Analysis Of Decisions Taken At The 22ND & 23RD Meetings Of The GST Council

This article provides an analysis of the
changes made or proposed in the 22^nd and 23^rd GST Council
meetings. A wide range of changes have been brought about in these Council
meetings which seem to aim at reducing the tax and compliance burden. One gets
a feeling that GST is turning out to be another law entangled in a complex web
of notifications which is perceived to be more dynamic than the stock exchange.
Some attribute the dynamics to a premature introduction of the law.

There were lots of speculations around the
outcome of the 23^rd Council meeting after the Hon’ble Prime Minister
had promised relief. The top most highlight of all proposals was the relocating
of almost 178 items from the 28% slab to 18% slab. On one hand, it appears that
the rate change was purely to please the aam aadmi, while on the other hand it
seems the move is aimed at discouraging tax evasion on fast moving consumer
goods. If we consider this as a move to discourage tax evasion, it may lead to
tax buoyancy with more transactions in these goods coming into the system. In
the subsequent paragraphs, the major changes brought about by the 22^nd
and the 23^rd Council meetings are analysed.

1.  REDUCTION IN TAX RATES

     The reduction of GST rate
on almost 178 items from 28% to 18% is a major move by the Government. Most of
the daily use items like chocolates, custard powder, polishes, sanitary ware,
etc. are the goods where the rate reduction is done. However, luxury and sin
goods like pan masala, aerated water and beverages, cigars and cigarettes,
tobacco products, cement, paints, perfumes, ACs, dish washing machines, washing
machines, refrigerators, vacuum cleaners, cars and two-wheelers, aircraft and
yacht continue to be in the highest tax bracket of 28%.

     The rates were reduced
with effect from 15^th November 2017; however, the goods bearing the
original MRP were in stock with the distributors and retailers. Most of the big
players have announced that they will ask their logistical partners to ensure
that the rates that get charged to consumers are below the MRP affixed on the
package to take care of the rate reduction.  

2.  5% GST RATE FOR RESTAURANTS

     As a consequence of
recommendations of the GST Council, another major move affecting the restaurant
industry was notifying 5% GST for restaurants. Prior to this change in rate of
tax, airconditioned       restaurants and
restaurants serving liquor had to bear GST @ 18% and other restaurants had to
bear 12% GST. As per the amended rate notification, the rate of GST on certain
restaurants, eating joints including canteen or mess has been notified @ 5%
(with no Input Tax Credit). It is felt that this change seems like a mandatory
scheme for eateries. Prior to introducing this change, the Hon’ble Finance
Minister had stated that all members of the Council felt that restaurants were
not passing on the benefit of ITC to consumers and GST was being levied on
existing card rates. There is no doubt in the fact that we all must have felt
our restaurant bills going up post implementation of GST. The million dollar
question that comes up here is whether this change is going to actually reduce
our restaurant bills.

     Few questions that arise
in this regard are enumerated hereunder:

     Is the amendment against
the objective of GST

     GST as we all know is a
value added tax and the objective of this tax is to allow seamless flow of
credit. Such a move of restricting the ITC in the hands of eateries may go
directly against the stated objective.

     The terms ‘restaurant’
& ‘eating joint’ is not defined

     The rate notification (5%)
covers within its ambit restaurants, eating house including mess or canteen.
This implies that this rate applies only in case where the activity of supply
of food is undertaken by a restaurant, eating joint including a mess or
canteen. This also means that when the food is supplied by a retail outlet like
a banya shop or a super market, 5% rate shall not apply. There is no clarity on
status of bakeries located in hotels (run by third parties), standalone ice
cream parlours. These tax payers are nothing but re-sellers of ready to eat
food and in most cases there is no preparation or serving done at the store or
retail outlet. There is an urgent need for the Government to clarify the
coverage of this entry, else the basic objective for which the GST rates were
reduced may not get fulfilled. Rather, there is always a possibility that end
consumer prices may increase to cover the increase in cost of supply due to denial of ITC.     

