GST - Good & Simple tax?
16th June 2018

 

GST was implemented a year ago has it met our expectations?  Is it "Good and Simple" as claimed? What are the major areas where it needs to be improved?

1.    Reduce the number of rates : Currently there are seven different tax rates. Ideally it should be one or two rates. This was the recommendation in the 1st Discussion Paper from the Empowered Committee way back in 2009. Most countries have one or two rates only.

2.    Reduce the tax rate : The highest  GST rate of 28 % is one of the highest in the world. There is an additional compensation cess on “sin” and “luxury goods”. The Revenue Neutral Rate determined by the committee under the Chairmanship of the Chief Economic Advisor, Mr Arvind Subramanian concluded the RNR does not exceed 18%. This is also precisely what many economists including Dr. Manmohan Singh suggested.
 
3.    GST seems to be a complex amalgam of the legacy tax laws which are subsumed into it without actually shedding some of the complexities.

The Government and the GST Council are apprised of these issues and its understood that these aspects are under review and changes can be expected in terms of reduction of the number of GST rates and the rates itself.

Read the article

Traders have begun using horse-carts instead of motorised vehicles to transport goods across States to bypass e-wall bill requirement.

13th June 2018

 One doesn’t know whether one can applaud the ingenuity of some traders who seem to have found a tiny loop-hole in the GST rules to bypass e-way bill requirement.

Apparently, a few traders have begun using horse-carts instead of motorised vehicles when transporting goods across States.

The CGST Act requires any “conveyance” carrying goods valued more than Rs 50K across States to be accompanied by an E-way bill. The expression “conveyance” includes a “vehicle” which may well cover non-motorized horse/bullock carts too. However CGST rule 138 (14) specifically excludes non-motorised vehicles. Relevant portion of the rule reads :

“(14) Notwithstanding anything contained in this rule, no e-way bill is required to be  generated—
(a)…;
(b) where the goods are being transported by a non-motorised conveyance”

So as on date the approach of the traders in using horse or bullock carts seems a perfectly legal approach. Its likely that this loop-hole may soon be plugged by an appropriate amendment to the rules.

 

The Union Minister of Petroleum & NG, Mr Dharmendra Pradhan says as petrol and diesel exclusion from GST costs state owned oil industry Rs 200 billion.

7th June 2018

The Union Minister of Petroleum & NG, Mr Dharmendra Pradhan is reported to have said that as petrol and diesel is kept out of the purview of GST, the state owned oil industry is losing Rs 200 billion annually in terms of input credit.

Well, this is true not just for the state owned oil industry but all manufacturers, service providers and traders (entire economy) lose input credit since the petro-products are out of the scope of GST.

Secondly, the credit loss to the industry and trade reflects as tax collected and retained by the Central and State Govt. So any which way the Govt really doesn't lose.

Thirdly, instead of speaking about a long term plan of GST introduction the immediate solution to reduce petrol and diesel prices will be to cut central excise. This will have a snowball effect as it will automatically reduce State VAT as value drops.

Question is, whether the Govt is confident of its finances to reduce central excise.

Isn’t creating jobs a good thing? Should it be taxed?

7th June 2018

Isn’t creating jobs a good thing? Should it be taxed?

When countries are straining to create new jobs to meet the growing unemployment, one wouldn’t think that authorities will impose taxes on jobs.

But this is exactly what the Seattle City Council voted to do. Unanimously by a 9-0 vote.  The new kind of tax called “head tax” will be levied at $275 per employee, per year on “for-profit” companies which gross at least $20 million per year in the city. This tax will become effective from next year i.e. 2019 and will apply to large employers like Amazon, Microsoft, Starbucks etc. that will be covered by the parameters set for the tax. This tax is watered down as the initial proposal was $500 per employee.

The underlying reason for the new tax is to create a fund to help the homeless population in Seattle find affordable housing. Another likely reason is that the city has added a large number to its population in recent years. This makes home prices in Seattle one of the fastest growing pushing it out of reach of the poor. Those who support the tax believe that the revenue is needed to build shelters and the head tax is progressive as it falls on those who benefit the most from the growth.

