Tushar JoshiSenior Associate
The last quarter of 2021 saw several developments in the indirect tax space, specifically in relation to the GST regime, which are likely to have significant impact for businesses. These developments come against the backdrop of the decisions of the GST Council and the Finance Act, 2021, which made certain amendments to the Central Goods and Services Tax Act, 2017 (CGST Act) effective from 1 January 2022. From the perspective of businesses, there are a host of changes in substantive provisions, procedural rules and tax rates to consider.
Retrospective expansion of meaning of ‘supply’
The scope of supply has been expanded by inserting Section 7(1)(aa) to the CGST Act retrospectively from 1 July 2017. This amendment, introduced through the Finance Act, 2021, provides that activities or transactions between clubs and associations and their members for consideration will constitute ‘supply’ as they are deemed to be two separate persons and therefore taxable.
This amendment was brought in to overcome the effect of the judgment of the Supreme Court in State of West Bengal & Ors. v Calcutta Club Ltd. which held that sales tax could not be levied on a sale between an unincorporated club and its members. The judgment had clarified the position in relation to the 46th amendment to the Constitution of India which inserted Article 366(29A) in the definition clause defining 'deemed sale'. This insertion created a legal fiction to construe a supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration as a deemed sale, and therefore liable to tax. In this judgment, it was held that the doctrine of mutuality continued to apply to transactions of deemed sales of goods between clubs and their members and even with the amendment to the Constitution of India, sales tax could not be levied on a transaction of sale between unincorporated clubs and their members.
With the insertion of Section 7(1)(aa) to the CGST Act, transactions between clubs and their members will constitute a taxable supply, retrospectively, and pose a GST burden on the clubs for supplies made to their members. In most cases, such clubs will not have collected GST from the recipient, leading to significant tax liability on the supplier and consequent potential litigation. This provision may also impact the inter-se supply between members of unincorporated joint ventures.
Restriction on availing Input Tax Credit
Under the GST regime, a controversial issue is that if a supplier does not pay GST, then input tax credit (ITC) to a recipient is denied. This is problematic for recipients as failure by suppliers to pay GST affects their ability to claim ITC.
The issue has been further complicated by the insertion of Section 16(2)(aa) to the CGST Act by the Finance Act, 2021, to be implemented from 1 January 2022. As per Section 16(2)(aa), ITC will be allowed only when the details of the invoice or debit note have been furnished by the supplier in its return for outward supplies (in Form GSTR- 1) and such details of invoice or debit note have been communicated to the recipient (in Form GSTR 2B). A corresponding amendment to Rule 36(4) of the Central Goods and Services Tax Rules, 2017 (CGST Rules) has also been made to implement Section 16(2)(aa) such that ITC cannot be claimed by the recipient if the supplier has not furnished the details of such supply in its outward returns. The compliance with this additional conditionality to claim ITC is likely to be burdensome for the assessees in cases where even though they receive goods and services and pay GST thereon, the supplier fails to reflect the details of such supplies in its outward returns.
Thus, this issue under GST regime will likely plague assessees. ITC genuinely claimed should not be disturbed merely because the supplier did not reflect the invoices in its returns. In such cases, it would be beneficial if an enquiry is conducted at the supplier’s side and recipient’s credit remains unaffected.
Recovery proceedings in case of self-assessed tax returns
Prior to 1 January 2022, if there was a mismatch between the monthly return for outward supply (Form GSTR-1) and the monthly consolidated return (Form GSTR-3B) of a supplier, the tax department could initiate proceedings for determination of tax amount under Section 73 or 74 of the CGST Act. However, this position has been altered from 1 January 2022. An Explanation has been inserted in Section 75(12) of the CGST Act, such that recovery of self-assessed tax can be made by the tax department under Section 79 if there is a mismatch between the GST returns, i.e., Form GSTR-1 and GSTR-3B. Consequently, in a situation where details of supplies are reflected in Form GSTR-1 of the supplier but not captured under Form GSTR-3B, recovery under Section 79 (by detaining or selling goods, deducting the amount payable from the money owed to the person, etc.) can be made without following the rigours of Section 73 or Section 74 of the CGST Act such as issuing show cause notices and adjudication thereof.
