionable claim’ means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the Civil Courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent;
It is apparent from the above definition that an actionable claim is a claim, or rather a right to claim, either an unsecured debt or any beneficial interest in movable property which is not in the possession of the claimant. So far as the first limb of the definition is concerned, it seems to cover only unsecured debts. Therefore, it should cover cases such as bill discounting where a business sells its receivables to another person, generally a banking and financial institution, and receives the consideration upfront, though a lower amount than what is receivable. The receivable is subsequently realised by the bank and the difference between the amount realised and the amount paid for bill discounting is its margin / profit.
The second limb of the definition has been analysed in detail by the courts. In the context of lottery tickets, the division Bench of the Supreme Court in the case of H. Anraj & Others vs. Government of Tamil Nadu [(1986) AIR 63] had held that lottery tickets were goods and therefore liable to sales tax. However, the said decision was later set aside by the Constitution Bench in the case of Sunrise Associates vs. Government of NCT of Delhi and Others [(2006) 5 SCC 603-A]. While doing so, the Court had laid down the following principles:
• The fact that the definition of goods under the State laws excluded actionable claims from its purview would demonstrate that actionable claims are indeed goods and but for the exclusion from the definition of ‘goods’, the same would have been liable to sales tax.
• An actionable claim is only a claim which might connote a demand. Every claim is not an actionable claim. A claim should be to a debt or to a beneficial interest in movable property which must not be in the possession of the claimant. In the context of the above definition, it is a right, albeit an incorporeal one. In TCS vs. State of AP [(2005) 1 SCC 308] the Court has already held that goods may be incorporeal or intangible.
• Transferability is not the point of distinction between actionable claims and other goods which can be sold. The distinction lies in the definition of an actionable claim. Therefore, if a claim to the beneficial interest in movable property not in the vendee’s possession is transferred, it is not a sale of goods for the purposes of the sales tax laws.
• Some examples of actionable claims highlighted by the Court include:
- Right to recover insurance money,
- A partner’s right to sue for an account of a dissolved partnership,
- Right to claim the benefit of a contract not coupled with any liability,
- A claim for arrears of rent has also been held to be an actionable claim,
- Right to the credit in a provident fund account.
• An actionable claim may be existent, accruing, conditional or contingent.
• A lottery ticket can be held to be goods as it evidences transfer of a right. However, it is the right which is transferred that needs to be examined. The right being transferred is claim to a conditional interest in the prize money which is not in the purchasers’ possession and would fall squarely within the definition of an actionable claim and would therefore be excluded from the definition of goods.
In the context of transferrable REP licenses which gave permission to an exporter to take credit of exports made, the Larger Bench in the case of Vikas Sales Corporation vs. Commissioner of Commercial Taxes [2017 (354) E.L.T. 6 (SC)] held that the Exim License / REP Licenses were goods since they were easily marketable and had a value independent of the goods which could be imported using the said licenses, and therefore they could not be treated as actionable claims.
Actionable claims vis-à-vis GST
Section 9 of the CGST Act, 2017, which is the charging section for the levy of GST, provides that the same shall be levied on a supply of goods or services, or both. The terms are defined u/s 2 as under:
(52) ‘goods’ means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;
(102) ‘services’ means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;
Unlike the Sales Tax / VAT regimes where actionable claims were excluded from the definition of goods, GST law specifically provides that goods shall include actionable claims. Thereafter, Schedule III treats the supply of actionable claims – other than lottery, betting and gambling – as being neither a supply of goods nor a supply of service, thereby excluding the supply of actionable claims from the purview of GST. However, what is the scope of coverage of actionable claims?
Section 2(1) of the CGST Act, 2017 defines actionable claim to have the same meaning as assigned u/s 3 of the Transfer of Property Act, 1882. The definition under the Transfer of Property Act, 1882 has been given above.