Read the article

No GST on sale at airport by 'duty-free' shops to International passengers.

4th June 2018

Apparently good sense has prevailed and sale to international passengers at "duty free" shops will become really duty free restoring the position prior to the Delhi Bench AAR ruling.
Admitting that India exports goods and not taxes, the official has confirmed that no GST will be collected by "duty free" shops. A clarification will be issued that these shops only need to collect a copy of the passport from the passenger to whom goods are sold. They can then claim refund of the GST paid on the purchases of goods treating the copy of the passport as proof of sale of goods.

This reverses the position created by the Delhi AAR ruling where it was held that GST will be levied and collected on sale to international passengers. The reason for this conclusion was the sale happens before the goods cross the customs frontier of India and hence taxable.

Govt issues GST - FAQ on "financial services" based on recommendations of the group set up for sector-specific issues.

4th June 2018

In a 32 page FAQ issued for "Financial Services", the Government has clarified several points relating to banking and financial services in GST.

These clarifications are based on the recommendations made by one of the Groups set up to study sector-specific issues.

The clarification in the FAQ confirms that interest charged on credit card dues, additional interest payable on default of loan installment, finance lease and exit fees paid to banks by mutual fund investors will attract GST.

However, free services provided by banks which was the major bone of contention on services such as ATM withdrawals, free cheque books issued will not be taxable.  Also, ATMs are considered as a place of business needing registration under GST. Transactions relating to securitisation, derivatives, future and forward contracts have been clarified as exempt from GST.

Read FAQ issued by Govt.

An estimated amount of over Rs 20,000 crore is pending with the Government as GST refunds to exporters

30th May 2018

According to the Ganesh Kumar Gupta, President of Federation of Indian Export Organisation (FIEO),  an estimated amount of over Rs 20,000 crore is pending with the Government as GST refunds to exporters. More than half this amount is stuck as input tax credit. 

According to Gupta “IGST exemptions are being made time to time which have led to instability. The exemptions should be made on a permanent basis,”. This means input tax credit on inputs and input services cannot be utilised as the final stage becomes exempted leading to locked up credits.

To deal with this situation the Government has organised a "Special Refund Fortnight" from May 31 to June 14. During this fortnight the Central and State GST officials are expected to clear refund applications received on or before April 30, 2018.
 

Does a taxpayer have a right to change his tax position when he discovers he erred by accepting a tax liability not knowing an exemption existed? The Revenue argues, No! Even a Single Judge Bench accepts this logic! Fortunately, it is over-turned by a Division Bench!

29th May 2018

Madras High Court :The Executive Officer Vs Commr of Appeals, Salem :    A learned Single Judge rejected the petition on two grounds : 1. The appellant had accepted the tax liability and hence is estopped from questioning the levy thereafter; 2.  The appeal was filed late, its time barred and there is no provision to condone of delay.

The petitioner submitted that "there is no estoppel against the statute. ....some of the services rendered by the Municipalities are exempted from service tax under the Mega Notification issued by the respondents 1 to 3."

The Division Bench upheld the petitioner's view that "there cannot be any estoppel against statute and if it is found that some of the services, on which service tax is sought to be levied, are actually exempted from the purview of the service tax. The concession or an admission of liability by the officials cannot be a ground to reject the challenge to the very levy of the service tax."

Read the article    Read the Judgement

 

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Recent Court / Tribunal Judgements

8th June, 2018 : Calcutta High Court : Gati-Kintetsu Express Private Limited. Vs Asst Commr of State Tax : A seizure order u/s 129(1) of the CGST Act for goods seized was challenged in the writ petition. The order was appealable but the petitioner claimed it was covered by the exception carved out in Sec 121, hence, writ petition was maintainable.  Revenue argued the exception relates to books of accounts, registers etc. where no statutory appeal is provided. The Court held :

"The petitioner has a statutory alternative remedy available. It would be appropriate to permit the petitioner to prefer an appeal from the impugned order before the designated appellate authority...."

