Notification 40/2017 dated 23rd October 2017 lays down the procedure wherein CGST is to be levied on intra state supplies of taxable goods by a registered supplier to another registered recipient at 0.05% subject to fulfillment of certain conditions. Similar notifications have been issued under SGST and IGST. Therefore, in case of intra state supplies tax rate on such supplies would be 0.05% CGST and 0.05% SGST and in case of Inter State Supplies, tax rate would be 0.1% IGST.
This article seeks to analyse financial impact of the transaction wherein a registered supplier supplies goods to registered recipient for export at a tax rate of 0.1% as against full payment of tax. Whether such supply of goods at reduced rate would be beneficial both for the exporter and the supplier or would adversely affect both exporter and the supplier. Let’s analyse the provisions and reach to the conclusion on the said matter.
Eligibility to claim refund under GST
Section 54(3) of the CGST Act provides as follows:
(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:
Provided that no refund of unutilised input tax credit shall be allowed in cases other than––
zero rated supplies made without payment of tax;
where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council:
Thus there are only two situations wherein refund can be claimed by the person i.e. against zero rate supplies made without payment of tax and second in case of inverted duty structure.
2. Zero rated Supplies made without payment of Tax
The term zero rated supply has been defined under section 16 of the IGST Act as follows:
(1) “zero rated supply” means any of the following supplies of goods or services
or both, namely:––
(a) export of goods or services or both; or
(b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.
3. Does supply by registered supplier to registered recipient for export fall under zero rated supplies
No, supplies made by a registered supplier to registered recipient for export does not fall under the definition of zero rated supplies.
4.Does supply by registered supplier to registered recipient for export fall under the definition of deemed exports:
Deemed Export has been defined under sub-section 39 to section 2 of the CGST Act as follows:
(39) “deemed exports” means such supplies of goods as may be notified under section 147;
Section 147 of the CGST Act provides as follows: The Government may, on the recommendations of the Council, notify certain supplies of goods as deemed exports, where goods supplied do not leave India, and payment for such supplies is received either in Indian rupees or in convertible foreign exchange, if such goods are manufactured in India.
Central Government vide notification No. 48/2017 has classified following supplies as deemed exports
a) Supply of goods by a registered person against Advance Authorisation
b) Supply of capital goods by a registered person against Export Promotion Capital Goods Authorisation
c) Supply of goods by a registered person to Export Oriented Unit
d) Supply of gold by a bank or Public Sector Undertaking specified in the notification No. 50/2017-Customs, dated the 30th June, 2017 (as amended) against Advance Authorisation
If we refer to the above four supplies as notified under deemed export, it can be observed that supplies made by a registered supplier to registered recipient for export have not been classified as deemed export.
5. Applicable refund provisions for registered supplier making supplies to registered recipient for export
The refund provisions applicable to the persons making taxable supply of goods to registered recipient for export would fall under the inverted duty structure i.e. clause (ii) to proviso to sub-section (3) to Section 54 as referred above in para (a).
Therefore, a registered supplier making taxable supplies of goods to registered recipient for export would have to file refund application under the provisions for refund of tax under inverted duty structure.
6. When can such registered supplier apply for refund
As per the clause (e) of Explanation-2 to Section 54 of CGST Act, such person can apply for refund at the end of the financial year in which such claim for refund arises.
7. Eligible duties for refund:
The provisions of clause (ii) to proviso to sub-section (3) to Section 54 provides that
“where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council”
The language provides that credit should have been accumulated on account of tax rate on inputs being higher than the rate of tax on output supplies.
The term “Input” has been defined under sub-section (59) to section 2 of the CGST Act as follows:
(59) “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business;
The term input refers only to goods and not to services.
Explanation 1 to Section 54 provides that the term refund for the purpose of section 54 shall mean:
(1) “refund” includes refund of tax paid on zero-rated supplies of goods or services or both or on inputs or input services used in making such zero-rated supplies, or refund of tax on the supply of goods regarded as deemed exports, or refund of unutilised input tax credit as provided under sub-section (3).
This provision refers to the refund of the unutilized input tax credit as provided under sub- section (3) which in turn refers only to the accumulation of credit on account of rate of tax on inputs being higher than the rate of tax on supplies.
If we refer to Form RFD-01 i.e. Application for refund of Input Tax Credit, application for refund in case of inverted duty structure has to be filed under Statement-1 of the Form RFD-1. The format for Statement -1 is as follows:
Turnover of inverted rated supply of goods
Tax payable on such inverted rated supply of goods
Adjusted total turnover
Net input tax credit
Maximum refund amount to be claimed [(1×4÷3)-2]
1
2
3
4
The Instructions to the Form RFD-01 defines the term Net Input Tax Credit as input tax credit availed on inputs during the relevant period for the purpose of Statement-1 and will include ITC on input services also for the purpose of Statement-3A and 5A.
Thus, it has been specifically provided that Net ITC would include input tax credit on inputs only under Statement-1 and Net ITC would include Input Tax Credit of both Goods and Services in Statement 3A and Statement 5A.
Statement 3A relates to Export without payment of tax and Statement 5A relates to Refund on account of supplies made to SEZ unit / SEZ developer without payment of tax.
However, there seems to be a difference between the definition of Net ITC as provided under Rule 89(4) and Forms and seems that it may require reconsideration. There under rules lawmakers have taken the same definition of ITC as is applicable for refund of taxes paid on export of goods or services without payment of tax which is not in line with the wordings as provided under Section 54.
Therefore, any credit accumulated on account of tax on input services being higher than tax on output supplies would not be eligible for refund under Inverted Duty Structure and only duty relating to the goods which has been accumulated on account of rate of tax on output supplies lower than rate of tax on inputs would be eligible for refund.
8. Impact on the registered suppliers making supplies at 0.1% to the registered recipient for exports:
Restriction under provisions of clause (ii) to the proviso to sub-section 3 of section 54 would have a major impact on the registered supplier making supplies of taxable goods at 0.1% to the registered recipient for exports.
Refund would only be available after the expiry of the Financial Year in which the claim of refund arises.
Refund would only be available in respect of inverted duty structure of goods and not for services. Take for Example if a person has paid Tax @ 28% on the purchase of goods of Rs 10000 and Tax @ 18% on receipt of service for manufacturing of goods of Rs 5000/-. He has supplied goods @ 0.1%. In such a case he would only be eligible for refund of inverted duty structure for goods and not for services.