GST on lottery tickets
The intention of the Legislature to tax lotteries is loud and clear from the fact that Schedule III entry only treats actionable claim – other than lottery, betting and gambling – as neither a supply of goods nor a supply of service. The Rate Notification for goods also specifically provides the rate applicable on lotteries as 28%. Further, Rule 31A of the Valuation Rules also clearly provides a specific method to determine the value of supply in case of lottery tickets.
Despite such clarity, the issue of the validity of the levy of tax on lottery tickets has been raised before several courts. The Calcutta High Court, in the case of Teesta Distributors vs. UoI [2018 (19) GSTL 29 (Cal)] had upheld the levy of GST on lottery tickets and held as under:
• The Centre or the State Government had not exceeded their jurisdiction in promulgating the statutes for the levy of GST on lottery tickets,
• The levy did not violate any constitutional or fundamental rights,
• The differential rate of tax was permissible and it was not discriminatory. Further the Government was within its rights to have the same,
• The definition of goods as per the Constitution of India is an inclusive definition with a very wide sweep to cover both tangible as well as intangible products.
The issue again came up before the Larger Bench of the Supreme Court in the case of Skill Lotto Solutions India Private Limited vs. UoI [2020 – VIL – 37 – SC]. Dismissing the petition, the Court held as under:
• The definition of goods u/s 2(52) does not violate any constitutional provision nor is it in conflict with the definition of goods given under Article 366(12). Therefore, there is nothing wrong with actionable claims being included within the scope of goods u/s 2(52).
• The decision of the Constitution Bench in the case of Sunrise Associates holding lottery as actionable claims was a binding precedent and not obiter dicta.
• Schedule III entry, while treating actionable claims sans lottery, betting and gambling outside the purview of supply of goods or services for the purpose of section 7, was not discriminatory in nature.
• On the issue of the validity of Rule 31A which determined the value of taxable supply based on the price of the ticket without excluding the prize money component thereof, the Court held that the value of taxable supply is a matter of statutory regulation, and when the value is to be transaction value to be determined as per section 15, it is not permissible to compute the value of taxable supply by excluding the prize which has been contemplated in the statutory scheme. Therefore, while determining the value of supply, prize money was not to be excluded.
GST on activities of betting, gambling
The terms ‘betting’ or ‘gambling’ have not been defined under the CGST Act, 2017. But there is a similarity between the two. Both generally refer to setting aside a certain amount in expectation of a much larger amount on the basis of the occurrence or non-occurrence of a particular future event. The person who collects the amount promises to pay the prize money on the occurrence of the said event. However, the distinction between betting and gambling would be that betting would be something which would depend on an event where the activity is done / carried out by a different person altogether, for example, horse racing, sports, etc., while gambling would involve the person himself undertaking the activity.
The fact that Schedule III specifically excludes betting or gambling from the scope of actionable claims would demonstrate that there is not an iota of doubt as to whether or not the activity of betting or gambling is an actionable claim. The only question that would need consideration is whether the specific activities of betting / gambling which require a certain skill set would be liable to tax or not. The reason behind this is because the Supreme Court has, in the case of Dr. K.R. Lakshmanan vs. State of TN [1996 AIR 1153] held as under:
The expression ‘gaming’ in the two Acts has to be interpreted in the light of the law laid down by this Court in the two Chamarbaugwala cases, wherein it has been authoritatively held that a competition which substantially depends on skill is not gambling. Gaming is the act or practice of gambling on a game of chance. It is staking on chance where chance is the controlling factor. ‘Gaming’ in the two Acts would, therefore, mean wagering or betting on games of chance. It would not include games of skill like horse racing. In any case, section 49 of the Police Act and section 11 of the Gaming Act specifically save the games of mere skill from the penal provisions of the two Acts. We, therefore, hold that wagering or betting on horse racing – a game of skill – does not come within the definition of ‘gaming’ under the two Acts.
The above decision clearly lays down that any activity which involves application of skill would not be treated as betting or gambling. In the context of card games such as rummy and bridge, the Bombay High Court has, in the case of Jaywant Sail and Others vs. State of Maharashtra and Others held that the same involves application of skill and the same cannot be treated as betting / gambling.