7th June, 2018 : Calcutta HC: Sanjay Kumar Bhuwalka Vs UOI : The bail application was rejected by the Addl Chief Judicial Magistrate, Sealdah allowing the investigating agency to conduct custodial interrogation in connection with case under Section 132(1)(a),(b) and (c) of the Central Goods and Services Tax Act, 2017. Since the custodial interrogation is yet to be done, the Court kept application is kept pending as deferred for a week.

6th June 2018 : Karnataka High Court : Gulf Oil Lubricants Vs GST Council & Ors :
The writ petition was filed seeking the Court to issue directions to the respondents to  amend the Section 140(3) and 140(5) of KGST Act to permit transitional credit which is allowed in other states such as Kerala, Bihar and  Sikkim. The petitioner  subsequently sought leave & withdrew the petition to approach the Authority for appropriate relief.

6th June, 2018 : Calcutta High Court :  Sukumar Chandra Saha Vs Dy Commr Commercial Taxes : The order passed by the revisional authority was challenged in the writ petition. The revisional authority sought certain clarifications on C – Forms. But before the clarifications were received from the purchaser, the revisional authority passed the order. The Hon'ble Court remanded the matter to the revisional authority on the limited aspect of the clarifications.

5th June, 2018 : Calcutta High Court : Ota Falloons Forwarders Pvt. Ltd. Vs. UOI This judgement deals with a number of questions including (i) Can an appeallable order be challenged in writ petiton on grounds of jurisdiction ? (ii) Are the time limits in Regulation 22 & 20 mandatory or directory? (iii) Is the notice time barred ? (iv) If so, is the order vitiated by lack of jurisdiction? (v) If a wrong Regulation is cited will it vitiate an order? etc. After considering these issues in detail, the Hon'ble Court rejects the petition.

4th June, 2018: Calcutta High Court : Reliance Jute Mills Vs UOI  : Jute bags were exempted from central excise duty. The jute industry, DGS & D, Min of Commerce and Government undertakings of the States and Centre proceeded on the basis that no excise duty was payable on jute bags. However, since the plaintiff marked the jute bags as mandated by the Jute Commissioner, the Revenue considered them to be branded and hence taxable. Excise duty, penalty and interest were therefore imposed on the jute bags.

The plaintiff contended that the markings on the bags were compulsory. They did not enhance the value of the jute bags. Also there is no connection between the aforesaid products and the manufacturer. This contention has been accepted and settled in the Supreme Court by a judgement dated 13th February, 2018 (RDB Textiles Vs. CCE) Accordingly, the Hon’ble Court restrained the Revenue from realizing any excise duty, penalty, interest etc. on the jute bags.

4th June, 2018 : Bombay High Court : Jignesh Prakash Shah Vs. CBI & Ors  : In this case the Hon'ble High Court held that the CBI has no power to to impound the petititoner's passport and retaining it for a long period. The Court followed the Supreme Court judgement in Suresh Nanda Vs. Central Bureau of Investigation. Relevant portion of the judgement reads :

"Considering the observations of the Courts in the aforesaid decision, it is clear that the power of impounding are vested with the Passport Authority. In the circumstances, the passport was seized by the respondents on 13th March, 2014. Retention of passport for such a long period amounting to impounding, which is not permissible in law. The illegality cannot continue in perpetuity. It is within the domain of the Passport Authority to initiate action under Section 10(3)(e) of the Passport Act."

1st June, 2018 : Dehi HC : Rajesh Sharma Vs DRI : The petitioner sought interim bail for the purpose of medical treatment of his mother. She is about 70 years is ill and his wife had already sought divorce. After seeking independent medical opinion of a doctor the Court granted interim bail for a period of two weeks with conditions.