9. Negative for registered suppliers making supplies to registered recipient for export at reduce tax rate of 0.1% vis-à-vis against full payment of tax
This would be negative for registered persons making supply of taxable goods to the registered recipient for exports and would result in blocking of working capital and in turn would shift of the burden from the exporter to the person making supply to the exporter.
However such burden shifting would have a much higher impact as the exporter paying full tax to the supplier is eligible for refund after the export of goods but supplier making supply of goods to the registered recipient for export would only be eligible for refund after the expiry of the financial year in which the claim for refund arises.
Secondly exporter would be eligible for refund of entire taxes paid on input goods and services but in case of registered supplier making taxable supplies of goods to the registered recipient for exports, he would only be eligible for refund of inverted duty structure of goods and not for services.
Thus, any option for supply of taxable goods by the registered supplier at 0.1% to the registered recipient for export has to be taken very carefully and analysed on a case to case basis not only on account of the issues as discussed above but also for the additional compliance’s as narrated in the notification which has to be done by the supplier and the recipient.
Series-4: Reversal of ITC due to Non-Payment of Consideration within 180 days to the Supplier of the Goods or Services-Treatment in Annual Return
This is one of the most common errors committed by while filing of GSTR-3B. ITC availed has not been reversed due to non-payment of consideration to the supplier within 180 days of the invoice. The situation would be particularly trivial in cases wherein consideration has not been paid by March 2018 as this might result in additional payment to be made by the Taxpayer by Cash by DRC-03.
Situation 1: Mr A had purchased Goods from Mr B for Rs 100000 and paid Tax of Rs 20000 on 15th July 2017. He did not pay any amount to supplier and was required to reverse the Input Tax Credit in accordance with the second proviso to Section 16(2) read with Rule 37 of CGST Rules, 2017. Following scenarios may arise:
Reversal made in the Month of January 2018
Particulars
Amount
Table
Amount reversed in Pursuance of Second Proviso to Section 16 of CGST Act, 2017
20000
Table 7A
Reversal made in the Month of September 2018
Particulars
Amount
Table
Amount reversed in Pursuance of Second Proviso to Section 16 of CGST Act, 2017
20000
Table 12
Reversal made in Annual Return
Particulars
Amount
Table
Amount reversed in Pursuance of Second Proviso to Section 16 of CGST Act, 2017
20000
Table 7A
This last scenario would result in Additional payment of Tax Via DRC-03 in Cash in Annual Return for the Year 2017-18.
Situation 2: Mr A had purchased Goods from Mr B for Rs 100000 and paid Tax of Rs 20000 on 15th July 2017. He was required to reverse the Input Tax Credit in accordance with the second proviso to Section 16(2) read with Rule 37 of CGST Rules, 2017. He reversed the said amount in the Month of January 2018.
Scenario 1: He paid Rs 100000 in the month of March 2018 and reclaimed the said amount in the month of March 2018.
Scenario 2: He paid Rs 100000 in the month of March 2018 and reclaimed the said amount in the month of June 2018.
Scenario 3: He paid Rs 100000 in the month of March 2018 and reclaimed the said amount in the month of December 2018 in GSTR-3B.
Particulars
Amount
Table
Table
Table
Amount reversed in Pursuance of Second Proviso to Section 16 of CGST Act, 2017
20000
Table 7A
NA
NA
Scenario-1-Reclaimed in March 2018
20000
NA
Table 6H
NA
Scenario-2-Reclaimed in June 2018
20000
NA
NA
Table 13
Scenario-3-Reclaimed in December 2018
20000
Relevant for 2018-19
Situation 3: Mr A had purchased Goods from Mr B for Rs 100000 and paid Tax of Rs 20000 on 15th July 2017. He was required to reverse the Input Tax Credit in accordance with the second proviso to Section 16(2) read with Rule 37 of CGST Rules, 2017. He reversed the said amount in the Month of January 2018.
Scenario 1: He paid Rs 100000 in the month of June 2018 and reclaimed the said amount in the month of June 2018.
Particulars
Amount
Table
Table
Table
Amount reversed in Pursuance of Second Proviso to Section 16 of CGST Act, 2017
Calculation of Interest payable in GST has been a point of discussion for long and dust does not seems to be settling as of now in the very near future. This article is an attempt to highlight the difference in the language used in the Statute regarding the calculation of Interest wherein
Situation-1-Relevant Provision refers to the interest payable under section 50 of CGST Act thus providing that both the rate and the manner of calculation of interest would be that as provided under section 50,
Situation-2- Whilst at first the relevant provision refers to the interest payable at the rate provided under section 50 but at the same time provides method of calculation of interest itself.
Below is the comprehension of the Provision wherein relevant Provision refers to the interest payable under section 50 of CGST Act thus providing that both the rate and the manner of calculation of interest would be that as provided under section 50
Tax deduction at source-Section 51(6)- If any deductor fails to pay to the Government the amount deducted as tax under sub-section (1), he shall payinterest in accordance with the provisions of sub-section (1) of section 50, in addition to the amount of tax deducted.
Collection of tax at source-Section 52(6)- If any operator after furnishing a statement under sub-section (4) discovers any omission or incorrect particulars therein, other than as a result of scrutiny, audit, inspection or enforcement activity by the tax authorities, he shall rectify such omission or incorrect particulars in the statement to be furnished for the month during which such omission or incorrect particulars are noticed, subject to payment of interest, as specified in sub-section (1) of section 50.
Assessment of non-filers of returns-Section 62(2)- Where the registered person furnishes a valid return within thirty days of the service of the assessment order under sub-section (1), the said assessment order shall be deemed to have been withdrawn but the liability for payment of interest under sub-section (1) of section 50 or for payment of late fee under section 47 shall continue.
Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for any reason other than fraud or any willful-misstatement or suppression of facts-Section 73(1)- Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised for any reason, other than the reason of fraud or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder.
Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for any reason other than fraud or any willful-misstatement or suppression of facts-Section 73(5)- The person chargeable with tax may, before service of notice under subsection (1) or, as the case may be, the statement under sub-section (3), pay the amount of tax along with interest payable thereon under section 50 on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment.
Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any willful-misstatement or suppression of facts-Section 74(1)- Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice.
Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any willful-misstatement or suppression of facts-Section 74(5)- The person chargeable with tax may, before service of notice under sub-section (1), pay the amount of tax along with interest payable under section 50 and a penalty equivalent to fifteen per cent. of such tax on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment.
Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any willful-misstatement or suppression of facts-Section 74(8)- Where any person chargeable with tax under sub-section (1) pays the said tax along with interest payable under section 50 and a penalty equivalent to twenty-five percent. of such tax within thirty days of issue of the notice, all proceedings in respect of the said notice shall be deemed to be concluded.
Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any willful-misstatement or suppression of facts-Section 74(11)- Where any person served with an order issued under sub-section (9) pays the tax along with interest payable thereon under section 50 and a penalty equivalent to fifty per cent. of such tax within thirty days of communication of the order, all proceedings in respect of the said notice shall be deemed to be concluded.
Payment of tax and other amount in instalments-Section 80-On an application filed by a taxable person, the Commissioner may, for reasons to be recorded in writing, extend the time for payment or allow payment of any amount due under this Act, other than the amount due as per the liability self-assessed in any return, by such person in monthly instalments not exceeding twenty-four, subject to payment of interest under section 50 and subject to such conditions and limitations as may be prescribed.
Export of goods or services under bond or Letter of Undertaking-Rule 96A-Any registered person availing the option to supply goods or services for export without payment of integrated tax shall furnish, prior to export, a bond or a Letter of Undertaking in FORM GST RFD-11 to the jurisdictional Commissioner, binding himself to pay the tax due along with the interest specified under sub-section (1) of section 50..
Recovery of refund of unutilised input tax credit or integrated tax paid on export of goods where export proceeds not realised-Rule 96B(1)-Where any refund of unutilised input tax credit on account of export of goods or of integrated tax paid on export of goods has been paid to an applicant but the sale proceeds in respect of such export goods have not been realised, in full or in part, in India within the period allowed under the Foreign Exchange Management Act, 1999 (42 of 1999), including any extension of such period, the person to whom the refund has been made shall deposit the amount so refunded, to the extent of non-realisation of sale proceeds, along with applicable interest within thirty days of the expiry of the said period or, as the case may be, the extended period, failing which the amount refunded shall be recovered in accordance with the provisions of section 73 or 74 of the Act, as the case may be, as is applicable for recovery of erroneous refund, along with interest under section 50.
Below is the comprehension of the Provision wherein at first the relevant section only refers to the interest payable at the rate provided under section 50 but at the same time provides method of calculation of interest of its own.
Matching, reversal and reclaim of input tax credit-Section 42(8)-A recipient in whose output tax liability any amount has been added under sub-section (5) or sub-section (6), shall be liable to pay interest at the rate specified under sub-section (1) of section 50 on the amount so added from the date of availing of credit till the corresponding additions are made under the said sub-sections.
Matching, reversal and reclaim of input tax credit-Section 42(10)- The amount reduced from the output tax liability in contravention of the provisions of sub-section (7) shall be added to the output tax liability of the recipient in his return for the month in which such contravention takes placeand such recipient shall be liable to pay interest on the amount so addedat the rate specified in sub-section (3) of section 50.
Matching, reversal and reclaim of reduction in output tax liability-Section 43(8)- A supplier in whose output tax liability any amount has been added under sub-section (5) or sub-section (6), shall be liable to pay interest at the rate specified under sub-section (1) of section 50 in respect of the amount so added from the date of such claim for reduction in the output tax liability till the corresponding additions are made under the said sub-sections.
Matching, reversal and reclaim of reduction in output tax liability-Section 43(10)-The amount reduced from output tax liability in contravention of the provisions of sub-section (7) shall be added to the output tax liability of the supplier in his return for the month in which such contravention takes place and such supplier shall be liable to pay interest on the amount so addedat the rate specified in sub-section (3) of section 50.
Collection of tax at source-Section 52(11)- The concerned supplier, in whose output tax liability any amount has been added under sub-section (10), shall pay the tax payable in respect of such supply along with interest, at the rate specified under sub-section (1) of section 50 on the amount so added from the date such tax was due till the date of its payment.
Provisional assessment-Section 60(4)- The registered person shall be liable to pay interest on any tax payable on the supply of goods or services or both under provisional assessment but not paid on the due date specified under sub-section (7) of section 39 or the rules made thereunder, at the rate specified under sub-section (1) of section 50,from the first day after the due date of payment of tax in respect of the said supply of goods or services or both till the date of actual payment, whether such amount is paid before or after the issuance of order for final assessment.
Tax collected but not paid to Government-Section 76(4)- The person referred to in sub-section (1) shall in addition to paying the amount referred to in sub-section (1) or sub-section (3) also be liable to pay interest thereon at the rate specified under section 50 from the date such amount was collected by him to the date such amount is paid by him to the Government.
Reversal of input tax credit in the case of non-payment of consideration-Rule 37(3)- The registered person shall be liable to pay interest at the rate notified under subsection (1) of section 50for the period starting from the date of availing credit on such supplies till the date when the amount added to the output tax liability, as mentioned in sub-rule (2), is paid.
Manner of determination of input tax credit in respect of inputs or input services and reversal thereof-Rule 42(2)(a)- where the aggregate of the amounts calculated finally in respect of ‗D1‘ and ‗D2‘ exceeds the aggregate of the amounts determined under sub-rule (1) in respect of ‗D1‘ and ‗D2‘, such excess shall be [reversed by the registered person in FORM GSTR-3Bor through FORM GST DRC-03] 59in the month not later than the month of September following the end of the financial year to which such credit relates and the said person shall be liable to pay interest on the said excess amount at the rate specified in sub-section (1) of section 50for the period starting from the first day of April of the succeeding financial year till the date of payment.
Manner of determination of input tax credit in respect of inputs or input services and reversal thereof-Rule 42(3)(a)- where the aggregate of the amounts calculated finally in respect of ‗D1‘ and ‗D2‘ exceeds the aggregate of the amounts determined under sub-rule (1) in respect of ‗D1‘ and ‗D2‘, such excess shall be reversed by the registered person in FORM GSTR-3Bor through FORM GST DRC-03 in the month not later than the month of September following the end of the financial year in which the completion certificate is issued or first occupation of the project takes place and the said person shall be liable to pay interest on the said excess amount at the rate specified in sub-section (1) of section 50for the period starting from the first day of April of the succeeding financial year till the date of payment.
