Indirect Tax

This update highlights some of the key budgetary changes along with other important developments in the indirect tax space in the last quarter.

Himanshu SinhaPartner

Shashank ShekharCounsel

Tushar JoshiSenior Associate

The first quarter of 2022 saw a host of budgetary changes introduced in the Goods and Services Tax (GST) and Customs laws. While these changes have been enacted through the Finance Act, 2022 (Finance Act), the effective date for amendments to the Central Goods and Service Tax Act, 2017 (CGST Act) will be notified later.

The notable amendments under GST have been around the eligibility of a recipient to avail input tax credit (ITC) and under Customs laws, regarding ‘proper officer’ and their appointment. We discuss them in detail below.

Key Developments

  • Goods and Services Tax

    • Auto-generated statement for availing ITC to replace matching/reconciliation process; additional restriction to be imposed on taxpayers for availment of ITC

      The return filing process under GST laws envisaged a two-way communication between supplier and recipient followed by matching/reconciliation of the details mentioned in their respective returns. The liability of output tax and the availability of ITC was determined basis the respective returns filed by the supplier and the recipient.

      However, by way of substitution of Section 38 of the CGST Act, only the supplier will be required to file the details of outward supply while the requirement of furnishing the details of inward supply by the recipient will be done away with. Accordingly, the two-way process will be replaced with an auto-generated statement to be provided to the recipient consisting of: (i) ITC that may be available to the recipient and (ii) ITC not available to the recipient.

      Thus, the recipient’s credit will depend on the details furnished by the supplier and could be affected by defaults on part of the supplier.

      Further, Section 16 of the CGST Act, which prescribes the eligibility conditions for availing ITC by recipients, has been amended to provide that if auto-generated statement (under the amended Section 38) specifies that ITC on goods and services is restricted, then the recipient cannot avail such ITC.

      Given that a contravention by the supplier may be beyond the recipient’s control, these changes may have a prejudicial impact on recipients.

    • Concept of provisional claim of ITC removed

      The Finance Act does away with the concept of claim of eligible ITC by the recipient on a provisional basis. Currently, the recipient can provisionally claim ITC until the matching/reconciliation of details of outward supply and inward supply furnished by the supplier and the recipient, respectively.

      However, after the amendments, ITC may be availed as per self-assessment by the taxpayer. Further, ITC may be reversed along with interest if the tax is not paid by the supplier and re-availed later once it is paid.

      While the mechanism of matching returns as envisaged originally under GST laws could not be fully implemented on account of certain technological limitations, it was still theoretically advantageous to taxpayers because of its inherent design to modify/revise details of transactions recorded in returns on the basis of two-way communication between suppliers and recipients. On the contrary, the new system is dependent on details furnished only by suppliers and dilutes the original return filing and matching process. As a result of the proposed changes in the return filing system, provisional claim of ITC will become inconsequential.

      The replacement of matching/reconciliation mechanism will dilute the inherent checks and balances envisaged at the time of introduction of GST legislation. Given the challenges faced by businesses on this front in the past, the need to ensure that suppliers are filing details of supply correctly at their end will be all the more important now for availing ITC.

    • Standard Operating Procedure for scrutiny of returns

      A comprehensive standard operating procedure (SOP) has been issued by the Central Board of Indirect Tax and Customs (CBIC) to the officers of Central GST to ensure uniformity in the manner of scrutiny of returns of taxpayers falling under central jurisdiction for financial years 2017-18 and 2018-19. The SOP provides guidelines regarding selection/identification of returns, the procedure for scrutiny, schedule and timelines to be followed, reporting and monitoring on part of the proper officer and the proper officer empowered to undertake such scrutiny. Further, an illustrative list of parameters to be verified is also prescribed for the convenience of the proper officer. These parameters include output tax liability, ITC, interest and late fee.

      The SOP is an interim measure and will remain effective till the time a scrutiny module for online scrutiny of returns is made available on the CBIC-GST application.

      The issuance of SOP indicates a more proactive intent of the tax department for conducting scrutiny of returns and it is likely to provide guidance to GST officers for scrutinising the taxpayers’ returns on objective parameters. At the same time, it will also help taxpayers inculcate a practice of self-review and be alert against possible lapses.

  • Customs

    • Amendments pursuant to Supreme Court’s decision in Canon India on designating DRI officers as proper officers

      The Finance Act amends provisions related to proper officer and their appointment to overcome the decision of the Supreme Court in Canon India Pvt. Ltd. v Commissioner of Customs in which it was held that an officer of the Directorate of Revenue Intelligence (DRI) is not a ‘proper officer’ under the Customs Act, 1962 (Customs Act) and therefore, DRI officers lack the jurisdiction to issue show cause notices. This decision resulted in quashing of show cause notices issued by DRI by various high courts and tribunals.

      The amendments now enable the Board to appoint, by notification, officers of DRI as ‘proper officer’. Further, the Finance Act validates: (i) issuance of show cause notices by DRI, (ii) notifications under which DRI officers were appointed as ‘proper officer’, and (iii) give retrospective effect to the relevant amendments, by deeming fiction, to address the defect identified by the decision of the Supreme Court.

      Consequent to the enactment of the Finance Act, the Board has issued notifications invoking the new provisions for confirming various appointments of proper officers.

      While a review petition against the judgment is pending consideration by the Supreme Court, it has also issued notice in a separate Special Leave Petition on the ground that certain provisions of the Customs Act were not pointed out to the Court while deciding Canon India. Nevertheless, the amendments introduced by the Finance Act directly attempt to cure the defects highlighted by the Supreme Court in Canon India.

      Given the tax implications, it will be important for businesses to watch out for the developments on this issue, especially where show cause notices have already been quashed following Canon India. However, despite the retrospective amendments, this issue is likely to be litigated further before the courts till it attains finality at the Supreme Court level.

    • No Social Welfare Surcharge payable on goods exempt from basic and other customs duties

      The Department of Revenue (Tax Research Unit) issued a clarification on the applicability of Social Welfare Surcharge (SWS) on goods exempt from basic customs duty or other customs duties/cesses.

      SWS is collected by the Central Government on imported goods under Section 110 of the Finance Act, 2018. It is levied and collected as a duty of customs and calculated at the rate of 10% on aggregate of customs duties, taxes and cesses. As SWS is calculated on the aggregate of customs duty payable on the import of goods and not on value of imported goods, it has been clarified that SWS would be 'Nil' in cases where the aggregate of customs duty is zero even though SWS has not been specifically exempted.

      This clarification helps to settle the uncertainty regarding the applicability of SWS where customs duty had been exempted because certain field formations had been taking a view that even where customs duty was exempted, SWS was payable on notional customs duty determined at the tariff rate.

The last quarter also witnessed a marathon hearing before the Supreme Court on the levy of Integrated Goods and Service Tax on ocean freight. As this issue has major ramifications for importers that import goods on Cost Insurance Freight basis, i.e., where the freight to shipping line is paid by the foreign exporter, the decision of the Supreme Court is widely anticipated. On the customs front, the controversy around ‘proper officer’ is far from being settled and even the retrospective amendments made in law may have to pass the test of judicial scrutiny.

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