Category: GST Special Articles -

Background

The total indirect tax revenue in 2016-17 was Rs.17 lakh
crore. It has been guesstimated that about 30% of traders, small manufacturers
and service providers who are liable to be registered and pay duty/ tax have
not registered in the past. They were part of the “grey/ parallel economy”.
There is a business of fake bills without sale or service provision presently.
This sector is expected to close down substantially due to the matching concept
under which GST needs to be paid for credit to be available. Some part of this
segment may be forced to join the mainstream tax payers over a period. Some
sectors who still have the highest rate of 28% with or without additional
cesses could try and keep the entire transaction outside the recording and may
risk the seizure of their goods and demands.   

The total number of registered assessees in about 6 months of
its implementation is expected to cross 1 Crore!!. This could be the result of
demonetisation as well as withdrawal of exemption and broad basing objective of
GST. The need for the receiver of the services to pay under reverse charge for
all unregistered supplies including raising of invoice, classification, payment
may lead to all businesses to avoid any unregistered supplies whether for goods
or services. Dealers and Service providers who do not wish to stop their services
to the trade, industry or businesses would now voluntarily register to ensure
clients do not have to comply on their behalf. This maybe even if they are
eligible for the exemption upto Rs. 20 lakh.

The CA Advantage

The knowledge of accounts, costing, direct/ indirect tax
laws, company Law and commercial laws makes a CA’s quite complete from legal/
tax side. This coupled with the experience from understanding businesses
through conduct or audit, providing opinions, preparation/ certifying of financial
statements, representing before many financial and tax authorities provides a
CA with a deep understanding of business.

The total number of CAs who have attended at least a 20 hour
GST awareness as on date who are in industry and practice maybe around
1,00,000. As on date around 5000 CAs are learning every week in seminars,
workshops, certificate courses conducted by the ICAI, study circles, BCAS and
other associations across the country.

The non-qualified consultants who outnumber us today
operating in indirect tax area may find that the scope of being an intermediary
between the client and the officers is restricted. Those in advisory who have
learnt GST well and have some accounting knowledge may continue to support
clients in the GST regime. They would of course need to take the services of
CAs for the mandatory audit which would be started to be conducted post May
2018. 

The CAs already practicing in VAT, Service Tax and Excise /
Customs would find it easier to understand the GST which is a mixed bag of all
these laws. In the present GST Act and Rules 2017, we observe that most of the
provisions have been borrowed from VAT and to some extent service tax and
excise. The GST law was supposed to be simple and clear, but as it stands today
is very cumbersome and it may not be possible for SMEs to comply without
professional assistance. 

The total number of CAs (delegates) who have attended various
type of GST related CPE awareness / training sessions as on date is in excess
of 1,20,000 with 6,000 additionally being trained every week either through the
indirect tax committee initiatives or the various regional councils, branches
and associations. Even if some have gone for multiple programs, the minimum
number of CAs who are aware maybe in excess of 50,000.

Therefore, in the view of the paper writer, the CA would be
the first option for all enterprises of turnover above Rs. 2 crore. If they are
unable to accept, only then other professionals would be considered as an
option.

Opportunity for Image Makeover

It is indeed sad but true that a small proportion of CAs are
able to create a negative perception of the profession at large. However, the
fact that in many wrongdoings by trade/industry, the CAs are being implicated/
targeted indicates that the view of the public/ media needs to be reversed. The
common perception of the “black sheep” of our profession is normally not
discussed, much less penned. The paper writer has attempted to list a few areas
where we could improve and avoid such allegations:  

1.  Do not suggest/ manipulate the accounts.
Always give accurate certificates based on evidence (copies to be in working
papers) especially on the claim of credit on stocks, credit admissibility etc.
This would compel the tax authorities do place weight on all certificates
issued by us.

2.  To avoid assisting / helping clients in tax
evasion. It maybe far better to provide a true picture to client and stress on
the advantages of compliance. The “trust” factor which is very important to be
enhanced in the GST regime.

3.  When he gives opinions especially on issues of
continuation of business rates and credit, see that there is a clear
communication of what the client wishes in writing. If not there, communicate
what is expected from us to client and then do a professional job clearly
stating the assumptions if any and not trying to reduce the tax impact. This
would build respect of the client over time as well as the GST officers.  

4.  CAs can and need to be more communicative. We
also most times have not been trained in drafting. Complete communication,
clear case law reference, differentiating the adverse judgment, attaching
expert opinions/ books (especially in classification) and concluding logically
could stand us in good stead.  

5.  CAs would do well to escalate to higher level
officers when lower level are not helpful to resolve issues of the clients.
This should always be done in writing. The results of this practice has been
found to be favourable in the present regime and in GST would be far more
successful.

6.  We can improve in many more areas including
professionalism in dealing with the client viz., keeping commitment for
delivery of requisite quality in time, keeping the service motive etc.

These negative perceptions over time are to be overcome with
honest, ethical work, demonstrated over and over. The law is moving towards
transparency and the days of the intermediaries seem to be getting over. When
the VAT law came, the pure intermediary population came down by about 30% from
2005 onwards.   

Humongous Opportunity under
GST

The distinction can be made between the pre / post GST period
openings / service streams.

Role – Pre-GST period

This is a one-time opportunity focused on GST preparedness of
clients. Specific contribution by the professional could be:

a.  Assist in classification and arriving at the
rates applicable using the Harmonised System of Nomenclature (HSN) as well as
the interpretative rules set out in the notification. Similarly, carefully
advising on availability of any exemption based on the notification ensuring
that the conditions if any are complied;

b.  Analyse the industry impact considering the
global and Indian situation of the product / service. This study may also have
to include the major vendors and customers;

c.  In case of unintended hardship to some
sectors- representation to the drafter would be in order as the level of
listening presently is very high. This could be done upto a period of 6 months after
the implementation date;

d.  For the walk in clients who have not done an
impact study, the clarity on the major impact on the client under GST due to
indepth understanding of the business could be a value add;

e.  CA could be part of the core team of client
for transiting into GST smoothly without business disruption and safeguarding
of the margins as a knowledge advisor;

f.   Understanding legacy tax systems at client
workplaces so as to provide appropriate advise on migrating to better systems/
ERP or suggest modification to make the existing systems GST compliant;

g.  Assisting in preparation of a strategic plan
for procurement and marketing systems of clients needed under GST. For example,
supporting in decisions on: Closure/ reduction in godowns and branches; direct
sale through e-commerce; evaluation of the working with C&F agents; in
house/ outsourcing the distribution function to logistic companies; sourcing
inputs at lowest cost within shorter time; linking to the ERP of the customer etc.;

h.  Suggesting the changes in accounting software
and internal control systems to suit GST. Test and confirm the robustness;

i.   GST awareness at initial stages and training
for management, staff, customers, vendors of clients on ongoing basis
especially the operational team consisting of the marketing and purchase;

j.   Vetting and suggestion to modify agreements/
contracts/ major purchase orders overlapping or supplies to be made in GST
regime;

k.  Ensuring that the credits in the past are
examined for their eligibility and those missed are availed. The reconciliation
of the credit as per books to the returns before GST is implemented can be a
value added activity. This would include validating the last return. The time
window for this is limited to a couple of months after implementation;

l.   The verification to ensure that the credits
carried forward are eligible and complete. The deduction for the unreconciled
forms as provided is made and if negative, the decision not to claim the carry
forward; 

m. Ensuring that the claim of credit on stock in
hand is maximised by ensuring purchasing with excise duty paying documents as
well as proper stock recording especially with job workers and agents and
ensuring well thought of stocking policy;.

n.  Reviewing the various business transactions to
examine whether closing out the transaction in the pre GST or post GST period
is advantageous;

0.  The students of CA- the future CAs and staff
in the CA office would also require to be taught the new law to enable them
also to actually do the verification. Review and audit in GST and confirm that
the transition mistakes are not material;

o.  Many CAs have specialisation in information
technology and some even hand on consulting skills in ERP environment. These
skills could ensure that the client would get his IT integrated and able to
comply with the complex needs of GST compliance.

Role – Post-GST

The implementation of GST would bring many challenges for
trade / industry and for us, opportunities to serve:

i.   In the initial stages of GST implementation,
there would be many doubts which are not covered in the new law. There may also
be gaps in knowledge of GST at various levels in the organisation. These are
likely to unintendedly result in denial of registration, interruption to do
business, loss of eligible credit, old law risks and exposures carried forward,
inadvertent non-compliance in GST. There would a period of uncertainty and need
for someone to confirm the myriad issues arising. The internet (Google) at such
times may not be effective as too much of inaccurate/ incorrect suggestions in
the initial stages are expected. The proactive professional handholding and
quick response may not only ensure continuation of the clients’ business, but
enable them to take advantage of the changes in the business structures;

ii.  Regular online documented service to the
functional head of clients’ business;

iii.  Assisting in the filing of the 1^st
return, claim of tax credit on stocks in hand accurately;

iv. Review the compliances in transition. It maybe
noted that the disputes in GST would come normally after 3-4 years and at that
time, rectifying past errors would well nigh not be possible;

v.  A one time comprehensive review after 3 months
of implementation to ensure GST compliance;

vi. Regular review and reconciliation on credit
matching and recovering credits lost from the vendors in case of payment made
on gross would also be required;

vii. Once GST stabilises over a year or so, the
focus would be more on compliance which means a regular internal audit of GST;

viii.  The GST audit by CAs in the year 2018 would be
a watershed year for the profession to demonstrate that we as CAs are competent
and knowledgeable; Also to assure the revenue department that there is no need
of invasive investigation or audit by tax officers;

ix. Routine tax assignments for payment and filing
of returns would see a spike at least in the initial stages of uncertainty;

x.  It is true that if one can avoid a dispute in
tax it is better. Therefore, a preventive exercise of early correction/
disclosure could avoid or mitigating the disputes allowing clients to
concentrate on their core activities;

xi. In case of dispute, look at the possibility of
passing on the impact where credit is available as an option. If not possible,
then support in making replies based on fact as well as legal principles.

xii. Support in resolving disputes where it cannot
be mitigated due to interpretation differences or due to demand raised by
revenue.

Conclusion

This new levy is bound to come up with many obvious
challenges due to the law being in the process of being drafted. It is expected
that the rough edges of the law would be ironed out in the period of 6 month to
a year post implementation of GST. This was our experience in Company Law in
the past few years. 

The extent of making use of the opportunities would largely
depend on understanding the law and preparedness for what is not covered in the
law. In the words of Abraham Lincoln – “Give me six hours to chop down a
tree and I will spend the first four sharpening the axe”.

Preamble

The most talked about change in the indirect tax laws i.e.
Goods & Services Tax (“GST”) is expected to be effective from 1^st
July 2017. We, chartered accountants, being service providers are also covered
under the ambit of GST. Currently, we are liable for payment of service tax
under the provisions of the Finance Act, 1994 (“Service Tax legislation”). This
legislation will be subsumed under the GST. 
We will be governed by the provisions of the GST Acts.

An effort has been made in this article to highlight
important provisions that would be applicable to practising chartered
accountants, its impact and the challenges we might face as GST assessees.

Migration

All practising chartered accountants registered under the
Service Tax legislation are required to compulsorily get themselves migrated to
GST. [Section 22(2) of Central Goods and Services Tax Act (CGST Act)] If they
do not expect the value of their aggregate turnover during the financial year
2017-18 to exceed Rs. 20 lakh (or Rs. 10 lakh in special category states), they
can surrender their GST registration [Rule 17(4) of Registration Rules].  Aggregate turnover includes exempt supplies
and zero rated supplies also. Usually, for a practising chartered accountant
most of his services would be taxable only. However, export of services,
services provided to SEZ units and also to SEZ developers will have to be
included while computing aggregate turnover even though they are zero rated
supplies.

Registration

Under Service Tax legislation, a practising chartered
accountant has the option of not getting himself registered if his aggregate
taxable turnover in a financial year does not cross Rs. 10 lakh.  If the aggregate turnover on pan India basis
exceeds Rs. 20 lakh (Rs. 10 lakh for special category states), one has to get
himself registered under GST. The aggregate turnover would include all taxable
supplies as well as exempt and zero rated supplies also. All chartered
accountants registered under the Service Tax legislation and having turnover
between Rs.10 lakh and Rs. 20 lakh (not from the special category states), have
the option of not getting themselves registered under the GST Laws. This may
save them from the hassles of the compliances under the GST Laws. However,
negative fallout would be that they would lose credit of all the GST paid on
their inputs, capital goods and input services. It would be a cost to them.

The chartered accountant making any inter-state supply has to
get himself registered irrespective of his turnover [Section 24(i) of CGST
Act]. Similarly, if the chartered accountant is liable to pay tax under reverse
charge, then also he has to get himself registered irrespective of his turnover
[Section 24(iii) of CGST Act].

The Certificate of Registration is required to be displayed
in a prominent location at all places of business. [Rule 11 of the Registration
Rules]

Branches

In service tax, service provider was having the option to go
either for centralised registration or standalone registration for its branch
offices. Unlike Service Tax legislation, there is no concept of centralised
registration under GST. A chartered accountant having offices in more than one
state will have to obtain separate registration under the GST Laws for offices
in each state.

Further when any service is provided by one branch to another
branch without any consideration, the same will be treated as a supply liable
to GST and invoice for the same will have to be raised. [Entry 2 Schedule I
read with section 7(1)(c) of the Central Goods & Services Act]. This was
not a case in service tax as self-service was not liable to service tax.

Place of Supply

This is one of the most important provisions of the GST Laws.
This determines the tax to be charged i.e. Central GST & State GST or
Integrated GST. The Service Tax legislation was a central law and a single tax
was charged irrespective of the Place of Supply of such services.

GST is a dual tax and hence a chartered accountant needs to
find out place of supply and raise invoice accordingly on client. Section 12(2)
of IGST Act determines the place of supply of services by a chartered
accountant where the location of the chartered accountant and the location of
the recipient of services are both in India. Place of supply in such case will
be the location of the service recipient where the address on record exists
otherwise the location of the supplier of services will be the place of supply.
Mostly in all cases, the address of the client (the service recipient) as well
as his GST number will be available with the chartered accountant. Hence such
address would be the place of supply.

The location of supplier (in the given case a chartered
accountancy firm) is a crucial factor for determining whether the provision of
service is intra-state supply or inter-state supply. It will be a challenge to
determine the location of the supplier in case of multi locational firm having
presence in various states providing services to same client from different
locations. 

Services Accounting Code

All invoices raised need to mention the Services Accounting
Code (SAC). This was not a requirement under the Service Tax legislation and
also there was only one category of service i.e. Chartered Accountancy
Services. At the time of making the invoice, one will have to keep in mind the
nature of services provided and its corresponding service classification. The
most common classification of services which would cover the regular services
provided by practising chartered accountants is listed hereunder:

Sr. No.	Service Code	Service Description
1.	997156	Financial Consultancy Services
2.	998221	Financial Auditing Services
3.	998222	Accounting and Bookkeeping Services
4.	998231	Corporate Tax Consulting and Preparation Services
5.	998232	Individual Tax Preparation and Planning services

GSTIN of Clients

One of the mandatory requirements for preparing an invoice
under the GST Laws is that if the service recipient is registered, the invoice
has to contain his GST registration number i.e. GSTIN. All chartered
accountants need to collect their clients’ GSTIN. It should be readily
available in their database and they need to ensure that the same is printed on
the invoice issued to client.

Issue of Invoice

Section 31(2) of the CGST Act read with Rule 2 of GST Invoice
Rules makes it mandatory for service provider (including Chartered Accountants)
to issue invoice within 30 days from the date of supply of service. In case of
statutory audit, the chartered accountant will have to raise invoice within 30
days of attesting financial statements. For other services, one may determine
the date of supply of services on the basis of contractual arrangement with the
client.

Invoices are required to be prepared in duplicate the
original copy being marked “Original for Recipient” and the duplicate copy
being marked “Duplicate for Supplier” [Rule 3(2) of the Tax Invoice, Credit
& Debit Note Rules].

For all advances received, a Receipt Voucher will have to be
issued containing the prescribed particulars [Section 31(3)(d) of the CGST
Act].

Time of Supply of Service

Under the service tax provisions, the chartered accountant
had the option of paying tax on receipt basis where the value of taxable
services provided in a financial year was less than Rs. 50 lakh. Most of the
chartered accountants maintain their books of account on cash method. It was
very convenient for them to compute their tax liability on cash basis of
accounting. However, under the GST there is no such option. Everyone has to
discharge their tax liability as per the time of supply which is earlier of
date of invoice or date of receipt of payment or the date of provision of
service, where the invoice is not raised within 30 days of provision of
service. This would now involve regular reconciliation and may require
maintaining additional set of records.

Applicability of Reverse Charge

Any taxable goods or services procured by a registered person
from an unregistered supplier, the registered person procuring such supply will
have to pay tax under reverse charge [Section 9(4) of the CGST Act]. A
practising chartered accountant would be incurring many expenses such as
purchase of stationery, tea & snacks for office staff, repairs &
maintenance, etc. which are mostly supplied by unregistered persons.
Registered chartered accountants will have to pay tax under reverse charge on
all such procurements and also generate an invoice and a payment voucher
[Section 31(3)(f) of the CGST Act] for the same. However, vide Notification No.
8/2017 dated 28^th June, 2017, the Government has exempted intra
state supplies of goods or services received from an unregistered supplier from
the applicability of the provisions of reverse charge where the aggregate of
such supplies from any or all the suppliers do not exceed Rs. 5,000/- in a day.
This would bring a major relief to all the tax payers. In addition to this,
section 9(3) of CGST Act prescribes for payment of tax under RCM on notified
services even if it is procured from registered vendor.

Relevant Transitional Provisions

Section 142(11)(b) of CGST Act provides that GST is not
payable on those services where service tax was leviable under the Finance Act,
1994. In other words, GST will not be payable on advances received or invoices
raised before the effective date.

What happens in case where chartered accountant (liable to
discharge service tax liability on realisation basis) has provided services and
issued the invoice in pre GST regime and realises the consideration in post GST
regime? It seems such chartered accountant will be liable to pay service tax
and not GST on such consideration as the point of taxation in respect of such
services has already arisen in pre-GST regime.

Section 140(1) of the CGST Act entitles a registered person
(chartered accountant) to carry forward the Cenvat credit balance reflected in
the service tax return filed for the period immediately preceding the effective
date of GST.  He has to file form GST
TRAN-1 within 90 days of the appointed day specifying the amount of Cenvat
credit to be carried forward [Rule 1(1) of Transitional Rules].

Valuation

Section 15 of the CGST Act provides that the value of supply
shall be the transaction value which shall include all incidental expenses
charged by the service provider to the service recipient. Hence, all
reimbursement of expenses (other than incurred as pure agent) will be liable to
GST. Moreover, any expenses which the supplier is liable to pay in relation to
such supply but which is paid by the recipient will have to be included in
value of supply. Even interest or late fees received by chartered accountants
for delayed payment will also be liable to GST.

GST Rate

There is no specific entry for the services provided by
chartered accountants in the schedule of GST Rates released by the GST Council.
It falls in the residual entry No. 36 wherein the rate of GST is 18 %. So all
services provided by practising chartered accountants will be liable to GST @
18 %. If the supply is intra-state, then 9 % CGST and 9% SGST will have to be
charged and if the supply is inter-state, then 18% IGST.

Input Tax Credit

Under the Service Tax legislation, a service provider was
entitled to credit of service tax paid on input services and also excise duty
paid on inputs and capital goods. He was not entitled to credit of VAT paid on
inputs and capital goods. It was a cost to the service provider.

Under the GST, a registered chartered accountant will be
entitled to input tax credit of both i.e. GST paid on goods as well as
services. To this extent, there would be a reduction in the cost.

However, the credit would be available only if the goods and
services are received; invoice for the same is received and contains the
recipient’s GSTIN and the supplier has paid the applicable GST on the same and
also filed his GST return. Unless all the above is not done input tax credit
would not be available [Section 16(2) of the CGST Act].

Where payment to the vendor is not made within 180 days from
the date of issue of the invoice, the corresponding input tax credit will have
to be reversed. The same shall be available on making payment for the same
[Section 16(2) of the CGST Act]. Under the Service Tax legislation, this period
is 3 months.

Section 16(4) of the CGST Act provides for the time limit to
avail input tax credit. It can be claimed on the basis of invoice or tax paid
document before earlier of:

–   Due date of filing of return for the month of
September following the end of the financial year to which such invoice or tax
paid document pertains; or

–   Date of filing of annual return .

Tax deducted at Source

GST law provides for
deducting tax at source from the payment made to vendor by persons or such
category of persons as notified by government where total value of such supply
under a contract exceeds Rs. 2,50,000. Rate of TDS is 2% [1% CGST and 1% SGST
or 2% IGST].

There are chances that chartered accountant firms having
turnover above a certain limit might be covered under TDS. If covered, the
chartered accountancy firm will be obliged to deduct TDS on payments made to
its vendors, issue TDS certificate and file TDS returns [Section 51(1) of the
CGST Act].

The Chartered Accountancy firm would also be tax deductee.
This will add to the administrative burden of reconciling GST TDS and the
revenue declared in the GST returns.

Return Filings and Tax Payments

Currently, service tax is required to be paid on quarterly
basis and the returns are required to be filed every half year. Under the GST Laws, the payment of tax has to be made on monthly
basis on or before 20^th of succeeding month.

All registered persons need to file returns as under:

Type of statement	Due Date
Details of outward supplies	10th of succeeding month
Details of inward supplies	15th of succeeding month
Monthly Return	20th of succeeding month
TDS Return	10th of succeeding month
Annual return	31st December following the end of the financial year

This will increase the compliance burden substantially.

Similar to Service Tax provisions, Nil returns are also
required to be filed under the GST Laws [Section 39(8) of the CGST Act].

Under the Service Tax regime, only the consolidated value of
services rendered in a quarter was required to be filed. In the GST returns,
details of each individual invoices (unless issued in favour of an unregistered
person) has to be uploaded. This again will increase compliance.

Any Return filed without payment of self-assessed tax, will
be treated as an invalid return. Returns for any tax period will not be allowed
to be furnished, if the return for any of the previous tax period has not been
filed [Section 39(10) of the CGST Act].

Audit

There is no provision under service tax legislation for
compulsory audit of accounts by a chartered accountant or a cost
accountant.  However, under the GST
regime, all assessees having turnover exceeding Rs. 200 lakh will be required
to get their accounts audited by a chartered accountant or a cost accountant
[Section 35(5) of the CGST Act read with Rule 21(3) of the Returns Rules].

Electronic Back-Up of Records

Proper electronic back-up of records will have to be
maintained so that in the event of destruction of such records due to accident
or natural causes, the information can be restored within a reasonable period
of time [Rule 2 of Accounts & Records Rules].

Conclusion

Accounting for GST is yet
another challenge the businesses will have to accept so as to be ready for
compliance in GST Regime.

The present article is
divided into various segments to understand the impact of GST on the accounting
aspects of businesses. Provisions under GST Acts require maintenance of
records, uploading information and/or periodic reporting and producing the same
on demand.

Chapter VIII of the CGST
Act contains provisions in respect of maintenance of accounting records. The
draft Rules also provides for certain additional compliances and maintenance of
documents.

Basic records by all
registered persons

In view of section 35(1),
every registered person shall maintain books of accounts and other records
relating to each place of business at the respective place of businesses. This
section requires maintenance of a true and correct account of the following
records:

a.  Production
or manufacture of goods

b.  Inward
and outward supply of goods or services or both

c.  stock of
goods

d.  Input tax
credit availed

e.  Output
tax payable and paid and

f.   Such
other particulars as may be prescribed.

Registered person may keep
and maintain accounts and other particulars in electronic form.

Warehouse keeper/
transporter

The owner or operator of
warehouse or godown, used for storage of goods, and the transporter is also
required to maintain records of the container, consignee and other relevant
details of goods.

Section 35(6) provides
that if the records are not maintained properly or the amount of tax payable on
goods or services are not accounted for then the Proper Officer will determine
the amount of tax payable on the goods or services as if the said goods or
services were supplied as such by the person.

Additional requirements

The draft rules in respect
of accounts and records also require the registered person to keep account and
other relevant documents including invoices, bills of supply, delivery challan,
Credit and Debit notes, receipt vouchers, payment vouchers, refund vouchers and
E- way bills. Besides this, he has to maintain records in respect of imports
and exports of supplies and the cases where tax is payable on Reverse Charge
Basis.

The rule also requires to
maintain the record separately for each activity including
manufacturing, trading and provision of services. For persons other than those
who have opted for composition scheme u/s. 10, the stock records are also to be
maintained. This includes data/documents in respect of the stock which is lost,
stolen issued as gift or free samples. In case of manufacturer the records of
raw material, finished goods, generation of scrap and wastage should also be
maintained. Under the GST law, besides information and records to be
maintained, as discussed hereinabove, these persons shall be required to
maintain accounts in respect of advances received and adjusted, liability under
the reverse charge mechanism, ITC claimed, name and addresses of vendors and customers,
places where the goods are stored including for transit storage etc. The record
should maintain audit trail in case of records maintained in electronic
format.

Service provider

Service provider should
also maintain records in respect of goods used in rendering of services, input
service utilised and services supplied. In case of a works contractor
the records need to be maintained for each contract separately.

Records to be
retained/preserved

These records including
the records in respect of invoices, bills of supply etc. have to be retained
for a period of 72 months from the due date of furnishing of Annual return for
the year pertaining to such accounts and records. Thus, the records are to be
maintained for a period of six years from the year end plus for the period of
time available for filing annual return that is till the 31^st
December of the subsequent year. Therefore, effectively, records are to be
maintained for six years and nine months from the end of the year.

In case of matters which
are pending in appeal or other proceedings including enforcement actions,
records are to be kept till the matters are settled plus a period of 1 year
from the date of orders in such appeals/other proceedings.