Whether the above precedents would apply under the GST regime as well and can it be claimed that when the application of a skill set is involved, the same would not classify as betting / gambling? This issue had come up before the Bombay High Court in the case of Gurdeep Singh Sachar vs. UOI [2019 (30) GSTL 441 (Bom)]. In this case, the petitioner had filed a criminal PIL against a gaming platform which allowed participants, upon payment of fees, to create fantasy teams and the performance of each player would be calculated based on the actual performance of the players during a sports event. From the fees collected from the participants, the portal would retain certain amounts for itself as service charges and the balance amount would be used for paying the prize money to participants. The portal was paying GST under Rule 31A(3) only to the extent of the amounts retained by it.
The petition alleged that the portal was violating the provisions of the Public Gaming Act, 1867 as well as the provisions of Rule 31A of the CGST Rules, 2017 which required payment of tax on the entire value and not after reducing the prize money component – which has also been confirmed by the Supreme Court in the case of Skill Lotto (Supra). Relying on the decision in the case of Dr. K.R. Lakshmanan (Supra), the High Court held that the online game conducted by the portal involved application of skill and, therefore, the same could not be treated as betting / gambling. Since there was an application of skill, the provisions of the Public Gaming Act, 1867 were not applicable in view of the specific provision of section 12 thereof which provided that the Act shall not apply in cases involving the application of skill.
On the GST front, the Court held that the activities carried out by the portal did amount to actionable claims; however, the same could not be treated as lottery, gambling or betting. Therefore, the same would be covered under Entry 3 of Schedule III and hence the said activities were outside the purview of the levy of tax. Since tax itself was not payable, the question of operation of Rule 31A (3) was not applicable.
However, while dealing with the issue of rate of tax, the Court held that the portal was right in discharging tax at 18% on the platform fee, i.e., the amounts retained by it from the escrow account. In a way, the Court held that the platform fee does not partake the character of actionable claim but is in the nature of an independent service rendered by the platform.
So far as taxability on the recipient of the prize money is concerned, the Appellate Authority for Advance Ruling has, in the case of Vijay Baburao Shirke [2020 (041) GSTL 0571 (AAAR-MH)] held that the prize money is not a consideration either for supply of goods or supply of service. An interesting observation made by the Authority has held that not every contract becomes taxable under the GST law. The AAAR further held that every supply is a contract but every contract is not a supply.
GST on chit funds
Chit funds are regulated by the Chit Funds Act, 1982. This is a unique financing model. Under this, a person generally known as trustee or foreman, organises the fund. And people participate in it by contributing a fixed amount on a monthly basis. A chit is prepared for each participant and every month one chit is drawn and the participant whose name comes out receives the money. The activity is carried on regularly till the name of each participant is drawn out. In other words, each participant has a right to receive the money. Generally, the trustee or foreman retains his charge for organising the fund.
In the above business model, the issues that would need consideration are:
• Is there an element of actionable claim present in the above model?
The Supreme Court has, in the context of service tax in the case of UoI vs. Margdarshi Chit Funds Private Limited [2017 (3) GSTL 3 (SC)] held that in a chit business, the subscription is tendered in any one of the forms of ‘money’. It would, therefore, be a transaction in money. Once it has been held that chit fund is nothing but a transaction in money, it would be incorrect to treat it as an actionable claim.
However, even if one analyses the definition of actionable claim for academic purposes, it would be difficult to arrive at a conclusion that there is an element of actionable claim present in the said model. In pith and substance, the chit fund is nothing but a financing model where a person periodically invests funds and the same amount is received back by him, albeit after some reduction on account of foreman / trustee charges. The person whose name comes out first is set to gain more as he gets to use the sum for a longer period compared to the person who receives it at the end.
