CBIC confirms tax evasion and acknowledges concerns on GST AAR orders

13th December

The Central Board of Indirect Taxes & Customs (CBIC) confirms that despite anti-evasion measures adopted when implementing GST, the tax evasion in GST during Apr-Nov 2018 amounted to Rs 12K Crores.

The CBIC also acknowledged concerns of the industry and trade that orders from GST AAR State Benches are sometimes conflicting. The solution to this was a National AAR which would reflect reflect a uniform approach for the whole of India. However this idea for a national AAR bench appears to have hit a road block as it requires around 40 members with every state being represented.

 

The next indirect tax reform is aimed at customs procedures to boost trade and improve ease of doing business

4th December

The Chairman of CBIC, Mr S Ramesh elaborated that current customs procedures will be replaced by processes in line with best practices of the World Customs Organisation (WCO). This will entail eliminating face-to-face contact with tax officials, automated clearance of goods, linking ports to enable flexibility to assess goods landed in other ports, e-traceability of shipments etc. These will speed up clearances and substantially reduce corruption.

Mr Ramesh said “We want to go in for something which will be radically different from what we have been doing. We are going to venture into a new territory called faceless assessment... We could start a pilot in a month’s time,”

These steps are likely to enable India to boost its ranking getting into the top 50 rank (currently 80) of the World Bank’s Ease of Doing Business.

Supreme Court dislodges Rajasthan HC judgement and denies IT exemption to Urban Improvement Trust

22nd October

 

SC has dislodged a Rajasthan HC judgement saying the Urban Improvement Trust set up under the State law is neither a  "municipality" nor a "municipal board". The SC inter alia holds:

"The word “Municipal Committee” occurring in Clause (iii) Explanation, thus, has a definite purpose and object.

Purpose and object was to cover those bodies, which are discharging municipal functions but are not covered by the definition of municipalities as was required to be constituted by Article 243Q of the Constitution of India. Urban Improvement Trust constituted under the Rajasthan Urban Improvement Act, 1959, thus, cannot be held to be covered by the definition of Municipal Committee as contained in Clause (iii) of Explanation to Section 10(20) of the I.T. Act......"

Read the full text of the judgement.

Ministry of Statictics seeks GST data to improve Accounts

19th October

It has been reported that the Ministry of Statistics & Programme Implementation (MSPI) has sought quarterly GST data (output, input and revenue) on tax paying units from the Ministry of Finance.

This data is expected to improve the quality, timeliness and credibility  of both National Accounts Statistics and state-level accounts. Also this step is expected to reduce data collection cost. Apparently, the Finance Ministry will share this data one the GST system stabilises.

 

Fraudulent GST invoices to the tune of Rs 245 Crores and evasion of Rs 42 Crore detected by Bengaluru State GST Authorities

18th October

A businessman name Mangilal was arrested and later remanded to judicial custody on Tuesday 16th October.

The State GST authorities after preliminary investigations alleged that Mangilal issued fake invoices to the tune of Rs 245 Crore. They also alleged that he evaded GST of Rs. 42 crore.

His modus operandi included obtaining a GST registration in  the name of a deceased person and  issuing invoices in that name or of fictitious persons.

 

Goods in the factory can't be offending goods. When physical control operates, goods outside the factory must be presumed duty paid

17th October, 2018

Goods "lying within the factory premises were not contravening goods and had not violated any provision of Central Excise Act and, therefore, their confiscation is set aside."

"...goods which were confiscated such as at the transporter premises of Baba Roadlines.... the redemption fine cannot be directed to be paid by the appellants because said goods were proceed to have been manufactured by the appellant.

"...2,88,000 sticks of Captan brand cigarettes stated to have been found in excess at the residential premises of Shri Roop Singh .....cannot be contravening goods because the manufacturers factory was under physical control and it was not possible to remove manufactured goods without payment of duty...."  Musk Tobacco & Ors Vs CCE, Lucknow

 

Recent Court / Tribunal Judgements

 National Anti-profiteering Authority

Decisions for the National Anti-Profiteering Authority :

  1. 1. Shri Ankur Jain & DG Anti-Profiteering, CBIC Vs M/s Kunj Lub Marketing Pvt. Ltd. : Case No. : 10/2018 : 8th October, 2018
  2. 2. Sh. Jijrushu N. Bhattacharya & DG Anti-Profiteering, CBIC  Vs M/s NP Foods (Franchisee M/s Subway India) : Case No. 9/2018 : 27th September, 2018
  3. 3. Miss Neeru Varshney & DG Anti-Profiteering, CBIC Vs M/s Lifestyle International Pvt. Ltd. : Case No. 8/2018 : 25th September, 2018
  4. 4. Shri Sukhbir Rohilla along & 108 other Applicants & DG Anti-Profiteering, CBIC Vs M/s Pyramid Infratech Pvt. Ltd. : Case No. 7/2018 : 18th September, 2018  
  5. 5. Shri Pawan Sharma & DGAP, CBIC Vs M/s Sharma Trading Company, Jaipur: Case No. 6/2018 : 7th September, 2018
  6. 6. Dinesh Mohan Bhardwaj Vs M/s Vrandavaneshwree, Automotive Private Limited : Case No. 1/2018 : 27th March 2018

 CESTAT Decisions

 

18th October, 2018 : CESTAT Mum : UPS Jetair Express Private Limited   Vs Commissioner of CGST, Mumbai East 

Revenue denied CENVAT credit only on the ground invoices didn't mention the registration number of the service provider. No other allegations were made regarding receipt of input services, eligibility etc.