Agent & Principal

Every agent shall also maintain
records; from authorisation received by him from each principal to receive or
supply of goods/ services on behalf of such principal, the particulars of the
value and quantity of goods or services received, value and quantity of Goods
or services supplied, details of accounts furnished and the taxes paid on
receipt or on supply of goods or services on behalf of every principal.

Similarly, carrier of
goods, consignment sales Agent, clearing forwarding agent should also maintain
records in respect of delivery/ dispatch of goods, records in respect of the
goods handled by him on behalf of the registered person.

Owner or operator of godown
or warehouse and transporters

Every owner or operator of
godown or warehouse and a transporter should maintain accounts and submit
details regarding his business electronically on common portal in form GST
ENR -01. On submission of such information, a unique enrolment number
shall be generated and communicated to the said person that is the owner/
operator of godown or a transporter. Such enrolment once granted in one State
or Union Territory would be deemed as registration by such person in all the
States or Union territory. Moreover, the operator of the godown should store
the goods in such a manner that they can be identified item wise and owner wise
and should facilitate physical verification for inspection by the proper
officer on demand.

It is clear from the above
that the GST Act and the Rules provide for elaborate guidelines for
maintenance, retention and production of accounts and records to facilitate
determination of correct liability under the GST law. The other objective is to
maintain records in such manner that it facilitates cross matching of
information when processed on the Common Portal. The data to be uploaded on the
common portal requires transaction wise, HSN/SAC code wise, State wise data to
be uploaded of inward as well as outward supplies. Thus, for maintaining
accounting records a registered person will be required to reorganise its
accounting department, the information technologies software and also
appropriate training to its staff.

In view of the above legal
requirements to maintain accounts and records, the businesses are expected to
re-energise and rearrange its entire system of accounting.

Chart of accounts to be
maintained

Traditionally the accounts
include accounts in respect of excise duty payable, State VAT and CST account
Payable as also accounts in respect of CENVAT available and input tax credit
available. However, in view of the change, the following ‘Charts of Account’
will have to be created and maintained in the accounting system.

Chart of Accounts:

Under GST all these taxes
(excise, VAT, service tax) will get subsumed into one account, and following
new accounts have to be created.

–   Input CGST a/c

–   Output CGST a/c

–   Input SGST a/c

–   Output SGST a/c

–   Input UTGST a/c

–   Output UTGST a/c

–   Input IGST a/c

–   Output IGST a/c

–   Electronic Cash Ledger (to be maintained on
Government GST portal to pay GST)

–   Electronic Credit Ledger (to be maintained on
Government GST portal to pay GST)

–   Electronic Liability Ledger (to be maintained
on Government GST portal to pay GST)

It may be noted all these
records are to be maintained state wise, hence if a person is having
registration under the GST Act, say in five states, the above chart of accounts
need to be multiplied by five times.

Accounts to be maintained
under GST Regime

To summarise, every
registered taxable person shall keep and maintain, at his principal place of
business, a true and correct account of production, inward and outward supply
and such other records as specified under Goods and Services Tax Act.

Accounts / Records	Information required	By whom?
Register of Goods Produced	Account should contain detail of goods manufactured in a factory or production house	Every assessee carrying out manufacturing activity
Purchase/Inward Register	All supplies received during each tax period for manufacturing/sale/supply of goods and/or services	All Assessees
Sales/Outward Register	Account of all the supplies made whether of goods or services during each tax period	All Assessees
Stock Register	This register should contain a correct record of inventory available at any given point of time.	All Assessees
Input Tax Credit Availed	This register should contain the details of Input Tax Credit availed in each tax period	All Assessees
Output Tax Liability	This register should contain the details of GST liability in respect of al taxable supplies with reference to rate of tax	All Assessees
Output Tax Paid	This register should contain the details of amount paid as CGST, SGST and IGST, each tax period wise	All Assessees
Other Records as may be specified	Government can further specify, by way of a notification, additional records and accounts to be maintained	Specific Business as may be notified by the government

Having discussed the basic
records to be maintained and chart of account required, let’s discuss other
challenges, some of them in respect of transition to the GST, in the book
keeping.

Reconciliation statements
to be maintained

A. Reconciliation of financial records
maintained at GSTN portal:

Since the concept of
supply is so wide that practically speaking, everything debited to Profit &
Loss A/c & credited to Profit & Loss A/c barring exceptions like
salaries & wages, interest and depreciation / amortisation of expenses,
etc., are all either inward supply or outward supply. Moreover, despatches to /
from branches, addition and disposal of assets etc are also added to the
aggregate supply. In the circumstances, there would be differences between
financial books of account and the ‘aggregate turnover’ reported in GSTR-1.
Even currently, such reconciliation is required to be made. However, the type of
transactions which will get reflected in the reconciliation statement would
increase substantially. To highlight one,in case of where the Head office
placing order on the vendor asking the vendor to directly despatch the goods to
the branch outside the state, would require generating an additional document
between Head office and the respective branch and treat that transaction as
‘supply’ in view of section 10(1)(b) of the IGST Act. Obviously, the financial
accounting system do not recognise this type of peculiar transaction.
Similarly, the reconciliation exercise should also involve the amount lying in
the tax credit ledger maintained at the Govt portal. Typically, the credit
reversed on account of mismatches, orphaned entry or non-payment to vendor will
get reflected only on the GSTN portal; however, in the financial books these
items will continue as claimable credits. Therefore, reconciliation of these
numerous entries and taking appropriate decisions in each of these cases is
very important.

B. Reconciliation of GSTR with the financial / MIS
reports

The GSTR requires
reporting of the transaction wise and HSN wise and SAC wise information. Thus,
aggregate of the turnover of sales as per particular HSN code – say bulk drug
should tally with the sales reflected of bulk drug in the financial accounts.
The disposal of assets in the financial books and its valuation and/or
taxability under the GST act will be quite different. This may also require
reconciliation.

In view of the above
background certain accounting challenges which requires attention and IT
support are discussed herein below in brief.

Listed below are some of
the transactions or documents that requires cross references, tracking, taking
corrective actions and/ or review at regular intervals. The accounting team and
the persons in the organisation who created those records, will have to get
involved in the process so that these transactions get attended at the
earliest. Help from the accounting software and other MIS reports generated in
this respect will certainly help in the process. Needless to say, allowance of
ITC, credit notes/debit notes, credits for TDS and TCS etc is dependent on the
actions from the vendor/customer of the company. Early resolution of these
entries goes a long way in proper accounting and determination of liability of
payment of taxes, profitability as also drawing of state of affairs on the
Balance Sheet day.

As mentioned herein above,
IT support would facilitate to a great extent in compiling the information
required and its reporting need while filing the GSTR. Some of these challenges
are enumerated/ highlighted hereunder:

1.   Linkages
of debit note/ credit note with original invoices.

2.   Adjustment
of advance received against a supply and tracking of receipt voucher and
payment voucher. Returns requires reference of the transaction no/id to be
mentioned to enable to correlate each of these transactions of adjustments of
‘advances’.

3.   Generation
of electronic way bill and mention thereof on the supply invoice.

4.   Tracking
and monitoring of mismatches / unmatched orphaned entries for claim of ITC.

5.   Monitoring
and verification of ITC reversal.

6.   Statistical
information in respect of number of invoices raised during the period.

7.   Claim of
ITC in case of proportionate allowance on a provisional basis while filing the
returns and the review therefore to carry out adjustments, if any, at the year
end.

8.   Tracking
transactions / information normally not part of the financial books of account
but are required as ‘supply’ to be reported in GSTR-1 e.g. barter and exchange,
free issues do not get captured in the financial records. However, these are
now required to be reported in GSTR-1. Further, valuation of the barter and
exchanges etc. requires framing of company policy in this respect.

9.   Creating
and updating product master and service master with the respective HSN / SAC
codes.

10. Discipline
in maintaining records. Traditional book keeping wherein generally, the rate
difference / quantity difference is in purchase / service inward invoices is
over written on the invoice and recomputed. This practice will have to be given
a good bye and system of issuing debit notes/ credit notes has to be introduced
and followed strictly. Similarly, the overall discipline in accounting,
classifying and reporting HSN and SAC codes will have to adhered to.

11. The IT
software should prompt an alert or determine the ‘place of supply’ [POS] and
‘location of supplier’ [LOS] so that errors in determining intra-state or
inter-state supplies is eliminated / minimised. Similarly, the software should
select the invoice type like ‘tax invoice’ or ‘bill of supply’ in appropriate
cases.

12. The
delivery challan should have cross reference of invoice number. Even in case of
stock transfer advices attracting IGST, similar references of tax invoice be
given.

13. Cancellation
of invoices: ERP packages normally do not allow cancellation of invoice once
generated. To nullify the wrong issuance of invoices, credit note is required
to be issued. Care should be taken that such wrong issuance of invoices and
rectifying credit notes, do not get reported in the GSTR.

14. The
invoicing / accounting software should have built in rule / concept to
determine the following:

a.  Interstate
and intra state

i.   Location
of supplier

ii.  and
place of supply

for different types of supplies

b.  Rate of
tax

i.   HSN or
SAC code classification

ii.  Composite
supply

iii.  Mixed
supply

c.  RCM –
inward supply

i.   LOS and
POS thereof

ii.  Rate of
tax

iii.  Claim
of ITC

iv. Creation
of payment voucher

v.  Reporting

d.  Bill to
ship to type of transaction

i.   POS and
LOS thereof

ii.  HO
placing order on behalf of branch factory etc. – generation of document and
recognising of the tax liability

15. The
concept under the GST Act in respect of supply, intra-state, inter-state,
composite supply, mixed supply, etc. are totally new and requires them to be
made understood to the accounting, commercial, logistics and other staff in the
organisation.

16. Mechanism
to rectify errors in intra state vis-a-vis inter-state supplies – Such wrong
classification of transaction needs to be attended to as this would result into
claim of refund of wrong deposit and/or paying incorrect taxes. Appropriate
accounting entries need to be passed in books.

17. Claims on
account of goods return / deficiency in services, etc.

18. Revision
in pricing etc. Issue of D/N or C/N. passing of the tax credit or recognising
the additional tax liability.

19. Fixation
of responsibility in the organisation in tracking and monitoring of the items
of reconciliation statements

20. Maintenance
and distribution of ISD – input service credit.

a.  transfer
of credit to the state wise electronic credit ledger in the financial books

21. Inter
branch reconciliation.

22. Policy
determination in respect of inter-branch service billing and its valuation.

23. State
wise Trial Balance: It is observed that majority of the ERP software in the
present configuration of accounts do not facilitate drawing of state-wise Trial
Balance. Currently the assessment under state VAT Acts poses practical
difficulties in the assessment proceedings as the officers at times, demand
either state-wise Trial Balance and/or a certificate from a chartered
accountant certifying the sales and purchase turnover in the State. Now that
the software is either amended or configured for GST compliances, the software
should be able to generate state wise Trial Balances.

24. Transition
– TRAN-1. In the transition to GST, Form TRAN 1 is required to be submitted
declaring the carry forward of tax credit from CENVAT or State VAT returns into
ST, claiming of duty/ tax credit in respect of stock etc. This Form also
requires to generate certain information and supporting documents such as:

a.  data /
documents / statement required for submission of TRAN-1

b.  back up
documents and reconciliation statements in support of TRAN-1

25. Accounting
challenge in case of goods return in GST period where the sale was effected in the
pre-GST period. As per provisions contained in section 142(1), if the goods
return effected by the registered dealer, it would be treated as independent
supply under the GST and the customer would charge the applicable GST say SGST
and CGST. This will get reflected in the GSTR-1 of the customer as also
supplier. However, in the financial books; the entry would be to reversal of
the original sales / service income. On GSTN portal this would be tracked as
ITC claimable and appropriate adjustment would happen in the electronic credit
ledger. In the financial books, actually speaking, the original VAT or the
service tax payable will have to be reversed. As against this the GSTR – 1
would show fresh purchases / inward in the hands of supplier and fresh outward
supply in hands of the customer. Surely, the financial books will not recognise
this and would result into reconciliation item with financial books. Please
note, hundreds of such types of transactions will be required to be tracked and
this would have to be tracked state-wise based on the original sales offered
under the respective State VAT / service tax returns. It is quite possible that
the return could be intra state whereas the original sale was inter state sales
and was booked in the CST return. All such situations are likely to complicate
the tracking mechanism.

26. Physical
stock vs. book stock as on 30^th June 2017: In the transition to GST,
stock held as on 30^th June is required to be uploaded and credit, if
any, in respect of CED or VAT is to be carried forward to GST regime.
Reconciliation / rectification entries in respect of the physical vs. book
stock may have to be passed in the pre-GST period so as to avoid disallowance
of ITC etc in the GST Regime.

27. Credit
note in respect of scheme discount pertaining to Pre-GST period be passed in
the pre-GST period so that the reduction in the VAT liability, if any, can be
claimed in the pre-GST period. Similarly, the issue of free goods in respect of
supplies effected during the pre-GST period be issued in the pre -GST period.

Introduction

Both Central and State
Governments have decided to implement GST from 1^st July, 2017 in
place of excise, service, VAT, etc. The GST is said to be ‘One Nation One Tax’.
It is presumed under GST that there will be a free flow of inter-State trade
and commerce. One of the hurdles of levy of CST on inter-State transaction is
subsumed in GST to levy IGST with a benefit of ITC in receiving State. It was
also expected, that since IGST will be levied on each and every inter-state
supply, the check post and e-way bill provisions contained in various State VAT
Laws would be abolished. However, to the surprise of trade and industry, the
GST Act provides for “way bills” and detention, seizure and release of goods
and conveyance in transit and confiscation thereof, etc. The draft e-way
rules are also available in public domain. Although, it is not yet clear that
from which date the provisions of E-Way Bills will be effective and whether in
the same form or in a modified manner, in this article an attempt is made to
discuss provisions of draft e-way bills rules made available as on this day.

Information to be furnished prior to Movement of Goods (Rule
1)

Rule 1 provides for
furnishing of information prior to commencement of movement of goods and
generation of e-way bill. Accordingly, every registered person who causes
movement of goods of consignment value exceeding fifty thousand rupees;-

i)  in relation to a supply:;or

ii) for
reasons other than supply; or

iii) due to
inward supply from an unregistered person, shall,
before commencement of movement of 
goods, furnish information in Part A of Form GST INS-01.

The form is to be
furnished electronically, on the common GSTN portal.

Generation of E-way Bill by Registered Supplier/ Recipient

The e-way bill is
required to be generated for 
transporting goods whether in his own conveyance or hired one and
registered supplier or recipient may generate e-way bill in form GST INS-1
after furnishing information in Part B of Form GST INS-01.

Generation of E-way Bill by Transporter

Where the e-way bill is
not generated as above and goods are handed over to a transporter, the
registered person has to furnish information relating to the transporter in Part
B of FORM GST INS-01. Then transporter shall generate e-way bill on the
basis of information furnished by registered person in Part A of FORM GST
INS-01.

Generation of E-way
Bill for consignment less than Rs. 50000/

It is mandatory to
generate e-way bill for transporting goods valuing more than Rs.50,000/-.
However, it is provided that the registered person or transporter may at his
option generate and carry the e-way bill even where the value of consignment is
less than Rs. 50,000/-.

Supply by unregistered person

Even an unregistered
person or transporter can generate e-way bill. However, under Explanation to
sub–rule 1, it is provided that where the goods are supplied by an unregistered
person to a registered recipient, the movement is deemed to be caused by such
recipient , if it is known at the time of commencement of movement of goods. As
a result of this explanation, in such cases the registered recipient has to
furnish the information and generate the e-way bill.

Unique E-Way bill
Number (EBN)

Upon generation of the
e-way bill on the common portal, a unique e-way bill number ( EBN) shall be
made available to the supplier, the recipient and the transporter on the common
portal.

Transfer of Goods
during Transit

Sub-rule (3) of rule 1
provides that when a transporter transfers goods from one conveyance to another
in the course of transit, he shall generate new e-way bill before such transfer
and further movement of goods specifying the mode of transport.

Multiple Consignments

In case of multiple
consignments in one conveyance, the transporter shall indicate the serial
number of e-way bills generated in respect of each such consignment and a consolidated
e-way bill in Form GST INS-2 shall be generated by him. Where the
consignor has not generated e-way bill and the value of consignment exceeds Rs.
50,000/-, then the transporter shall generate Form GST INS-01 on the basis of
invoice, bill or delivery challan, as the case may be, and also generate
consolidated e-way bill in Form GST INS-02.

Furnishing of Information

The information furnished
in Part A of Form GST INS-01 shall be made available to the registered
supplier on the common portal who may utilise the same for furnishing details
in return Form GSTR-1. In case of unregistered supplier the information
shall be furnished to him through his mobile number or e-mail, if available.

Cancellation of E-way
Bill

Sub-rule (6) to rule 1 provides for cancellation of e-way
bill when goods are either not transported or not transported as per details
given in e-way bill. The e-way bill can be cancelled either directly on GSTN or
through a Facilitation Centre notified by the Commissioner. However, the e-way
bill should be cancelled within 24 hours of its generation. But, it cannot be
cancelled once it is verified by the proper officer.

Validity of E Way-Bill

Sub rule (7) to rule 1
provides validity of e-way bills and form the relevant date as under;-

Sr. No.	Distance	Validity Period
1.	Less than 100 km.	One day
2.	100 km. or more but less than 300 km.	Three Days
3.	300 km. or more but less than 500 km.	Five Days
4.	500 km. or more but less than 1000 km.	Ten Days
5.	100 km. or more but less than 300 km.	Fifteen Days

The commissioner has the
power to extend the validity of e-way bill by notification for certain
categories of goods as may be specified therein.

The relevant date is
defined by way of explanation to the said sub-rule to mean that the date on
which the e-way bill is generated and the period of validity shall be counted
from the time at which it is generated.

Acceptance or
Rejection of Details of E-Way Bill by Recipient

The details of e-way bill
generated shall be made available to registered recipient of goods on common
GSTN portal. The recipient has to communicate acceptance or rejection of
consignment covered by the e-way bill. When he does not communicate his
acceptance or rejection within 72 hours of the communication to him on the
common portal, it is deemed that he has accepted the details. The facility of
generation and rejection of e-way bill may also be made available through SMS.

Documents and Devices to be carried by the Person In-charge

Rule 2 provides for
carrying of following documents and devices by the person in charge of a
conveyance;-

a) The
invoice or bill of supply or delivery challan, as the case may be,

b) A copy
of e-way bill or e-way bill number either physically or mapped to a Radio
Frequency Identification Device (RFID) embedded on to the conveyance in such
manner as may be notified by the Commissioner. The Commissioner may by
notification require the transporter to get the said device embedded on to the
conveyance and map the e-way bill to the RFID before movement of goods.

A registered person may
obtain an Invoice Reference Number by uploading a tax invoice issued by him in Form
GST-INV-1 and produce the same for verification by the proper officer in lieu
of the tax invoice. Such number shall be valid for a period of thirty days
from the date of uploading. When registered person uploads the invoice, the
information in Part A of Form GST INS-01 shall be auto populated on the
basis of the information furnished in Form GST INV-1.

The Commissioner may, by
notification, require the person in charge of conveyance to carry the following
documents instead of e-way bill;-

a) tax
invoice, or bill of supply or bill of entry; or

b)  a delivery
challan, where the goods are transported other than by way of supply.

Verification of Documents and Con-veyance

Under rule 3, the
Commissioner or an authorised proper officer may intercept any conveyance to
verify the e-way bill or the e-way bill number in physical form for all intra
or inter-state movement of goods. The Commissioner shall get RFID readers
installed at a place where the verification of movement of goods is carried out
and it shall be verified through such RFID readers where the e-way bills are
mapped with RFID. However, where any information is received for tax evasion
then the authorised proper officer, after obtaining prior approval, physical verification
of conveyance can be carried.

Inspection and Verification of Goods

The proper officer shall
prepare summary report of every inspection of goods in transit and it shall be
recorded on line in Part A of Form GST INS-03 within twenty four hours of
inspection and final report in Part B of Form GST INS-03 shall be
recorded within three days of the inspection. It is also provided that where
the physical verification of goods being transported is done at one place
within the State or any other State, no further verification of the said
conveyance shall be carried out again in the State unless specific information
relating to evasion of tax is made available subsequently.

Facility of Uploading of Information of Detention of Vehicle

It is the policy of the
Government not to detain any vehicle for more than 30 minutes. Therefore, a
provision is made in sub-rule (5) for uploading details by transporter of
information of detention of vehicle for more than 30 minutes in Form GST
INS-04.

Other Miscellaneous

The provision for e-way
bill is applicable to all goods whether taxable or not. Even for transportation
of NIL rated goods also e–way bill is required.

The e-way is applicable
for transportation of goods by unregistered person including agriculturist. However,
in that case the recipient shall have to generate e-way bill if the
unregistered person has not generated it.

E-way bill is required
for each and every movement of goods whether in same city or in a State or
interstate. Also, it is required for movement of goods between the branch of
same person within or outside the State.

The term ‘conveyance’
defined in section 2 (34) of the Act to include a Vessel, an aircraft or
vehicle. Hence the e-way bill is required only when the goods are transported
through defined conveyance.

The term value is not
defined in the draft rule. So it should be transaction value of the goods
supplied by way of sale. In any other case, valuation rule may apply to
determine the value of goods. However, when the goods are supplied for
provision of services that is by way of hire then, no clarity is required to
take value of supply of service and not the value of goods itself.

In case of contravention
of provisions of e-way bill, the goods and vehicle carrying the goods can be
detained and confiscated u/s. 129 of the act. The goods can be released upon
payment of applicable tax and penalty equal to 100% of tax if owner comes
forward for release of goods. In case the owner does not come forward for
release of goods, the payment of tax and penalty equal to 50 % of value of goods is required for release of goods.

In case of exempt goods
for owner, the payment of two percent of value of goods or twenty five thousand
rupees whichever is lower is required to be paid for release of goods. If owner
does not come forward for release of exempted goods, the amount five percent of
goods is required to be paid for release of goods.The goods can be released
upon furnishing a security of the amount payable as provided herein above.

Conclusion

Introduction

Across the globe, value added tax by whatever name called,
applies to international trade on destination principle, exports are free of
VAT and imports are taxed on the same basis and at the same rate as local
production. This destination principle is sanctioned by World Trade
Organization (WTO) Rules.What is free of VAT is termed as zero-rated where tax
on costs and overheads can be recovered.The principle of neutrality takes
centre stage in the context of international trade. GST thus being based on destination
principle, exports from a country of origin go out at zero-rated tax, after
exempting or refunding the input taxes that may be given to the resources used
in its manufacturing. Zero-rating of exports ensures neutrality of VAT in
international trade through unequivocal application of the destination
principle. The OECD guidelines on neutrality of VAT in international trade lay
this down as the first guideline. Thus, exports must leave the country
completely free of tax whereas tax on imported goods should be the same as the
tax levied on domestically produced goods.

Exports: Goods

Following the above principle and as also under the laws
relating to central excise, VAT laws of States and service tax, exports
continue to remain zero-rated and a similar benefit continues to be given to
Special Economic Zones (SEZs) under GST law effective from July 01, 2017. While
this benefit is extended to processing zones of the SEZ, sales from SEZ to
Domestic Tariff Area (DTA) continue to remain taxed under GST system.

As per section 2(5) of IGST Act, 2017 IGST Act) “Export of
goods” with its grammatical variations and cognate expressions, means taking
goods out of India to a place outside India”.

As per section 2(52) of CGST Act, ‘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”.

Thus, it appears that both tangible as well as intangible
goods are covered by the above expression. Now as per section 7(1)(d) of the
CGST Act, certain activities are treated as supply of services as listed in
Schedule II. This list inter alia includes the following transactions as
service transactions at para 5:

“(c) Temporary transfer or permitting the use
or enjoyment of any intellectual property.

 

(d)Development, design, programming,
customization, adaptation,upgradation,enhancement, implementation ofinformation
technology software”.

Thus, these activities have to be considered as services
under the GST law. Currently, when software is exported on a tangible medium,
it is considered as export of goods. The Karnataka High Court in Sasken
Communication Technologies Ltd. vs. Joint Commissioner of Commercial Taxes,
Bangalore 2011-TIOL-707-HC-KAR-ST held “Intellect is not property by itself.
Through intellect you can create intellectual property.” It is that
intellectual property that will become goods “once put on a medium for sale”.
Intellectual property does not exist in the mind of the technician. What exists
in his mind is the intellect. Using that Intellect, a technician creates or
develops ‘goods’. It is that goods which is called intellectual property when
put on a medium for sale.” In view of this, no service tax was chargeable
on the said transaction of sale. Further, the above service description
appearing in respect of software service and intellectual property in Schedule
II is the same as under service tax law in section 66E. Therefore, software
when provided on a tangible medium and if also capable of replicating should be
considered sale of goods. From the description above viz. “temporary transfer”
of intellectual property or permitting use thereof only is to be treated as ‘service’.
It implies thus that permanent transfers of IPR or providing software on a
tangible medium would be treated as ‘goods’. However, considering the given
law, the issue of classification may remain open. In case of an export
transaction, there may not be direct tax implication as whether goods or
service, it will be a zero-rated supply. Nevertheless, there may be implication
when the Government announces/notifies any incentive either for export of goods
or services.

Export: Services

As per Rule 2(6) of IGST Act, “Export of services” means the
supply of any service when,––

(i)  the supplier of service is located in
India;

(ii)  the recipient of service is located outside
India;

(iii) the place of supply of service is outside
India;

(iv) the
payment for such service has been received by the supplier of service in
convertible foreign exchange; and

(v)  the supplier of service and the recipient
of service are not merely establishments of a distinct person in accordance
with Explanation 1 in section 8”.