Manner of determination of input tax credit in respect of inputs or input services and reversal thereof-Rule 42(4)(c)- where, C3aggregate_comm exceeds C3final_comm, such excess shall be reversed by the registered person in FORM GSTR-3Bor through FORM GST DRC-03 in the month not later than the month of September following the end of the financial year in which the completion certificate is issued or first occupation takes place of the project and the said person shall be liable to pay interest on the said excess amount at the rate specified in sub-section (1) of section 50for the period starting from the first day of April of the succeeding financial year till the date of payment.
Manner of determination of input tax credit in respect of capital goods and reversal thereof in certain case-Rule 43(2)(a)- where value of Tefinal exceeds the aggregate of amounts of Te determined for each tax period under sub-rule (1), such excess shall be reversed by the registered person in FORM GSTR-3Bor through FORM GST DRC-03 in the month not later than the month of September following the end of the financial year in which the completion certificate is issued or first occupation takes place of the project and the said person shall be liable to pay interest on the said excess amount at the rate specified in sub-section (1) of section 50for the period starting from the first day of April of the succeeding financial year till the date of payment.
Therefore, it might seem that to read plainly that Section 50 is the only section providing levy of interest thus might be incorrect as the intention of the legislature might seem otherwise in some of the provisions, wherein only rate has been referred to be taken from Section 50 but at the same time method for calculation of Interest has been referred in the relevant provision itself. The dust will take time to settle.
The next part of the article would be containing the analysis of the language used in Section 42 and Section 43.
Introduction to Section 143 of CGST Act and the option to send the goods without payment of tax to the Job Worker
It would be apt to quote provisions of Section 143 before moving ahead in this brief write up-
A registered person (hereafter in this section referred to as the “principal”) may under intimation and subject to such conditions as may be prescribed, send any inputs or capital goods, without payment of tax, to a job worker for job work and from there subsequently send to another job worker and likewise..
Provisions of Section 143 of CGST Act allows principal to send the goods to the Job Worker without payment of tax under intimation and subject to such conditions as may be prescribed and further goods have to be returned back from the job worker to the principal within the time specified under Section 143.
Option to send the goods without payment of tax is not mandatory for the principal and he may send the goods against payment of tax to the job worker
The facility to send the goods without payment of tax is optional upon the principal and not mandatory. Therefore, if deemed fit, principal can send the goods against payment of tax. Further, sending of goods to the job worker without payment of tax would be against intimation and subject to such conditions as may be prescribed. The intimation in this case would be ITC-04 and the have been provided in Section 143 read with Section 19 of CGST Act, 2017 and Rule 55 of the CGST Rules, 2017.
Circular No. 38/12/2018 Dated 26th March 2018 also clarified that registered person (principal) is not obligated to follow the said provisions. It is his choice whether or not to avail or not to avail of the benefit of these special provisions. Therefore, it is at the option of the registered person that whether he wants to opt for sending the goods to the Job worker with payment of taxes or without payment of taxes.
Consequences of the goods not being returned with the specified time limit
Section 143 of the CGST Act, 2017 provides that if the time frame specified therein for bringing back or further supplying the inputs / capital goods is not adhered to, the activity of sending the goods for job work shall be deemed to be a supply by the principal on the day when the said inputs/capital goods were sent out by him. Thus, the statute has by virtue of a deeming provision treated the non-receipt of goods within the specified time limit as if the goods have been supplied on the day when they were sent out by the principal to the job worker for job work.
If the principal does not opt for sending goods without payment of tax then he would have to send the goods against payment of tax
If the principal does not opt for sending goods without payment of tax then goods would be sent against payment of tax and job worker would be able to take Input Tax Credit of the tax charged thereon and also principal would also be allowed to take credit of the inputs against the said liability.
Impact of Section 143 of CGST Act, 2017
As can be envisaged from the discussion above that Section 143 allows the principal to send the goods to the job worker without payment of tax and if the principal does not opt for the same, then he can only send the goods against payment of tax. Thus, as a corollary, it can be said that had section 143 would not have been there, then sending of goods to job worker would have only be possible against payment of tax. But how good that corollary is would be required to be tested on the legal aspect and this article tries to analyse it.
Section 143 of CGST Act, 2017 vis-a-vis Rule 4(5)(a) of Cenvat Credit Rules, 2004
Bare provision of Section 143 of CGST ACT, 2017
a) Option for sending the Goods
A registered person (hereafter in this section referred to as the “principal”) may under intimation and subject to such conditions as may be prescribed, send any inputs or capital goods, without payment of tax, to a job worker for job work and from there subsequently send to another job worker and likewise..
b) What happens if goods are not received within the specified time limit
(3) Where the inputs sent for job work are not received back by the principal….within a period of one year of their being sent out, it shall be deemed that such inputs had been supplied by the principal to the job worker on the day when the said inputs were sent out.
Bare provision of Rule 4(5) of Cenvat Credit Rules 2004
a) Procedure for sending the Goods
The CENVAT credit on inputs shall be allowed even if any inputs as such or after being partially processed are sent to a job worker and from there subsequently sent to another job worker and likewise, for further processing, testing, repairing, re-conditioning or for the manufacture of intermediate goods necessary for the manufacture of final products or any other purpose, and it is established from the records, challans or memos or any other document produced by the manufacturer or the provider of output service taking the CENVAT credit that the inputs or the products produced therefrom are received back by the manufacturer or the provider of output service, as the case may be, within one hundred and eighty days of their being sent from the factory or premises of the provider of output service, as the case may be:
b) What happens if goods were not received within the specified time limit
If the inputs or capital goods, as the case may be, are not received back within the time specified under sub-clause (i) or (ii), as the case may be, by the manufacturer or the provider of output service, the manufacturer or the provider of output service shall pay an amount equivalent to the CENVAT credit attributable to the inputs or capital goods, as the case may be, by debiting the CENVAT credit or otherwise…
Understanding-On a comparison of the above provisions of pre and post GST Regime, it can be observed that under Central Excise Regime, a person sent the goods to job worker without payment of tax and if the same were not received within the specified time limit, then ITC attributable to inputs or capital goods would have to be reversed. However, in GST Regime option has been provided to the tax payer either to remove the against payment of tax or without payment of tax and if the goods are not received within the specified time limit then it is deemed as if the goods have been supplied on the date on which the goods were sent out. Thus, on one hand pre-GST Regime provided for reversal of ITC in case of receipt of goods beyond the prescribed time limit but on the other hand, in post-GST Regime, non-receipt of goods has been treated as deemed supply.