     Whether charging 5% is
mandatory

     On a perusal of the
notification it is apparent that the rate of 5% prescribed in the notification
at Entry no. 7(i) is subject to the condition that no ITC on inward supplies of
goods or services that are used for providing the service is claimed. A
residuary entry at serial no. 7(ix) which prescribes 18% rate for all
accommodation, food and beverage services that are not covered by other entries
excludes restaurants and eating joints covered by entry no 7(i). Further, an
explanation in entry 7(ix) specifically excludes restaurants covered by entry
at serial no. 7(i). A question that arises here is whether 5% is a mandatory
rate or a rate that is conditional to not claiming ITC. On a strict and
conservative interpretation, 5% seems to be mandatory rate for those covered by
entry 7(i) of the above notification.

     Another school of thought
is that 5% rate attaches a condition to it and hence is applicable only where
the condition is satisfied. Hence, it cannot be read to be mandatory. Then in
such a case where should such cases get classified. Can they be classified
under entry 35 as “Other miscellaneous services not covered elsewhere” is a
question which needs immediate attention of the government. 

     Would the move lead to a
reduction in restaurant bills?

     Every business activity is
run with an intention to earn profit and it is a simple math that profit is
sales – cost. Tax is charged on sales value. Hence, there is no doubt that 5%
should be charged on the base sale price. So let’s go back to base sales price.
Base sale price would be decided based on a certain mark up over the cost. With
the denial of ITC under the 5% scheme the operating costs are bound to go up
(especially across the counter sale of ready food). The logical outcome would
be increase in base sale price. Most of the restaurants operate in leased
premises and the lease rentals are liable for payment of GST. This would
constitute a huge ITC loss for the restaurants. The amount of ITC that shall
hit the Profit and Loss account debit side would vary from restaurant to
restaurant and only restaurants that operate on a low ITC may perhaps be in a
position to reduce the base sale price along with the reduction in the rate of
tax. 

3.  CHANGES IN COMPOSITION
SCHEME

     (A)   Changes already implemented

    The 22^nd GST
Council meeting proposed an increase in the threshold limits for composition.
Section 10 of the CGST Act, 2017 empowers the Government to raise the maximum
threshold as under:

    Subsequent to the above
change an order¹ was issued to clarify certain aspects relating to
composition scheme. This order was issued in terms of powers of the Government
to remove difficulties arising in giving effect to any provisions of the Act.
The following was clarified in the above order:

a)  A tax payer engaged in
supplying restaurant and other services specified in Para 6(b) of Schedule II
to the Act and also supplying exempt services (including interest income) shall
be allowed to go for composition u/s. 10 if all other conditions are satisfied.

b)  Further, it was clarified
that while computing his aggregate turnover for determining eligibility for
opting for composition, the value of these exempt services shall not be
included.

     As per the Press Release
dated 06-10-2017, it was also decided to constitute a Group of Ministers who
shall work towards making composition scheme even more attractive.

[1] Order No. 01/2017-CT, dated 13-10-2017 issued
under section 172 of the CGST Act, 2017.

(B) Changes proposed at 23^rd
GST Council meeting to be implemented after making legislative changes

(i)  It has been proposed to
enhance the current threshold to 200 Lakhs. However, this proposal can come
into effect only after making changes to the law       

(ii) Uniform composition rate
of 1% to be made applicable to manufacturers and traders. However, no change is
proposed to composition rate applicable to restaurants.

(iii) Supply of services up to
Rs. 5 lakh per annum will be allowed by exempting the same

The notifications relating to (ii) and (iii)
above are still awaited. It may be noted that the changes as per 22^nd Council
meeting and proposals by 23^rd Council meeting would imply the
following:

(i)  Rule 3(3A) has been
inserted in the CGST Rules,2017 allowing entry into composition scheme any time
till 31-03-2018.

(ii) The option for composition
shall be applicable only in the month succeeding the month in which the option
opting for composition is exercised by filing Form GST CMP-02.

(iii) Such persons shall also
have to intimate details of inputs and capital goods in stock and pay ITC
attributable to such stock as per section 18(4) and computed in the manner
prescribed in Rule 44 of the CGST Rules. The intimation has to be given in Form
GST ITC-03.