In order that a supply of any service is considered exported,
conditions provided in section 2(6) of IGST Act are to be complied with as
discussed below. Further, as against export of goods, where only physical
movement is relevant, in case of services, the location of the supplier and
that of the recipient are relevant. For this, the provisions to determine the
place of supply are required to be looked at.

–   Location of supplier in India

     When a supply is made by a service provider
from his business place or an establishment located in India, the first
condition of the above Rule 2(6) stands fulfilled i.e. the supplier of service
is located in India. The expression “location of the supplier of services” is
defined in section 2(15) of IGST Act. This is for determination of the exact
location i.e. place of business or a fixed establishment or any other
establishment, from where the supply of a service is made.

–   Location of recipient outside India:

     The service supplied by a person in India
should be received outside India. For this purpose, ‘recipient’ is defined in
section 2(93) of CGST Act and “location of recipient of services” is defined in
section 2(14) of IGST Act. The meaning of recipient is provided based on
whether consideration is payable or otherwise and would include an agent on
behalf of the recipient to mean that the supply is made to the principal even
when the agent has received a service.

–   The place of supply of service

     When a service is supplied by a person
located in India to a recipient located outside India, the place of supply
should be determined as “outside India”. This is to be determined in accordance
with section 13 of the IGST Act. (This is discussed and analysed in detail in
this July 2017 issue of BCAJ in the article “Place of supply of services“ and
hence not touched upon here). Under the service tax law, Place of Provision of
Service Rules, 2012 and prior to July 2012, Export of Services Rules 2005 were
prescribed for the purpose.

–   Receipt of payment in convertible foreign
exchange

     On the lines of service tax provisions, GST
law also contains the condition of receipt of consideration or the payment for
the service to be in convertible foreign exchange to consider a service as
exported. This condition does not exist for export of goods. The service
supplier is required to produce evidence of such receipts in convertible
foreign exchange such as Foreign Inward Remittance Certificate (FIRC) issued by
banks in this regard. In the case of Sun-Area Real Estate Pvt. Ltd. 2015
(39) STR 897 (Tri.-MUM) “foreign exchange” was interpreted in detail.
Referring to Notification No. FEMA 9/2000-RB of 03/05/2000, the rupee payment
appearing in FIRC was held as receipt in “convertible foreign exchange”.
Further, referring to the Supreme Court’s judgement in J B. Boda And Company
Private Limited vs. CBDT (SC) 223 ITR 271 (SC), it was observed as follows:

     “The Hon’ble Supreme Court has held that
the said amount of brokerage retained by the Indian insurance broker from the
total amount due to the foreign insurer shall be treated as foreign exchange.
In view of the above judgments, I am of the view that when a foreign bank is
maintaining Indian rupees in their account obviously such Indian rupees were
obtained in lieu of foreign exchange. For example, if any payment is made from
India to any foreign country it is to be made in foreign exchange and thus
there is an outflow of foreign exchange but if the payment is made in Indian
rupees, there is a saving of foreign exchange and if the said Indian rupees is
received in India, the same is in lieu of foreign exchange which was saved at
the time of repatriation of Indian rupees to foreign country. On this logic
under the Foreign Exchange Management Act also it provided that if the payment
in Indian rupees is received in India through banking channel it is deemed to
be convertible foreign exchange.”

–   Supplier and recipient of service are not
merely establishments of distinct person:

Under GST law, two establishments of a person in two
different States or a Union territory and establishment of a person in India
and an establishment outside India are treated as establishments of distinct
persons in terms of Explanation-I to section 8 of GST Act. Thus a service
provided by a company located in Mumbai, India to their branch office in
Mauritius is not considered as an export of service as they are establishments
of distinct persons or they are not two separate legal entities.

Export of goods and services are zero-rated under GST law and
therefore exports can be made without payment of any tax. However, for all
zero-rated supplies, input tax credit is available even when exempt supplies
are exported.

Deemed Exports

“Deemed Exports” is a unique concept operating as a part of
Foreign Trade Policy (FTP) of India. Essentially, deemed exports mean those
transactions in which the goods supplied do not leave the country and the
supplier in India receives the payment for goods either in Indian rupees or in
free foreign exchange. The purpose for ‘deeming’ is to extend certain benefits
and relaxations in so categorised transactions even though they are not export
in nature but are viewed crucial and therefore deemed as exports. Section 2(39)
of CGST Act defines deemed export as such supplies of goods as may be notified u/s.
147. Thus, the notification in this regard is yet to be issued when this is
written. Under FTP, supply of goods under advance authorisation, supply of
goods to Export Oriented Units (EOU) software technology Park (STP), Electronic
Hardware Technology Park (EHTP), Bio-Technology Park Scheme (BTP) etc.,
supply of capital goods to EPCA authorisation holders, supply of maritime
freight containers by 100% EOU when these containers are exported out of India
within 6 months or such further period as permitted by Customs, supply to
projects funded by U. N. agencies etc. are considered eligible supplies
to be ‘deemed’ as exports. The said concept may continue on the onset of GST
with or without modification.

SPECIAL ECONOMiC ZONE (SEZ)

Both, Special Economic Zone (SEZ) and Special Economic Zone
Developer (SEZ developer) are defined in the IGST Act in sub-sections (19) and
(20) respectively in section 2. These terms derive their meanings as per
definitionsunder the Special Economic Act, 2005 (SEZ Act). The SEZ Act 2005
contains special provision regarding procurement of goods and service without
payment of taxes. In line with existing laws of central excise, service tax etc.,
GST law also provides for refund of taxes paid by the supplier supplying goods
or services to a developer or a unit holder. There has been a significant
amount of litigation on the interpretation of provisions of SEZ Act, a few of
which cited here may help under GST as well although these have been ruled in
the context of service tax or customs duty. In case of Essar Steel Ltd. vs.
UOI 2010 (249) ELT 3 (Guj), Essar located in SEZ at Hazira, Surat received
iron ore pellet from their non Vizage Pellet unit in SEZ. Customs department
demanded export duty considering that SEZ is outside the territory of India.
The High Court set-aside the demand observing that section 53 of the SEZ Act
provides that the Zone would be deemed a territory outside the customs
territory of India for the purpose of authorised operations. However, the
customs territory cannot be equated with the territory of India and such
interpretation would render SEZ Act redundant. The Zone cannot be considered
outside Indian Territory under service tax law. Notification No.9/2009-ST
provided exemption from payment of service tax for services provided to
developer or units in SEZ. In Reliance Ports and Terminals Ltd. 2015 (40)
STR 200 (Tri.-Ahmd.), the revenue’s case was that during the relevant
period March 2005 and 20/05/2009, the exemption did not exist. Therefore,
service tax should be paid by service provider and appellant would claim refund
thereof. The Tribunal interalia observed that section 51 of SEZ Act had
overriding effect if there is anything inconsistent with the provisions in any
other law and therefore exemption was available to SEZ unit under section
26(1)(e) of SEZ Act. In Norsia Container Lines 2011 (23) STR (Tri.-Del),
containers were used by unit for authorised operations in SEZ and also
sometimes outside SEZ. The Tribunal observed that as long as the containers
were used for export of goods, the exemption was available.

As per section 7(5)(b)of IGST Act, supply of goods and
services or both to or by a SEZ developer or SEZ unit would be treated to be
supply in the course of interstate trade or commerce. In accordance therewith,
for example, even if a person in Mumbai provides any service to a unit in SEZ
in Maharashtra, it will be treated as interstate supply and IGST is chargeable
primarily, notwithstanding that refund would be available since the supply is
zero-rated as in the case of exports, however subject to conditions and
safeguards and procedure prescribed for granting refund as briefly discussed
below.

Operation in territorial waters

Section 9 of IGST Act, a non-obstante clause provides that
notwithstanding anything contained in this Act, where location of the supplier
is in territorial waters, the location of such supplier or where the place of
supply is in the territorial waters, the place of supply would be considered to
be in the coastal state or union territory where the nearest point of the
appropriate baseline is located. This provision primarily seems to be aimed at
avoiding litigation in relation to supply to or from any location in
territorial waters.

However, there requires better clarity as discussed hereafter.
The limit of territorial waters is of 12 nautical miles from the nearest point
of the appropriate baseline as per section 3(2) of the Territorial Waters,
Continental Shelf, Exclusive Economic Zone and other Maritime Zone Act, 1976.
The continental shelf of India comprises the seabed and sub-soil of the
submarine areas that extend beyond the limit of its territorial waters
throughout the natural prolongation of its land territory to the outer edge of
continental margin or to a distance of 200 nautical miles from the baseline
referred above. India has and always had full and exclusive sovereign rights in
respect of its continental shelf (sections 6CD(1) and (2) of the said Act of
1976).

The exclusive economic zone of India is an area beyond and adjacent
to the territorial waters and the limit of such zone is 200 nautical miles from
the baseline referred above. ‘India’ as per section 2(56) is defined to
includethe land mass of the country, its territorial waters, seabed and sub
soil underlying such waters, continental shelf, exclusive economic zone or
other maritime zone and the airspace above its territory and territorial
waters. Therefore the issue that requires examination is for example, when a
supply of repairs and maintenance services including supply of spare parts is
made to offshore oil and gas industry operation at Mumbai High by a Mumbai
vendor on offshore oilfield located in Arabian Sea around 160 km. West of the
Mumbai Coast, whether it would be considered supplies made in the State of Maharashtra
only as the power to levy GST is delegated to States as the said section 9 has
an overriding effect. The question is whether the expression “territorial
waters” used in section 9 would be construed as area upto 12 nautical miles
only. In any case, supplies in the area beyond 12 nautical miles and upto 200
nautical miles can neither beconsideredexport nor an interstate movement as
this area does not form part of any State of the country. Therefore by default
also, whether the supply would be construed as made in Maharashtra is an issue.
Conversely, if oil recovered at Bombay High is transferred to a refinery in
Mangalore, Karnataka, the supply would be considered interstate supply and IGST
would be recoverable.

The issue whether materials supplied on the vessel located in
the territorials waters was a sale within the state of Maharashtra in the
context of Maharashtra VAT provisions was considered by the Bombay High Court
in the case of Raj Shipping vs. State of Maharashtra [2015] 62 taxmann.com
309 (Bombay), wherein the Bombay High Court noted that since the agreement
to sell was entered in the state of Maharashtra, the refinery was very much
within the state of Maharashtra and the assessee’s place of business was in
Mumbai and the contract was carried out from Mumbai the sale was held to be
within the State of Maharashtra (The matter lies in the Supreme Court for
finality). Another interesting decision of the Apex Court is also relevant here
i.e. In UOI vs.Rajendra Dyeing and Printing Mills Ltd. (2004) 10 SCC 187,
it was held that when there is movement of goods outside territorial waters of
India, it is then an export may be said to have taken place. In the instant
case, the cargo was destroyed when the vessel sank within territorial waters of
India. Therefore, there was no export of cargo and no duty drawback was
available in respect of the cargo. Considering theserulings, litigation as
regards supply to or from territorial waters cannot be ruled out.

High Sea sale

What is known in common parlance as High Sea sale is a sale
taking place by transfer of documents of title to goods before the goods have
crossed the customs frontiers of India, thus is a sale in the course of import.
Such transactions are known as deemed imports. There is no bar on the same
goods being sold more than once while the goods are on high sea. The delivery
from customs is therefore on account of last high sea sale purchaser. Bill of
Entry is also filed in the name of the last purchaser. These transactions are
exempt under Central Sales Tax Act, 1956.

As per section 7(2) of the IGST Act, supply of goods imported
into the territory of India till they cross the customs frontiers of India
shall be treated to be a supply of goods in the course of interstate trade or
commerce. Whereas as per proviso to section 5(1) of the IGST Act, IGST shall be
levied on goods imported into India and will be collected as per section 3 of
the Customs Tariff Act, 1975 on the value determined under the said Act at the
point when duties of customs are levied on the said goods u/s. 12 of the
Customs Act, 1962. Thus, reading of section 7(2) indicates that sale in the
course of import before crossing the customs frontier would be chargeable to
IGST. However, harmonious reading of both section 7(2) and charging section
5(1) indicates that the supply made prior to the goods reaching customs
frontiers should not be liable for IGST. Thus, whether the provision of section
7(2) leading to charging IGST on a high sea sale is unintended or otherwise,
cannot be concluded with certainty. The question that still remains is whether
jurisdiction of the GST law as per the definition of India discussed above
remains upto 200 nautical miles from the baseline and therefore, whether
“international transfer or supply of goods” made beyond 200 nautical miles
would be outside the scope of GST law. However, to prove that ‘supply’ was made
prior to the vessel or aircraft entering the ‘limit’ of jurisdiction of the law
also appears a challenging task. In view hereof, the route of high sea sale
would lose its relevance if in terms of section 7(2), the sale made prior to
goods reaching customs is subject to IGST.

Refund provisions: Zero-rated supplier

Section 16 of IGST Act defines zero-rated supply as follows:

16. (1)
“zero rated supply” means any of the following     supplies
of goods or servicesor both, namely:––

(a) export of goods or services or both; or

(b)
supply of goods or services or both to a Special Economic Zone developeror a
Special Economic Zone unit.

Sub-section (3) of the said section 16 reads as follows:

(3) A registered person making zero rated supply shall be
eligible to claim refund under either of the following options, namely:––

(a) he may supply goods or services or both under
bond or Letter of Undertaking, subject to such conditions, safeguards and
procedure as may be prescribed, without payment of integrated tax and claim
refund of unutilised input tax credit; or 

(b) he may supply goods or services or both,
subject to such conditions, safeguards and procedure as may be prescribed, on
payment of integrated tax and claim refund of such tax paid on goods or
services or both supplied,

     in accordance with the provisions of
section 54 of the Central Goods and Services Tax Act or the rules made thereunder.

Thus the export of goods and services and supply of goods and
services to SEZ developer or units in SEZ are zero-rated supplies. As
distinguished from service tax law, supply of services/or the goods can be made
without payment of IGST only under bond or letter of undertaking or else the
payment of integrated tax to be made (from input tax credit account) and then
claim refund thereof.In turn, the refund in respect of all zero-rated supplies
is governed by section 54 of the CGST Act along with refund in other cases. In
terms of these provisions as well as the already prescribed Refund Rules,
important requirement or conditions are listed below:

–   Only registered persons would be eligible to
claim refund. Thus in order to be eligible for claiming refund, registration is
a prerequisite.

–   An application is required to be made in the
prescribed form from the relevant date within 2 years. Relevant date for
exported goods would be the date of vessel or aircraft leaving India or the
date of dispatch by the post office as the case may be. In case of deemed
exports, the date of furnishing the relevant returns. In case of exported
services, the relevant date is the date of receipt of foreign exchange when
services are completed prior to the receipt of such payment and when advance is
received prior to supply of services, the date of issue of invoice.

–   Refund can be claimed by a registered person
at the end of any tax period for unutilised input tax credit.

–   No refund of unutilised input tax credit is
available where exported goods are subject to export duty.

–   Also when drawback is availed in respect of
central tax or integrated tax by supplier of goods or services, refund would
not be allowed.

–   All applications would have to be accompanied
by adequate documentary evidence as prescribed to establish that refund is due
to the applicant.

–   90% of the total amount claimed (excluding
the amount of input credit provisionally accepted) will be refunded within 7
days and thereafter within 60 days a final order will be made in respect of
applications complete in all respects after due verification of documents in
terms of prescribed procedure subject to the conditions that the claimant of
refund is not prosecuted during the preceding 5 year period or under the
existing law where the amount evaded was above Rs.2.5 crore.

–   No refund can be withheld or deducted in
certain circumstances such as non-filing of any return or in case of pendency
of any tax interest or penalty dues.

–   When the goods or services are exported
without payment of tax under bond or letter of undertaking, refund will be
granted as per the following formula:

     Refund amount = (turnover of zero-rated
supply of goods + turnover of zero rated supply of services x net ITC +
adjusted turnover.

     In the above, refund means the maximum
admissible fund, net ITC means credit availed on inputs and input services
during relevant period. Turnover means the turnover in a State or Union
Territory excluding the value of exempt supplies other than zero-rated supplies
during the relevant period

Conclusion

Job-work industry constitutes a significant sector in the
Indian economy. It is an indispensable arm of our industrial sector. “Job work”
includes outsourced activities which may or may not result into manufacture.
The person undertaking the job work is called job worker. The job worker works
under the instructions of the principal manufacturer and exercises his labour
over the inputs or material belonging to his principal. Where exercise of
labour results in manufacture of goods, excise duty becomes applicable and in
other cases, service tax comes into play. Some job works involve transfer of
material from job-worker to principal manufacturer in the course of execution
of the work in which case VAT/CST may get attracted. In some cases, a job
worker provides pure labour and entire inputs/ raw materials are provided by
the principal manufacturer.

Job-Work and Existing Law

The context of Central Excise Act, the Hon’ble Supreme Court
in the case of Ujagar Prints, etc. vs UOI 1988 (38) ELT 535 had held
that, the assessable value of the goods in the hands of job-worker, would
include value of the goods supplied to the job-worker for processing plus the
value of the job-work done plus manufacturing profits and manufacturing
expenses whatever would be included in the price at the factory gate but not
any other subsequent profit or expenses. Subsequently, Rule 10A was inserted in
the Central Excise Valuation whereby, transaction value of the goods processed
by the job-worker was amended to also include profits of the principal
manufacturers (i.e. transaction value of the goods sold by the principal
manufacturer at the time of removal of goods from the factory). The job work
operations not amounting to manufacture would be regarded as service. The
job-work processing charges charged by the job-worker to principal manufacturer
would attract service tax. This would include price of the raw material, labour
and processing charges. The raw material supplied by the Principal manufacturer
free of charge may not form the part of value of taxable services.

Job-Work and GST

Under the GST regime, the term “job work” is defined in
section 2(68) to mean any treatment or process undertaken by a person on
goods belonging to another registered person and the expression “job
worker” shall be construed accordingly. Contract manufacturing is not strictly
same as job-work as in that case, contract manufacturer uses his own material.
The principal manufacturer only affixes his label and sells the product.
Therefore, ‘contract manufacturing’ would not be considered as job-work.
Distinction between contract manufacturer and job-worker would be relevant in
GST since transaction between principal manufacturer and job-worker has been
given special treatment in GST Law.Various provisions concerning job-work
transactions are discussed in this Article.

Whether supply of goods from Principal to Job-work would
attract GST if provisions of section 143 are ignored?

Section 143 of the GST Act, makes special provisions for
transactions between manufacturer and job worker. It provides that, a
registered person (say principal manufacturer) may send any inputs or capital
goods to a job-worker, without payment of tax on the basis of intimation
given to the proper officer and subject to certain conditions. The levy under
the GST law is on “supply” of goods and services.

The term supply is wide enough to cover any form of supply
such as sale, service, transfer, barter, exchange, licence, rental, lease,
disposal etc. However, supply made by one person to another person
without consideration would not attract GST [unless the supplier and receiver
are related persons]. Hence, author is of the view that, even in the absence of
section 143(1), a supply of any goods (inputs, capital goods, consumables,
tools, jigs etc.) by a manufacturer to unrelated job-worker would not
require payment of tax.

Why scheme under section 143 is required?

Then a question may arise as to whether principal is required
to reverse Input Tax Credit (ITC) availed by the manufacturer in respect of
such goods supplied to job-worker on the ground that outward movement of such
goods to job-worker does not suffer GST. Besides, when the job-worker returns
the ‘processed goods’ back to manufacturer and charges job-work processing
charges, the question may arise as to whether value of ‘such goods’ for the
purpose of GST would include only ‘job work charges’ or ‘transaction value’ of
the processed goods.

As regards entitlement of ITC, section 19 provides that the
principal (manufacturer sending the raw material etc.) shall, subject to
certain conditions and restrictions as may be prescribed, be allowed input tax
credit on inputs/ capital goods sent to a job worker for job work. Such
conditions and restrictions are contained in Rule 10 of the ITC Rules approved
on 17.05.2017 (discussed later). The ITC is allowed, even if the inputs/
capital goods are directly sent to a job worker for job work without being
first brought to his place of business. However certain additional
conditions are contained in section 19, which makes it necessary for principal
and job-worker to avail the benefit of scheme contained in section 143. In
other words, benefit of section 19 is available to manufacturer only if he
avails the benefit of scheme u/s. 143.

It appears that, intention of section 19(3) and 19(6) is
to require the principal to reverse the ITC, if benefit of scheme contained in
section 143 requiring the principal to give intimation is not obtained or in
case the goods are not received back within stipulated period as per section
143, but that intention is not coming out from the wordings of section 19(3)
and 19(6). Section 19 provides that, where the inputs (or capital goods)
sent for job work are not received back by the principal after completion of
job work or otherwise or are not supplied from the place of business of the job
worker in accordance with clause (a) or clause (b) of sub-section (1) of
section 143 within one year of inputs (and within three years in case of
capital goods) being sent out, it shall be deemed that such inputs/ capital
goods had been supplied by the principal to the job worker on the day when the
said inputs were sent out. The exception is provided only in respect of moulds
and dies, jigs and fixtures, or tools.The use of the expression “it shall be
deemed that such inputs had been supplied by the principal to the job worker on
the day when the said inputs were sent out” in section 19(3) is a misfit
and appears to be a drafting error – copy pasting from provisions of 143(3) and
143(4) of the Act. The suggested correct wordings would be, “the principal
shall be liable to pay Input Tax Credit availed on such inputs or capital goods
on the date of supply of such goods to job-worker in accordance with provisions
contained in section 143(3) and 143(4).”

Thus, going by the spirit of section 19, if the Principal has
given/obtained benefit of scheme u/s. 143, he would not be required to reverse
the ITC in respect moulds and dies, jigs and fixtures, or tools sent out to a
job worker for job work at all, even if he had paid no GST at the time of their
supply to the job-worker. As regards inputs and other capital goods, the
reversal of ITC is not required at the time of sending such goods to job
worker, only if goods are brought back or otherwise dealt with by the principal
and job-worker, within time limit specified in the provisions of section 143.

Time Limit contained in section 143

Under section 143, if the principal supplies goods to
manufacturer under intimation, then he shall be required to bring back to
any of his place of business, the inputs after completion of job work or
otherwise within one year or capital goods within three years of their being
sent out. The restriction is not applicable to moulds and dies, jigs and
fixtures, or tools. Alternatively, such processed goods or capital goods can,
within the aforesaid period, also be supplied from the place of business of a
job worker on payment of tax within India, or with or without payment of tax
for export. However, in order to supply such goods directly from the place of
job-worker, principal shall either be required to declare the job-worker’s
place as his place of business or the job worker should be a registered dealer.
In other words, if the place of job-work is not registered with the department,
the processed goods shall be first required to be brought to any registered
place and it can be supplied only from such place.

In this context, another question may arise that, if the
job-worker has his own registration with the department and the principal
decided to supply the goods directly from the place of business of such
job-worker on payment of duty, then who shall pay the tax on such supply,
principal or job-worker? In this regard, Explanation below section 21 provides
that, the supply of goods, after completion of job work, by a registered job
worker shall be treated as the supply of goods by the principal
referred to in section 143, and the value of such goods shall not be included
in the aggregate turnover of the registered job worker. Besides section 143(2)
also provides that, the responsibility for keeping proper accounts for the
inputs or capital goods shall lie with the principal. If legislative intention
is to make the principal liable to pay tax in respect of such supply, then this
explanation was more suitable u/s. 143 instead of section 21. It would also
mean that, principal would be required to register job-worker’s premises as his
place of business (notwithstanding the job-worker has his own registration) as
only in that case principal would be in a position to declare and pay tax on
such outward supplies in his GSTR-1.

In short, it appears that, section 143 requires the
job-workers to pay GST only in respect of their processing/ job working charges
and not on the transaction value of the processed goods. In addition to job
work charges, if any waste and scrap is generated during the job work, the job
worker shall be required to pay tax on supply of such scrap if he is registered
and only in cases where such job-worker is not registered, payment is required
to be made by the principal.

Whether section 143 is applicable, if Job-worker’s Premise is
registered as additional place of business of Principal, where both are located
in the same State

The aforesaid discussion will be applicable, if principal and
job-worker are located in different States. However, if they are located in the
same State, then the question may arise as to what would happen, if the
job-worker’s place of business is registered by the principal as its additional
place of business? In that case, whether it would be necessary to take recourse
to provisions of section 143.

Author is of the view that, in such case, provisions of
section 143 will be of no consequence. The concept of supply presupposes
existence of more than one person. Under GST, the transaction between two units
of the same entity without consideration is regarded as supply only if said
units have obtained separate registration. Therefore, if both the units are
covered in the same registration certificate, the movement of goods between
such units would not be regarded as supply for the purpose of GST. The movement
of goods within places of businesses covered under same registration also does
not contemplate any reversal of ITC. Hence, if job-worker’s place in the same
State is registered as additional place of business of the principal, supply of
goods made by principal to job-worker as his additional place of business would
not attract GST, the question of reversal of ITC would not arise and the supply
of processed goods from the said premises of job-worker to any other premise of
the principal in the same State (covered under same registration) would also
not attract GST. Besides, the principal would be in a position to supply the
processed goods to his customers directly from place of such job worker in a
routine manner, that being his own registered place of business. The job-worker
will only be required to pay GST on his job-working charges and if the
job-worker is unregistered, principal would be liable to pay it under reverse
charge mechanism and claim ITC thereof.

Author is therefore of the view that, if the job-worker  is located in the  same State as that of Principal, it is
advisable to register job-worker’s premises as his additional place of
business.

Rule 10 – Conditions and restrictions in respect of inputs and
capital goods sent to the job worker

As per Rule 10, the inputs, semi-finished goods or capital
goods shall be sent to the job worker under the cover of a delivery challan
issued by the principal, including where such goods are sent directly to a
job-worker. The delivery challan shall be issued at the time of removal of
goods for transportation, by the principal to the job worker and shall contain
the following details:

–   delivery challan should be serially numbered
not exceeding sixteen characters, in one or multiple series, and shall contain
a date.

