In continuation of the article
published in the April, 2020 issue of this Journal, we have detailed certain
other areas of comparison between the Income tax and the GST laws
REVISION IN
PRICE OF SUPPLY – ACCRUAL OF INCOME VS. SUPPLY OF SERVICE
The time of supply
and the accrual of income are generally synchronous with one another. The
earlier article discussed that the supply aspect of a contract generally
precedes the claim of consideration from the contract. In most contracts, the
right to receive consideration starts immediately on completion of supply
resulting in co-existence of supply and income in a reporting period. Yet, in
certain cases the occurrence of supply and the consequential income therefrom
may spread over different tax periods. This concept of timing can be understood
from the perspective of tax treatments over retrospective enhancement of price
/ income. Income tax awaits the right to receive the enhanced income but excise
retraces any additional consideration back to the date of removal and is not
guided by the timing of its accrual.
Under the Excise law, there was
considerable debate on the imposition of interest on account of revision of the
transaction value subsequent to removal of excisable goods. The Supreme Court
through a three-judge Bench in Steel Authority of India Ltd. vs. CCE,
Raipur (CA 2150, 2562 of 2012 & 599, 600 & 1522-23 of 2013) was
deciding a reference in the light of decisions in CCE vs. SKF India Ltd.
[2009] 21 STT 429 (SC) and CCE vs. International Auto Ltd. [2010]
24 STT 586 (SC) wherein the question for consideration was the due date
of payment of the excise duty component on subsequent enhancement of a
tentative price. In other words, whether the date of removal of goods would be
relevant in case of a subsequent enhancement of price with retrospective
effect. The Court, after analysing the provisions of sections 11A, 11AB, etc.
held that the date of removal was the only relevant date for collection of tax
and the transaction value would be the value on the date of removal. Even
though the price of the transaction was not fixed on the date of removal,
subsequent fixation of price would relate back to the date of removal and
interest would be applicable on the additional price collected despite the
event taking place after the removal.
In service tax, the taxable event was
the rendition of service [Association of Leasing & Financial Service
Companies vs. UOI; 2010 (20) STR 417 (SC)]. Rule 6 of the Service Tax
Rules r/w the Point of Taxation Rules provides for payment of service tax based
on the invoice raised for rendition of service. In case of regular services,
the invoice was considered as a sufficient trigger for taxation, while in the case
of continuous services the right to claim consideration was considered as the
appropriate point of time when tax would be applicable. The said rules seem to
be the source of the provisions contained in the GST law, especially for
services. Where provision of service is the point of taxation, the principles
as made applicable to removal under the Excise law would also be applicable to
service tax laws.
In sales tax law, the term turnover
(and sales price) was defined on the basis of amounts receivable by the dealer
towards sale of goods. The Supreme Court in Kedarnath Jute Manufacturing
Co. Ltd. [1971] 82 ITR 363 (SC) stated that the liability to pay sales
tax would arise the moment the sale was effected. In the case of EID
Parry vs. Asst. CCT (2005) 141 STC 12 (SC), the Court was examining
whether interest was payable on short payment of purchase tax on account of
enhanced purchase consideration payable after fixation of the statutory minimum
price of sugar under the Government Order. The Supreme Court held that no
interest was payable on such enhanced consideration and any tax paid earlier
was a tax paid in advance. In fact, the Court went a step further stating that
the amount paid towards the provisional price fixed by the government is not
the price until finalised by the government for the transaction of sale.
Now under the GST law, tax on supply of
goods / services is payable on the invoice for the supply, i.e. typically on or
before the removal of goods or the provision of service. From the perspective
of supply of goods, the collection of taxes under GST has blended the sales tax
concept (relying on invoice) and the excise concept (relying on removal).
However, there is a clear absence of a condition of ‘right to receive’
the consideration from the recipient while assessing the supply of goods.
One probable reason would be that the
legislature has presumed an invoice as evidence of the supplier completing its
obligation under the contract, resulting in a right to receive the
consideration. The other reason could be that the legislature is fixing its tax
at the earliest point in time (which it is entitled to do), i.e. when the
outward aspect of a contractual obligation takes place and is not really
concerned with the timing of its realisation. Both reach the same conclusion,
that while income tax stresses on ‘right to receive’,
GST latches onto the transaction immediately on ‘completion of obligation to
supply’ and does not await realisation
of consideration to establish taxing rights. In effect, the time of supply for
GST may in many cases be triggered even before the income accrues to the
taxpayer and as a consequence creating a timing difference between both laws.