Therefore, departure has been made from the previous regime in as much as with goods being sent out against payment of tax and non-receipt of goods within the specified time limit would be treated as deemed supply from the date when the goods were sent out for job work against reversal of Input Tax Credit in the previous regime.
Whether sending goods against payment of tax is possible without the activity of sending goods by principal to job worker being classified as supply under section 7 of CGST Act, 2017
Section 143 is not the charging section which can provide for levy of tax without the same being covered within the scope of supply by virtue of Section 7. It is further emphasised that any transaction can be held to leviable to tax without falling within the scope of supply only by virtue of a deeming provision as has been provided in section 35(6). However, Section 143 does not provide that if the principal does not opt for the option provided under this section then he would have to send the goods against payment of tax by deeming as if the goods have been supplied to the job worker. If such deeming fiction is not provided for in the section for the principal not opting for sending goods without payment of tax, then sending the goods against payment of tax is only possible provided the said transaction falls within the scope of supply under section 7 on its own. The deeming fiction is only applicable when the goods are not received within the prescribed time limit.
Thus, Section 143 unless by way of deeming provision which it does not contain, by itself cannot provide that if procedure provided under the section is not opted for then the goods can only be sent against payment of tax if the transaction by itself does not fall within the scope of supply as provided under section 7.
Circular No. 38/12/2018 dated 26th March 2018 also provides the same that essentially, sending goods for job work is not a supply as such, but it acquires the character of supply only when the inputs/capital goods sent for job work are neither received back by the principal nor supplied further by the principal from the place of business / premises of the job worker within the specified time period (under section 143) of being sent out. However, at another place it provides that it is at the option of the registered person that whether he wants to opt for sending the goods to the Job worker with payment of taxes or without payment of taxes.
Therefore, the circular contradicts itself wherein it is clarifying that sending the goods by principal to job worker is not “essentially” a supply but acquires character of supply if the goods are not received within the specified time limit but at the same time it also provides that sending the goods by following the procedure laid down in Section 143 is optional for the principal. He may send the goods against payment of tax if he deems it fit. Thus, the circular only provides that the activity acquires the nature of supply when the goods are not received back within the specified time limit but does not provide that how it acquires the nature of supply if the procedure laid down in section 143 is not opted to be followed.
The question is that if an activity of sending of goods by principal to job worker does not fall within the scope of supply essentially at the time of sending of the goods then whether tax can be demanded if it is opted that procedure laid down in the section is not to be followed. It would be apt to highlight that Section 143 is somewhat similar to conditional exemption under Section 11 wherein it allows an activity to carried out without levy of tax but the question is if an activity is not at all falling within the scope of supply then what’s the purpose of allowing it to be carried out against payment of tax.
Deeming provision in Section 143 is only applicable in case goods are not received back within the specified time limit and no such deeming provision is provided for cases wherein the option is not opted for
3) Where the inputs sent for job work are not received back by the principal….within a period of one year of their being sent out, it shall be deemed that such inputs had been supplied by the principal to the job worker on the day when the said inputs were sent out.
Circular No. 38/12/2018 dated 26th March 2018 clarifies that deeming provision is not only deeming the activity of sending of goods to job worker as supply but also deeming that it would be treated as supply from the date when the goods were sent out.
The term “supply” has not been defined but only scope has been given and that too an inclusive one. Whether in such scenario can movement of goods from principal to job worker and vice versa could be held to be covered within the scope of supply
The next question which arises is whether movement of goods from principal to job worker and vice versa could be held to be supply. This is so because had section 143 not been in place or if a person does not opt for sending goods without payment of tax, then tax could have been levied only if sending of such goods to job worker and receipt thereof would have been supply.
Apparently, there is no consideration when the goods are moved from principal to the job worker and vice versa. The only mode of consideration which can be sought is when the goods are sent to job worker, such movement is a supply and when the goods are received back from the job worker, such movement from job worker to principal is also a supply. Therefore, such transaction for GST would be more in the nature of exchange or barter of raw material and finished goods. But, then schedule II Para 3 provides that any treatment or process on goods belonging to others is a service. So, again how can activity of merely sending the goods without opting for provision under section 143 can be held as leviable to tax.
Further whether Para 1 Schedule I regarding permanent disposal or transfer of business asset for which ITC has been claimed, can be made applicable for treating the activity of sending goods as “Supply”. But then sending goods to job worker is not permanent disposal or transfer of business asset as the same would be brought back or supplied from the premises of job worker by principal.
The matter is far from clear although the legislative intent seems to treat the same as Supply of goods if the option provided under section 143 is not opted for.
Movement of goods for Job Work has been treated differently from the movement otherwise than for supply
The legislative intent of treating the movement from principal to job worker different from the movement otherwise than for supply is clear from Rule 55 as well which is reproduced as follows:
For the purposes of-
(a) supply of liquid gas where the quantity at the time of removal from theplace of business of the supplier is not known,
(b) transportation of goods for job work,
(c) transportation of goods for reasons other than by way of supply, or
(d) such other supplies as may be notified by the Board,
the consigner may issue a delivery challan, serially numbered not exceeding sixteen characters, in one or multiple series, in lieu of invoice at the time of removal of goods for transportation, containing the following details
Thus, transportation of goods for job work has been categorised differently from the transportation of goods for reasons other than by way of supply. This might also be on account of specific provision of Section 143 and job work being treated differently from other movement of goods which have not been treated as supply.
So, what if someone does not opt for the procedure laid down in Section 143. Can he challenge that sending goods for job work by principal to job worker is not essentially a supply and therefore no tax can be demanded on not opting for procedure laid down in Section 143. The section itself does not provide that activity of sending the goods without following the procedure would be deemed as a supply but only provides for deeming provision if the goods are not received back within the specified time period and that too if the procedure is opted for
Lets try to conclude the discussion –
Supposedly, Principal has sent the goods for job work and has not opted for procedure under section 143. The question is if a person has not opted for the procedure in section 143 can he be asked to pay tax on sending the goods to job worker.