–   name, address and GSTIN of the consignor, if
registered,

–   name, address and GSTIN or UIN of the
consignee, if registered,

–   HSN code and description of goods,

–   quantity

–   taxable value,

–   place of supply, in case of inter-State
movement, and

–   signature.

The details of challans in respect of goods dispatched to a
job worker or received from a job worker during a tax period shall be included
in FORM GSTR-1 [ Table -13] furnished for that period.

Where the inputs or capital goods are not returned to the principal
within the time stipulated in section 143, the challan issued under sub-rule
(1) shall be deemed to be an invoice for the purposes of the Act.

Transitional Provisions concerning Job-Worker

As per section 141 where any inputs/ semi-finished goods
received at a place of business had been removed as such or removed after being
partially processed to a job worker in accordance with the provisions of
existing law prior to the appointed day and they are returned to the said place
on or after the appointed day, no tax shall be payable if such inputs/
semi-finished goods, after completion of the job work or otherwise, are
returned to the said place within six months from the appointed day. If however,
such inputs / semi-finished goods are not returned within a period of 6 months
as specified in section 141, then CENVAT Credit taken by the principal
manufacturer on such inputs / semi-finished goods is liable to be recovered
from the manufacturer in accordance with provisions of section 142(8)(a).
Similar provisions are also contained in respect of excisable goods sent for
job work for further processing not amounting to manufacture, carrying out
tests etc. As regards semi-finished goods/excisable goods sent for
further processing, carrying out tests etc., section 141 allows transfer
the said goods to the premises of any registered person for the purpose of
supplying therefrom on payment of tax in India or without payment of tax for
exports within the period specified in this sub-section. Section 141 also
requires the manufacturer and the job worker to declare the details of the
inputs or goods held in stock by the job worker on behalf of the manufacturer
on the appointed day in such form and manner and within such time as may be
prescribed. As per Rule 3 of Transition Rules approved by Council of
04.06.2017, principal and job-worker shall submit declaration in Form TRAN-1
specifying therein, the stock of the inputs, semi-finished goods or finished
goods, as applicable, held by him on the appointed day. The relevant Format is
contained in Table-9 (a) and (b) of TRAN-1 and such form is also required to be
furnished by the job-worker whether or not he is registered in GST.

1.  Small & Medium Business Enterprises / Tax
Payers including Non – Profit bodies, Co-operative Societies etc [SME]

SME Sector comprises a
significant component of the Indian Economy. Under the prevailing business
scenario in the country, there are small & tiny business units scattered
across the country in large numbers extensively in the Unorganised Sector. Though,
SME Sector contributes very small portion in terms of taxes, it is very
important to our Economy inasmuch as, it significantly contributes to India’s
GDP, provides employment (directly/indirectly) to a large number of people
& also contributes substantially to the Exports of our Country. Accurate
statistics in this regard are not formally available. However, the following be
noted:

–   According to Annual Report (2015-16) of the
Ministry of Micro, Small & Medium Enterprises, there are estimated to be
about 51 Million MSME businesses, employing more than 117 Million people and
have a combined Fixed Asset value of 15 lakh crore (app).

–   According to other press reports, if the
entire unorganised sector is considered comprehensively on a pan India basis,
the SME businesses in India estimated to be around 51 Million, could be
contributing to 45% of India’s GDP and employing 450 million people (app).

–   It is also estimated that SME Sector could be
contributing around 30% to 40% of India’s Total Exports. 

SME Sector is likely to be severely impacted by the GST
Regime. Hence, the implications on this Sector are discussed hereafter, for the
awareness & understanding of SME tax payers. All references in the write up
to Central GST would cover corresponding provisions under State GST as
well. 

2   Threshold Limits

Threshold Limits are usually provided for imposition of any
tax, so that SME are kept out of the tax net. This is also administratively
expedient as it is difficult to exercise control over large number of SME,
where revenue generated is less compared to administrative costs involved.

2.1 Existing
Position

The present threshold limits for SME under different indirect
tax laws are as under:

a)  Central Excise Act, 1944 (CEA)

•    SSI Exemption Scheme upto Value of Taxable
Clearances of 150 lakh in a year subject to terms & conditions.

•    Concessional Excise Duty (2%) without CENVAT
Credit on Specified Products of mass consumption.

b)  Finance Act, 1994 (Act)

     (Service Tax)

•    SSI Exemption Scheme upto Value of Taxable
Services of 10 lakh in a year subject to terms & conditions.

c)  Maharashtra VAT, 2002

•    Turnover upto 5 lakh in a year subject to
conditions.

•    Composition Scheme for specific businesses
subject to terms & conditions.

2.2  Threshold Limits under GST

a)  The threshold limits under Central Goods &
Services Tax Act, 2017 (CGST) & State Goods & Services Tax Act 2017
(SGST) are as under :

•    turnover upto 10 lakh in a year
(Registration Limit 9 lakh)

•    turnover upto 5 lakh in a year (Registration
Limit 4 lakh) for Specified States.

b)  There is no threshold limit under the
Integrated Goods & Services Tax Act, 2017 (“IGST”) in regard to inter–state
transactions of goods & services

c)  For computing the threshold limit, “aggregate
turnover” is defined u/s. 2(6) of CGST as under:

“aggregate turnover” means the aggregate value of all taxable
supplies (excluding the value of inward supplies on which tax is payable by a
person on reverse charge basis), exempt supplies, exports of goods or services
or both and inter–State supplies of persons having the same Permanent Account
Number, to be computed on all India basis but excludes Central tax, State tax,
Union territory tax, integrated tax and cess;

d)  Under Section 2 (47) of CGST, “exempt supply”
is defined as under :

“exempt supply” means supply of any goods or services or both
which attracts nil rate of tax or which may be wholly exempt from tax u/s. 11,
or u/s. 6 of the Integrated Goods and Services Tax Act, and includes
non–taxable supply;

e)  Notwithstanding the threshold limits stated in
Para (a) above, the following category of persons shall be required to be
compulsorily registered in terms of ection 24 of CGST:

i)   Persons making any inter–State taxable supply

ii)  Casual taxable persons

iii)  Persons who are required to pay tax under
Reverse Charge

iv) Persons who are required to pay tax under
section 9(5) of CGST

v)  Non – Resident taxable persons

vi) Persons who are required to deduct tax u/s. 51
of CGST whether or not separately registered

vii) Persons who supply goods and/or services on
behalf of other registered taxable persons whether as an agent or otherwise

viii)Input
Service Distributor, whether or not separately registered

ix) Persons who supply goods and/or services, other
than supplies specified in Section 9(5) of CGST, through electronic commerce
operator who is required to collect tax at source u/s. 52 of CGST

x)  Every electronic commerce operator

xi) Every person supplying online services from a
place outside India to a person in India, other than a registered person.

xii) Such other person or class of persons as may be
notified by the Central Government or a State Government on the recommendations
of the Council.

3   Composition Scheme – Section 10 of CGST
(Scheme)

a)  The Salient Features of the Scheme are as
under:

i)   Scheme is available to those SMEs whose
aggregate turnover in a financial year does not exceed Rs. 75 lakh (increased
from earlier limit of 50 lakh as per press reports) on an optional basis if the
registered person :

•    is not engaged in supply of services other
than supply of food & services for human consumption [as referred in clause
(b) of para 6 of Schedule II – CGST]

•    is not engaged in making any supply of goods
which are not leviable to tax under CGST

•    is not engaged in making an interstate
outward supplies of goods

•    is not engaged in supply of goods through
electronic commerce Operator (covered by section 52 of CGST)

•    is not a manufacturer of such goods as may
be notified by the govt. 

ii)  All registered taxable persons having the same
PAN number can opt for the Scheme if all such persons also opt for the Scheme:

iii)  The taxable persons opting for the Scheme will
have to pay a fixed percentage of gross turnover as tax. The rates of tax for
Composition Scheme are as under :

Category of persons	Rate of tax as % of Turnover	Aggregate rate of tax (Centre & State) as % of Turnover
Manufacturers (other than notified goods)	1%	2%
Service Providers [viz Suppliers of food / beverages  as referred in clause (b) – Para 6, Schedule II of CGST]	2½	5%
Any other eligible supplier u/s. 10 of CGST	½ %	1%

iv) SME opting for Scheme would not be entitled to
any ITC.

v)  Taxable persons who opt for the Scheme will
not be allowed to charge GST in their invoice and cannot recover tax from
customer

vi) Scheme is subject to reverse charge provisions
contained in section 9(3) & (4) of CGST

vii) The option availed of by a registered person
under the Scheme shall lapse from the day on which his aggregate turnover
during a financial year exceeds the specified limit of 75 lakh (increased from
50 lakh as per press reports)

viii)Registered
Person opting for the Scheme shall have to comply with conditions &
restrictions stipulated under the Composition Rules notified under CGST / SGST. 

4       Concerns of SME Sector

4.1    Fixation to Effective lower threshold would
expand SME Coverage under GST

a)  The threshold limits under GST regime, as
stated in para 2, above, is likely
to bring a large chunk of SME Sector under GST inasmuch as :

•    Present exemption limit of 150 lakh under
central excise is reduced to 20 lakh under GST;

•    Presently, a tax payer having business
across different states in India, is entitled to the benefit of threshold limit
in each State. Under GST, in such cases, the threshold limit would be available
on an all India
basis; and

•    Compulsory Registration irrespective of
threshold limit for large number of specified tax payers as stated in para 2.2(e)
above, would result in substantially higher registrations.

b)  Compared to the threshold exemption scheme
presently prevalent which is applicable to taxable turnover (Central Excise
& Service tax,) effective threshold limits under GST would be very low
inasmuch as :

•    for computing, aggregate turnover, taxable
and exempt supplies of goods & services & export turnover is to be
considered

•    “exempt supply” would cover non taxable
supplies.

     These factors would make the effective
threshold limit for Registration under GST very low & increase
registrations in SME Sector substantially:

     It has been provided in section 23(1)(a) of
CGST that a person engaged exclusively in the business of supplying not taxable
/exempt goods & services shall not be required to be registered. However,
even with a nominal taxable supply of goods /services, registration may become
necessary if the aggregate turnover exceeds Rs. 20 lakh.

     A significant fall out of the above, is
that such persons would be hit by provisions of section 9(4) of CGST discussed
in para 4.2 hereafter.

c)  Even in cases covered by section 23(1)(a) of
CGST, Registration would become necessary, in regard to cases covered under
Reverse Charge Provisions [viz section 9(3) of CGST.]

d)  Since the threshold limit of 75 lakh
(increased from 50 lakh as per press reports) for Composition Scheme would
cover exempt / non–taxable Supplies, the effective exemption limit would be
very low. In this regard, it is pertinent to note that, in the Union Budget for
2016-17 the turnover limit for presumptive taxation (for Specified Business)
has been increased from 1 crore to 2 crore.

4.2    Tax on purchases by registered persons from
unregistered persons 

The relevant
extract of section 9(4) of CGST is reproduced hereafter :

The Central tax in respect of the supply of taxable goods or
services or both by a supplier, who is not registered, to a registered person
shall be paid by such person on reverse charge basis as the recipient and all
the provisions of this Act shall apply to such recipient as if he is the person
liable for paying the tax in relation to the supply of such goods or services
or both.

It is very likely that a large number of SME businesses
(traders, service providers etc.) could be within threshold limit of Rs.
20 lakh and hence strictly not required to be registered under GST. However, as
stated above, a most unprecedented provision has been made under GST law, to
the effect that if a registered person purchases goods/services from an
unregistered person, he is  required to
discharge tax liability under reverse charge basis on such purchases without
any threshold limit.

This provision is most
absurd and defies any rationale inasmuch as the govt. on the one hand has given
threshold exemption and at the same time, has indirectly taken it away on the
other hand. It would increase compliances (preparation of invoices for each
procurement) for the registered SME and also increase costs of doing business.
Another implication is, due to increased compliances, registered persons may
avoid dealing with unregistered SME. This could drive away lakhs of SMEs out of
business & affect their basic survival & livelihood.

4.3    Hardship Provisions relating to Input Tax
Credit (ITC)

a)  No ITC in cases where tax is not paid by the
supplier

     Section 16(2)(c) of CGST provides that no
ITC can be claimed, by a taxable person who receives the goods/services, in
cases where the GST is not paid by the supplier of goods & services.

     This is a highly draconian provision in GST
without any sound justification & rationale inasmuch as a taxpayer
receiving goods / services and making valid payment (with tax) to the supplier
would be penalised for default committed by the supplier (non – payment of
tax). Instead, in such cases, the supplier should face stiff penal actions.
Instead, a compliant tax payer is being penalised, for no fault of his. 

     It has
been a very well settled practice, under MODVAT (CENVAT) Credit Mechanism which
is prevalent under Central Excise / Service Tax for the past 30 years, to the
effect that, if the manufacturer / service provider availing credit has
properly and validly received goods / services supported by duty / tax paid
document and has taken reasonable steps to ensure that there is no malafide
evidence from the duty / tax paid document issued by the supplier, such
manufacturer / Service provider is entitled to Credit and Credits cannot be
reversed even in cases where it is subsequently found that the supplier has not
paid the duty / tax to the govt. There is no convincing reasoning / justification
provided as to why this settled practice is being done away with under GST.

    This provision would create unprecedented
hardships to Trade & Industry particularly in the SME Sector which is
always short of working capital and is contrary to the cause of “ease of doing
business” in India. 

b)  Matching, Reversal & Reclaim of ITC

     Under the GST regime, all GST registered
businesses are required to uplift all supply information through the GSTN
portal by the 15^th day following the close of a month. In order to
claim an ITC, the purchaser must upload all purchase information by the 15^th
day following the close of that month. A credit will only be available where
the purchaser’s invoice matches the sales invoice uploaded by the supplier and
the GST has been paid.

     Under this approach, it will be almost
impossible for a business to claim its credit entitlement on a timely basis.
The delay in claiming credits and the costs associated with managing this
system alone will unnecessarily increase the working capital of SME businesses,
eroding one of the benefits of moving to a GST system.

c)  Reversal of ITC in case of non – payment to
supplier

     In cases where a registered person avails
ITC but payment is not made to supplier within 180 days from the date of issue
of invoice, such registered person is required to reverse such ITC and also
liable to pay interest from the date of availment of ITC till the date of
payment. It is further provided that, such registered person shall be entitled
to claim ITC upon payment.

     This would adversely impact the SME Sector
who usually operate with low margins and under severe working capital
constraints.

d)  Denial of ITC in case of non –
compliances 

Some
examples are as under :

i)   No ITC would be available during the period
for which a tax payer is not registered.

ii)  Non – filing of GST returns for a consecutive
period of six months (3 Returns in case of Composition Scheme), would result in
cancellation of the GST registration. The fallout of this provision is onerous,
inasmuch as a cancellation of registration under GST shall be deemed to be a
cancellation of registration under GST. Further, once registration is
cancelled, ITC would be denied to the customers of such taxpayer.

iii)  Section 16(2)(d) of CGST provides that
registered taxable person shall not be entitled to ITC unless he has furnished
Return u/s. 39.

     The above provisions are too harsh inasmuch
non – compliances could happen due to variety of reasons and would adversely
impact SME Sector who operate with limited infrastructure.

4.4   Working Capital Blockages & Constraints 

     In addition to the hardship provisions
relating to ITC stated in Para 4.3 above,
the following provisions under GST, would also result in working capital
blockages & impact cash flows of SME Sector :

a)  Unlike the practice prevalent under current
indirect tax regime, under GST regime, stock transfers to own branches would be
taxable. With GST being paid on the date of transfer but Credit becoming
available only when stocks are liquidated by the receiving branch, cash flows
would be severely impacted.

b)  Merchant Exporters’ Business Model is widely
prevalent in the SME Sector. Under the existing indirect tax regime, Merchant
Exporters procure goods from exempted SSI units without excise duty and without
payment of State VAT in terms of declaration filed for export. However, under
the GST regime, suppliers’ would charge GST/SGST/IGST to the Merchant
Exporters. Upon payment, Merchant Exporters would have to claim refund. Though
it has been provided that 90% of the refund claims would be granted
provisionally within 7 days, delays are very much likely. This is likely to
create huge cash flow constraints for SME Merchant Exporters’ and cause
hardships.

4.5    Substantial Increase in Compliances 

It is widely known that the SME Sector operates with a very
limited skilled infrastructure. The level of statutory compliances, at the present
itself, is very high. Since GST would work on total automation, compliance
level is likely to increase substantially. Under GST, 3 Returns would be
required to be filed every month and 1 Annual Return. In case TDS provisions
are applicable, there would be additional compliance. The compliance costs are
likely to increase substantially for the SME Sector (including non–profit
bodies, Co-operative Societies etc.).

4.6    Recommendation

Considering the peculiar business scenario in the country and
the circumstances under which SME Sector operates, their significance in the
Indian Economy and practices prevalent worldwide, the following is recommended: 

–   Threshold
limits (including composition) should be rationalised. In this regard,
Threshold for presumptive taxation under income tax, be considered.

–   Scope of
Composition Scheme should be enlarged to cover specific businesses (as
successfully prevalent under present State VAT regime).

INTRODUCTION

Most of the indirect tax statutes in India are based on selfassessment
procedure. Filing of returns is an important
part of implementing the tax and the self-assessment
scheme. In simple words, a return is a declaration that
a tax payer gives to the tax administration which would
broadly comprise of furnishing details of his outward
supplies (and the tax collected thereon), inward supplies
(and tax charged thereon) and the net tax payable or
refundable.

Due to the multiplicity of indirect taxes, a tax payer, at
present, may be required to file more than one return
under more than one of the applicable tax legislations.
Each of the applicable legislations would have its own form
of return requiring various details. This makes compliance
under existing indirect tax structure time-consuming and
cumbersome.

RETURN FILING PROCESS UNDER GST
REGIME

A return is defined u/s. 2(97) to mean any return prescribed
or required to be filed under the Act or any rules made
thereunder. While the procedure of self-assessment would
continue under the GST regime, the process of return
filing would witness a radical change. Broadly, the filing
process envisages furnishing information through three
statements/returns, which are required to be furnished by
three different dates as prescribed under the law. In view
of complete electronic compliance and matching concept,
the sensitivity of furnishing accurate data would assume
immense importance in the GST regime.

SALIENT FEATURES OF RETURN
COMPLIANCE UNDER GST

TYPES OF RETURNS UNDER GST

The types of returns, nature of compliance, periodicity
and references to statutory provisions and return rules
are tabulated hereunder:

FORM GSTR1: DETAILS OF OUTWARD
SUPPLIES

The process of return filing under GST shall commence
with Form GSTR-1. A registered taxable person [‘RTP’]
shall furnish details of his outward supplies [including
deemed supplies under Schedule-1]. The various tables
in the form are summarised hereunder:

AUTO DRAFTED DETAILS OF SUPPLIES
– GSTR-2A/ 4A/ 6A

Auto drafted details of outward supplies furnished
by n-number of suppliers shall be communicated to
respective RTP’s in Form GSTR 2A [regular RTP’s],
GSTR-4A [Composition RTP’s] and GSTR-6A [ISD’s].
These shall be made available to the recipients after 10th
of the month following the tax period on the common
portal based on details furnished in GSTR 1, 5, 6, 7 and 8. The auto drafted details shall comprise of the following:

FORM GSTR2: FURNISHING DETAILS OF
INWARD SUPPLIES

Section 38 of the CGST Act states that every RTP shall
furnish details of inward supplies received during a month.

This process would require the RTP to first go through
the herculean task of reconciling the auto drafted details
made available in GSTR-2A with the actual supplies as
per his books of accounts. Supplies that are not auto
populated shall be entered by the RTP and he shall selfclaim
the credit thereon. Table-wise details to be furnished
in GSTR-2 are summarised hereunder:

FORM GSTR-1A: AUTO DRAFTED DETAILS
OF SUPPLIES TO SUPPLIER

Details of inward supplies as added, corrected or deleted
by the recipients shall be communicated to the supplier
in Form GSTR-1A [Section 38(3)/ (4) r/w Rule Ret-1(4)].
This implies that supplier shall be provided only details
of unmatched transactions in GSTR-1A.The source of
details appearing in GSTR-1A shall be counter party
GSTR 2, GSTR-4 or GSTR-6. The supplier is required to
accept or reject the details contained in GSTR-1A on or
after 15th but before the 17th of the month succeeding the
tax period. Consequently, details furnished in GSTR-1 by
such supplier shall be updated. If the supplier does not accept the change made by the recipient, it shall qualify
as an unmatched transaction in the hands of the recipient.
GSTR-1A shall contain details of mismatch in respect of:

 Taxable supplies to RTP other than those attracting
RCM

 Taxable supplies to RTP attracting RCM

 Zero rated supplies made to SEZ units or developer
and deemed exports

 Debit/ Credit notes including amendments there of
issued during the period.

FORM GSTR-3: MONTHLY RETURN

Subsequent to filing GSTR-1 and 2, a monthly return in
Form GSTR-3 has to be furnished which can be filed only
after GSTR-1 and 2 are uploaded. It consists of two parts.
Part-A shall be auto generated based on details furnished
in GSTR-1 and 2. It comprises of details of turnover,
output taxes, RCM liability, ITC, reversal and reclaims
relating to ITC and reduction in output liability, TDS, TCS
and liability to pay interest and late fees. In Part-B, the tax
payer needs to furnish details of tax, interest and late fee
payments and details of refund claims.

PART-A: Elements relating to ITC and other credits

Part-A would also provide details of various credits that
flow from the claims made in GSTR-2. The structure of
details relating to credits is explained with the help of a
diagram hereunder:

PART A: Details of Interest and Late Fees

Table 10 shall auto populate levy-wise details of interest
payable on account of various reasons. Extract of the
table is reproduced hereunder. Table 11 shall also furnish
details of late fees payable.

PART-A: Elements for computing total tax liability in Table 9

Part B of the return is to be filled by the tax payer. Various
tables in which details have to be furnished in Part B are
enumerated hereunder:

FORM GSTR-4: QUARTERLY RETURNS BY
COMPOSITION TAX PAYER

Section 10 of the CGST Act provides for composition
levy for small businesses.The threshold for opting for
composition levy has been capped at Rs. 75 Lakhs.
Under composition levy the RTP is not allowed to claim
ITC. However, he has to verify details of inward supplies
received in Form GSTR-4A and prepare details of inward supplies. GSTR-4 is a consolidated return which would
contain details of outward and inward supplies and
computation of tax and other dues and details of payment
thereof.

Where RTP opts for paying tax under composition at the
beginning of the financial year, the RTP shall continue to
furnish GSTR 1, 2 and 3, wherever required, relating to
supplies for the prior period. He shall continue doing so till
the due date for filing return for the month of September
in the succeeding financial year or date of furnishing of
annual return for the previous year, whichever is earlier.
However, in such cases he shall not be entitled to claim
any ITC in respect of invoices pertaining to period
prior to opting for composition levy [Rule Return-4(4)].
Conversely on the same lines where RTP opts to withdraw
from composition he shall continue filing GSTR-4, where
required up to the dates referred above [Rule Return-4(5)].
Broad contents of GSTR-4 are tabulated hereunder:

FORM GSTR-5: RETURN FOR NON-RESIDENT
TAXABLE PERSON

Non-Resident taxpayers are required to furnish details of
all taxable supplies in GSTR-5.Details to be furnished in
GSTR-5 are tabulated hereunder:

FORM GSTR-5A: DETAILS OF SUPPLIES OF
OIDAR SERVICES BY A PERSON LOCATED
OUTSIDE INDIA TO A NON-TAXABLE PERSON
IN INDIA

The above person shall be required to furnish return in
Form GSTR-5A. Details to be furnished in the return
broadly include the following:

1 State wise and rate wise details of supplies made to
consumers in India and IGST/ Cess thereon
Amendments to above details may be made in Table
5A

2 Interest, penalty or any other amount payable

3 Tax, Interest, late fee or any other amount payable
and paid.

FORM GSTR-6: RETURN FOR INPUT SERVICE
DISTRIBUTOR [‘ISD’]

An ISD is shall furnish details of receipt ITC for distribution
and distribution of ITC in GSTR-6. The auto populated
details of inward supplies shall be made available to ISD
in GSTR-6A. The ISD shall verify, modify, accept or reject
the contents and prepare details in GSTR-6. Since, the
ISD only receives tax invoices it shall not be liable for any
payment under RCM. At its level it has to identify invoices
with respect to eligibility of ITC at invoice level in GSTR-6.
However, it shall distribute the eligible as well as ineligible
ITC [Table-5]. Further, Tax effect of amendments, credit
and debit notes as well as mismatches of ITC shall also
be distributed amongst the units by issuing credit note
[Table-8]. Any excess or short distribution amongst units
shall be re-distributed [Table-9]

FORM GSTR-7: RETURN FOR TAX DEDUCTION
AT SOURCE [‘TDS’]

Under the GST regime, certain persons are required to
deduct tax at source on specified inward supplies. Details
to be furnished in GSTR-7 include the following:

 Deductee-wise details of amount paid and TDS
deductee quoting the GSTIN of the deductee.

 Amendments to above details furnished can be made
in Table 4.

 Amount of TDS and amount paid.

 Interest, late fees payable and paid.