Therefore, even if prices are tentative, it may be quite possible to tax the
transaction and subsequent fixation of prices of supply of goods or services
would not assist the taxpayer in claiming that the point of tax liability is
the point of fixation of the price.
One caveat would be that in case of services
the law does not have any tangible substance to trace its origin and
completion, and hence as a subordinate test adopts receipt of consideration as
the basis of the supply (of service) having been complete (both in the case of
regular and continuous supply of service). But this is a matter of legislative
convenience of collection rather than a conceptual point for analysis.
DEPRECIATION
COMPONENT ON CAPITAL ASSETS
The GST law prohibits the claim of
Input Tax Credit (ITC) if such component has been capitalised in the written
down value (WDV) of the block of assets under the Income-tax Act [section 16(4)
of CGST]. This is introduced to prohibit persons from availing a dual benefit:
(1) a deduction from taxable profits under income tax; and (2) a deduction from
output taxes. Taxpayers generally opt to avail ITC and refrain from taking
depreciation on such tax components. In case a taxpayer (erroneously or
consciously) avails depreciation on the ITC component of capital goods without
claiming the credit under GST, does the window to relinquish its claim of
depreciation and re-avail ITC continue to remain open?
We can take the case of motor vehicles
which was originally considered as ineligible for ITC becoming eligible for the
same if the taxable person decides to sell the asset during the course of
business. The answer could be a ‘possible’ yes (of course, with some practical
challenges). Section 41(1) of the Income-tax Act permits an assessee to offer
any benefit arising from a previously claimed allowance / deduction as income
in the year of its credit. Through this provision the assessee may be in a
position to reverse the depreciation effect and state that there is no
depreciation claim on the ITC component of the asset. We may recall that the
Supreme Court in Chandrapur Magnet Wires (P) Ltd. vs. CCE 1996 (81) ELT 3
SC had in the context of MODVAT stated that if the assessee reverses a
wrongly-claimed credit, it would be treated as not having availed credit. This
analogy can serve well in this case, too, on the principle of revenue
neutrality. But the contention of revenue neutrality becomes questionable where
there is any change in law, in tax rates, etc.
However, the
reverse scenario, i.e. giving up the ITC claim and availing depreciation, may
not be as smooth. While there may not be an issue under the GST law, the
Income-tax Act follows a strict ‘block of assets method’ and alterations to
such blocks, except through enabling provisions, are not permissible. The block
of assets method only permits alterations to the block in case of acquisition,
sale, destruction, etc. of assets and does not provide for retrospective change
in the actual cost of the asset. The only alternative is to file a revised
return before the close of the assessment year in which the acquisition takes
place by enhancing the actual cost, or file a revised block of assets during
the course of assessment proceedings.
ASSESSMENT VS.
ADJUDICATION OR BOTH
The Privy Council in Badridas
Daga vs. CIT (17 ITR 209) stated that the words ‘assess’ and
‘assessment’ refer to the procedure adopted to compute taxes and ‘assessee’
refers primarily to the person on whom such computation would be performed
(also held in Central Excise vs., National Tobacco Co. of India Ltd. 1972
AIR 2563). While adjudication and assessment are both comprised in the
wider subject to ‘assessment’, the procedure for assessment under income tax is
distinct from the assessment systems under the Excise / GST laws.
Income tax follows the concept of
previous year and assessment year, i.e. incomes which are earned in a financial
year (previous year) are assessed to tax in the immediately succeeding year
(assessment year). Consequently, income tax liability arises at the end of the
previous year and is liable for payment during the assessment year. The
taxpayer is required to compute the net income arising during the previous year
and discharge its liability after the close of the previous year as part the
self-assessment scheme. The unit of assessment is a year comprising of twelve
months. On the other hand, the liability towards GST is fixed the moment the
transaction of supply takes place with the collection being deferred to a later
date through a self-assessment mechanism, i.e. the 20th of the
subsequent calendar month (tax period).