However, the fact is that the participant enjoys the claim to a movable property, i.e., the prize money. And the only issue that remains is what is the legal remedy that a participant whose name has been picked in the lot has in case the foreman fails to pay the prize money. In this respect, reference to section 64 of the Chit Funds Act, 1982 is important. Sub-section (3) thereof provides that civil courts shall have no jurisdiction to entertain any suit or other proceedings in respect of any dispute. The issue as to whether Consumer Forums have jurisdiction over chit fund matters is already in dispute with contrary decisions by the Madras High Court in N. Venkatsa Perumal vs. State Consumer Disputes Redressal Commission [2003 CTJ 261 (CP)] and the Andhra Pradesh High Court in Margadarsi Chit Fund vs. District Consumer Disputes Redressal Forum [2004 CTJ 704 (CP)]. Therefore, it can be said that there is substantial confusion over whether or not civil courts can have jurisdiction over civil matters, specifically in view of the extant provisions of the Chit Fund Act, 1982 and perhaps, the finality of this issue can be a basis to determine whether chit funds can actually be treated as actionable claims.
• Whether the foreman / trustee is liable to pay GST on the charges retained by him?
The answer to the above question would depend on the classification which one accords to the chit fund business. If one takes a view that the activity of a chit fund is nothing but a transaction in money, the charges retained by the foreman / trustee would be liable to GST. The Rate Notification prescribes the GST rate at 12% on services provided by the foreman / trustee subject to the condition that input tax credit on inputs used for providing such service has not been claimed by the foreman / trustee. However, there is still no clarity on whether the foreman or trustee shall be liable to pay GST only on the charges retained by him or on the whole amount collected from the participants. Under the Service Tax regime (though the levy was stuck down in the Delhi Chit Funds Association case), an abatement was provided in relation to the service provided by the foreman / trustee. Taking a cue from the same, one may take a position that a foreman / trustee is liable to pay GST only on the commission retained by him and not on the entire amount.
However, if one takes an aggressive view and treats the participation in chit fund as an actionable claim, the question of taxability of the amounts retained by the foreman / trustee should not arise since it would be a consideration for a transaction which is neither a supply of goods nor a supply of service.
In the context of GST on chit funds, an application for a ruling was filed before the AAR seeking clarity on whether or not additional amount collected from participants for delay in paying the monthly amounts were includible in the value of taxable service. The Authority in the case of Usha Bala Chits Private Limited [2020 (39) GSTL 303 (AAR-GST-AP)] held that the additional amount received was classifiable as principal supply of financial and related services and therefore liable to GST @ 12% under Entry 15 of Notification 11/2017-CT Rate dated 28th June, 2017.
GST on assignment of escalation claims
In case of infrastructure companies, substantial amounts are stuck in escalation claims which are subject to conclusion of arbitration proceedings. In order to manage cash flows and monetise the same, such companies at times assign such escalation claims to financing companies. The arrangement is that all the future proceeds of the said escalation claim are assigned to another party which would upfront pay a discounted amount to such infrastructure companies. Once the escalation claim is settled, the entire amount sanctioned would be received by the financing company on which the infrastructure company would have no rights.
It appears that the above transaction would qualify as assignment of actionable claim. The construction company has a right to claim the escalation costs from the clients, which they assign to another company which would squarely fall within the ambit of actionable claim.
The issue, however, would remain with respect to the payment of tax on reaching of finality of such actionable claims. It is important to note that the escalation claim is for receipt of consideration for a supply made by the infrastructure company. Generally, such contracts are in the nature of ‘continuous supply of services’ and therefore the tax on the same is payable at the time when the client accepts the provision of service. The question that would arise is who would be liable to pay the tax on such underlying service in such cases – the contractor / infrastructure company, or the assignee company to which the right has been assigned?
The fact remains that the service has been provided by the infrastructure company and therefore the liability to pay tax thereon shall also be on the infrastructure company. However, one also needs to keep in mind that the journey of an escalation claim reaching finality is generally long. It might happen that the escalation claim approved in 2021 might pertain to a service performed in 2011, i.e., at the time of levy of service tax when the service might have been exempted, while under the GST regime the same becomes taxable. In such a situation, the issue of whether or not the liability to pay tax on such service would arise on account of transition provisions [see section 142(11)] is something which one might need to analyse.