The question here is whether introducing
such changes in the scheme of composition would really make it attractive at a
time when we are approaching the end of the financial year. 

4.  RELIEF IN COMPLIANCE
PROCEDURES PROPOSED AT THE 22^nd AND 23^rd GST COUNCIL MEETINGS

A.  Filing of GSTR-2, 3
suspended:

     Inspite of the glitches
and the OOPS! on the GSTN portal tax payers did manage to file returns in Form
GSTR-3B and GSTR-1. However, when it came to furnishing details of inward
supplies, it seemed to be a task on hand for matching various elements (with
the biggest challenge being Invoice number and date). It was highly unfair for
a genuine tax payer where his credit claim is made depended on the timely
furnishing of outward supplies by his vendor. Considering the hardships faced
by tax payers, the Government has suspended filing of GSTR-2 which is viewed as
a very practical and bold step.

     It
may be noted here that filing of GSTR-2 has been suspended for the time being
but at some point in time this compliance has to be faced.The press release
dated 10-11-2017 states that a committee of officers would work out the time period for filing of GSTR-2 and
3.

From an industry perspective, what seems to
be the most desirable is:

a)  Invoice number level and
date matching should be done away with and only the tax element be matched.

b)  Alternatively the matching
of ITC may be done after the end of the financial year or on a quarterly basis
instead of monthly basis.

c)  If the ITC matching is done
on an annual or quarterly basis Forms GSTR-1, 2 and 3 should be consolidated
and a single return containing details of outward and inward supplies and the
tax computation for each period should be filed at the end of the month or
quarter, as the case may be.

B.  Quarterly returns for SME
sector

     Another welcome move
relates to reduced periodicity of filing of returns by small and medium sized
businesses with annual aggregate turnover up to Rs. 1.5 crore, and  it was proposed at the 22^nd
council meeting to allow such SME businesses to file GSTR-1, 2 and 3 and
also pay taxes on quarterly basis. Consequent to the 22^nd
council meeting, the notification giving effect to this proposal was long
awaited.

     However, the above
decision was tweaked at the 23^rd council meeting where filing of
GSTR-2 and 3 was suspended for the time being for all tax payers and quarterly
filing due dates and eligibility for the SME sector were notified as under:

     Form 3B and payment of
taxes continue to be a monthly affair

     It may be noted here that
even though periodicity has been changed for filing Form GSTR-1, the
periodicity for payment of taxes and filing of Form GSTR-3B is still a monthly
affair for all tax payers (unlike what was the original proposal at the 22^nd
Council Meeting).

     The efforts that are
required for computing the tax liability for a month and preparing Form 3B are
no less than filing of Form GSTR-1. In such a situation, would just changing
periodicity of filing GSTR-1 to quarterly really help the SME sector?

     Clarity on applicability

     The eligibility of a tax
payer for filing quarterly returns as notified² is reproduced here
under:

     “The registered persons
having aggregate turnover of up to 1.5 Crore rupees in the preceding financial
year or the current financial year,
as the class of registered persons who shall follow the special procedure as
detailed below for furnishing the details of outward supply of goods or
services or both

     The confusion that is created
here is the reading of the word “or” used in the notification. Whether a tax
payer whose turnover in the preceding year was below the 1.5 crore mark but who
has crossed this threshold already in the current year can still avail the
benefit of quarterly filing. The same question arises in a vice versa
situation. However, if we go by the intention, it seems that the word “or”
should be read literally and not as “and”. Hence, even if the aggregate
turnover is above 1.5 crore in the current year, the benefit should be
available.

5.  NO GST PAYABLE ON ADVANCES
RECEIVED FOR SUPPLY OF GOODS

     The liability to pay tax
arises when the time of supply gets triggered. The provisions relating to time
of supply state that the liability shall arise on the earlier of the date of
invoice or date of receipt of payment. This implies that GST becomes payable on
advances received prior to making of the supply. While the service tax law
already contained provisions for taxing advances, similar provisions were not
present under the VAT laws and central excise law. The concept of taxing
advances relating to supply of goods was fairly new to suppliers of goods under
the GST law and had its own inherent issues, especially when it is difficult to
determine the classification of the goods to be supplied at the time when the
advance is received. Further, at times, it was also difficult to determine the
location of the supplier where advances were centrally received at the head
office.