 Refund claimed from Electronic cash ledger

 Details of entries in Electronic cash ledger for payment
of TDS/ Interest shall be populated after payment of
tax and submission of returns

 Certificate of TDS is to be issued in GSTR-7A

FORM GSTR-8: STATEMENT OF TAX
COLLECTION AT SOURCE [‘TCS’]

An E-Comm is required to collect tax at source from net
value of taxable supplies made through it. It has to furnish
details of supplies made through it and the TCS in GSTR-
8. Broad details furnished in GSTR-8 are as under:

MISCELLANEOUS RETURN COMPLIANCES

Every RTP [Other than ISD, NR Taxable person, casual
taxable person and persons liable for TDS/ TCS] shall file
an annual return for every financial year on or before 31st
December of following the end of the said financial year:

LATE FEE [SECTION 47]

Section 47 provides for levy of late fee for default in
furnishing of returns on or before the due date. The same
are tabulated hereunder:

MATCHING CONCEPT

The GST regime has introduced the concept of matching
claims of ITC and claims relating to reduction of output
taxes by a RTP. This concept forms an important basis for
claiming of ITC under GST regime. Currently, many states
in India match input set-off claimed with corresponding
sales disclosed by suppliers. However, this is not a
practice followed under Central Excise and Service Tax.
Under GST regime the matching is envisaged on two
broad fronts:

 Matching of ITC claims

 Matching of claims relating to reduction in output tax
[e.g. Credit notes].

MATCHING, REVERSAL AND RECLAIM OF
ITC [SECTION 42]

Section 41 states that a RTP shall be allowed to self-claim
ITC in respect of his inward supplies on provisional basis
for 2 month [As per the FAQ released by the CBEC on
31-03-2017]. This provisional acceptance shall be subject
to the matching of claims in terms of section 42. In terms
of section 42, all claims of ITC by a RTP being a recipient
of supply shall be matched by the GSTN portal after the
due date of filing GSTR-3. The claims shall be matched –

 With corresponding details of outward supply
furnished by the concerned supplier in the same or
earlier month. Following details shall be matched:

• GSTIN of Supplier

• GSTIN of the Recipient

• Invoice or Debit note no.

• Invoice or Debit note date

• Tax Amount

 With the IGST paid on Import of goods by him

 For duplications of claims of ITC

Claims shall be accepted in following cases

 In respect of invoices and debit notes that were
accepted by the recipient without amendments on the
basis of GSTR-2A shall be accepted subject to the
supplier filing a valid return;

 Where the amount of ITC claimed by the recipient is
equal to or less than the amount of output tax paid by
the supplier on such invoice or debit note.

Explanation 1 & 2 to Rule ITC-10]

Details of claims that have matched shall be communicated
to the recipient in Form MIS-1 [Rule ITC-11]

Discrepancy in ITC Claim

The matching process may lead to discrepancy on
following broad grounds:

 Recipient has claimed ITC in excess of the tax
declared by the supplier

 There is no matching declaration by the supplier

 Duplication of claim of ITC by recipient.

Consequences in Case of Discrepency

The discrepancy in ITC claim shall be communicated on
GSTN portal to the recipient in [Form MIS-1] and supplier
[Form MIS-2] on or before the end of the month in which
matching is done. This process may lead to the following
situations:

MATCHING, REVERSAL AND RECLAIM OF
REDUCTION IN OUTPUT TAX [SECTION 43]

The matching process envisaged by section 43 is in respect
of credit notes issued by a RTP. Any reduction in output
tax on account of credit note requires a corresponding
reversal of ITC claim by the recipient. Section 43 states
that the details of every credit note issued by a supplier
shall be matched –

 With the corresponding reduction in claim of ITC by
the recipient, in the same or subsequent month, and;

 For duplication in claim of reduction of output tax

The matching of reduction in output tax shall be done in
respect of following details:

 GSTIN of the supplier and the recipient

 Credit note no. and date

 Tax amount

The other procedure relating to matching, reversal and
reclaim of reduction in output tax contained are similar to
provisions relating to matching, reversal and reclaim of
ITC discussed above.

CONCLUSION

It is evident that compliance under GST is going to be a
month-long activity and not a monthly activity. Accuracy
of data punching would be of utmost importance. Further,
the technology driven matching concept would surely
make GST a self-monitoring system. However, in times
to come small businesses would face great challenge in
coping up with high compliance requirements coupled
with increased cost of compliances.

GLOSSARY/NOTE

 E-Comm: Electronic Commerce Operator

 RTP: Registered Taxable person

 ITC – Input Tax Credit

 All references to section should be read as reference
to CGST Act.

Registration of an assessee or a ‘taxable person’ is the
starting point in any tax law. It is the most fundamental requirement of
identification of the business for tax purposes and monitoring compliance
requirements.

CGST Act provides for registration of every supplier
effecting the taxable supplies. Every supplier having aggregate turnover
exceeding Rs. 20 lakh in the financial year is required to be registered. This
threshold limit of Rs.20 lakh is reduced to Rs.10 lakh in cases of supplies
effected in the States of Himachal Pradesh, Uttarakhand, Manipur, Arunachal
Pradesh, Assam, Jammu & Kashmir, Meghalaya, Mizoram, Nagaland, Sikkim, and
Tripura. For calculating the Threshold limit, supply of goods by a registered
Job-worker after completing job work, shall be treated as the supply of goods
by the “principal” and shall not be included in the aggregate
turnover of the registered job worker.

Registration, under GST, is a State-wise requirement which
means a person making supplies in every State is required to be separately
registered in that State once the threshold limit is crossed taking to account
supplies from all States. Such a person making taxable supplies from different
places in the State will be required to take one registration in the State,
except in case of business verticals in which case multiple registrations are
permitted. If a tax payer supplies from different places in the State, he has
to opt for one place as “principal place of business” and mention all other
places in the State as “additional place of business” at the time of obtaining
registration. The application for registration will have to be made within 30
days from the date the liability of registration arises.

A business vertical means a distinguishable component of an
enterprise that is engaged in the supply of individual goods or services or a
group of related goods or services which is subject to risks and returns that
are different from those of the other business verticals and for this purpose
the following factors shall be considered:

–   the nature of the goods or services;

–   the nature of the production processes;

–   the type or class of customers for the goods
or services;

–   the methods used for distribution of goods or
supply of services; and

–   the nature of regulatory environment
(wherever applicable), including banking, insurance, or public utilities.

Aggregate turnover is defined to mean the aggregate value of
all taxable supplies, exempt supplies, export of goods or services or both and
inter-State supplies made by the person having same Permanent Account Number to
be computed on the all India basis. However, Central tax (CGST), State tax
(SGST), Union Territory tax (UTGST), Integrated tax (IGST) and Cess are not to
be included in such supplies. Further, value of inward supplies on which tax is
payable on reverse charge basis is also to be excluded.

A Special Economic Zone unit or developer shall make a
separate application for registration as a business vertical distinct from its
other units located outside the Special Economic Zone.

All the existing tax payers (under Excise, VAT or Service
Tax) are not eligible for threshold limit exemptions. They have to compulsorily
migrate and obtain provisional registration from GSTN before the appointed day,
irrespective of the fact that their turnover is less than threshold limit
specified in the GST Law. However, such tax payers can opt out from the
provisional registration if their supplies are not covered under GST or they
are within the threshold limit.

A casual taxable person or a non-resident taxable person
shall have to apply for the registration at least 5 days prior to the
commencement of business. A casual taxable person is one who occasionally
undertakes transaction involving supply of goods for services or both in the
course or furtherance of business in a State or Union Territory where he does
not have fixed place of business. A non-resident taxable person is one who
occasionally undertakes transaction involving supply of goods for services or
both in the course or furtherance of business but not having fixed place of
business or residence in India.

Categories of persons who are required to be registered
irrespective of the threshold

–   person making any inter-State taxable supply;

–   casual taxable person making taxable supply;

–   persons who are required to pay tax under
reverse charge;

–   electronic commerce operator undertaking
supplies on behalf of other suppliers (liable to discharge tax liability for
supply of services as may be notified)

–   non-resident taxable person making taxable supply;

–   persons who are required to deduct tax at
Source under GST;

–   persons who supply goods or services or both
on behalf of other registered taxable person whether as an agent or otherwise;

–   input service distributor;

–   every electronic commerce operator;

–   every person supplying online information and
database access or retrieval services from a place outside India to a person in
India, other than a registered taxable person;

–   such other person or class of persons as may
be notified by the Central Government or a State Government on the
recommendations of the Council.

Following persons are not liable for registration

–   Any person engaged exclusively in the
business of supplying goods or services or both that are not liable to tax or
wholly exempt from tax under CGST or under the Integrated Goods and Services
Tax Act

–   An agriculturist, to the extent of supply of
produce out of cultivation of land.

–   Government may, on the recommendations of the
Council, by notification, specify the category of persons who may be exempted
from obtaining registration under this Act.

Voluntary registration

Provisions are made for a person, though not required to be
registered, may get himself registered voluntarily.

Deemed registration or rejection of application for
registration and cancellation or revocation of registration certificate

Any grant of registration or Unique Identity Number under any
SGST or UTGST shall be construed as grant of registration under CGST.
Similarly, any grant of registration or Unique Identity Number under CGST shall
be construed as grant of registration under SGST or UTGST, as a case may be.
Any rejection of application for registration or cancellation or revocation of
registration shall be treated likewise.

Transfer of Business and Registration

A transferee, or the successor of a business on going concern
basis shall be liable to be registered with effect from the date of such
transfer or succession. In a case of transfer pursuant to sanction of a scheme
or an arrangement for amalgamation or, de-merger of two or more companies by an
order of a High Court, the transferee shall be liable to be registered with
effect from the date on which the Registrar of Companies issues a certificate
of incorporation giving effect to such order of the High Court. This means that
the Registration Certificate issued to a person is not transferable to any
other person.

Special Provisions relating to casual taxable person and
non-resident taxable person

The Certificate of Registration issued to a casual taxable
person and non-resident taxable person shall be valid for 90 days from the
effective date of registration or any earlier period as specified in the
application. An extension of period not exceeding 90 days may also be granted
on sufficient cause being shown. An advance deposit of tax shall be credited to the electronic cash ledger equivalent to the estimated
tax liability for the registration period sought.

Suo Moto Registration by the department

During the course of any survey, inspection, search, enquiry
or any other proceeding under the Act, it is found that a person liable to
register has failed to apply for the same, proper officer may register such
person on temporary basis and issue order in FORM GST REG-12. Registration will
be effective from the date of order. Such person is required to apply for
registration within 30 days from the date of such temporary order, unless he
files an appeal against such order.

Amendment to registration

There are various situations in which the Registration issued
by the competent authority requires amendment in line with real time
situations. In such a case, every registered taxable person shall inform any
changes in the information furnished at the time of registration within 15 days
of such changes.

The proper officer cannot reject the request for amendment
without affording a reasonable opportunity of being heard by following the
principles of natural justice.

Cancellation of registration

A registration granted can be cancelled by the proper officer
either on his own or on application of the registered person when —

–   the business is discontinued, transferred
fully for any reason including death of proprietor, amalgamation with other
legal entity, demerged or otherwise disposed of; or

–   there is any change in the constitution of
the business; or

–   the taxable person is no longer liable to be
registered.

     Registration may be cancelled
retrospectively if the proper officer so deems fit any of the following
situations after giving the person an opportunity of being heard:

(a)
Registered person has contravened such provisions of the Act or Rules;

(b) Person
paying tax under Composition Scheme has not furnished returns for 3 consecutive
tax periods;

(c) any
taxable person has not furnished returns for a continuous period of 6 months;

(d) person
who has taken voluntary registration has not commenced business within 6 months
from the date of registration;

(e)
Registration has been obtained by means of fraud, willful misstatement or
suppression of facts.

As such, cancellation of registration shall not affect the
liability of the taxable person to pay tax and other dues under the Act for any
period prior to the date of cancellation whether or not such tax and other dues
are determined before or after the date of cancellation.

Where the registration is cancelled, the registered taxable
person shall pay an amount equivalent to the credit of input tax in respect of
inputs held in stock and inputs contained in semi-finished or finished goods
held in stock on the day immediately preceding the date of such cancellation or
the output tax payable on such goods, whichever is higher. The payment can be
made by way of debit in the electronic credit or electronic cash ledger.

In case of capital goods, the taxable person shall pay an
amount equal to the input tax credit taken on the said capital goods reduced by
the percentage points (to be prescribed) or the tax on the transaction value of
such capital goods whichever is higher.

Revocation of cancellation of registration

Any registered taxable person, whose registration is
cancelled, may apply to proper officer for revocation of cancellation of the
registration within thirty days from the date of service of the cancellation
order.

The proper officer shall not reject the application for
revocation of cancellation of registration without giving a show cause notice
and without giving the person a reasonable opportunity of being heard.

Procedure for registration

–   Online application to be made in FORM GST
REG-01 by declaring PAN, mobile number, email address, State or UT, along with
other documents duly signed and electronically verified. Persons who are liable
to deduct TDS or collect TCS shall apply in FORM GST REG-07. Non-resident
taxable person shall apply in FORM GST REG-09. A non-resident taxable person
shall be allotted a Temporary Reference Number for making an advance deposit of
estimated tax liability.

–   Acknowledgement will be generated in FORM GST
REG-02.

–   Proper officer shall either grant
registration or issue a notice in FORM GST REG-03 for any additional
information and clarification within 3 working days. Applicant should reply in
FORM GST REG-04 within 7 working days from date of receipt of notice. If
applicant fails to reply, proper officer may reject the application in FORM GST
REG-05 or if he is satisfied with the information furnished then he may grant
registration within 7 working days

Background

Introduction of The Goods and Services Tax (‘GST’) is being
touted as a paradigm shift in the field of indirect tax reforms in India and
rightly so because it is expected to change the manner in which taxes are
administered and at the same time it will change the way business is conducted
in India. Two key outcomes expected after the introduction of GST is the
reduction of the cascading effect of multiple taxes and the creation of a
common national market. These outcomes are sought to be achieved by merging
several Central and State taxes into a single tax namely GST, parallelly, the
introduction of GST will also make tax administration transparent and easier to
administer.

By the time this article is published, GST will have come
into effect and India will have embarked on its journey to an integrated goods
and services tax regime.

Islands of data

With the introduction of GST there was a need for a mega
infrastructural support and IT infrastructure is a key component in this.
Before GST, the Centre and State indirect tax administrations have been working
under different laws, regulations, procedures and formats and consequently they
had independent IT systems. Needless to say, independent IT systems are small
islands of data – isolated from others and dis-integrated. Integrating them for
GST implementation and bringing them under an entirely new indirect tax system
and administration need fresh institutional arrangement. For this task, the
government has created Goods and Services Tax Network (GSTN).

Concept

The GST System Project is a unique and complex IT initiative.
It is unique as it seeks, for the first time to establish a uniform interface
for the tax payer and a common and shared IT infrastructure between the Centre
and States. Integrating them for GST implementation is a complex exercise given
that it entails the consolidation of all the tax administrations (Centre, State
and Union Territories) to the same level of IT maturity with uniform formats
and interfaces for taxpayers and other external stakeholders, only then an
indirect tax ecosystem will be created.

Besides the above, given that GST is a destination based tax,
the settlement mechanism amongst the States and the Centre for settlement of
taxes accruing from inter-State trade of goods and services (IGST) needs to be
robust. This will be possible only when there is a strong IT Infrastructure and
Service back bone which enables capture, processing and exchange of information
amongst the stakeholders (including tax payers, States and Central Governments,
Accounting Offices, Banks and RBI).

The Goods and Services Tax Network (‘GSTN’)

GSTN is a section 25, not for profit organisation owned by
government and private players jointly. GSTN has been entrusted with the
responsibility of building Indirect Taxation platform for GST to help tax
payers prepare, file, rectify returns and make payments of their indirect tax
liabilities. It is expected to be a one stop solution for all indirect tax
requirements, business will be able to manage tax easily. Unlike current
indirect tax, where there are multiple sites backed by provisions and
compliances, it is expected to become lot easier for the assesse and government
to track the status of returns and payments with the help of GSTN.

What are the functions of GSTN?

The GSTN as a back end infrastructural support mechanism has
the main responsibility of providing a robust IT infrastructure and related
services to the Central and State Governments, taxpayers and other
stakeholders, by integrating the common GST portal and connecting it to the
existing tax administration IT systems.

Administrative functions of GSTN

GSTN as a tax
administration platform will be inter-connected with the existing
administrative mechanisms. The common GST Portal developed by GSTN will
function as the front-end of the overall GST IT eco-system. The common GST
portal by GSTN will process applications for registration, payment, return and
prepare MIS/ reports.

Similarly, the IT systems
of CBEC (Central Board of Excise and Customs) and State Tax Departments (except
Model I states) will function as back-ends. The work of back-end operation is
to handle tax administration functions such as registration approval,
assessment, audit, adjudication etc.

Functions of GSTN

Following are the main functions
of GSTN:(i)      facilitating
registration;

(ii)    filing
and forwarding the returns to Central and State tax authorities;

(iii)   computation
and settlement of IGST;

(iv)   matching
of tax payment details with banking network;

(v)    providing
various Management Information System reports to Governments.

(vi)   analysis
of tax payers’ profile; and

(vii) running
the matching engine for input tax credit.

Relationship of GSTN with Tax Administrations

The common GST Portal developed by GSTN will function as the
front-end of the overall GST IT eco-system. The IT systems of CBEC and State
Tax Departments will function as back-ends that would handle tax administration
functions such as registration approval, assessment, audit, adjudication etc.
Various States and CBEC are developing their backend systems themselves. GSTN
is doing the backend for 20 States and 5 UTs. GSTN is interacting with CBEC and
States for ensuring mutual interaction between the front-end that would be
operated by GSTN and the back-ends of the tax administrations. During the
operation phase, as well GSTN will continue the interaction with CBEC and
states and extend help wherever necessary.

GST IT Strategy

The GSTN has been assigned the role of facing taxpayers and
these among other things include filing of registration application, filing of
return, creation of challan for tax payment, settlement of IGST payment (like a
clearing house), generation of business intelligence and analytics. All
statutory functions to be performed by tax officials under GST like approval of
registration, assessment, audit, appeal, enforcement etc. will remain
with the respective tax departments. The diagram below shows the work
distribution.

Role of GSTN with respect to Filing of Returns

Under GST, there will be common return for CGST, SGST and
IGST, eliminating the need to file separate tax returns with Central and state
GST authorities. Checking of claim of Input Tax Credit (ITC) is one of the
fundamental pillars of GST, for which data of Business to Business (B2B)
invoices have to be uploaded and matched. The Common GST Portal created and
managed by GSTN will do this matching on the basis of invoice level data filed
as part of return by all taxpayers. Similar exercise will be done for inter-state
supplies where goods or services will move from the state of origin to the
state of consumption and so will the taxes. The claim of IGST and its
utilisation will be settled based on returns filed at the Common GST portal.

Role of GSTN with respect to Registration Application

Under GST, the registration of taxpayers will be common under
Central and State GST and hence one place of filing application for the same
i.e. the Common GST portal. The application so received will be checked for its
completeness by the GST portal, which will also carry out validation of data
like PAN from CBDT, CIN/DIN from MCA and Aadhaar of promoters, if provided,
from UIDAI. After completion of validation, the registration application will
be shared with respective central and state tax authorities. Query of tax
authorities, if any and their final decision will be communicated to GST portal
which in turn will communicate the same to the taxpayer.

The Common GST Portal, as explained in brief above, will be
the single interface for all taxpayers from any part of the country. Only in
case where a taxpayer is picked up for scrutiny or audit, and such cases are
expected to be small in number, he will interface with the respective tax
authority issuing the notice under the Act. For all other cases, which is
expected to be around 95%, the Common GST Portal will be the only taxpayer
interface.

Access to Data

The design of GST systems is based on role based access. The
taxpayer can access his own data through identified applications like
registration, return, view ledger etc. The tax official having
jurisdiction, as per GST law, can access the data. Data can be accessed by
audit authorities as per law. No other entity can have any access to data.

Challenges

The challenges before the GSTN are daunting but not
unsurmountable. Challenges inter alia include:

–   Integrating multiple databases

–   Creating the IT environment and enabling all
the checks and balances/validation with a moving goal post (frequent changes in
law)

–   Collating data for more than 60 million tax
payers (existing and fresh) and issue registration numbers to all

–   Creating a single window for accepting
returns for all tax payers

–   Creating a facility for accepting invoice
level data on a month to month basis, storing and archiving the same for later
retrieval.

–   Creating and maintaining online credit
ledgers to receive and disseminate data to all stakeholders

–   Enable the online matching of credits and
reconciliation of mis-matches

–   Maintaining data integrity, confidentiality
and security.

Preamble

Usually a supplier of goods or service is a taxable person
liable to discharge tax liability under Goods and Service Tax Act (‘GST Act’).
However, in exceptional cases, GST legislation stipulates that the liability
under the GST Act shall be discharged by recipient instead of supplier of goods
or services. This is popularly known as reverse charge mechanism (‘RCM’).

While the RCM is not entirely a new concept under the Indian
indirect tax landscape, given the fact that it was quite common under the
erstwhile Sales tax regime.  However, the
tax considerations were quite different back then, considering that Sales tax
was a single point levy (i.e. levied at the first point of sale) with limited
input tax credits, leading to value shifting and leakage of tax revenue. In
contrast, the current Value Added Tax regime is a multi-point levy whereby the
full value is captured under the tax net. Similarly, under the Central Excise
legislation, full value is sought to be covered by levying tax on the Maximum
Retail Price (‘MRP’). Due to this reason, perhaps, neither the Central Excise
nor VAT legislation (barring the States of Punjab, Assam and Madhya Pradesh)
presently provides for RCM. Given its successful implementation under service
tax legislation, the Government has decided to continue the same in GST also.

Administrative convenience and ease of tax collection are
primary motivations for using RCM. The tax authorities prefer to collect tax
from small number of assessees from organised sector instead of chasing large
number of small and unorganised tax payers. Broadening tax base could be
another purpose of RCM.

Basics of RCM

Reverse charge applies only when there is a charge on supply.
If supply is exempted, nil rated or non-taxable, RCM does not apply in such a
case.

Recipient of goods or services discharges GST under RCM as if
he is the person liable for paying the tax on supply procured by him. All
provisions of the Act including the collection, recoveries and penal provisions
apply to the recipient and he is required to pay applicable tax i.e. CGST and
SGST/ UTGST, or IGST depending on location of supplier and place of supply. The
tax liability needs to be discharged under RCM at applicable rate of tax.

Recipient makes payment on his own account under the
recipient’s GSTIN number and is declared in his GST Returns as taxable supplies
on which tax liability is discharged.

Payment made under RCM is not a Tax Deducted at Source
(‘TDS’) paid by recipient on behalf of supplier and hence, the supplier does
not get credit of tax paid under RCM by the recipient.

Once the tax is paid under RCM by the recipient, it becomes
an input tax and the recipient (payer of tax under RCM) is entitled to avail
Input Tax Credit (‘ITC’) thereof, subject to other provisions contained in
Chapter V of CGST Act and Input Tax Credit Rules.

Relevant Legal Provisions

Section 9 of Central Goods and Services Tax Act, 2017 (‘CGST
Act’) provides for levy and collection of Central Goods and Service Tax
(‘CGST’). The power to collect tax under RCM from recipient is derived by
government u/s. 9(3) and 9(4) of CGST Act which read as under:

“Section 9(3) – the Government, on recommendation of the
Council, by notification, specify categories of supply of goods or services or
both, tax on which shall be paid on reverse charge basis by recipient of such
goods or services or both and all the provision of this Act shall apply to such
recipient as if he is the person liable for paying the tax in relation to the
supply of such goods or services or both.

Section 9(4) – the central tax in respect of the supply of
taxable goods or services or both by a supplier who is not registered, to a
registered person shall be paid by such person on reverse charge basis as the
recipient and all the provisions of GST legislation Act shall apply to such
recipient as if he is the person liable for paying the tax in relation to the supply
of such goods or services or both.”

Similarly, section 5 of the Integrated Goods and Services Tax
Act, 2017 (‘IGST Act’), section 7 of the Union Territories Goods and Services
Tax Act, 2017 (‘UGST Act’) and respective section of the State Goods and Services
Tax Act, 2017 (‘SGST Act’) also provide for RCM on a similar pattern to that of
the CGST Act.

Reverse Charge Mechanism (‘RCM’) in brief

Based on the above, it can be said that reverse charge
applies in case of notified supplies of goods and services or in case of
supplies by a specified category of suppliers.

RCM on notified goods or services

Recipient of notified goods or services or both is liable to
pay CGST under RCM on supply of notified goods or services u/s. 9(3) of CGST
Act.

Recipient is liable to discharge GST liability under RCM
irrespective of:

–   Recipient being registered person or
unregistered person; or

–   Supplier of notified goods or services is
registered person or unregistered person.

Notified
goods under RCM

Presently, the GST Council has recommended very few goods,
i.e., tobacco leaves, cashewnuts in shell, etc. are notified
goods for the purpose of RCM. Any person buying tobacco leaves will be liable
to discharge GST under RCM on purchase of tobacco leaves.

The Government, on the recommendation of GST Council, may in
future expand the list of goods liable under RCM.