Thus, in the backdrop of the above examples, now we come to the last but the main question that whether if a person does not opt for procedure laid down under Section 143, can the legislature demand tax from the principal even if sending of the goods is not a supply under section 7 and section 143 does not contain a provision for treating the activity of sending goods by principal without opting for procedure laid down under the section as a deemed supply. It only contains a deeming provision for goods not received back within the specified time limit and that too for the person who has opted for the procedure.
The summary is that if the activity of sending goods to job worker essentially is not a supply then merely because section 143 prescribes optional procedure for sending the goods without payment tax and if such optional procedure has not been followed, it cannot be the sole criterion for holding the principal liable to payment of tax for an activity which in itself does not fall within the purview of supply (and something which has been provided in Circular No. 38/12/2018 Dated 26th March 2018).
Can a section prescribing procedure overrule the scope of section 7 because asking a person to reverse the Input Tax Credit is one thing (as in the case of pre-GST Regime) but to hold an activity to be against payment of tax would be a completely different scenario and for that a specific provision should be there for providing levy of tax either deeming or otherwise (Just like in the case of non-receipt of goods within the specified time limit). The payment of tax on activity is only possible in the statute once it is falling within the scope of supply or there is a deeming provision for such activity to be falling within the scope of supply.
Concluding the above write-up it seems that there are some missing links in the jig saw puzzle as in the case of issuance of vouchers in GST Regime and one which would be taking its own course in the future. The above write up is a food for thought for the readers and although conclusion should be inevitable for each write up but for this one it’s better to conclude without conclusion but keeping it open ended.
Ruling of AAR on Cleaning Services provided to Indian Railways by Contractor-Whether Exempt or not
The article tries to Analyse the impact of decision of Delhi AAR in Case No. 06/DAAR/2018 dated 23.04.2018 of M/S VPSSR Facilities wherein it was held that
“The cleaning services supplied to Railways i.e. cleaning of locomotives, railway stations, railway lines provided by the applicant cannot be said to be covered in Clause (6) of Schedule XII of the Constitution which covers ‘public health, sanitation conservancy and solid waste management’ functions of the Municipalities. The Municipalities are constitutionally entrusted with such functions in relation to urban areas but they are not entrusted with such functions in relation to Railway properties.”
The key question herein which had to be decided by AAR was whether cleaning services provided to railways fall under e Article 243W of the Constitution. The relevant entry which was sought to be covered is “Public health, sanitation conservancy and solid waste management.”Therefore whether cleaning services provided to Railways would fall within the activity of “Public Services.
The issue needs a deeper understanding the detailed discussion is as follows:
Article 285 of Constitution of India
Article 285(1) of the Constitution of India provides exemption of property of the Union from State taxation as follows:
The property of the Union shall, save in so far as Parliament may by law otherwise provide, be exempt from all taxes imposed by a State or by any authority within a State.
Therefore, as per the provisions of Article 285 of the Constitution of India, any property which belongs to Union of India would be exempt from levy of all taxes imposed by the a State. However, Parliament may be law provide otherwise than the provisions of article 285.
Supreme Court Judgement in case of Rajkot Municipal Corporation & Ors. Versus Union Of India dated November 19, 2009
The issue before Hon’ble Apex Court was
“The issue in these appeals relates to payment of service charges relating to supply of water, conservancy/sewerage disposal and other indirect services like approach roads with street lighting, drainage etc. provided by the said Municipal Corporations to properties owned by Union of India and its departments.”
The Hon’ble Apex Court referred to the decision In Union of India & Ors. v. State of Uttar Pradesh & Ors.- 2007 (11) SCC 324, wherein it was that charges for supply of water or for other services rendered under any statutory obligation, is a fee and not tax. It was held that the Union of India was liable to pay such charges and should honour the bills served in that behalf. Referring to Section 52 of the UP Water Supply and Sewerage Act,1975, it was held that the charges were loosely termed as “tax”, that the nomenclature was not important and what was charged is a fee for the supply of water as well as maintenance of the sewerage system, and such service charges are to be considered as a fee and were not hit by Article 285 of the Constitution. It was further made clear that what was exempted by Article 285 was a tax on the property of Union of India but not a charge for service which were being rendered in the nature of water supply or for maintenance of sewerage system.
The Hon’ble Apex Court then subsequently referred to in Para 6 of the Judgement that
When these appeals were earlier listed for hearing, both sides agreed that they will attempt a broad consensus on several pending issues and narrow down the areas of controversy and agree for a dispute resolution mechanism. We are told that in pursuance of it, discussions were held among various departments of the Government of India with the Department of Urban Development. In pursuance of it, an affidavit dated 9.4.2009 has been filed on behalf of Union of India crystallizing its stand on various issues. Union of India has now agreed in principle for the following:
It is liable to pay service charges to the municipal corporations for providing services like supply of water, conservancy/sewerage disposal, apart from general services like approach roads with street lights, drains etc.
Having regard to the fact that only service like supply of water could be metered and other services like drainage, solid waste management, approach roads, street lighting etc., could not be metered, the percentage of property tax will be worked out as service charges, on the basis of instructions issued by the Ministry of Finance.
(Emphasis Supplied)
Para 7 of the Judgement provided that
The Union of India has also stated that taking note of the relevant circumstances, it has decided to pay service charges at the following rates:
(a) 75% of the property tax levied on private owners, where the properties of the Union are provided by the municipal corporations with all services/facilities as were provided to other areas within the municipal corporation;
(b) 50% of the property tax levied on private owners, in regard to properties of the Union, where only some of the services/facilities were availed; and
(c) upto a maximum of one-third (33 and 1/3%) of the property tax levied on private owners in regard to properties which did not avail any of the services provided by the municipal corporation, as they were self-sufficient on account of all services being provided by the Union itself.
Para 9 of the Judgement then referred as follows:
Learned counsel for the appellants submitted that the appellant municipal corporations submitted that they were broadly in agreement with what has been stated and agreed by Union of India in the said affidavit. The appellant-Municipal Corporations also confirmed and agreed:
that they will not levy or demand any “property tax” in respect of the properties belonging to Union of India and used for the purposes of the government;
that the demands will relate only to service charges for direct services like supply of water and conservancy/sewerage disposal services, and other general services such as approach roads with street lighting, drainage etc.;
(Emphasis Supplied)
Para 10 of the Judgment provided that
The appellants however expressed reservations only in regard to the stand of the Railways that it will only pay nominal service charges at 5% of the property tax. They point out that there can be no property of Railways which can be termed as 100% self sufficient in regard to services, as common indirect services provided by the Municipal Corporation (like approach roads with street lighting etc.)will be enjoyed by them. They also drew our attention to the fact that Ministry of Railways (Railway Board)had also issued a circular dated 24.7.1954, similar to the circulars issued by the Government of India, Ministry of Finance, providing for payment of part of the property tax, as services charges for water, scavenging etc. The learned Solicitor General however stated that she was not sure whether the said circular continues in force or was superseded by other circulars. Be that as it may.