1st June, 2018 : Dehi HC : Agya Import Ltd Vs Jt Commr of Customs,ICD, Tughlakhabad : The petitioners imported on 24th February, 2016 goods from Germany but filed BoE for home consumption nearly 4 months later.  One of the directors of the petitioner, was arrested was in judicial custody for 2 months on import of similar goods seized by SIIB.  These goods were also seized on  the belief they were undervalued and notice was issued. Nearly 18 months after seizure, the petitioner requested provisional release which was granted under order dated 28th May, 2018.  The petitioner is aggrieved by the conditions imposed.  The Court declined to interfere in the matter as the petitioner can invoke the statutory appellate remedy.

31st May, 2018: Delhi High Court :  Santani Sales Organisation Vs CESTAT  : The Hon'ble Court set aside the stay order of the CESTAT under Section 35F requiring an additional pre-deposit of 10% of the confirmed demand after 2nd appeal. The petitioner had deposited  7.5% of the total duty and cess demand, and at the second stage made a further deposit of 2.5% of the duty and cess demand. Revenue demanded an addition 10% pre-deposit which will be a fresh and separate deposit. Therefore, cumulatively the pre-deposit should be 17.5% of the duty demand at the 3rd appeal stage.

The Court held : "12. It is clear from the aforesaid provisions that a graded scale of pre-deposit has been provided. In case of first appeal, whether before the Tribunal or before the Commissioner (Appeals), 7.5% of the duty and penalty in dispute must be deposited. In case of second appeal before the Tribunal, the amount gets enhanced from 7.5% to 10%.....
24. Accordingly, we would allow the present writ petition and set aside the order and direction of the Tribunal that the petitioner must deposit additional 10% of the duty and penalty in dispute for the second appeal to be heard and adjudicated...."

31st May, 2018 :  Madhya Pradesh High :  Ramesh Chandra vs. The State of Madhya Pradesh : The High Court on an anticipatory bail application made by a Govt servant working in Commercial Tax Check Post, Navgaon  grant the bail with conditions. The allegation was he took the Form 49 and handed over the same to co-accused Sonu. The Court concluded : "that investigation has already been over and charge-sheet has been filed and the applicant is a government servant and there is no possibility of his absconsion or tampering of evidence, but without commenting on the merits of the case, I deem it proper to grant anticipatory bail to the applicant. "

31st May, 2018 : Delhi High Court : Farha Hussais Vs UOI & Ors. : Wife's petition to release the COFEPOSA detenue Mr Sharaft Hussain is granted by the Hon'ble high Court. The detenue was a CHA who was arrested on allegations that 33 importers had imported using fraudulent licences. The detenue on the other hand stated that he has bonafide purchased scripts/licenses from the various firms of Mr. Pathror against payments. The detenue learnt that these licences were fraudulent / tampered with later when the customs officials informed him. The High Court lists out several factors which wree not taken into account the most important being  "that the licenses for payment of duty was used by the G-Card Holder Mr Diwakar Sharma and not the Detenue.:"
The writ petition was allowed and the detenue ordered to be released forthwith.

Click for earlier Judgements in 2018

Classification Of Goods Under GST

Date : 25th January, 2018

 Rate and value are two most critical parameters to determine tax liability

The indirect tax payable on goods is quantified by applying a tax rate on the transaction value of goods assessed. Except in case of a specific rate i.e. tax payable is a specific amount for a unit of measure i.e. numbers, weight, volume or area. In all other cases, the tax rate and value are the most critical parameters to determine the correct tax liability.

Ideally any GST should have fewer tax rates not seven different rates

In Singapore, Japan or Australia for instance, a single GST rate applies to all goods & services. This is 7%, 8% and 10% respectively. So, in Singapore, whether the item is a fountain pen, a 65” colour TV, or a cup of coffee in Starbucks, the GST rate is a standard 7% on these items. A standard rate eliminates classification disputes eliminating the need for an elaborate tariffs to classify goods or services.