There may be genuine cases of discrepancy between Form GSTR-1 and Form GSTR-3B of the supplier. Even in such cases, recovery proceedings can be initiated without following the adjudication procedure, which may adversely impact the assessee. Therefore, it becomes important for businesses to be cautious while filing Forms GSTR-1 and GSTR-3B.
Electronic Commerce Operators
From 1 January 2022, the services of transportation of passengers by non-air-conditioned carriages, metered cabs, motorcycles and autorickshaws when supplied through Electronic Commerce Operators (ECOs) have been made taxable and GST is required to be paid by ECOs.
Even services of transportation of passengers by autorickshaws when provided through ECOs have been brought under the tax net and now the liability to discharge GST will be on the aggregators. This may result in some variance in the fare of autorickshaws plying on roads from those booked through apps.
Further, ECOs will be liable for payment of GST on restaurant services supplied through them. Though the tax burden would remain the same, the point of collection of tax will change from restaurants to ECOs ensuring greater compliance and thereby plugging leakages.
Inverted duty correction
Pursuant to the decision taken in the 45th GST Council Meeting, the GST rate on footwear not under Rs.1000 per pair has been increased from 5% to 12% from 1 January 2022. This move aims to resolve the issue of inverted duty structure (i.e., where ITC has accumulated on account of tax rate on inputs being higher than tax rate on output supplies). However, a similar hike in the rates for textiles has been deferred. The decision to continue with the existing rates was announced in the 46th GST council meeting on 31 December 2021. This was due to opposition from various State Governments against such a hike on textile products.
Works contract services to Governmental Authorities and Governmental Entities
GST rate for composite supplies of works contract services/pure services of various descriptions to Governmental authorities or Governmental entities has been increased to 18% from 1 January 2022. These were earlier exempt or taxable at a concessional rate of 12%.
This is likely to pose an issue for companies that have long-term contracts with Governmental authorities and Governmental entities. Contracts entered into on the strength of exemption/concessional rates will have to be revisited in view of this change in tax. Change-in-law clauses will have to be reviewed so that the increase in tax rate does not result in increased costs to business.
Developments related to detention, seizure and release of goods and vehicles in transit
Sections 73 and 74 of the CGST Act deal with the determination of tax liability. Clause (ii) to Explanation 1 of Section 74, which also extends to Section 73 of the CGST Act, provides that where proceedings for determination of tax against the main person have concluded, the proceedings against all persons liable to pay penalty under the specified sections will also be deemed to be concluded.
The Finance Act, 2021 amended this clause such that the proceedings under Section 129 (pertaining to detention, seizure and release of goods and vehicles in transit) and Section 130 (pertaining to confiscation of goods or vehicles and levy of penalty) of the CGST Act have been kept independent of proceedings under Sections 73 and 74. Accordingly, even though the proceedings under Section 73 or 74 may have concluded, proceedings under Section 129 and 130 for detention and confiscation of goods and vehicles can still go on.
Further, an appeal can now be filed against the order for penalty in respect of detention or seizure of goods or vehicles upon payment of 25% of the penalty amount. The penalty amounts in case of detention or seizure of goods under Section 129 have also been revised.
The provision for release of goods or vehicles on a provisional basis upon furnishing a bond and security has been omitted. However, vehicles can be released on payment by the transporter of the penalty amount or one lakh rupees, whichever is less.
Where the person transporting goods or owner of goods fails to pay the penalty within fifteen days, the detained goods or vehicles can be sold or disposed of. To recover penalty by sale of detained or seized goods or vehicles, a new Rule 114A has now been inserted in the CGST Rules.
These amendments have been implemented from 1 January 2022. Businesses should exercise greater caution while effecting transportation of goods in vehicles since minor omissions or oversight can prove to be onerous.
The intent behind introducing these changes seems to be to plug revenue leakages and ensure greater compliance with the GST laws. At the same time, it is equally important to safeguard the interest of bona fide taxpayers. For true success of the GST legislation, ease of doing business is as important as the need for securing the interests of the tax department and genuine taxpayers should not be penalized for minor lapses.
It is hoped that the FY 2022 Budget will address the concerns of bona fide taxpayers particularly in respect of availment of ITC. For better resolution of tax disputes to settle various positions under GST law, it is important that the Government provides for the constitution of Appellate Tribunals. Specifically, the creation of GST Appellate Tribunals has been long overdue, but it remains to be seen if the upcoming budget progresses on this front.