(Emphasis Supplied)
Para 11 of the Judgement then finally concluded that
In view of the above, there is no need to consider the appeals on merits. We dispose of appeals and
pending applications by recording the following broad agreement between the parties:
(i) The Union of India and its departments will pay service charges for the services provided by the appellant municipal corporations. They will not pay any property tax. The service charges will be paid at 75%, 50% and 33 1/3% respectively of the property tax levied on private owners, depending upon whether Union of India or its department is utilising the full services, or partial services or nil services. The Union of India represented by its concerned department will enter into agreements/understandings in regard to service charges for each of its properties, with the respective municipal corporation
(Emphasis Supplied)
It would be apt to highlight that this judgement of Hon’ble Apex Court was followed by the Hon’ble Allahabad High Court since the dispute between Union of India and Nagar Nigam Varanasi was for the period 2011-12 i.e. year falling subsequent to the date of Judgment of Hon’ble Apex Court in the Matter of Rajkot Municipal Corporation.
However in earlier Judgments wherein such agreement between the Union of India and States was not reached and issue regarding recovery of service charges are not similar to recovery of tax on property, Hon’ble Apex Court in the matter of Union of India Vs. Ranchi Municipal Council and later of followed on by various High Courts had held that
“4. The controversy is no longer res integra. This Court in Union of India v. Purna, Municipal Council had held that Section 135 of the Railways Act is subject to the provisions of Article 285 of the Constitution. Therefore, the respondent-Municipality was restrained from demanding any payment by way of service charges from the Railways.”
Engineering code of the Indian Railway Department
Indian Railways Department has prescribed an Engineering Code for its Civil Engineering Department for maintenance and renewal of Civil Engineering assets of the Railways. Para 1920 to 1922 is significant for understanding the impact of Article 285 of Constitution of India and services of Local Bodies availed by the Indian Railways.
a) Para 1920 of the Engineering code of the Indian Railway Department
Para 1920 provides that Railways would with effect from 1st April 1954 pay the local bodies in States except in the State of Jammu and Kashmir, for “Service Charges” in respect of Central Government properties. The Railway will make payment in respect of their properties for “Specific Charges” rendered by local authorities but payment of such “Service Charges” shall be treated not as payment of taxes but of compensation payable in quasi contract. “Specific Charges” will include not only direct services such as water and electric supplies, scavenging etc., but also general services such as street lighting, town drainage, approach roads connecting the Railway properties etc. But such items as educational, medical or, public health facilities will be excluded. Para 1920 is being reproduced herewith:
1920: Under clause (i) of Article 285 of the constitution the properties of the Government of India are exempt from all taxes imposed by local authorities in the States. Without prejudice to the legal rights conferred under the appropriate laws on any property held by the Central Government within the jurisdiction of local bodies, payment should be made with effect from 1st April 1954 to local bodies in States except in the State of Jammu and Kashmir, for “Service Charges” in respect of Central Government properties on the following basis :-
(i) The Railway will make payment in respect of their properties for “Specific Charges” rendered by local authorities but payment of such “Service Charges” shall be treated not as payment of taxes but of compensation payable in quasi contract. “Specific Charges” will include not only direct services such as water and electric supplies, scavenging etc., but also general services such as street lighting, town drainage, approach roads connecting the Railway properties etc. But such items as educational, medical or, public health facilities will be excluded.
(ii) For large and compact blocks of these properties the Railway will not pay for such Specific services as they themselves arrange.
(iii) The assessment of “Service Charges” should be on actual basis in case of metered water or electricity etc. or where services like drainage and scavenging etc. are charged for separately. But where some or all such specific services are not charged for separately but are part of a consolidated property tax, the quantum of `Service charges” payable to the local bodies should be calculated in terms of paras 1922, 1923 and 1924.
(iv) Railway Administration may also enter into separate contract with any local authority for the supply of water and electricity or scavenging or any other services.
b) Para 1922 of the Engineering code of the Indian Railway Department
Para 1922 provides for calculation of quantum of Service Charges. The important issue to be observed herein that the quantum of service charges have been divided into two parts i.e.
In respect of isolated Railway properties where all services are availed of by the Railway in the same manner as in respect of private properties.
In the case of colonies which do not directly avail of civic services within the area and are self-sufficient in all respects
In respect of colonies where only who partially avail civic services within the area
The Quantum of “Service Charges” payable to local bodies should be calculated on the following basis with effect from 1st April, 1967 if they are levied as consolidated tax as distinct from separate taxes for each item of service :–
(i) In respect of isolated Railway properties where all services are availed of by the Railway in the same manner as in respect of private properties, the Railway will pay service charges equipment to 75 per cent of the properly tax realised from individuals.
(ii) In the case of large and compact colonies which are self-sufficient with regard to services or where some of the services are being provided by the Railways themselves the service charges will be calculated in the following manner
(a) In the case of colonies which do not directly avail of civic services within the area and are self-sufficient in all respects, the payment of service charges will be restricted to 33-1/3 per cent of the normal rate of property tax applicable to private, properties.
(b) In respect of colonies where only a partial use of the services is made service charges will be paid as 50 per cent of the normal property tax rate.
(c) In respect of colonies where all the services normally provided by the municipal body to the residents of other areas within its limits are being availed of, service changes will be paid as 75 per cent of the property tax rate realised from private individuals.
Note:- If in a property tax assessment, elements of charges for individual services which are not availed of, are identifiable, the quantum of general tax for the application of para 1922, should be excluding such elements.
c) Para 1924 of the Engineering code of the Indian Railway Department
Para 1924 provides that for taxes being levied separately for each item of service, share of general services rendered by a local body to be borne by the Railway will be calculated separately. For example, in case of scavenging tax, service charges payable have been divided into two parts i.e.