A single rate across all items is not be possible in India. Financial inequality makes it necessary to differentiate and apply different tax rates for different types of goods.  For instance, goods meant for mass consumption, luxury goods, goods injurious to health and other goods must attract different tax rates. In such a multiple-rate situation, accurate classification is mandatory to avoid disputes.

The multiple indirect tax rates on goods were reduced over decades to 12.5%

Indian indirect tax laws at both the Central and State levels were continuously rationalised to minimize classification disputes. Innumerable tax rates tended to tax disputes on classification. This problem was addressed and number of tax rates minimised over the decades.

 
Tariff & tariff schedules provided the legal substrate for accurate classification

Also, tariffs and tariff schedules were made a part of the tax legislations to provide legal authority to classification. Till 1986, the Central Excise and Salt Act contained the First Schedule listing items from 1 to 68. In January 1986 the Central Excise Tariff Act [aligned with the global Harmonized System of Nomenclature (HSN)] became operative.

The First Schedule to the Central Excise Tariff Act 1985 reflected the HSN. This included the descriptions, notes in each Section, Chapter, Heading and Sub-heading and corresponding duty rates. The General Rules of Interpretation and Explanatory Notes to the Central Excise Tariff Act also reflected the HSN.

In short, these became the legislative substrate for accurately classifying goods. Similarly, the respective sales tax and subsequent VAT laws set out Tariff Schedules to determine the tax rate applicable for different items.

In addition, notifications were issued exempting goods, manufacturers, dealers, specific end-uses etc. either fully or partially from tax. These notifications together with the Tariffs determined the effective rate applicable on any transaction.

GST on goods is a move away from a smaller number of tax rates to seven different tax rates

Another significant point is that just before implementing GST on 1st July 2017, most goods attracted 12.5% central excise duty rate and similarly the VAT rate applicable on most goods was 12.5% or 5%. This meant minimum scope for classification disputes.

After GST, the scene has completely transformed. GST brings several schedules with different GST rates for goods. The combined CGST + SGST rates in these schedules are 0%, 0.25%, 3%, 5%, 12%, 18% and 28%. It’s not unusual to find that goods which were hitherto under the same tax bracket are in GST spread over 12%, 18% and even 28%.

Increased number of tax rates needs more robust legislation for accurate classification

As stated above increased number of tax rates creates more scope for classification disputes. Naturally, one would expect the GST law would be made correspondingly robust to prevent such disputes. This is not so. On the contrary none of the GST legislations (CGST, SGST, IGST, UTGST) seem to include any tariff or tariff schedule, Section or Chapter Notes, General Rules of Interpretation  or Explanatory Notes as a part of these enactments.

Currently only notifications are the legal basis to determine GST rates – No tariffs or tariff schedules

The only legislation currently available to determine GST rates are notifications (subordinate legislations) issued from time to time. For example, the central tax rates applicable to different goods was set out by Notification 1/2017 Central Rate dated 28th June 2017. This notification prescribes different GST rates for items included in different schedules.

Also Table to the notifications lists out the Chapter headings comprising of 4 digits (presumably from the HSN) and the corresponding description of each Chapter heading. This apparently is the only legal authority to determine the GST rates applicable to goods. Though it is generally understood that GST classification is based on HSN, there is no legal authority to link HSN with GST.

There is no Tariff or Tariff Schedule with legal authority to rely upon. Although there is a Explanation at the end of the Notification which makes applicable the “rules of interpretation” to the Customs Tariff Act, 1975 including the Section, Chapter Notes and the general explanatory notes to the   First Schedule, it still falls very short of a globally evolving HSN with no legal authority to refer to the Explanatory Notes to the HSN which is sometimes crucial to determine classification of goods.

The relevant portion of the Explanation to the Notification reads as under :

"(iii) “Tariff item”, “sub-heading” “heading” and “Chapter” shall mean respectively a tariff item, sub-heading, heading and chapter as specified in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975).

(iv) The rules for the interpretation of the First Schedule to the Customs Tariff Act, 1975 (51 of 1975), including the Section and Chapter Notes and the General Explanatory Notes of the First Schedule shall, so far as may be, apply to the interpretation of this notification."