The assessment of income under income
tax takes place in multiple stages. The return filed u/s 139 is examined
through a process popularly called summary assessment, the scope of which involves
examination of mathematical accuracy, apparent errors (such as conflicting or
deficient data in the return), incorrect claims based on external data sources
with Income tax authorities (such as TDS, TCS, Annual Information Reports,
etc.) [section 143(1)]. Based on a Computer-Aided Selection System, a return
may be selected for detailed scrutiny assessment on the legal and factual
aspects involving information gathering, examination, application and final
conclusion through an assessment order [sections 143(2) and (3)]. One
assessment year is subjected to a single scrutiny assessment. Once this takes
place, such an assessment cannot be altered other than by a re-assessment. The
re-assessment provisions u/s 147 provide for assessment of escaped income (either
arising after self-assessment or scrutiny assessment) which can be initiated
within a stipulated time frame in cases of escaped incomes. Income tax has
defined time limits for initiation and completion of such scrutiny and
re-assessments.
The Excise and service tax laws follow
a system of adjudication rather than a scheme of assessment. This probably is
on account of the physical administration system adopted by Excise authorities
during the 1900s. The Excise law has bifurcated the administrative function
into two stages, (a) audit / verification function (information collation), and
(b) adjudication function (legal application). These functions are not
necessarily performed by the same authority. The audit function was not
codified in law but guided by administrative instructions. It involved
site-cum-desk activity wherein the authorities performed the information
collection and issued an exception-based report on the identified issues. After
this, the adjudicating authority prepares a tax proposal, referred to as a show
cause notice, giving its interpretation over a subject with the evidence
collected for this purpose. The adjudicating authority would complete the
adjudication after due opportunities and confirm / drop the proposal by
issuance of an adjudication order. The Excise law provided for time limits on
issuance of the show cause notice but did not provide an outer limit to its
completion.
The critical difference between the two
systems can be examined from these parameters:
(1) Source
and scope – Scrutiny assessments are currently selected through a computer-aided
selection process. Though administrative instructions limited the assessments
to identified issues, the officer had the liberty to expand the scope in cases
where under-reporting of taxes is identified. The statute does not limit the
scope of the scrutiny proceedings. Adjudication commences after internal audit
/ verification / inspection reports but not through any random sampling
methodology. The scope of the adjudication is clearly defined and the entire
proceeding only hovers around the issue which is defined in the notice.
(2) Methodology – Income tax
assessments involve both fact-finding and legal application. The onus is on the
officer to seek the facts required and arrive at a legal conclusion, but the
stress is initially on the facts of the case. The diameter of an ideal
adjudication process is driven by application of law and the presumption is
that the adjudicating officer has concluded the fact-finding exercise thoroughly;
however, in practice any deficiency in facts can be made good by seeking an
internal verification report or submission from the taxpayer. In adjudication,
the fact-finding authority and the decision-making authority may not
necessarily be the same, unlike in income tax assessments.
(3) Adversarial
character – Adjudication is slightly adversarial in nature, in the sense that the
notice commences with a proposal of tax demand leaving the taxpayer to provide
all the legal and factual contentions against the proposal. Revenue and
taxpayers are considered as opposing parties to the issue identified.
Assessments do not acquire an adversarial character until the Revenue officer
reaches a conclusion that there is under-payment of taxes.
(4) Multiplicity
and parallel proceedings – Scrutiny proceedings are undertaken only once for a particular
assessment year. Multiple scrutiny proceedings are not permissible for the same
assessment year even on matters escaping attention during the scrutiny
proceedings. Multiple adjudications by different authorities (in ranking /
function) are permissible for a particular tax period, though the issues may
not necessarily overlap with each other. As regards periodicity, there would be
one income tax assessment in force for a particular assessment year but there
can be multiple adjudication orders in force for the tax period. The period
under adjudication is not limited by tax periods or financial years, except for
the overall time limit of adjudication.
(5) Revenue’s
remedy – In income tax, Revenue does not have the right to appeal against the
assessment order of the A.O. Where orders are ‘erroneous’, the Commissioner can
exercise his revisionary powers. Adjudications being adversarial in nature are
orders against which both the taxpayer and the Revenue have the right of
appeal. Revision proceedings are limited in scope in comparison to appellate
proceedings where Revenue is under appeal – for example, revision proceedings
cannot be initiated where the A.O. adopts one of the two possible views (order
would not be erroneous) but the appellate proceedings would be permissible even
in cases where the Commissioner differs from the view adopted by the
subordinate. At the first appellate forum, the Commissioner of Income Tax (Appeals)
[CIT(A)] is permitted to wear the A.O.’s hat and enhance the assessment during
the course of the proceedings. Under Excise, the Commissioner of Central Excise
(Appeals) [CCE(A)] proposing enhancement of tax would have to necessarily
operate as an adjudicating officer assuming original jurisdiction and following
the time limits and restrictions as applicable to the original adjudication
proceedings – for example, the CIT(A) can enhance the assessment of an order
under appeal even if the time limit for assessment has expired, but a CCE(A)
would not be permitted to issue a show cause notice for enhancement after the
time permissible to issue a show cause notice.
