Himanshu SinhaPartner
Shashank ShekharCounsel
Tushar JoshiSenior Associate
The Goods and Service Tax (GST) Council held its 45th meeting in the previous quarter and took several important decisions. The Central Government introduced a WTO compliant export subsidy scheme called ‘Scheme for Remission of Duties and Taxes on Exported Products’ (Scheme) to enable reimbursement of taxes/duties/levies for exported products which are not refunded under any other scheme. On its part, the Supreme Court settled the issue of refund of unutilised Input Tax Credit (ITC) pertaining to ‘input services’.
Key Developments
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Decisions taken in 45th GST Council Meeting
In the recently concluded GST Council Meeting, several key decisions impacting rate of tax as well as substantive provisions under GST have been taken.
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Scope of Intermediary Services
The export related benefits under GST available on export of services from India by businesses are not available in case services qualify as ‘intermediary services’. In this context, there was a need for clarity regarding what services qualify as such. Accordingly, the Central Board of Indirect Taxes and Customs (Board) has clarified the scope of ‘intermediary services’ under GST law.
To be classified as such, the arrangement must have a minimum of three parties, two of which transact in the main supply and one arranges or facilitates the main supply. Further, there should be two distinct supplies, i.e., the main supply between the two principals and ancillary supply (which is the intermediary service) of facilitating or arranging the main supply. It has been further clarified that intermediary service provider has the character of an agent, broker or any other similar person who merely arranges or facilitates the main supply but does not himself provide the main supply. The role of intermediary is only supportive, and it does not supply goods or services or securities on its own account. However, sub-contracting for a service is not an intermediary service.
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Scope of Distinct Persons for the purpose of Export of Services
Under the Integrated Goods and Services Tax Act (IGST), services provided by Indian companies to group entities located abroad, will not be eligible for GST benefits if they qualify as ‘merely establishments of a distinct person’.
In this regard, the Board has clarified that a company incorporated in India and a foreign company (incorporated by or under the laws of a country outside India) are ‘separate persons’ under the IGST and cannot be considered as ‘merely establishments of a distinct person’. Therefore, (i) supply of services by a subsidiary/ sister concern/ group concern, etc., of a foreign company, which is incorporated in India, to the foreign company located outside India and (ii) the supply from a company incorporated in India to its related establishments outside India, which are incorporated under the laws outside India, would qualify as ‘export of services’ and therefore, will be eligible for the GST benefits. This is because these are not supply between ‘merely establishments of distinct persons’ but a case of ‘export of services’.
This important clarification helps in settling the confusion over eligibility of services provided by Indian companies to group entities located abroad, for GST benefits.
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Delinking of Invoice from Debit Note under Section 16(4) of the CGST Act
Section 16(4) of the CGST Act disallows the entitlement of ITC in respect of any invoice or debit note after a specified date.
The Board has clarified that the ‘date of issuance of debit note’ (not the date of underlying invoice) will determine the relevant financial year for the purpose of taking ITC in respect of Section 16(4), as amended w.e.f. 1 January 2021.
The Board accordingly has clarified that for availment of ITC on or after 1 January 2021, the amended Section 16(4) will apply (and date of the issuance of the debit note will be determinative of the financial year) regardless of whether debit notes were issued prior to or after the said date. However, any ITC availed prior to 1 January 2021 will be governed by the unamended Section 16(4) of the CGST Act.
As a result of the clarification, the denial of ITC basis the underlying invoice will get resolved and the assessees will be able to claim ITC based on the date of the debit notes.
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Supreme Court’s Decision on Inverted Duty Structure
An important issue impacting sectors such as fertilisers, mining, textiles, e-commerce, EPC, footwear, etc., is the accumulation of ITC on account of rate of tax on ‘input services’ being higher than the rate of tax on output supplies. CGST Act only provides for refund of accumulated ITC on account of rate of tax on ‘input goods’ being higher than the rate of tax on output supplies. As per the formula prescribed under Central Goods and Services Tax Rules, 2017 (CGST Rules), ITC pertaining to only ‘input goods’ (and not ‘input services’) can be claimed as refund. This often results in accumulation of ITC relating to input services as the unutilised ITC cannot be claimed as refund in case of an inverted duty structure.
The constitutional validity of these provisions was challenged before the Gujarat High Court as well as the Madras High Court. The Gujarat High Court declared the formula as ultra vires the CGST Act, insofar as it restricted the refund only to the extent of ITC on ‘input goods’ and denied the refund of ITC on input services. On the other hand, the Madras High Court refuting the challenge to the constitutional validity of the provisions held that refund is a statutory right and extending the benefit of refund of ITC only to ‘input goods’ and not to ‘input services’ is a valid classification. The issue, thus, moved to the Supreme Court.
The Supreme Court held that the provisions are unambiguous and the words ‘input services’ cannot be read into the words ‘input goods’. Affirming the Madras High Court decision, the Supreme Court held that refund is only a statutory right and the Parliament is within its legislative competence to determine whether to grant refund of only unutilised ITC on ‘input goods’ or both on ‘input goods’ and ‘input services’. However, the Court noted certain aberrations in the formula prescribed to claim refund. This related to the presumption in the formula that output tax payable on supplies has been discharged from the ITC accumulated on account of ‘input goods’ and there has been no utilisation of the ITC on input services. The Court further noted that even though in practical application, the formula resulted in inequity, it was neither ambiguous nor unworkable. Therefore, the Court refrained from interfering with the applicability of the formula however, it strongly urged the GST Council to reconsider the formula and take a suitable policy decision on the same.
From a perspective of businesses, this development means that this accumulated ITC for which refund is not available is going to add to the costs for businesses.
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Remission of Duties and Taxes on Exported Products
The Central Government has made amendments in the Foreign Trade Policy 2015-20 to introduce the Scheme for Remission of Duties and Taxes on Exported Products (Scheme) and has also notified the guidelines and rates thereunder. The Scheme allows for the refund of the previously un-refunded duties/ taxes/levies at the Central, State and local level borne on exported products. However, the rebate under the Scheme will not be available in respect of duties and taxes already exempted or remitted or credited. Further it will be subject to receipt of sale proceeds within the time allowed under the Foreign Exchange Management Act, 1999. The Scheme will take effect for exports from 1 January 2021 onwards. The Scheme is likely to give boost to the exports sector by increasing the competitiveness of the goods covered by it.
With the pandemic receding and the economy gaining steam, the tax authorities have started GST audit of assessees. While new issues are likely to arise in the future, the decisions taken by the GST Council should help in alleviating some of the issues being faced by the industry.
Further, in the light of Supreme Court’s recommendation, the GST Council should now reconsider the formula for inverted duty so that it applies equitably for the refund of unutilised ITC whether on account of ‘input goods’ or ‘input services’.