Notified services under RCM

GST Council has recommended following services on
which tax will be payable on RCM:

Nature of Service	Service Provider (‘SP’)	Service Recipient (‘SR’)	% of GST payable by SR
Import of Services	Any person who is located in non-taxable territory	Any person located in taxable territory other than non-assessee online recipient (Business Recipient)	100%
Goods Transport Agency Services in respect of transportation of goods by road	Goods Transport Agency	a. Factory b. Society c. Co-operative society d. Person registered under GST Act e. Body corporate f.  Partnership Firm g. Casual taxable person .	100%
Legal Services	Individual advocate or firm of advocate	Any business entity	100%
Arbitration Services	Arbitral Tribunal	Any business entity	100%
Sponsorship Services	Any person	Body corporate or partnership firm	100%
Services by Government or local authority excluding: – Renting of immovable property – Services by department of posts – Services in relation to aircraft or vessel inside or outside precincts of port / airport – Transport of goods or passengers	Government or local authority	Any business entity	100%
Director’s service	Director of company or body corporate	Company or body corporate	100%
Insurance agency service	Insurance agent	Any person carrying on insurance business	100%
Recovery agency service	Recovery agent	Banking company, financial institution,  NBFC	100%
Transportation of goods by a vessel from a place outside India up to customs station of clearance in India	Person located in non-taxable territory to a person located in non-taxable territory	Importer as defined under Customs Act, 1962	100%
Transfer or permitting use or enjoyment of Copyright relating to original literary, dramatic, musical or artistic works	Author or music composer, photographer, artist, etc.	Publisher, Music Company, Producer	100%
Rent-a-cab service through e-commerce operator	Taxi driver or rent-a-cab operator	Any person	100% by e-commerce operator

While the aforesaid list of services covered under reverse
charge is by and large on the same lines as the current list of services
(specified in Notification no 30/2012-ST read with Rule 2(1)(d) of Service tax
Rules, 1994, it is pertinent to note that (a) services by Online Information
Data Access providers, (b) services related to distribution and marketing of
lottery tickets, (c) supply of manpower for any purpose or security, and (d)
references to representational services by senior advocates have been excluded
and certain changes / additions have been made such as: (a) in case of GTA
services – casual taxable persons have also been obligated to pay on a reverse
charge basis, (b) Transfer or permitting the use or enjoyment of a copyright
covered under clause (a) of sub-section (1) of section 13 of the Copyright Act,
1957 relating to original literary, dramatic, musical or artistic works and (c)
in case of radio taxis or passenger transport services provided through
ecommerce operators – the obligation has been cast upon the ecommerce operator.

Partial reverse charge: Under service tax, partial
reverse charge is prescribed on few services wherein certain portion of tax
liability is to be discharged by service provider and balance to be discharged
by service recipient under RCM.

There is no concept of partial reverse charge in GST.

RCM on procurement of goods or services from unregistered
persons

Registered (taxable) person is liable to pay tax under RCM on
any goods or services or both procured by him from an unregistered
person. Following are likely to be the unregistered persons under the GST
regime:

–   Person not carrying on any business or
profession; or

–   Person whose aggregate turnover is below the
threshold limit; or

–   Supplying exempt goods or services

–   Supplying goods or services which are taxed
at NIL rate of tax

–   Supplying services which are covered under
reverse charge

–   Person located in Jammu & Kashmir; or

–   Person located outside India; or

–   In simple terms, he is not registered though obliged
to get registered.

Followings are a few illustrations to demonstrate the
circumstances in which RCM triggers:

–   An unregistered architect (whose turnover is
Rs. 15 lakh) raises an Invoice of Rs. 1 lakh on builder. In such a case,
builder being registered person will be liable to pay GST on Rs. 1 lakh under
RCM.

–   An item of stationery is bought by registered
business entity from small unregistered shop. In such a case, such business
entity will have to discharge GST under RCM.

Time of supply for RCM

Due date of payment of tax under RCM is linked to the time of
supply as prescribed u/s. 12 and 13 of CGST Act.

Time of Supply for goods:

It shall be earliest of following:

–   Date of receipt of goods; or

–   Date of payment entered in books of accounts or
date of debit in bank, whichever is earlier; or

–   Date immediately after 30 days from date of
invoice

Where it is not possible to determine time of supply as
above, time of supply shall be date of entry in books of accounts of recipient
of supply.

Illustration:

Date of Invoice	Receipt of goods	Date of payment	31st day from date of invoice	Time of Supply
30/09/17	30/09/17	15/10/17	31/10/17	30/09/17
30/09/17	15/11/17	30/11/17	31/10/17	31/10/17
30/09/17	15/11/17	16/08/17	31/10/17	16/08/17

Time of Supply for
services:

It shall be earliest of
following:

–   Date of payment entered in books of accounts
or date of debit in bank, whichever is earlier; or

–   Date immediately after 60 days from date of
invoice

Where it is not possible
to determine time of supply as above, time of supply shall be date of entry in
books of accounts of recipient of supply.

Illustration:

Date of Invoice	Date of payment	61st day from date of invoice	Time of Supply
30/09/17	15/10/17	30/11/17	15/10/17
30/09/17	10/12/17	30/11/17	30/11/17

Mandatory registration for
person liable to pay GST under RCM

Section 24(iii) of CGST Act mandates compulsory registration
for persons liable to pay tax under RCM. Threshold limit is not applicable to
persons liable to pay under RCM. Person having less than Rs. 20 lakh turnover
or supplier of exclusively exempt or non-taxable goods /services will also be
liable for GST registration if he is obliged to discharge tax under RCM.

Illustration: Co-operative society availing goods
transport agency (‘GTA’) services of nominal value will be liable to pay GST
under RCM and consequently, liable to get itself registered irrespective of the
fact that such a society is not making any taxable supply or their aggregate
turnover is below the threshold limit.

Obligation on Service
providers (providing services covered by reverse charge) to obtain registration
under GST legislation

Service providers supplying the aforementioned services if
they are not already registered under some other category or those not given
the benefit of migration will have to obtain registration under GST
legislation, as and when the portal is enabled for the same.

In this regard, there is an ongoing controversy whether or
not persons covered under reverse charge are required to obtain registration.
In this connection, attention is invited to section 22(1) of the CGST Act which
provides that ‘Every supplier shall be liable to be registered under this
Act in the State or Union territory, other than special category States, from
where he makes a taxable supply of goods or services or both,
if his aggregate turnover in a financial year exceeds twenty lakh rupees’.
It is highlighted that unlike Service tax legislation wherein the obligation to
register was cast upon the person liable to pay tax, under the GST legislation,
the obligation has been linked to making a taxable supply (irrespective of
whether the said service is covered by forward or reverse charge). While the
GST Council in its 16^th meeting has resolved that lawyers /
advocates would be exempted from obtaining registration as per a notification
(proposed to be issued) u/s. 23(2) of the CGST Act, the fate of various other
service providers such as insurance agents, GTAs, independent directors, etc.,
remains undecided.

Documentation

Section 31(3)(f) mandates registered person liable to pay GST
under RCM to issue an invoice in respect of goods and services received by him
from unregistered supplier. Such invoices should contain all particulars as
prescribed u/s. 31(1) and 31(2) read with GST Invoice Rules to the extent
applicable. This would mean registered person procuring goods and services and
paying tax under RCM is obliged to mention HSN Codes and Service Accounting
codes of goods or services procured by him.

Rule 1 of Input Tax Credit Rules provides that a registered
person shall avail input tax credit on the basis of an invoice raised in
accordance with provisions of section 31(3)(f).

Further, registered person liable to pay GST under RCM shall
issue a payment voucher at the time of making payment to supplier.

Unintended casualties,
unanswered question and challenges posed by reverse charge provisions
pertaining to unregistered persons

While the Government may claim that there are laudable
objectives in casting obligation to pay tax on URD purchases, there are certain
unintended casualties and unanswered question and challenges which will have to
be faced going forward. Some of these are briefly described below:

Freshly qualified Chartered Accountants: One of
the outcomes expected post implementation of GST legislation is that most
businesses will shy away from dealing with an unregistered person. This would
be primarily on account of the additional compliance burden attached to the
consumption of such supplies. One direct and unintended casualty to these
provisions will be a freshly qualified Chartered Accountant and small
practitioners. It is quite likely that their turnover will be below the
threshold limit on account of which they have not obtained registration. Notwithstanding
this fact, reverse charge would apply and business will cringe at the time of
availing their services. Such small practitioners will be forced to obtain
registration, maintain records and file no less than 37 returns annually, thus
casting a huge financial and administrative burden on the fledgling
practitioner.

Requirement for a minimum threshold limit: The
obligation pay tax on procurements from unregistered persons has been cast
without reference to any monetary limit and without prescribing any exceptions.
As a result, even the smallest of purchases – i.e. purchase of a cutting chai
or basic refreshments, photocopying charges or the like will have to be mapped
and reported. In this connection, entry no. 81 of the Service exemption list released
on 18^th of May suggests that an omnibus exemption may be granted
from payment of GST u/s. 9 (4) of CGST/SGST Act in respect of supplies upto Rs
10,000/-. We will have to wait and watch out for relevant notifications to this
effect. Key factors would be whether the exemption will be qua the
suppliers or qua the transaction, etc.

Obligation to issue an invoice, classification of
supply and maintain records

Every recipient procuring supplies from unregistered persons
is obligated to issue an invoice at the time of procuring the services (refer
section 31 of CGST Act). Does this mean that the Government intends all
businessmen and their employee should carry an invoice book with them wherever
they go and make an invoice every time they procure basic items or that they
should only work with the organised (registered) players and cut out the small
and medium (mom & pop stores) enterprises. Painful and yet pertinent
question which remains unanswered.

Value addition is already taxed

Considering that GST is a tax on the value added, it is a
fact taken for granted that all supplies from unregistered would form part of
the value added and ultimately form part of the price charged at the time of
making outward supply. In such cases, there would be no loss of revenue to the
Government. Despite this glaring fact, the Government seems to have fallen a
prey to its greed to garner revenue.

Inter-State transactions

Legally speaking inter-State suppliers are required to obtain
registration from Rupee 1 (i.e. without a threshold limit), nonetheless, the
Government machinery maintains a stoic silence when asked a direct question as
to whether reverse charge would apply in case of inter-State supplies. The
silence becomes even more apparent when they are asked what happens if the
inter-State supplier is later made to pay tax on the same transaction, won’t it
result in double taxation – what are the safeguards? Questions like these speak
volumes of the challenges that are likely to be faced by business and the
administration when dealing with such transactions.

Transactions with non-residents

In the earlier paras, we have described the obligation
cast by sections 22 and 24 of the CGST Act to register, that too
notwithstanding the fact that supplies procured from non- residents would be
taxed in the hands of the importer. One is at a loss to understand, how the
Government proposes to administer these transactions.

Transactions with persons located in Jammu and Kashmir

CGST Act does not extend to the State of Jammu and Kashmir (J
& K) and recent reports in the public domain suggest that J & K is not
likely to implement GST on 1^st of July along with the rest of the
country. All trade with businesses / suppliers / customers are likely to face
uncertainty. Questions raised to the Government have remained unanswered.

Conclusion

The person paying tax under RCM is entitled to tax credit in
most of the cases. The Government may not be getting substantial revenue from
RCM. In the past, most of the State legislations for sales tax was having
concept of ‘purchase tax’ to be paid by registered dealer on purchases from
unregistered dealers. However, it was found to be a futile exercise (not
resulting into any substantial revenue to the Government), and therefore, in
most of the State VAT legislations, the concept of URD tax (purchase tax) was
scrapped.

RCM has inherent disadvantage of being an obstacle in the
free flow of tax credits across the businesses and  the nation. It also raises the question
whether it is fair on the part of government to put more burden of compliance
on law abiding organised sector of the economy.

It would be too cumbersome for a majority of the assessees to
comply with such a rigid compliance requirement. Moreover, it is difficult for
an assessee to reconcile their expenses as per financial statements with tax paid
under RCM as per returns. It is indeed a pain for any organisation to reconcile
such figures and satisfy the authorities in course of scrutiny, assessment,
audit and investigations, etc.

GST is a reality

Touted as a landmark reform, GST, which is an amalgam of
around 14 indirect taxes is a reality and is all set to be effective from 1^st
July 2017. The transition to GST from a plethora of existing indirect
taxes (“existing laws”) would necessarily entail challenges since not only the
legislations are different but even many of the fundamental concepts of
taxation are different.

In order to ensure a smooth transition and to keep such
challenges at the bare minimum, the GST Laws provide for various provisions
relating to transition. Such provisions are enshrined in Chapter XX of the CGST
Act. More or less similar provisions are contained in the SGST Laws as well. In
view of section 20 of the IGST Act, the transitional provisions of CGST Act
would apply to IGST Act as well.

Summary of the Transitional Provisions

The following table provides a
bird’s eye view of the statutory provisions dealing with transition from
existing laws to the GST Laws.

Section	Situation	Provisions
139	Registrations	Existing registrations will be automatically migrated provisionally.
140(1)	CENVAT Balance	Existing CENVAT Balance to be carried forward subject to conditions. State VAT Balance to be carried forward only subject to production of pending documents
140(2)	Capital Goods	Unavailed CENVAT Credit can be availed
140(3)	Stock in hand	Excise Duty Credit embedded in stock to be allowed (only for last one year) 40% / 60% notional CGST Credit if duty paying document not available
140(5)	Goods/Services in transit	Credit can be claimed within a period of 30 days from the transition date
140(6)	Stock in hand for composition dealer	Excise Duty Credit embedded in stock to be allowed (only for last one year)
140(7)	Input Service Distributor	Input Services eligible for distribution after the transition date also
140(8)	Centralised Registration	Carry forward of credit in case of centralised registration of service providers
140(9)	Recredit	Credit already reversed on account of non payment to vendors will be available for recredit if paid within 3 months
142(1)	Goods Returns	From registered dealers – independent supply From unregistered dealers – claim refund under earlier law
142(2)	Debit Note Credit Note	Discharge GST Claim GST Adjustment subject to ITC Reversal by the customer
142(3)	Pending Refund Claims	To be adjudicated under the earlier law
142(4)	Refund Claims to be filed	Under the earlier law, subject to the condition of non carry forward of credit to that extent
142(5)	Refund Claims	On account of non provision of service to be claimed under earlier law
142 (6&7)	Pending Appeals	Under the earlier law
142(8)	Pending Adjudication	Under the earlier law
142(9)	Revised Return	If results in additional tax, recoverable under the current law If results in excess credit, refund to be claimed under earlier law
142(10)	Ongoing Contracts	Supplies after appointed date taxable under current law
142(11)	Advances	If tax paid under earlier law, no tax payable under current law
142(12)	Goods on Approval	No tax if returned within 6 months
142(13)	TDS on works contract under existing laws.	Not liable if payment made after appointed date

Scope of this Article

As can be seen from the
above table, there are multiple provisions dealing with issues surrounding
transition. Further, many situations have not been envisaged. Broadly, the
provisions relating to transition can be divided into provisions dealing with
output taxes, provisions dealing with input credits and procedural matters.

In view of the size
constraints, this article deals with transitional provisions in relation to
output taxes and input credits. For transition provisions related to procedural
matters like registration, refunds, etc., the readers may look up to the
relevant sections.

Repeal and Savings

Section 174 of the CGST
Act repeals various existing laws from the date of commencement of the Act. At
the same time, it is also provided that the repeal of the said laws shall not
impact certain proceedings, rights and obligations already accrued under the
existing laws. Further, it is also stated that the general application of
section 6 of the General Clauses Act, 1897 is not impacted due to section 174.

The proviso to
section 174(2)(c) specifies that any tax exemption granted as an incentive
against investment shall not be treated as a privilege and accordingly, the
savings clause shall not apply. In the case of Shrijee Sales Corporation vs.
Union of India 1997 (89) E.L.T. 452 (S.C.), the Supreme Court held that
though the principle of promissory estoppel is applicable against
Government, in case of supervening public equity, the Government is allowed to
change its stand and can withdraw a time-bound exemption notification prior to
its expiry.

The above proviso
and the decision may become very relevant in understanding situations where
long term exemptions provided for investment in backward areas have already
been granted under the existing laws and not continued under the GST Law.

Taxable Event and
Collection of Duty/Tax

Section 3(1) of the
Central Excise Act, 1944 levies an excise duty on all goods manufactured in
India. Rule 9 requires the payment of duty at the time of removal of the said
goods. In this context, the Supreme Court in the case of CCE vs. Vazir
Sultan Tobacco Co. Limited 1996 (83) E.L.T. 3 (S.C.) has observed that
section 3 cannot be read as shifting the levy from the stage of manufacture or
production of goods to the stage of removal, that the levy is and remains upon
the manufacture or production alone and only the collection part of it is
shifted to the stage of removal

Accordingly, in the
context of special excise duty, the Court held that

The goods produced prior
to the date of the levy were not subject to such levy. If that is so, the levy
cannot attach nor can it be realised because such goods are removed on or after
the date of the levy

Goods manufactured during
the impost of levy but cleared after the lapse of levy would be liable for duty
at the rate and valuation in force as on the last date of levy.

Similar principles would
apply in the context of service tax where the taxable event u/s. 66B is on the
provision of service whereas the time of collection is defined through the
Point of Taxation Rules, 2011. However, in the context of VAT, generally the
taxable event as well as the collection is aligned to be at the time of
transfer of ownership in the goods.

While the GST Law provides
for repeal of the existing laws, it does not explicitly contain any provision
for extinguishing the liability already created under the existing laws. This
would imply that in cases where the taxable event is under the existing law,
the liability to pay tax continues under the existing law and is not exhausted
by payment of tax under the GST Law.

Services provided before
the appointed date but POT arises under the GST Regime

Rule 3 of the Point of
Taxation Rules, 2011 defines the point of taxation to be the date of issuance
of invoice if the same is issued within 30 days from the date of completion of
service. A testing agency issues a certificate of quality on 26^th
June 2017 and issues an invoice on 2^nd July 2017. In view of the
principles illustrated above, the testing agency will be required to discharge
service tax on the said transaction since the taxable event of rendition of
service is completed when the levy of service tax was in force. Section 142(10)
of the CGST Act will not come to the rescue of the agency since the said
provision applies only for supplies after the appointed date. Of course,
section 140(5) of the CGST Act will permit the credit of the service tax to the
recipient if the transaction is recorded in his books of accounts before 30^th
July 2017. For the said purpose, the phrase “services received on or after the
appointed date” will have to be read as “invoices received on or after the
appointed date” to make the provision operational.

A construction contractor
provides a continuous service to his clients. In view of the proviso to
Rule 3 of the Point of Taxation Rules, 2011, each event which requires the
receiver of service to make any payment to service provider (‘payment
milestone’) is deemed to be completion of the service to that extent. In a
particular instance, the construction contractor may have performed partial
work but the milestone may not be triggered on 30^th June 2017. In
such situations, since the deemed completion of service is not triggered at
all, the levy does not crystallise in the service tax regime and the
construction contractor may bill under the GST law with applicable GST. This
would also be in alignment with the provisions of section 142(10) of the CGST
Act.

A manufacturing company
avails the services of an advocate on 2^nd June 2017. The said
services are covered under reverse charge mechanism under the service tax law.
The payment to the advocate is made on 12^th August 2017. Rule 7 of
the Point of Taxation Rules, 2011 defines the point of taxation in case of
reverse charge mechanism to be the date of payment if the payment is made
within three months from the date of invoice. In this case, since the services
were rendered in June, the liability to pay service tax arises. The said
liability is payable for the month of August 2017 and needs to be discharged by
6^th September 2017. Unluckily, there is no provision
permitting the credit of such service tax paid.

In case of import of
services, section 21 of the IGST Act becomes relevant. The said provision
requires the payment of GST for import of services made after the appointed
date regardless of whether the transaction had been initiated before the
appointed date. However, the term ‘import of services made’ has not been
defined and therefore the interpretation of the said term may result in
litigation.

POT exhausted under the
existing laws, but supplies made after the appointed date

A converse situation can
arise in the context of goods and services where advances are received or
invoices are raised prior to 30^th June 2017 but the actual supply
happens under the GST Regime. In such situations, the correct trigger point of
taxation would be GST and not the existing tax requiring the assesse to file a
refund claim for the existing tax and further liability towards payment of GST
under the GST Law. However, in order to ease the process, Section 142(11)
provides for a transitional benefit under the GST Law.

Section 142(11)(a) states
that no tax shall be payable on goods under the GST Act to the extent that the
tax was leviable under the VAT Act of that State. Similarly, Section 142(11)(b)
states that no tax shall be payable on services under the GST Act to the extent
that the tax was leviable under the service tax law.

Section 142(11)(c) further
states that where tax was paid on any supply both under the Value Added Tax Act
and under the service tax law, GST shall be payable to the extent of supplies
made after the appointed day and the taxable personshall be entitled to take
credit of value added tax or service tax paid earlier

Subsequent Adjustments

It is likely that for a
supply effected in the pre-GST regime, there could be some variation in the
value of taxable service or value of goods on account of discount, etc. In such
cases, since the taxable event was under the existing law, the differential tax
should be payable under the existing law. However, as a transition provision,
Section 142(2) permits the issuance of a debit/credit note under the GST Regime
and such debit/credit note is deemed to have been issued in respect of an
outward supply under the GST Regime. This provision permits an adjustment on
account of GST for supplies which initially attracted VAT/Excise Duty/Service
Tax. Though no corresponding amendment is carried out under the existing laws
to insulate against the liability for the said debit notes, it can be said that
section 142(2) will have an overriding effect over the provisions of the
existing laws.

A downward adjustment of
tax consequent to the issuance of a credit note is permitted u/s.142(2)(b) only
subject to a corresponding reduction of input tax credit by the recipient. In
cases where the recipient was not eligible for input tax credit under the
existing laws, it is very likely that he will not agree for such a reduction in
his input tax credit. In such situations, will it be open for the supplier to
disregard the provisions of section 142(2)(b) of the CGST Act and invoke the
provisions of Rule 6(3) of the Service Tax Rules, 1994 and file a consequent
refund claim? In view of the legal principles enunciated, it is felt that such
an approach may be feasible.

Most of the current VAT
Regimes permit an adjustment on account of goods rejection if the rejection
happens within a period of six months. Section 142(1) reiterates the
eligibility of refunds under the existing law in case of goods rejection from
unregistered buyers. In fact, the said provision would also permit entitlement
of refund for excise duty. To that extent, the said provision is in alignment
with the legal principles. However, through a proviso in the said
section, it is stated that if the goods are returned by a registered person,
the return of such goods shall be deemed to be a supply. Can this proviso create
a tax liability on the person who is returning the goods? Further, can it override
the express provisions under the existing laws permitting the adjustment on
account of goods rejection in all cases?

Transitional Arrangements
in respect of input tax credit

Section 140 deals with
various situations where transitional arrangements are made for claim of
credit. The essence of the said provisions is covered in subsequent paragraphs.

Section 140(1) permits a
registered person to claim the CENVAT Credit carried forward in the last return
under the existing law. The Credit can be carried forward subject to certain
conditions. Similarly, the unutilised input tax credit disclosed in the VAT
Returns can be carried forward subject to certain conditions, one of which
pertains to receipt of all pending declarations.

Section 142(9)
specifically deals with situations of revised returns and states that any
increase in CENVAT Credit consequent to a revised return will not be carried
forward under GST, but be eligible for cash refund under the existing law. Will
this beneficial provision permit a back door entitlement for entities
accumulating substantial CENVAT Credits and unable to utilise the same?

Section 140(2) permits the
claim of unavailed credit on capital goods in cases where the credit under the
existing laws is available in instalments.

Section 140(3) is an
important provision permitting the claim of credit of eligible duties in
respect of inputs held in stock and inputs contained in semi-finished or
finished goods held in stock on the appointed day subject to various conditions
mentioned therein. The credit is available to a registered person, who was not
liable to be registered under the existing law, or who was engaged in the
manufacture of exempted goods or provision of exempted services, or who was
providing works contract service or a first stage dealer or a second stage
dealer or a registered importer or a depot of a manufacturer.

It may be noted that one
of the important conditions for the claim of credit is that the said registered
person is in possession of invoice evidencing payment of duty under the
existing law in respect of such and that such invoice is issued not earlier
than twelve months immediately preceding the appointed day.

In cases where the person
is not in possession of a duty paying document, a proportionate credit linked
to the output tax liability under the CGST Act has been prescribed through the
Transitional Rules. Similarly, in certain cases, the manufacturer is permitted
to issue a Credit Transfer Document to enable the person possessing the goods
to claim the credit on the basis of such document.

Section 140(9) permits
recredit of service tax credit already reversed under the existing law on
account of non-payment to vendors. The said re-credit will be available if the
value and the tax is paid to the vendor within 3 months from the appointed
date.

Section 140(5) permits a
credit of eligible duties and taxes in respect of inputs or input services
received after the appointed date if the said transactions are recorded in books of
accounts within 30 days from the appointed date.

Conclusion

Preface

Input Tax Credit or to say ITC mechanism is the backbone of
any system of Value Added Taxation (Vat). Goods and Services Tax (GST) being
based upon the principles of Vat, it has to provide for an appropriate
mechanism by which the basic concept of Vat remains intact. As we are well
aware, GST is a destination based tax, the burden of tax has to be borne by the
ultimate consumer of goods or services as the case may be. Neither there should
be any cascading of taxes nor any burden of such tax should fall on businesses.
Governments have to collect taxes from their subjects and the people have to
pay. While direct taxes are collected directly by the Government from all those
who are liable to pay such tax, in case of indirect taxes it may not be
possible for the Government to collect directly from the consumers. It is in
these circumstances, that responsibility is cast upon the businesses to collect
tax from consumers and deposit it into the Government Treasury. The businesses
as such are performing the role of a mediator. It is necessary therefore, that
such a mediator should not be burdened to pay any amount of such tax from his
own pocket. While the businesses will collect tax from consumers and deposit
into Government Treasury, it is necessary to ensure that Government gets
correct amount of taxes, as being paid by the consumers, and there is no
leakage of revenue.