(6) Demands
and refunds – Income tax assessments could result in a positive demand or a refund
to the taxpayer. The net result of the computation of income would have to be
acted upon by the A.O. without any further proceeding. Excise adjudications,
being issue-specific, can only result in tax demand or dropping of the
proceedings – but cannot result in refunds. The taxpayer is required to
initiate the refund process through independent proceedings. Consequently,
excess tax paid in respect of capital gains income can be adjusted with short
tax paid on business income. On the other hand, excess tax paid on a
manufactured product cannot be adjusted with short tax paid on any other
product – both these aspects are to be independently adjudicated and the
process of adjustment can only take place through a specific right of
adjustment under recovery procedures.
(7) Time
limits – Income tax has defined the time limits for initiation and completion
of proceedings, including re-assessment, etc. Excise laws are not time-bound on
the completion of the adjudication, though Courts have directed that the validity
of a notice can be questioned where there is unreasonable delay in completion
of the adjudication.
(8) Finality – Assessment orders
under income tax are final for the assessment year under consideration and no
issue for that assessment year can be re-opened or revised except by statutory
provisions under law. Adjudication orders are final only with respect to the
issue under consideration and Excise authorities are permitted to adjudicate other
issues within the statutory time limit. Therefore, multiple adjudication orders
for one tax period are permissible under the Excise law.
(9) Effect
orders – Appellate proceedings are with reference to specific issues and on
the completion of such proceedings the income tax authority is required to
modify the assessment order after taking into consideration the conclusion over
the disputed matter. An adjudication proceeding is itself issue-driven and
hence the appellate orders generally do not require any further implementation
by the adjudication officer unless directed by the appellate authority.
The GST law has adopted a hybrid system
of adjudication and assessment – adjudication seems to be inherited largely
from the Excise law and the assessment scheme has been borrowed from the Sales
Tax law. While sections 59-66 represent the assessment function, section 73/74
performs the adjudication over the issues gathered through assessment activity.
The consequence of having this dual functionality would be:
(a) All
assessments resulting in demand of taxes would necessarily have to culminate in
adjudication without which the demand would not be enforceable under law, even
though it may be liable. Where the assessment results in a refund of taxes, the
Revenue may not proceed further and would leave it to the assessee to claim a
refund under separate provisions, i.e. section 54. This is quite unlike in
income tax where refunds computed under the Act are necessarily required to be
paid and need not be sought by the assessee through a refund application.
(b) Under
sales tax, self-assessment was considered as a deemed assessment in the sense
that the return filed was considered as accepted unless reopened by Revenue
authorities. The assessment order modifies the self-assessment (i.e. return)
and no further adjudication is required to complete the assessment. GST also
treats the return filed as a self-assessment of income. In some cases where
assessments are to be made (best judgement assessment, scrutiny assessment,
etc.), the assessments are interim until final adjudication of the demand
arising therefrom. Though adjudication necessarily succeeds assessments (to
enforce demands), assessment need not necessarily precede adjudication.
(c) Revenue
authorities now have appellate and revision remedies for assessing escaped
taxes. Appellate rights have been granted to both the assessee and to Revenue
against the orders passed under sections 73 / 74 and revision rights have been
granted to the Commissioner to revise the said adjudication order (sections 107
and 108). In effect, Revenue has the option to either appeal or revise the
adjudication order (though in limited cases). This seems to be a concern given
the fact that adjudicating officers are expected to be independent authorities.
With multiple review powers by senior administrative offices on a suo motu
basis, any possibility of reopening of adjudication orders may impair the
quality and fairness of adjudication.
(d) GST
has for the first time introduced an overall time limit for completion of
adjudication and, in effect, capped the time limit for its commencement (three
months from the statutory time limit of completion). This is unlike the Excise
law where time limits of adjudication proceedings are not capped. The enactment
has also rectified an anomaly in the income tax law by stating that notices for
adjudication should be issued at least three months prior to the expiry of the
time limit for adjudication.
To sum up, the GST law seems to have a
blend of both, resulting in wide latitude of powers to the tax authorities and
one should tread cautiously while representing before the tax authorities by
ensuring robust documentation.