GST on vouchers
Vouchers are pre-paid instruments (PPI) that facilitate purchase of goods and services, including financial services, remittances, funds transfers, etc., against the value stored in / on such instruments. Such PPIs in India are regulated by the Reserve Bank of India which recognises three different kinds of instruments, namely:
• Closed system PPI: Issued by an entity for facilitating the purchase of goods or services from that entity only. For example, vouchers issued by broadcasting companies, telecoms, etc., which can be used against services provided only by such service providers.
• Semi-closed system PPI: Issued by banks as well as non-banks for purchase of goods or services, remittance facilities, etc., for use at a group of clearly identified merchant locations / establishments which have a specific contract with the issuer (or contract through a payment aggregator / payment gateway) to accept the PPIs as payment instruments. Sodexo vouchers is an example of such PPIs.
• Open system PPI: Issued by banks for use at any merchant for purchase of goods and services, including financial services, remittance facilities, etc. Cash withdrawal at ATMs / Points of Sale (PoS) terminals / Business Correspondents (BCs) is also allowed through these PPIs.
The closed system PPIs are not regulated by the RBI. However, the issuance of the same denotes an agreement by the issuer to supply certain goods or services, as the case may be. But the question that would need analysis is whether such vouchers can be constituted as an actionable claim or it is just an instrument to receive consideration for an agreement to supply goods or services? While the former appears to be a more appropriate answer, the fact remains that the PPI is nothing but a means to receive the consideration for supply of goods or service and therefore the same should be liable to GST at the time of issuance.
Therefore, if at the time of issuance all the elements for the levy of tax are known, i.e., recipient, nature of supply, place of supply, tax rate, etc., then GST should be paid at that moment itself by the person who issues the voucher. There would, however, be an issue of the value on which such issuer would be discharging tax. For example, for a voucher of Rs. 100, the company issuing the voucher would be receiving only Rs. 70, the price at which it sells to the distributor. The distributor might sell the voucher to the retailer for Rs. 85 who would further sell it to the consumer for Rs. 100. The question that would remain is whether the issuer would be charged tax on Rs. 100 or on Rs. 70? A more appropriate solution for this would be to look at the nature of the arrangement, i.e., whether the transaction is a P2P arrangement or a P2A arrangement, to determine the correct course of action.
Another issue which might be faced is in case where the goods or service to be supplied is not known. For example, a retailer, say Big Bazaar, issues a voucher of Rs. 1,000 which can be redeemed at any of its outlets for purchase / sale of goods or services or both, which may be taxable or exempt. In such a case, whether the retailer would be required to pay tax at the time of issuance of the voucher or its redemption shall remain open since all the elements for the levy of tax are not known at that time. In such a case, in view of specific provisions contained in sections 12(4) / 13(4), the tax would be payable at the time of redemption of the voucher. This view has been upheld by the AAR in the case of Kalyan Jewellers India Limited [2020 (32) GSTL 689 (AAR-TN)].
However, the above situation would change in case of semi-close and open system PPIs which are regulated by RBI and recognised as a legal means of tender and, therefore, more aptly classified as ‘money’ as defined u/s 2(75) of the CGST Act, 2017. Once the said PPIs are classified as money, the same are excluded from the definition of goods as well as service and therefore the question of payment of GST on the same does not arise. Similarly, once PPIs are classified as money, the need to analyse whether such PPIs would be treatable as actionable claim or not should also not remain.
GST on assignment of debts – secured / unsecured
Assignment or sale of secured / unsecured debts by banks is a common exercise undertaken to reduce their loan book. The debt could be of varied nature, such as loan for properties, business loans, etc., and may be secured or unsecured. However, all debts are not actionable claims which is apparent on a perusal of the definition of actionable claims as per which all debts other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property are treated as actionable claims.