Businesses, in any country, operate through a chain of people
performing different activities, and, sometimes it is a very long chain between
origin of goods and its consumption in the hands of ultimate consumer. An
importer or manufacturer may be the first person in the chain of production and
distribution of goods. Thereafter, there may be a distributor, a stockist, a
whole seller or a trader and the retailer, etc. Thus, before the goods reach in
the hands of ultimate consumer, they pass through various hands, and, each such
person may be adding some value to such goods whether by way of enhancing its
utility or otherwise whereby the price of such goods gets increased at each
stage in that chain of production and distribution. To take a simple example
suppose a manufacturer sells his goods at 100 rupees, the distributor adds his
expenses of transportation, etc. and after adding his margin sells at 110,
whole sellers sells at 120 and the retailer sells the same goods to the
consumer at 150 rupees. And if the rate of tax applicable is 10%, the consumer
is required to pay 15 rupees by way of tax (10% of 150), the Government should
get this 15 rupees in its treasury neither less nor more. One method of
collection of tax may be that Government collects 15 rupees directly from the
retailer and all other persons i.e. manufacturer, distributor, whole seller,
etc. need not  collect or pay any tax.
Such a system is called last stage taxation, which was prevailing long back but
discontinued due to large scale of revenue leakages. The system of first stage
taxation (i.e. collecting the intended amount of tax from the manufacturer
himself), which was there under the earlier sales tax laws, had to be
discontinued because of low tax base, and the MRP based system of collecting
taxes from the first stage dealer also does not find favour under a fair and
equitable system of taxation. However the system of Vat provides all such
benefits which we can expect from a fair and transparent system of taxation.
Under this system taxes are collected at each stage of production and
distribution at a predetermined rate of tax. Thus, in the above example: the
manufacturer has to collect a sum of Rs. 10 (10% of 100) from his purchaser
(the distributor). He has to deposit the same amount into Government treasury.
The distributor will collect Rs. 11 (10% of 110) from the whole seller. As he
has already paid Rs. 10 to the manufacturer, he will deposit Rs. 1 into the
treasury (11-10). Here Rs. 11 is the amount of output tax and Rs. 10 is the
input tax credit. Similarly whole seller will collect Rs. 12 (10% of 120) and
will pay into the treasury Rs. 1 (i.e. 12-11) and the retailer will collect Rs.
15 from the consumer (10% of 150) and he will deposit a net sum of Rs. 3
(15-12) into the treasury. Thus, Government will get a total sum of Rs. 15
(10+1+1+3) through all these persons involved in the production and
distribution chain. The consumer has paid Rs. 15 as tax for consuming the
product, the Government is getting the exact amount into its treasury, and,
none of the businesses have paid any amount out of their own pocket. They have
deposited the entire amount of tax that they have collected from their customer
after deducting there from the amount of tax which they have already paid
through their supplier/s. Neither any gain nor any loss to the businesses.
Thus, the amount of tax paid on supplies received in the business may be
considered as advance payment of tax, which in Vat terminologies is called as
Input Tax Credit. (Credit of taxes paid on inputs).

This concept of ITC is not new to all those who have been
dealing with Excise Duty, Service Tax and State Vat laws, wherein it already
exits either partially or fully in the form of Cenvat (earlier called Modvat)
and setoff, etc. But, as these taxes are being levied at different stages and
by different Government/s, there is no inter connectivity of these taxes and
therefore taxes paid under one or more enactments are not cenvatable against
the other. It is fragmented Vat, which is in practice in our country at
present. To overcome this difficulty the concept of GST was suggested long back
and now the stage has come that our country is ready to implement GST, although
it is dual GST, to begin with, due to federal structure, but in this form also
it will overcome several disadvantages and in future we may hope for a single
GST across the country. Thus, let all of us together ‘Welcome GST’.

The Indian GST law i.e. The Central Goods and Services Act
(CGST Act), IGST Act, UTGST Act as well as State GST Acts contain elaborate
provisions regarding input tax credit and claim thereof by eligible taxable
persons. The Rules made there under provide conditions for such claim. As the
provisions and the conditions are on the same line in all such enactments, the
provisions contained in CGST Act and the Rules may be discussed in brief as
follows: 

Input, Input Tax and Input
Tax Credit

Section 2 of the Central Goods & Services Act defines
various terminologies. Relevant definitions for the purposes of our discussion
are reproduced herein as follows:-

(59) “input” means any goods other than capital goods
used or intended to be used by a supplier in the course or furtherance of
business;

(60) “input service” means any service used or
intended to be used by a supplier in the course or furtherance of business;

(62) “input tax” in relation to a registered person,
means the central tax, State tax, integrated tax or Union territory tax charged
on any supply of goods or services or both made to him and includes—

(a)
the integrated goods and services tax charged on import of goods; (b) the tax
payable under the provisions of sub-sections (3) and (4) of section 9;

(c)
the tax payable under the provisions of sub-sections (3) and (4) of section 5
of the Integrated Goods and Services Tax Act;

(d)
the tax payable under the provisions of sub-sections (3) and (4) of section 9
of the respective State Goods and Services Tax Act; or

(e)
the tax payable under the provisions of sub-sections (3) and (4) of section 7
of the Union Territory Goods and Services Tax Act,

but does not include the tax paid under the composition levy;

(63) “input tax credit” means the credit of input tax;

(67) “inward supply” in relation to a person, shall
mean receipt of goods or services or both whether by purchase, acquisition or
any other means with or without consideration;

(19) “capital goods” means goods, the value of which
is capitalised in the books of account of the person claiming the input tax
credit and which are used or intended to be used in the course or furtherance
of business;

(94) “registered person” means a person who is
registered u/s. 25 but does not include a person having a Unique Identity
Number;

(105) “supplier” in relation to any goods or services
or both, shall mean the person supplying the said goods or services or both and
shall include an agent acting as such on behalf of such supplier in relation to
the goods or services or both supplied;

(106) “tax period” means the period for which the
return is required to be furnished;

(107) “taxable person” means a person who is
registered or liable to be registered u/s. 22 or section 24;

(108) “taxable supply” means a supply of goods or
services or both which is leviable to tax under this Act;

(47) “exempt supply” means supply of any goods or services or
both which attracts nil rate of tax or which may be wholly exempt from tax u/s.
11, or u/s. 6 of the Integrated Goods and Services Tax Act, and includes
non-taxable supply;

(78) “non-taxable supply” means a supply of goods or
services or both which is not leviable to tax under this Act or under the
Integrated Goods and Services Tax Act;

Eligibility to claim Input
Tax credit

Section 16(1) of the CGST act provides that: Every registered
person is entitled to take credit of input tax charged on any supply of goods
or services or both to him which are used or intended to be used in the course
or furtherance of his business.

Thus, to claim Input Tax Credit (ITC) it is necessary that
the claimant is a ‘registered person’. All such persons who are registered
under the Act (other than persons holding UIN) are eligible to claim ITC in
respect of taxes paid (i.e. CGST, SGST or UTGST and IGST) on all inward
supplies of goods and services received, which are used or intended to be used
in the course of his business or for furtherance of business. 

Such inward supplies may be of inputs, input services or
capital goods. All such supplies are eligible for claim of ITC. Thus, whether
it is raw material, packing material, trading goods, consumables, capital goods
or items of expenditure (debited to profit & loss a/c under various heads)
all such items are eligible provided the same are used or intended to be used
in the course or furtherance of business (subject to such conditions and
restrictions as may be prescribed).

Conditions & Restrictions

Apart from the basic condition i.e. used or intended to be
used in the course or furtherance of business, section 16(2) provides for
certain conditions, which may be summarised as follows:

(a) Goods
and/or services (as the case may be) must have been received.

(b) He must
have in possession a Tax Invoice (issued by the supplier) in respect of such supply

(c) Tax
charged on such inward supply must have been paid to the Government (whether in
cash or by way of utilisation of ITC).

(d) A return
(in accordance with section 39) has been furnished

(e) In
respect of capital goods, if the registered person has claimed depreciation
(under the Income Tax Act) on tax component of such assets (capital goods), ITC
shall not be admissible. That would mean that if tax component has been added
to the cost of such capital goods, ITC to that extent is not eligible.   

It has further been provided that if the recipient fails to
make payment to the supplier in respect of supplies so received (on which ITC
has been claimed) within a period of 180 days from the date of issuance of Tax
Invoice, the ITC so claimed has to be reversed. And such amount can be
reclaimed after making due payment to the supplier.

Reduction in ITC

Section 17 provides for certain conditions in which the claim
of ITC may get reduced to certain extent or proportionate reduction may have to
be worked out in following circumstances:-

(1)  If the taxable
supplies received are used partly for the purposes of business and partly for
any other purposes (may be for personal use). ITC will be admissible to the
extent of business uses only. If the exact amount is not ascertainable then
proportionate reduction method will be applicable.

(2) If the taxable supplies received are used partly for the
purposes of outward supply of taxable goods and/or services (including zero
rated supplies) and partly for exempt supplies. ITC will be admissible to the
extent of use in taxable supplies including zero rated supplies). If the exact
amount is not ascertainable then proportionate reduction method will be
applicable.

Note: ‘Zero Rated supplies’ are defined u/s. 16 of IGST Act
as follows:-

“16. (1) “zero rated supply” means any of the following
supplies of goods or services or both, namely:–  

(a) export
of goods or services or both; or

(b) supply of goods or services or both to a
Special Economic Zone developer or a Special Economic Zone unit.”

Thus, although there is no tax payable on outward supplies,
which are zero rated, input tax credit is available in full (without any
reduction).

(3) A banking company or a financial institution including a
non-banking financial company, engaged in supplying services by way of
accepting deposits, extending loans or advances shall have the option to either
comply with the provisions of section 17(2) (i.e. bifurcation of taxable and
exempt supplies), or avail of, every month, an amount equal to fifty per cent.
of the eligible input tax credit on inputs, capital goods and input services in
that month and the rest shall lapse.

No ITC

Section 17(5) of the CGST Act provides that; Notwithstanding
anything contained in sub-section (1) of section 16 and sub-section (1) of
section 18, input tax credit shall not be available in respect of the
following, namely:-

(a) motor vehicles and other conveyances except when they are
used––

(i) for making the following taxable supplies,
namely:—

(A) further
supply of such vehicles or conveyances; or

(B)
transportation of passengers; or

(C) imparting
training on driving, flying, navigating such vehicles or conveyances;

(ii) for
transportation of goods;

(b) the following supply of goods or services or both—      

(i) food and
beverages, outdoor catering, beauty treatment, health services, cosmetic and
plastic surgery except    where an inward
supply of goods or services or both of a particular category is used by a
registered person for making an outward taxable supply of the category of goods
or services or both or as an element of a taxable composite or mixed  supply;

(ii) membership
of a club, health and fitness centre;

(iii)
rent-a-cab, life insurance and health insurance except where––              

(A) the
Government notifies the services which are obligatory for an employer to
provide to its employees under any law for the time being in force; or

(B) such inward supply of goods or services or
both of a particular category is used by a registered person for making an
outward taxable supply of the same category of goods or services or both or as
part of a taxable composite or mixed supply; and

(iv) travel benefits extended to employees on
vacation such as leave or home travel concession;

(c) works contract services when supplied for construction of
an immovable property (other than plant and machinery) except where it is an
input service for further supply of works contract service;

(d) goods or services or both received by a taxable person
for construction of an immovable property (other than plant or machinery) on
his own account including when such goods or services or both are used in the
course or furtherance of business.

Explanation.––For the purposes of clauses (c) and (d),
the expression “construction” includes re-construction, renovation, additions
or alterations or repairs, to the extent of capitalisation, to the said immovable
property;

(e) goods or services or both on which tax has been paid u/s.
10 (composition schemes);

(f) goods or services or both received by a non-resident
taxable person except on goods imported by him; 

(g) goods or services or both used for personal consumption;

(h) goods lost, stolen, destroyed, written off or disposed of
by way of gift or free samples; and

(i) any tax paid in accordance with the provisions of
sections 74, 129 and 130 (specific cases).

Explanation.––For the purposes of Chapter V (Input Tax
credit) and Chapter VI (registration), the expression “plant and machinery”
means apparatus, equipment, and machinery fixed to earth by foundation or
structural support that are used for making outward supply of goods or services
or both and includes such foundation and structural supports but excludes-

(i) land,
building or any other civil structures;

(ii)
telecommunication towers; and

(iii)
pipelines laid outside the factory premises.

It may further be noted that following persons are not entitled
to claim input tax credit in respect of any of the items of inward supply of
goods or services:

1. An un-registered person

2.
Registered persons who have opted for Composition Scheme/s

3. Persons holding Unique Identification Number
(UIN)

4. A registered person whose registration is
cancelled (in respect of inward supplies on or after the date of cancellation).

Documentation requirements and conditions for claiming ITC

The input tax credit shall be availed by a registered person,
including the Input Service Distributor, on the basis of any of the following
documents, namely:-

(a) Tax invoice issued by the supplier of goods or
services or both in accordance with the provisions of section 31;

(b) An invoice issued in accordance with the provisions
of clause (f) of sub-section (3) of section 31, subject to payment of tax (i.e.
in respect of purchases from un-registered dealers, where tax is payable under
reverse charge scheme); 

(c) A debit note issued by a supplier in accordance
with the provisions of section 34 (in respect
of goods return, rate difference, etc.);

(d) A bill of entry or any similar document
prescribed under the Customs Act, 1962 or rules made there under for assessment
of integrated tax on imports;

(e) An ISD invoice or ISD credit note or any
document issued by an Input Service.

     Distributor in accordance with the
provisions of sub-rule (1) of rule invoice 7.

Time Limit for claim of ITC

The procedure to claim ITC
by a registered person is that the same can be claimed immediately in
respective month (Tax Period) to which the Tax Invoice relates (subject to
actual receipt of such goods/services). Each such claim of ITC is credited to
the Electronic Credit Register of such registered person. He may utilise the
credit as and when he would like to adjust the same against his output tax
liability.

However, if a person has not claimed ITC in the respective
month, for any reason, he may claim the same any time (i.e. in any tax period)
within 6 months from the end of financial year or before the time limit for
submitting Annual Return for the said financial year, whichever is earlier.
(The time limit prescribed for submitting annual return, at present is 31^st
December of next financial year. Thus, practically a person can claim the
unclaimed amount of ITC till he submits his return for the month of September
of next financial year). 

1.  Background

     Provisions for valuation of supplies in GST
are common for both goods and services. Section 15 of CGST Act read with nine
rules contained in Draft Valuation Rules (DVR) as approved by the GST Council
in May 2017 lay down the principles of valuation.

    Essentially, these principles of valuation
are to be applied in three buckets, depending on the nature of supply:

S. No.	Nature of supply	Applicable Section of CGST Act
1	Supply: a) to a recipient who is not related to the supplier; and b) where price is the sole consideration	15(1)
2	Supply: a) to a recipient who is related to the supplier; or where price is not the sole consideration	15(4)
3	Supplies notified by Government on the recommendations of GST Council	15(5)

For each of the above buckets, different (and in some cases,
alternate) methods of valuation have been prescribed in the law, depending on
existence of specified circumstances in different situations under each
buckets. These methods are discussed in subsequent paras separately.

However, for each of the above buckets, while
determining the value of supply:

a)   Section 15(2) lists specific amounts which
are required to be included; and

b)   Section 15(3) and Rule 7 of DVR lists
specific amounts which are required to be excluded

2.  Mandatory inclusions in value of supply

     Irrespective of the nature of supply, as
per section 15(2), following amounts shall be included in the value of a supply
(some practical examples of these are given in brackets):

i.   any taxes, duties, cesses, fees and charges
levied under laws other than GST related Acts, if charged separately by the
supplier (e.g. basic customs duty, property tax, etc. separately charged by
supplier to recipient);

ii.  any amount that supplier is liable to pay for
the supply but is incurred by the recipient and is not included in the price
actually paid/payable for the supply (e.g. salaries of suppliers’ employees,
electricity bill of supplier etc. paid by recipient);

iii.  incidental expenses, including commission and
packing, charged by supplier to recipient (e.g. outward freight, fumigation
charges etc.);

iv. any amount charged for anything done by
supplier for supply at the time of, or before delivery of goods / supply of
services (e.g. warehousing charges);

v.  interest/late fee/penalty for delayed payment
of consideration for supply; and

vi. subsidies directly linked to price of supply
excluding Government subsidies (e.g. subsidy received by canteen contractor
from recipient for subsidised meals given to recipient’s employees).

3.  Mandatory exclusions from value of supply

     Irrespective of the nature of supply, as
per section 15(3), following amounts shall not be included in the value of a supply,
if the conditions specified there against are satisfied (some practical
examples of these are given in brackets):

i.   any discount given before/at the time of
supply, if it has been recorded in the invoice issued for such supply (e.g.
discount on stock clearance sale);

ii.  any
discount given after supply, if such discount is:

–   established in terms of agreement entered
into at/before time of supply;

–   specifically linked to relevant invoices; and

–   input tax credit (ITC) attributable to it on
the basis of document issued by supplier has been reversed by recipient.

     (e.g. volume/target discount given as
per milestones)

     It needs to be noted that the above
exclusions are specific and conditional. Hence, neither any other type of
discount nor any of the aforesaid two types of discounts where the specified
conditions are not fulfilled, will be allowed to be deducted by the supplier
from the value of supply for computing GST liability of supplier.

    However, net effect of the above is that if
in practice,in respect of post-supply discount:

–   supplier does not want to seek reduction in
its GST liability (already discharged for the supply); and

–   recipient does not want to reverse ITC
attributable to such discount (already claimed earlier based on original invoice
of supplier),

     they can very well do so, with the supplier
issuing credit note to recipient u/s. 34 of CGST Act, only to the extent of the
amount of post supply discount, without giving any credit to the recipient for
the GST already charged in the original invoice for the supply, ITC for which
was already taken earlier by the recipient.

     As per Rule 7 of DVR, expenditure/costs
incurred by a supplier as a pure agent of recipient shall be excluded
from value of supply if all the following seven conditions (as against
twelve conditions specified in present Valuation Rules under Service Tax Law)
are satisfied:

(i)   supplier acts as pure agent of recipient when
he makes payment to third party on authorisation of recipient;

(ii)  payment made by pure agent on behalf of
recipient is separately indicated in invoice issued to recipient;

(iii)  supplies procured by pure agent from third
party are in addition to services (and possibly goods or both² )
supplied on his own account;

(iv) supplier acts as pure agent to incur
expenditure/costs in the course of his supply as per contractual arrangement
with recipient;

(v)  supplier neither intends to hold nor holds any
title to goods/services procured/supplied as such agent;

(vi) supplier does not use goods/services so
procured for his own interest; and

(vii) supplier receives only actual amount incurred
to procure such goods/services, in addition to amount received for supply made
on his own account.

4.  Value of supply to non-related persons

     Supply to a non-related person could be
such where:

(a) price is the sole consideration
for supply; or

(b) price is not the sole consideration
for supply.

     In situation (a), as per section 15(1),
value of such supply shall be ‘transaction value’, which is the price
actually paid/payable for the supply.

     In situation (b), as per section 15(4),
value shall be determined as per Rule 1 of DVR.

     The term ‘consideration’ is defined very
widely in section 2(31) of CGST Act in an inclusive manner. Therefore, in
addition to the specific inclusions stated in that definition, whatever
qualifies as consideration ordinarily and in terms of the Indian Contract Act,
will also be regarded as consideration. Following essential features of such
specific inclusions in the definition of ‘consideration’ need to be noted
carefully:

(a) any payment made or to be made, whether in
money or otherwise (i.e. in kind) in respect of, in response to, or for the
inducement of, the supply of goods/services;

(b) such payment may be made by the recipient or by
any other person (other than subsidy given by Government);

(c) monetary value of any act or forbearance, in
respect of, in response to, or for the inducement of, the supply of goods or
services or both, whether by the recipient or by any other person (other than
subsidy given by Government);

(d) deposit given in respect of the supply of
goods/services, if the supplier applies such deposit as consideration for such
supply.

Treatment of Free Issue/Free of Charge Material

It appears that Free Issue Material (FIM)/Free of Charge
(FOC) material made available by the recipient to the supplier in terms of
a condition precedent stated in the contract with the supplier, clearly
defining the scope and nature of the supplies of the supplier, can be argued to
be not includible in the value of the supply in terms of specific inclusions
stated in (a) and (c) above. To avoid possible disputes in this regard that
could be raised by Departmental Officers on account of the use of phrases like
‘in respect of’ and ‘for the inducement of’ having wide meanings in the
definition of ‘consideration’ as explained above, it would be desirable that
Government appropriately clarifies whether in aforesaid and/or other
circumstances, FIM/FOC material made available by recipient to the supplier is
or is not, required to be added to the value of supply by the supplier. 

Treatment of consideration in kind

Where supply is to a non-related person but price is not
the sole consideration, i.e. where price is partly in money and partly in kind,
or it is wholly in kind, Rule 1 of DVR provides for the following methods of
arriving at valuation in the sequence stated below i.e. if the first method
fails, value has to be determined as per next method and if the next one fails,
the third method and so on, where the last method is prescribed in Rule 5:

(a) Open Market Value (OMV) of the supply;

(b) sum total of consideration in money and such
further amount in money that is equivalent to the consideration not in money
(if such amount is known at the time of supply);

(c) value of supply of goods/services of like kind
and quality;

(d) sum total of consideration in money and such
further amount in money that is equivalent to the consideration not in money as
determined by application of Rule 4 or Rule 5 in that order (these Rules are
briefly narrated at S. Nos. 3 & 4 respectively in the table in Para 6
below).

5.  Meaning of ‘related persons’

     Curiously, the definition of ‘related
persons’ is not given in the definition section 2 of CGST Act, but it is given
in the Explanation to section 15 by clearly stating, ‘For the purposes of
this Act, – ”.

     As per this Explanation, in eight specified
types of relationships, persons will be deemed to be ‘related persons’, and
‘person’ for this purpose will include legal persons. Instances of these
specified types of relationships are – employer and employee; members of the
same family; one person directly/indirectly controls the other; persons who are
legally recognised partners in business; persons who are officers/directors of
one another’s businesses; a person who is associated with another person as its
sole agent/sole distributor/sole concessionaire.

6.  Value of supply to agents, related persons or
between distinct persons³

     Valuation for supply between a person
(being a principal) and his agent (other than sole agent), is prescribed in
Rule 3 of DVR, while valuation of supply between related persons (including
sole agent) or between distinct persons is prescribed in Rule 2 of DVR – both
of which Rules require determination of value as per Rule 4 or Rule 5 in
specified situations.

     Rules 2 to 5 also provide for sequential
method of arriving at valuation summarised in the table below:

S. No.	Method of valuation (in sequential order)	Supply between principal and agent (other than sole agent)	Supply between distinct persons and related persons (including sole agent)*
1	Open Market Value (OMV) of supply	3 [Rule 3 clause (a)]	3 [Rule 2 clause (a)]
2	Value of supply of goods/services of like kind and quality	N.A.	3 [Rule 2 clause (b)]
3	110% of cost of production/manufacture/acquisition of goods or cost of provision of services	3 [Rule 4]	3 [Rule 4]
4	Value using reasonable means consistent with the principles and general provisions of section 15 and DVR	3 [Rule 5]	3 [Rule 5]
Option available to supplier – 90% of price charged for goods of like kind and quality by recipient to his unrelated customer		3 (this option is in place of OMV method only)	3 (this option is in place of all above methods)

*Most importantly, as per second proviso to Rule 2 of DVR,
in all these situations, value declared in invoice of supplier shall be deemed
to be OMV, where the recipient is eligible for full input tax credit.This is
a great relief to businesses, as it will avoid possible valuation disputes with
Department in these situations.

The expressions ‘Open Market Value’ (OMV) and ‘supply
of goods or services or both of like kind and quality’ are defined in the
Explanation at the end of Rule 9 of DVR as under:

a)  ““open market value” of a supply of goods or
services or both means the full value in money, excluding the integrated tax,
central tax, State tax, Union territory tax and the cess payable by a person in
a transaction, where the supplier and the recipient of the supply are not
related and price is the sole consideration, to obtain such supply at the same
time when the supply being valued is made.”

(emphasis supplied) 

     In essence, OMV is arm’s length price.

b)  ““supply of goods or services or both of
like kind and quality” means any other supply of goods or services or both made
under similar circumstances that, in respect of the characteristics, quality,
quantity, functional components, materials, and reputation of the goods or
services or both first mentioned, is the same as, or closely or
substantially resembles, that supply of goods or services or both.”

(emphasis supplied) 

In practice, several challenges could arise in determining
what are ‘similar circumstances’ in light of the above specified
characteristics of a supply and therefore, due caution will have to be
exercised in this regard by drawing support from publicly available
information, opinions of experts, etc. which should be well documented – as is
done in case of transfer pricing regulations under Income Tax Act.

7.  Option to determine value of notified supplies

     As per section 15(5) read with Rule 6 of
DVR, in case of following notified supplies, where the recipient may or may not
be related or price may or may not be the sole consideration, supplier has
the option to determine the value as per method prescribed in Rule 6 of DVR
for each such notified supply (subject to satisfaction of specified
conditions), instead of determining value as per the principles discussed
in Paras 4 to 6 above:

S. No.	Nature/type of supply	Relevant criteria / optional deemed valuation method prescribed in Rule 6 – depending on specified situations
1	Exchange of foreign currency	a)  Difference between RBI buying and selling rates of specified currency b)  1% of gross amount of INR c)  1% of specified amount of INR derived/assumed to be received
2	Supply of foreign currency, including money changing	a)  Upto Rs.1 lakh – 1% of gross amount of currency exchanged (subject to minimum of Rs.250) b)  > Rs.1 lakh but < Rs.10 lakh – Rs.1,000 plus 0.5% of gross amount of currency exchanged c)  > Rs.10 lakh – Rs.5,500 plus 0.01% of gross amount of currency exchanged (subject to maximum of Rs.60,000)
3	Booking of air travel tickets by air travel agent	a)  Domestic – 5% of basic fare b)  International – 10% of basic fare
4	Life insurance (other than pure risk cover policies)	a)  Gross premium less amount allocated for investment/savings b)  Single premium annuity policy (other than (a) above) – 10% of premium c)  Any other policy – 25% of premium in first year and 12.5% of premium in subsequent years
5	Supply of second hand goods by person dealing in buying and selling such goods where no ITC is availed on purchase of such second hand goods	Positive difference, if any, between selling and purchase price (In case of goods purchased from defaulting unregistered borrower for recovery of loan/debt, purchase price of person making repossession shall be deemed to be the purchase price of such borrower reduced by 5% for every quarter/part thereof between date of purchase and date of disposal by such person making repossession)
6	Token, voucher, coupon or stamp (other than postage stamp) redeemable against supply of goods/services	Money value of goods/services redeemable
7	Taxable services provided by notified class of service providers from out of persons having more than one registrations under different GST Acts but treated as distinct persons (referred to in Para 2 of Schedule I of CGST Act),where ITC is available	Nil

8.  Rate of exchange and value inclusive of GST

     As per Rule 8 of DVR, for determining rupee
value of supplies involving foreign currency, the rate of exchange to be
applied shall be the applicable RBI reference rate on the date and time of
relevant supply in terms of section 12 (time of supply for goods) and section
13 (time of supply for services) of CGST Act.