     As proposed by the council
at its 22^nd Council Meeting, the requirement for making payment of
GST on advance was exempted only in cases of tax payers (not being under
composition) whose preceding year turnover did not exceed Rs. 1.5 crore or
current year turnover is not likely to exceed the above threshold³.
At the 23^rd Council Meeting, this relaxation was extended to all
suppliers of goods⁴. It may be noted that in case of supplier
of services the tax shall be payable on advances received.  

[2] Notification No. 57/2017-CT, dated 15-11-2017  

6.  CLARIFICATION IN CASE OF
INTER-STATE MOVEMENT OF RIGS, TOOLS, ETC.

     It has been clarified⁵
that inter-state movement of various modes of conveyances between distinct
persons carrying passengers, goods or for repairs and maintenance shall neither
be treated as a supply of goods or services and hence, no IGST shall be
payable.

     A similar issue was faced
in case of inter-state movement of rigs, tools and spares, and all goods on
wheels like cranes. These goods may move to various locations for providing
services. The press release states that no IGST shall be payable in case these
goods move for the purpose of providing services to customers or for the
purpose of getting these goods repaired. The press release further states that
applicable tax shall be payable on services that are provided using such goods.

     Consequent to the Council
decision, a clarification⁶ in this regard was issued which simply
states that circular 1/2017 shall mutatis mutandis apply to inter-state
movement of such goods, and except in cases where movement of such goods is for
further supply of the same goods, such inter-state movement shall be treated
‘neither as a supply of goods or supply of service,’ and consequently, no IGST
would be applicable on such movements. It further states that the applicable
GST shall be payable on repairs of such goods. There seems to be a disconnect
between the press release and the Circular to the extent that there is no
specific mention that no GST shall be payable even when these goods are used
for providing services to customers located in other States.

     Further, it is not clear whether the clarification would hold good where
the distinct person is registered in the other State and the billing location
is from that State.

[3] Notification No. 40/2017-CT, dated 13-10-2017

[4] Notification No. 57/2017-CT, dated 15-11-2017 

[5] Circular No. 1/1/2017-IGST, dated 07-07-2017

[6] Circular No. 21/21/2017-GST, dated 22-11-2017

7.  Other
changes

a)  Tax payers who have paid
late fees for July, August and September, 2017 shall be re-credited to their
Cash ledger under the “Tax” head.

b)  Late fees for return in Form
3B for the period Oct-2017 onwards have been reduced⁷ as
provided in the table below. It may be noted that the waiver applies only
for Form 3B and not other returns.

[7] Notification No. 64/2017-CT, dated 15-11-2017

c)  A facility for manual
filing of advance ruling applications has been introduced. Rule 97A has been
inserted in the CGST Rules⁸.        

d)  Exemption from registration
in case of small service providers (having aggregate turnover less than Rs. 20
lakh making inter-state or intra state supply of services through an E-Commerce
operator)⁹.

e)  Input Tax Credit has been
allowed¹⁰ in respect of supply of services to Nepal and Bhutan
despite the said services being treated as exempted services.

f)   Date for filing Form
TRAN-1 extended to 27-12-2017¹¹.

g)  Date for furnishing details
of goods sent to job worker in Form ITC-04 extended¹² to 31-12-2017
for the period Jul. to Sept., 2017. _

______________________________________________________________________

8      Notification No. 55/2017-CT, dated 15-11-2017
9      Notification No. 65/2017-CT, dated 15-11-2017  issued under section 23(2) of the CGST Act, 2017
10    Explanation inserted in Rule 43 of the CGST Rules, 2017 vide Notification No. 55/2017-CT, dated 15-11-2017
11    Order No. 9/2017-GST, dated 15-11-2017
12    Notification No. 63/2017-CT, dated 15-11-2017