How this came to be?

In the CBEC FAQ dated 31.3.2017, the classification of goods under GST has been covered in Question No 20. It reads as under :

“Q 20. How will the goods and services be classified under GST regime?

Ans. HSN (Harmonised System of Nomenclature) code shall be used for classifying the goods under the GST regime.

Taxpayers whose turnover is above Rs. 1.5 crores but below Rs. 5 crores shall use 2-digit code and the taxpayers whose turnover is Rs. 5 crores and above shall use 4-digit code. Taxpayers whose turnover is below Rs. 1.5 crores are not required to mention HSN Code in their invoices.”

 

Thus the applicability of the HSN Codes can be summarised as under:

⦁    If turnover is less than Rs 1.5 Crores no need to follow HSN
⦁    If turnover exceeds Rs 1.5 Crores but less than Rs 5 Crores ONLY 2 digit HSN codes (Chapter level details) required
⦁    If turnover exceeds Rs 5 Crores ONLY 4 digit HSN codes (Chapter Heading level details) required

Decision regarding classification in the 14th GST Council meeting on 18th May, 2017

Similarly in the 14th Meeting of the GST Council on 18th May, 2017 this point was discussed and appears at Point No 29.1 of the minutes of the said meeting. It reads :

“29.1. The Secretary drew attention to paragraph 6 of the agenda notes to agenda item 9 in Volume-3 and stated that GST rates would generally be prescribed at the 4-digit HS Classification, unless a carve out was required to specify the rate for a good at 6 or 8-digit levels. He proposed that for GST purposes, the classification of goods and the Rules for Interpretation thereof as given in the First Schedule to the customs Tariff Act, 1975 be relied upon.

The Council agreed to this proposal.” (emphasis supplied)

Decision in the GST Council doesn’t seem to be converted into GST law

Though this transpired in the GST Council on 18th May, 2017, the proposal to adopt the First Schedule of the Customs Tariff Act, 1975 for classification of goods and rules of interpretation under GST  has not been converted into law.  Currently, the notifications prescribing GST rates at 4-digit level are the only law under GST to classify and determine GST rates.

Perhaps this was caused by a need to implement GST quickly and keep the GST law simple keeping in mind small tax payers.

Budget speeches, trade notices FAQs have only persuasive value if there is ambiguity

It is well established that public notices, FAQs, budget speech etc. cannot alter the legal position carved out by Acts, Rules and Notifications.  These documents may have persuasive value and could be relied upon only if there is ambiguity or doubt.  Conversely, if the descriptions in the notification is clear and unambiguous, there is no need to refer to any external aid to interpret. The notification alone will determine the classification and GST rate applicable.


Absence of Tariff with legal authority could lead to classification related litigation

The absence of a Tariff with legal authority seems to be a lacuna in newly implemented GST. It could lead to classification disputes and litigation.
Under GST, tax payers are therefore faced with a combined impact of multiple tax rates for goods and also the absence of legislative authority for proper interpretation and classification. If a single GST rate was applicable on all goods, there would be no difficulty.

 
Either the Tariff should be legislated or the number of tax rates reduced to avoid litigation

The Government of India appears to be apprised of this situation and distinct steps have been taken to lower tax rates on a large number of items on three occasions since implementation. However, these changes have not reduced the number of GST slabs. Either the GST law must be amended to insert HSN and its interpretative tools to smoothen classification or the number of GST rates reduced to just three slabs.


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Tax Risk Management Part 1

An Introduction

 

Risk comes from not knowing what you’re doing. 
- Warren Buffet

Read the Article

 

Tax Risk Management Part 2

Tax Risks as Black Swan Events!

If you were asked "What 'tax risks' you perceive in your business?" What would be your answer?

Read the Article

 

 

Indirect Tax Risk Management

Indirect Risk Tax Management
 

 

 

 

Economic Survey of India 2017-18