UNEXPLAINED
CREDITS – UNACCOUNTED SALES / CLANDESTINE REMOVALS
Income tax contains specific provisions
deeming unexplained credits / moneys or expenditure (assets or income which
cannot be identified to a source). In income tax the said credits are deemed as
income and aggregated to the total income without the need to examine the head
under which they are taxable. Unlike income tax where tax is imposed on a
single figure, i.e. the total income of the assessee for the assessment year,
GST is applicable on individual transactions and identification of the
transaction is of critical importance.
In the recent past there have been
circumstances where inspection proceedings have resulted in detection of
unaccounted assets (such as cash). The practice of the Revenue has been to
allege that unaccounted assets are an outcome of the supply of particular
product / service and liable to tax under GST. This is being done even in the
absence of a parallel provision under GST to deem unaccounted assets as a
supply from a taxable activity. This approach suffers some deficiencies on
account of various reasons: (a) deeming fiction over incomes cannot be directly
attributable to a taxable supply; (b) the levy is dependent on certain factors
such as exemptions, classification, rates, etc. and such facts cannot be left
to best judgement; (c) a defendant cannot be asked to prove the negative (i.e.
prove that he / she has NOT generated the asset from a supply); (d)
presumptions of the existence of a transaction cannot be made without having
reasonable evidence on time, value and place of supply. The provisions of best
judgement u/s 62, too, do not provide wide latitude in powers and are
restricted to cases of non-filers of returns. In the absence of a document
trail or factual evidence, it would be inappropriate for the Revenue to allege
suppression of turnover and impose GST on such deemed incomes under income tax.
In the context of Excise, demands based
on income tax reports have all along been struck down on the ground that such
reports are merely presumptions and cannot by themselves substitute evidence of
manufacture and removal. In Commissioner vs. Patran Pipes (P) Ltd. – 2013
(290) ELT A88 (P&H) it was held that cash seized by income tax
authorities cannot form cogent evidence showing manufacture and clandestine
removal of such goods. The larger Bench in SRJ Peety Steel Pvt. Ltd. vs.
CCE 2015 (327) E.L.T. 737 (Tri.–Mum.) held that the charge of
clandestine removal cannot sustain merely on electricity calculations. In
service tax, too, in CCE vs. Bindra Tent Service (17) S.T.R. 470 (Tri .-
Del.) and CCE vs. Mayfair Resorts (22) S.T.R. 263 (P & H)
2010 it was held by the Courts that surrender of income before income
tax authorities would not be considered as an admission under the Service Tax
law. These precedents are likely to apply to the GST enactment as well, and
unless thorough investigation of these unexplained incomes is performed, tax
liability cannot be affixed to unexplained credits.
TAX AVOIDANCE
PROVISION SECTION 271AAD OF INCOME TAX ACT
By the recent Finance Act, 2020 the
Central Government has introduced a specific penal provision in the Income-tax
Act in terms of section 271AAD. The said section has been introduced to address
the racket of fake invoices – the income tax law has been empowered to impose a
penalty to the extent of the ‘value’ of the fake invoice. The
section is applicable (a) where there is a false entry in the books generally
represented through a fake input invoice (being a case where the supplier is a
bogus dealer, there is no supply of goods / services at all, invoice is fake /
forged); or (b) where a person has participated in such falsification – such as
supplier, agent, etc.
The GST law also contains provisions
u/s 122 to impose a penalty on the supplier to the extent of tax evaded in case
of bogus supplies. A recipient of such supplies is also liable for penalty to
the same extent. Therefore, apart from the basic payment of tax and interest, a
recipient and / or supplier would be liable to an aggregate penalty under both
laws which would exceed the value of the fake invoice, including the GST
component. This is apart from other penalties and consequences of prosecution
and de-registration. The presence of such stringent provisions would pave the
way to both income tax and GST authorities to jointly clean up the system of
this menace and share such information with each other for effective
enforcement. This provision is another step in integration of income tax and
GST laws.
The above instances (which are selected as examples) clearly convey the
need for industry to view any transaction from both perspectives at a
conceptual and reporting level. With the advent of GST, additional
responsibilities would be placed on taxpayers to provide suitable
reconciliation between GST and income tax laws. GST authorities would be
interested in identifying those incomes that were not offered to tax and income
tax authorities would be interested in identifying those supplies which have
not been reported as income. The taxpayer has to survive this tussle and stamp
his claim to the respective authorities.