Held : This is merely a procedural lapse. It is settled that CENVAT credit can't be denied on mere technicalities or procedural lapses.

CENVAT credit allowed, extended period of limitation not applicable.

Ed's comment : Isnt it surprising that a Senior Officer like Prin. ADG, DGPM, WRU, still needs to catch up with decades old case law regarding Modvat and Cenvat? It's repeatedly held procedural lapses aren't reason enough to deny credit. How will the dept reduce litigation? Should Tribunal for fairness?

18th October, 2018 : CESTAT Ahd : M/s Auto Care Lubricant Vs C.C.E. & S.T.-Vapi
The Tribunal relying on an earlier decision in Castrol India Ltd, held :
“The authorities under the Standards of Weights and Measures Act are the best judge to decide as to whether a product is required to be affixed with a MRP under the said Act or not. If said authority has clarified that 210 ltr. barrel are not required to be affixed with MRP, it was obligatory on the part of the Excise authority to accept such decision of Controller of Legal Metrology authority….., it was not open to the Excise authority to doubt the decision of the authority under Standards of Weights and Measures Act and to proceed independently ….”

18th October 2018 : CESTAT Ahd : M/s Javiya Finance Services, Javiya Marketing Vs C.C.E.& S.T.- Surat-I
The appellant were providing service of identifying customers for car loans and receiving commission from ICICI Bank. This was to be taxed under Business Auxiliary Services (BAS).  

The appellants admitted taxability but argued they were under bonafide belief the services are not taxable and so extended period of limitation should not be invoked.
Held : "The definition of Business  Auxiliary  Services  is  very  clear  and  there  is  no  scope  of interpretation. The definition specifically includes the service of promotion or marketing of any service of the client within its ambit." Appeals dismissed.

 

 12th Oct : CESTAT Mum : Tahnee Heights CHS Ltd. Vs Commissioner of CGST, Mumbai South : Held : "The appellant also do not provide any service to its members, who pay the amount towards their share of contribution, for occupation of the units ....the explanation furnished under clause 3(a) in Section 65B of the Act will not designate the appellant as an entity, separate from its members....the case of the appellant is not confirming to the requirement of 'service', as per the definition contained in Section 65B(44) of the Act."

10th Oct : CESTAT Ahd :  L & T Ltd. etc Vs C.C.E. Ahd Appellants argued the law and IS specifications had changed for their product "concrete mix" made at site. It was eligible for the exemption making the earlier Supreme Court judgement in their own case irrelevant.

Tribunal ruled that there is no change in the  C.Ex Tariff Heading description as far as ready mix concrete is concerned. There is no mention of any IS Specification anywhere in the SC judgement. So changes in IS Specifications cannot be used to distinguish the decision of Hon’ble Apex Court. Demand beyond the period of limitation set aside. Personal penalty quashed as this is a case of interretation.

11th Oct : CESTAT Chennai : M/s. Pepsico India HPL Vs Commr of GST & CE, Chennai Outer : The appellants had paid excess central excise duty for which they utilised the CENVAT credit. On realizing this they suo moto took re-credit of the excess amount debited from the Cenvat account.

Held:  Following the said decisions of the High Courts, The impugned order and demand was set aside.

3rd October, 2018 : Mayur Printers & Ors Vs C.C.E.& S.T. Surat-I :

Two points were raised in the Rectification of Mistake Application. First, credit denied on defective gate passes and second, there was no findings in respect of cenvat credit lying in their account which should have been adjusted against the demand. Tribunal held - credit admissible if established through evidence. Matter remanded.

3rd October, 2018: CESTAT Ahd C.C., Kandla Vs Reliance Port & Terminals Ltd.: Revenue argued thatEPCG benefit was not available for “consumables” which was deleted from Not 97/2004 Cus on 21.5.2007. “Consumables” are not “capital goods”.  Respondents submitted the imported items were “used for installation of Crude. Product pipelines, therefore, all the goods used during the initial installation of pipeline shall be categorized as capital goods only.” The Tribunal dismissed the appeal on limitation without entering the merits of the case as the Revenue had abandoned the argument of limitation.

 

 

High Court Judgements

 

2nd July, 2018  : Allahabad High Court : Hamdard (Wakf) Labs Vs Commr Of Commercial Taxes : The High Court upholds the Tribunal order and holds that "Sharbat "Rooh Afza" is not unclassifiable under Schedule-V of the Act and liable to tax @ 12.5%. It is neither fruit juice nor fruit drink nor processed fruit.

2nd July, 2018 :  Delhi High Court : JOYCE KAROUNG Vs NARCOTICS CONTROL BUREAU : Relying on the SC judgment in Babua v. State of Orissa, (2001) 2 SCC 566 the High Court concluded the petitioner is not prima facie not guilty. Also, liberty of a citizen must be balanced with the interest of the society especially where narcotic drugs and psychotropic substances are involved. It is alleged that this is not the first offence.

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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An Introduction

 

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Tax Risk Management Part 2

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

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