So far as the debt which gets classified as ‘actionable claims’ is concerned, there is no doubt regarding its non-taxability in view of the Schedule III entry. However, an issue arises in the context of debt which has been secured by mortgage of immovable property or by hypothecation or pledge of movable property and treated as actionable claim. It is important to note that even the said debt is a property for the bank and has all characteristics to be treated as goods, i.e., utility, capability of being bought and sold and, lastly, capability of being transmitted, transferred, delivered, stored and possessed. Therefore, while such debt does not qualify to be an actionable claim, the question that remains for consideration is whether the same would classify as goods for the purpose of GST. Can a view be taken that such debt is nothing but money receivable by a bank and therefore, even otherwise, it continues to be nothing but a transaction in money and hence cannot be treated either as goods or service?
The Board has attempted to clarify on this issue as under:
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Sr.
No. and Question
|
Answer
|
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40. Whether
assignment or sale of secured or unsecured debts is liable to GST?
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Section 2(52) of the CGST Act, 2017 defines
‘goods’ to mean every kind of movable property other than money and
securities but includes actionable claims. Schedule III of the CGST Act, 2017
lists activities or transactions which shall be treated neither as a supply
of goods nor a supply of services and actionable claims other than lottery,
betting and gambling are included in the said Schedule. Thus, only actionable
claims in respect of lottery, betting and gambling would be taxable under
GST. Further, where sale, transfer or assignment of debt falls within the
purview of actionable claims, the same would not be subject to GST.
Further, any charges collected in the
course of transfer or assignment of a debt would be chargeable to GST, being
in the nature of consideration for supply of services
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However, the above clarification seems to have not taken into consideration the fact that the definition of actionable claims covers only debts other than those that have been secured by mortgage of immovable property or by hypothecation or pledge of movable property. Therefore, this is going to be an open issue for the banking sector while dealing with such transactions.
GST on partners’ remuneration
Whether remuneration received by a partner from a partnership firm is liable to GST or not has been a controversy since the introduction of GST. In the case of CIT vs. R.M. Chidambaram Pillai [(1977) 106 ITR 292 (SC)] the Court held that the partners’ remuneration was nothing but a share in profit.
Even the Board has clarified in the FAQ that partners’ salary will not be liable to GST. The AAR in the case of Arun Kumar Agarwal [2020 (36) GSTL 596 (AAR-Kar)] has also held that partners’ salary is not liable to GST in view of Entry 1 of Schedule III which keeps the employer-employee transactions outside the purview of GST. Importantly, while dealing with the issue of share in profits, the AAR has held that the same is mere application of profit and therefore cannot be liable to GST. Perhaps this reasoning can be applied while dealing with the partners’ remuneration since the Supreme Court has already held in the context of Income-tax that partners’ profit is nothing but application of profits.
Other transactions
The Tribunal has, in the case of Amit Metaliks Limited vs. Commissioner [2020 (41) GSTL 325 (Tri-Kol)], held that compensation / liquidated damages payable on cancellation of agreements is nothing but an actionable claim and therefore cannot be treated as consideration. The reasoning accorded by the Tribunal was that the compensation was nothing but debt in present and future and, therefore, was an actionable claim.
In the case of Shriram General Insurance Company vs. Commissioner [2019 (31) GSTL 442 (Tri-Hyd)], the Tribunal held that surrender / discontinuance charges retained by the insurance company on premature termination of a unit-linked insurance policy was not consideration for a taxable service provided, but rather a transaction in an actionable claim which was excluded from the levy of service tax.
The AAR in the case of Venkatasamy Jagannathan [2019 (27) GSTL 32 (AAR-GST)] has held that an agreement to receive a share in profit from shareholders for strategic sale of equity shares over and above the specified sale price per equity share was nothing but an actionable claim and, therefore, could not be treated as supply of goods or services.
In Ascendas Services (India) Private Limited [2020 (40) GSTL 252 (AAAR-Kar)], the Authority held that bus passes were not actionable claims as the same were merely a contract of carriage.
CONCLUSION