     As per Rule 9 of DVR, where value of supply
is inclusive of GST, tax fraction shall be applied to determine the GST amount
included in such value i.e.

     GST = Value of supply inclusive of GST X Applicable GST rate for the supply /

               100 + Applicable GST
rate for the supply 

     This method would particularly become relevant
in cases of supplies of taxable goods/services obtained from unregistered
persons, where the registered person (i.e. recipient) is liable to pay GST
under reverse charge as per section 9(4) of CGST Act.

9.  Conclusion

     Given the complexities in real life
situations of supply of goods/services and related matters like conditions
precedent, nature of payments, need for outsourcing, nature of
concessions/incentives given, actual conduct of parties, technological
advancements etc., area of valuation of supplies liable to GST will pose
several challenges as well as opportunities for small, medium and large
businesses.

     All decision makers will have to be
cautious, methodical and process oriented for being fully GST compliant on one
hand and simultaneously achieving tax optimisation, for not only sustaining in
the increasingly competitive and disruptive business environment but also
increasing one’s market share in the world’s fastest growing economy.

Introduction

In any taxation matter, the classification of any items plays
an important role in determining the quantum of tax payable by the taxable
person. The GST Council has also approved four slabs of rates which are 5%,
12%, 18% and 28%. The different rates have been approved for different products
by the GST Council in their meeting held on 19/05/2017 and 20/05/2017. The
appropriate classification of goods or services will determine the rate of GST
payable.

The Tribunal and Courts have laid down different principles
of classification of goods or services. These principles are very helpful in
classifying the goods and services and accordingly determining the rate of tax.

Principles of Classification

The various principles are summarised below:

(a)
Commercial/Trade Parlance

(b)
Definition given in statute or chapter note/section note etc.

(c)
Description in HSN has persuasive value

(d)
Most specific description to be preferred over general description

(e)
Functional use of the product

(f)
Essential characteristics of goods or service

(g)
Importance of expert opinion and other evidentiary value

(h)
Importance of ISI specification

(i)
Importance of Finance Ministers speech

(j)
Importance of trade notice, circulars etc.

(k)
Chemical examination only provides content and not classification

(l)
Provision of relevant time

(m)
Burden to prove classification on department

(n)
Exemption notification cannot interpret tariff heading or sub heading

(o)
Beneficial classification

(p)
Jurisdiction to decide classification

Each of the above principles are discussed as follows:

a)  Commercial/Trade Parlance

    If meaning of goods/service is not defined
in relevant places in GST Act, then, meaning of the goods/service has to be
judged in the manner understood by the people dealing with it, i.e., the
goods/service should be understood in the commercial sense. This rule has been
consistently applied by various courts to decide the classification of the
product. For example, whether the product should be classified as cosmetic or
medicament shall be judged by the manner in which the people dealing the
product understand.

     The observation of the Supreme Court in
paras 29 & 34 in the case of Dunlop India vs. UOI 1983 (13) ELT 1566
(SC) substantiate this principle. The Supreme Court has observed as follows:

     “29. It is well
established that in interpreting the meaning of words in a taxing statute, the
acceptation of a particular word by the trade and its popular meaning should
commend itself to the authority.”

     “34. We are, however,
unable to accept the submission. It is clear that meanings given to articles in
a fiscal statute must be as people in trade and commerce, conversant with the
subject, generally treat and understand them in the usual course. But once an
article is classified and put under a distinct entry, the basis of the
classification is not open to question. Technical and scientific tests offer
guidance only within limits. Once the articles are in circulation and come to
be described and known in common parlance, we then see no difficulty for statutory
classification under a particular entry.”

     The above Principle of classification has
been followed consistently by the Supreme Court in the following cases:

          
Indian Aluminium Cables Ltd. vs. UOI 1985 (37)

           E.L.T (S.C)

           Collector of Central Excise,
Kanpur vs. Krishna

           Carbon Paper Co.1988 (37) E.L.T
480 (S.C)

     Commissioner vs. Pio Food Pack 1980
(6) ELT 353 (SC)

     Reliance Cellulose Products Ltd.,
Hyderabad vs. Collector of Central Excise, Hyderabad 1997 (93) E.L.T 646
(S.C)

This is the basic principle to determine the classification
of goods or service. Affidavits from persons like customers, distributors,
dealers along with purchase orders from customer, description of product in
invoice raised by supplier, normally substantiate the manner in which the
product is understood in the commercial parlance.

b)  Definition given in statute or chapter
note/section note etc.

     The principle of classification of product
as per trade parlance is not absolute principle. The statute making authority
has the power to define the product in a particular manner. The Hon. Supreme
Court in the case of Akbar Baharuddin vs. Collector of Central Excise, 1990
(47)ELT 161 (SC) has held that tariff entry shall not only be based on trade
parlance and understanding between the person in the trade. The said doctrine
of commercial understanding should be departed where the statute either in the
act or chapter note or in schedule or anywhere else defines the product in a
particular manner. The definition in the statute will take precedence over the
commercial understanding of the product in the trade.

c)  Description in HSN has persuasive value

     Under the General Agreement for Trade and
Tariff, commonly known as GATT agreement, World Trade Organization (WTO) has
been formed.The Customs Coordination Council (CCCN) working under WTO has
published Harmonized System Nomenclature (HSN) which is normally adopted by all
countries who have signed the GATT Agreement for the purpose of classification of
the products for Customs. In India, classification under Central Excise and in
various state VAT is also basedon HSN. The classification made in GST is also
based on HSN. Harmonized System Nomenclature published by CCCN gives a detailed
description of various products which are covered under a particular heading or
sub-heading. The description in HSN is very helpful in deciding the
classification of the product. The Hon. Supreme Court in the case of Wood
Crafts Products Ltd., 1995 (77) ELT 23 (SC) has held that the description
in HSN Explanatory Note has persuasive value.The Supreme Court has observed in
paras 12 and 18 as follows:

     “12. It is significant, as
expressly stated, in the Statement of Objects and Reasons, that the Central
Excise Tariffs are based on the HSN and the internationally accepted
nomenclature was taken into account to “reduce disputes on account of tariff
classification”. Accordingly, for resolving any dispute relating to tariff
classification, a safe guide is the internationally accepted nomenclature
emerging from the HSN. This being the expressly acknowledged basis of the
structure of Central Excise Tariff in the Act and the tariff classification
made therein, in case of any doubt the HSN is a safe guide for ascertaining the
true meaning of any expression used in the Act. The ISI Glossary of Terms has a
different purpose and, therefore, the specific purpose of tariff classification
for which the internationally accepted nomenclature in HSN has been adopted,
for enacting the Central Excise Tariff Act, 1985, must be preferred, in case of
any difference between the meaning of the expression given in the HSN and the
meaning of that term given in the Glossary of Terms of the ISI.

     18. We are of the view that the
Tribunal as well as the High Court fell into the error of overlooking the fact
that the structure of the Central ExciseTariff is based on the internationally
accepted nomenclature found in the HSN and, therefore, any dispute relating to
tariff classification must, as far as possible, be resolved with reference to
the nomenclature indicated by the HSN unless there be an express different
intention indicated by the Central Excise Tariff Act, 1985 itself. The
definition of a term in the ISI Glossary, which has a different purpose, cannot,
in case of a conflict, override the clear indication of the meaning of an
identical expression in the same context in the HSN. In the HSN, block board is
included within the meaning of the expression “similar laminated wood” in the
same context of classification of block board. Since the Central Excise Tariff
Act, 1985 is enacted on the basis and pattern of the HSN, the same expression
used in the Act must, as far as practicable, be construed to have the meaning
which is expressly given to it in the HSN when there is no indication in the
Indian Tariff of a different intention.

The same principle is repeated in the case of Business
Forms Ltd., 2002-142-ELT-18 (SC). Thus, description given in HSN is
very useful indetermining classification of the product.

d)  Most specific description to be preferred over
general description

     It is a general principle of classification
that most specific description shall be preferred over a more general
description. The judgements laying down the principle that most specific shall
be preferred to general in the matter of classification are discussed below:

     In
the case of Dunlop India Ltd. vs. Union of India 1983 (13) ELT1566 in
para 37, the Supreme Court has observed ‘when an article has by all standard
a reasonable claim to be classified under an enumerated item in the Tariff
Schedule, it will be against the very principle of classification to deny it
the parentage and consign it to the orphanage of the residuary clause.’

      In the case of Moorco (India) Ltd. vs. CCE
(supra), the Supreme Court has observed ‘in either situation, the
classification which is most specific has to be preferred over the one which is
not specific or is general in nature. In other words, between the two competing
entries one nearer to the description should be preferred. Where the class of
goods manufactured by the assessee falls, say, in more than one heading, of
which one may be specific, other more specific, 3^rd most specific
and 4^th general, the rule requires the authorities to classify the
goods in the heading which gives most specific description.’

e)  Functional use of the product

     Functional use of the product can certainly
be one of the factors in determining the classification, but cannot be the sole
criteria for determining the classification. Normally use of the product is not
relevant as the product is required to be classified in the condition in which
it is supplied. However, sometimes, tariff heading itself provides the use of
the product. In such a case, the ultimate use of the product is very important
for classifying the product. For example, entry No. 2309 in Central Excise
Tariff Act is “preparation of a kind used in animal feeding”. It is evident
from the description itself that preparation shall be used in animal feeding.
Where the description itself specifies the use of the product, classification
will be based on the ultimate use of the product. The Hon. Supreme Court in the
case of Atul Glass Industries vs. Collector of Central Excise, 1986 (25)
ELT 473 has held that in such a case, the goods are to be classified on the
basis of their primary function.

f)   Essential characteristics

     The product is purchased and sold due to
its essential characteristics. The principles for determining the essential
characteristics are –

     (a) Cost of components of the
product.

     (b) Functionality of the product.

     These are discussed below:

     (i) 
Cost of components of the product—

     The Hon’ble Supreme Court in the case of Xerox
India Ltd. vs. Cenvat Credit 2010 (260) ELT 161 has determined the
classification of multifunctional printing machines on this basis. The assessee
claimed classification under Chapter heading 8479.89 whereas the revenue
claimed classification under Chapter heading 8471.60. The machine performs
various functions of printer, fax, copier and scanner. The court observed that
printing function emerges as principal function and gives the machine its
essential character. In arriving at the principal function, the court held
that, in case of product Xerox Regal 5799, 85% of its total parts and
components and manufacturing cost is allocated to printing. Similarly, in case
of product Xerox XD 155df model, 74% of the parts and components along with
cost are allocated to printing. Similar principle of determining the essential
characteristic based on cost has been laid down in various other judgments.
Therefore, this is one of the criteria which can be applied for the purpose of
determining the essential characteristic.

     (ii) 
Functionality of the product—

     In the case of CCE, Hyderabad vs.
Bakelite Hylam Ltd. 1997 (91) ELT13 (SC) the issue was regarding
classification of decorative laminate sheet where paper constituted 60% to 70%
of the total weight and other input was plastic which constituted 30% to 40% of
the total weight. The Hon’ble Supreme Court in para 25, reproduced below, held
that the essential characteristic is given by plastic. The quality of plastic
like rigidity, strength, resistance to heat provide essential characteristic to
the product. Therefore, the product merits classification as plastic.

     “25. Rule 1 does not help to
classify the goods in the present case because Note 1(f) in Chapter 48 is not
applicable to these goods. The other relevant rule of interpretation is Rule
3(b) which provides that mixtures or composite goods consisting of different
materials which cannot be classified with reference to Rule 3(a) as in the
present case, are to be classified as if they consisted of the material or
component which gives them their essential character. In the present case, the
essential character of a decorative laminated sheet is its rigidity or strength
and its resistance to heat and moisture. These are essentially characteristics
which are imparted by resins. Paper does not possess any of these
characteristics.Therefore, applying Rule 3(b) and going by the essential
characteristicsof such laminated sheets, these goods are more appropriately
classifiable under Chapter 39.”

     Thus, in determining the essential
characteristics,   the above two factors
can be considered as guidelines. 

g)  Importance of expert opinion and other
evidentiary value

     Very often, when there is dispute regarding
nature of goods, it will be advisable for the authorities as well as the
taxable person to obtain opinion from technical experts or person dealing in
the goods to know the true character of the goods. It has been consistently
held that expert opinion is to be taken to understand the nature of product but
cannot decide the classification of the goods. It has no binding effect, but
only guiding effect on the authorities because ultimately, decision of proper
classification of the product is to be decided by the jurisdictional authority.
The Delhi Tribunal in case of Guest Keen William 1987 (29)ELT 68 has
observed in para 23 as follows:

     23. ……………………We have also
examined Shri Gujral’s argument that the opinion of the expert should be considered.
He cited the case of ‘K. Mohan & Co., Bombay vs. Collector of Customs,
Madras’ reported in ‘1984(15) E.L.T. 430’, and also cited ‘1984 E.C.R. 1086’
and ‘1986 (6) E.C.R. 334’. While we agree that expert opinion should be
considered, we observe that it is the language of the notification and the
facts of the matter whichshould be examined. An expert’s opinion has to be
given due respect but it cannot be the deciding, or binding factor.

     The above judgement has been maintained by
the Supreme Court in case of Guest Keen Williams Ltd. vs. Collector – 1997
(95) E.L.T. A144(S.C)

     It is also held that expert opinion
expressed by specialised institution has to be preferred over the opinion of
individual experts obtained at the instance of the assessee. These expert
opinions are not ignorable particularly if they are given by public
authorities. Opinion of any other persons who have knowledge in the field
regarding the product shall be given due importance for deciding the
classification of the product. The opinion of authorities like Textile
Commissioner, Law Ministry, etc. are to be given due importance for
classification of the product.

h)  Importance of ISI specification

     In many cases, the product is manufactured
as per ISI specification. Sometimes, the taxable person also affixes ISI mark
on the product.The ISI specification certifies the quality of the product and
not the name or character. View of the ISI shall be looked at some amount of
credibility for deciding the classification. It can be used as specialised
material in expert opinion, but other tangible consideration should also weigh
while determining the classification. Therefore, description of product in ISI
has limited value in determining the classification of goods.

i)   Finance Minister’s speech

     In some case, Finance Minister in the
Finance Bill may make certain reference while introducing the changes. Speech
of the Finance Minister represents the manner in which the authorities have
understood the change. Therefore, the speech of the Finance Minister can be
helpful in deciding the classification as held by the Hon. Gujarat High Court
in the case of ECHJAY Industries vs. UOI 1988 (34) ELT 42 (Guj)

j)   Importance of Trade Notice/Circulars, etc.

     Section
168 of GST Act empowers the Board or the Competent Authority of the State
wherever it considers necessary for the purpose of uniformity in implementation
of the Act to issue such orders, instructions or directions to GST Officers as
may deem fit. Similar provisions are contained in section 37B of Central Excise
Act. It has been consistently held that trade notices, tariff advices,
circulars, press notes etc. issued by the authorities are hardly
relevant for the purpose of classification of the product under Central Excise
Act as it cannot override the true meaning or interpretation underlined
statutory provisions. The classification has to be decided by the authorities
based on the description of relevant tariff entry and not on the basis of
tariff advice or instructions or circulars etc.

k)  Report by Chemical Examiner

     Very often, the authorities insist upon
testing of the product in order to determine the true composition of product
and nature of the product. Section 154 of GST Act also provides taking of
samples. It has been consistently held that the role of Chemical Examiner is
only to provide the content of the product or the nature of the product, but
not to decide classification of the product. Mention of classification in the
test report shall be ignored.The Hon. Gujarat High Court in the case of Stadfast
Paper Mills vs. Dr.Kohli, Former Collector of Central Excise, Baroda and
others 1983 (12)ELT 744 (Guj) has held that Chemical Examiner is required to
provide the constituent of different material contained in the article to
substantiate the nature of product. If the report mentions the classification
of product, the same shall be ignored. The relevant Extract of the above
judgment is as follows:

     12………………… Here it should
be recalled that the evidentiary value of the report of the Chemist lies only
in so far as it supplies the data obtained by him through the Chemical
analysis. It is none of the functions of the Chemists to give an opinion as to
whether the goods in question would be covered by a particular item of the
Tariff Schedule.

l)   Provision at the relevant time

     Sometime, the tariff description of the
entry may be amended over a period of time. While classifying the product, the
tariff description of relevant period should only be used for classification.
For example, say, goods are supplied in the month of August 2017. Further
assume there is amendment in the tariff entry in April 2018. The classification
of the product based on tariff description in August 2017 should only be
considered while classification for supplies made in August 2017. Subsequent
amendment will not be relevant for the purpose of deciding the classification.

m) Burden to prove classification is on department

     It has been held under Central Excise Act
that burden to prove is primarily on the excise authorities to establish
whether particular products falls under one tariff heading or another when the
manufacturer has classified the product in a particular tariff heading and the
department intends to classify it in a different heading. The department  must produce enough evidence to substantiate
that the product must classify differently. In other words, the burden of proof
of particular classification is on the department. This burden can be shifted
to the assessee when the classification adopted by him is not totally correct.

n)  Exemption notification cannot interpret the
tariff entry

     Sometimes, the department provides
exemption to a particular product and specifies the tariff entry for that
product. In such cases, the department has been taking plea that the product
should be classified under the heading mentioned in the exemption notification.
It has been consistently held that exemption notification cannot interpret the
tariff entry nor it can provide norms for the purpose of classification. The
classification of product must be decided based on description of tariff entry.
The Hon. Bombay High court in case of Mechanical Packing Industries vs.UOI
1987 (32) ELT 35 (Bom) has observed in para 11 as follows:

11.Secondly,
this is exactly what the Government cannot do by virtue of an exemption
notification. If there has to be any exemption, or classification that
necessarily must be done by the legislature and not by virtue of any power to
issue exemption notification under Rule 8(1) or (2) of the Central Excise
Rules.

o)  Beneficial classification

     It is a well established principle that when
the goods are classified under two different items or said items or ambiguous
sentences leave reasonable doubt about its meaning, then benefit of doubt is
given to the manufacturer and the classification should be adopted which is
beneficial to the manufacturer. This is based on the principle that when the
legislature has not clearly laid down the provisions of law benefit of doubt is
given to the manufacturer. The Hon. Bombay High Court in the case of Garware
Nylons Ltd. vs. UOI 1980 (6) ELT 249 (Guj) has held that the classification
beneficial to the assessee should be adopted.

p)  Jurisdiction to decide classification

     The jurisdiction to decide the
classification is on the jurisdictional officers of the supplier of
goods/service. The classification cannot be decided by the jurisdictional
officer of recipient of goods/service. They have no authority to change the
classification adopted by supplier of goods/service. The Hon. Supreme Court in
the case of Sarvesh Refractories, 2007 (218) ELT 488 (SC) has held that
classification cannot be changed by jurisdictional officer of recipient. The
relevant extract of the above mentioned judgment is as follows:

     6. The finding recorded by the
Tribunal is unexceptionable. We agree with the view taken by the Tribunal that
the appellant could not get the classification of ‘Loadall’ changed to Heading
84.27 from 84.29, as declared by the manufacturer. Insofar as the penalty
imposed by the authority-in-original is concerned, we are of the view that a
case for imposition of penalty is not made out and accordingly the same is set
aside and deleted. Rest of the order of the Tribunal restoring the order of the
authority-in-original is confirmed.

     The taxable person shall apply the above
principles for the purpose of classifying the goods or services.

    Classification of composite supply

     In trade parlance when both the goods or
services are supplied, it is considered as a ‘works contract’.  However, under GST the ‘works contract’ has
been defined in Section 2(119) as follows:

     “119.            “works contract” means a contract for building,
construction, fabrication, completion, erection, installation, fitting out,
improvement, modification, repair, maintenance, renovation, alteration or
commissioning of any immovable property wherein transfer of property in goods
(whether as goods or in some other form) is involved in the execution of such
contract.”

     The definition of ‘works contract’ can be
divided into following two parts:

a)  It should be contract for building,
construction, fabrication, completion, erection, installation, fitting out,
improvement, modification, repair, maintenance, renovation, alteration or
commission;

b)  It should result in an immovable property
wherein transfer of goods is also involved.

     Thus, as a result of provision of supply,
the contract shall result in immovable property. If it does not result in
immovable property, the supply cannot be considered as a supply of ‘works
contract’.

     If the contract of supply involves both
supply of goods or services and does not result in immovable property, the
supply can be considered either as a mixed supply or composite supply. The
‘mixed supply’ and ‘composite supply’ has been defined in section 2(30) and
2(74) of the GST Act which reads as follows:

     30.   “composite
supply” means a supply made by a taxable person to a recipient  consisting of two or more taxable supplies of
goods or services or both, or any combination thereof, which are naturally
bundled and supplied in conjunction with each other in the ordinary course of
business, one of which is a principal supply.”

     Illustration: Where goods are packed, and
transported with insurance, the supply of goods, packing materials, transport
and insurance is a composite supply and supply of goods is a principal supply.”

     74.   “mixed supply” means two or more individual supplies of goods
or services, or any combination thereof, made in conjunction with each other by
a taxable person for a single price where such supply does not constitute a
composite supply.

     Thus, the composite supply will be
classified as a supply of goods or service based on principal supply. Hence in
any composite supply, the principal supply is required to be determined. For
example, a person books a ticket from Mumbai to Delhi in Rajdhani Express. The
railways provide the service of transportation of passengers which is a
principal supply. However, in a train the food is also served and bed rolls are
also provided. These two supplies of food and bed rolls are to make the supply
of transportation of passengers more convenient and comfortable. Therefore, as
per section 2(30) of the GST Act, all the three supplies will be classified as
‘transportation of passengers’ and the tax rate applicable to transportation of
passengers will be payable by the railways.

     However, in many cases, it becomes very
difficult to determine the principal supply in composite supply. The Honourable
Supreme Court has laid down certain principles for determining the essential
character of the product. These principles can be helpful in determining the
principal supply of a product. These principles are:

     a. Cost of components of
the product—

     The Hon’ble Supreme Court in the case of Xerox
India Ltd. vs. CC 2010 (260) ELT 161 has determined the classification of
multi-functional printing machines. The assessee claimed classification under
Chapter heading 8479.89, whereas the revenue claimed classification under
Chapter heading 847160. The machine performs various functions of printer, fax,
copier and scanner. The court observed that printing function emerges as
principal function and gives the machine its essential character.In arriving at
the principal function, the court held that, in case of product XeroxRegal
5799, 85% of its total parts and components and manufacturing cost is allocated
to printing. Similarly, in case of product Xerox XD 155df model, 74% of the
parts and components along with cost are allocated to printing. Similar
principle of determining the essential characteristic based on cost has been
laid down in various other judgements. Therefore, this is one of the criteria
which can be applied for the purpose of determining the essential
characteristic.

     b. Functionality of the product
–

     In the case of CCE, Hyderabad vs.
Bakelite Hylam Ltd. 1997 (91) ELT 13 (SC) the issue was regarding
classification of decorative laminate sheet where paper constituted 60% to 70%
of the total weight and other input was plastic which constituted 30% to 40% of
the total weight. The Hon’ble Supreme Court in para 25, reproduced below, held
that the essential characteristic is given by plastic. The quality of plastic
like rigidity, strength, resistance to heat provide essential characteristic to
product. Therefore, the product merits classification as plastic.

     “25. Rule 1 does not help
to classify the goods in the present case because Note 1(f) in Chapter 48 is
not applicable to these goods. The other relevant rule of interpretation is
Rule 3(b) which provides that mixtures or composite goods consisting of
different materials which cannot be classified with reference to Rule 3(a) as
in the present case, are to be classified as if they consisted of the material
or component which gives them their essential character. In the present case,
the essential character of a decorative laminated sheet is itsrigidity or
strength and its resistance to heat and moisture. These are essentially
characteristics which are imparted by resins. Paper does not possess any of
these characteristics.Therefore, applying Rule 3(b) and going by the essential
characteristics of such laminated sheets, these goods are more appropriately
classifiable under Chapter 39.”

    Thus, in determining the essential
characteristic, the above two factors can be considered as guidelines.

    Thus, the functionality test or the test of
cost of product can be applied for the purpose of determining the principle of
supply.

     This principle can be applied to
comprehensive AMC. In case of comprehensive AMC, the intention of the recipient
is to ensure that the equipments run in a smooth condition, so that the maximum
benefit of the equipment can be derived by the recipient. Therefore, the
supplier of service regularly visits and inspects the equipments. He carries
out the function of cleaning, washing and greasing wherever required for the
equipments. However, wherever requbired, the service provider will also carry
out the replacement of the part which is covered in the contract. There may or
may not be any replacement of any part. Therefore, in this case, applying the
principle of functionality test, the service appears to be predominant and
accordingly the entire contract shall be classified as a service contract
levied to tax rate of 18%. It is quite possible that the part if any which is
replaced in the performance of the contract may attract 28% tax. However, since
it is a composite supply, where service is a principal supply, therefore, the
rate of tax would be 18%.

Conclusion