Where a Railway Administration has made efficient arrangements of its own for the daily removal and disposal of rubbish, filth etc. from its premises
Where the Railway Administration has made arrangements for removal of fifth etc., but where the local authority is responsible for its final disposal.
The detailed division is as follows:
In the case of taxes being levied separately for each item of service the share of general services rendered by a local body to be borne by the Railway will be on the following basis with effect from 1st April, 1954.
Water and Drainage Tax :
(a) Where a Railway Administration derives no direct benefit. 1/3 of the tax
(b) Where a Railway Administration derives only partial benefit. 1/2 of the tax
(c) Where a Railway Administration derives full benefit. Full tax
Scavenging Tax :
(a) Where a Railway Administration has made efficient arrangements of its own for the daily removal and disposal of rubbish, filth etc. from its premises.
No tax
(b) Where the Railway Administration has made arrangements for removal of fifth etc., but where the local authority is responsible for its final disposal.
1/2 of the tax
Lighting Tax :
(a) Where the Railway Administration does not take power from the local authority for lighting its premises and where the roads leading to be Railway station are also not lit by the local authority.
No tax
(b) Where the Railway Administration does not take power from the local authority for lighting its premises but the roads leading to the Railway Station are lit by the local authority.
1/2 of the tax
(c) Where the Railway Administration takes power from the local authority for lighting its premises
Full tax in addition to the charges for energy consumed
Responsibility of Municipal Committee for areas falling within their Jurisdiction: I have taken for reference purposes, an example of Madhya Pradesh Municipal Corporation Act which is as follows:
Matters to be provided for by Corporation.-
(1)The Corporation shall make adequate provision, by any means or measures which it may lawfully use or take, for each of the following matters, namely:-
(a) lighting public streets, places and buildings.
(b) cleaning public streets, places and sewers and all spaces not being private property, which are open to the enjoyment of the public, whether such spaces are vested in the corporation or not; removing noxious vegetation, and abating all public nuisances;
(f) removing obstructions and projections in public streets and places, and in spaces not being private property, which are open to the enjoyment of the public whether such spaces are vested in the Corporation or the Government;
(j) constructing, altering and maintaining public streets, culverts and Corporation boundary markets, latrines, urinals, drains, sewers and providing public facilities for drinking water; watering public streets and places;
(k) the management and maintenance of all municipal water works and construction and maintenance of new work and means for providing a sufficient supply of suitable water for public and purposes;
(m) the construction and the maintenance of public market and slaughterhouses and the regulation of all markets and slaughter houses;
(s) establishing and maintaining primary schools;
(u) the maintenance of municipal office and of all public monuments and other property vested the Corporation;
(x) the maintenance of public park, gardens, recreation grounds, public places and open spaces in existence and vested in the Corporation.
Definition of Public and Private Property under the Madhya Pradesh Municipal Corporation Act, 1956 is as follows:
(47) ―public place‖ means a space, not being private property, which is open to the use or enjoyment of the public, whether such space is vested in the Corporation or not;
(45) ―private street‖ means a street which is not a public street;
(55) ―street‖ means any road, foot-way, square, court alley or passage, accessible, whether permanently or temporarily to the public, whether a through fare or not;
and
shall not include every vacant space, notwithstanding that it may be private property and partly or wholly obstructed by any gate, post chain or other barrier, if houses, shops or other buildings abut thereon, and if it is used by any persons as means of access to or from any public place or thoroughfare, whether such persons be occupiers of such buildings or not;
but shall not include any part of such space which the occupier of any such building has a right at all hours to prevent all other persons from using as aforesaid;
and shall include also the drains on either side and the land whether covered or not by any pavement, verandah or other erection, which lies on either side of the roadway up to the boundaries of the adjacent property, whether that property be private property or property reserved by Government or by the Corporation for any purpose other than a street;
(49) ―public street‖ means any street-
(a) over which the public have a sight of way; or
(b) which have been heretofore leveled, paved, metalled, asphalted, channeled, sewered or repaired out of municipal or other public funds; or
(c) which under the provisions of the Act becomes a public street, and includes-
the roadway over any public bridge or causeway;
the footway attached to any such street;
public bridge or causeway, and the drains attached to any such street, public bridge or causeway;
If we refer to the above provisions only for a reference basis, albeit individual provisions of the other Municipal Corporation may differ but not as much, such provisions can be broadly for our reference purposes for this issue can be divided into two parts:
Part I:- Entrustment of responsibility to Municipality for cleaning of public streets, places and sewers which are not private property. Therefore cleaning of public street and public place is responsibility of Municipality even though its property may or may not vest in it. Public place has been defined as the space, not being private property, which is open to the use or enjoyment of the public, whether such space is vested in the Corporation or not. Whilst Public place shall not include any part of such space which the occupier of any such building has a right at all hours to prevent all other persons from using as aforesaid.
Part II:- Entrustment of responsibility to Municipality for maintenance of buildings, which includes limited set of buildings i.e. public market and slaughterhouses, municipal office and of all public monuments and other property vested the Corporation and public park, gardens, recreation grounds, public places and open spaces in existence and vested in the Corporation.
Conclusion in respect of Properties belonging to Railways vis-a-vis Article 285 of the Constitution of India and Respective Municipal Corporations Act
At the outset, below conclusion is on a broader basis and with the limited facts available in the Judgement:-
Issue 1: Housekeeping Services and Cleaning of Trains: Scope of activities before AAR were as follows:
(c) Providing On-Board Housekeeping Services in Trains
Cleaning of toilets, compartments, seats etc.
(e) Mechanized Cleaning of Trains
Coaches of Trains, and Housekeeping of depot premises etc.
For this issue, cleaning of Trains in my view is not a Municipal Function vesting with the Municipality and therefore it should not be exempt vide notification No. 12/2017 dated 28th June 2017.
Issue 2: Comprehensive Mechanized Cleaning of Railway Colonies and Removal and disposal of garbage from Railway Stations: The scope of the activities was
(f) Comprehensive Mechanized cleaning of railway colonies.
Cleaning of road and desilting of surface drains, manhole, gully trap and latrine system of various size and depth and maintenance of the same in the running condition of colony area, and removal of accumulated garbage silt muck etc. to the nominated railway dustbin.
(g) Removal and disposal Garbage etc. from railway colonies.
Conservancy contract for daily removal of solid waste/ rubbish/ refuse / hedge cuttings etc. from the dustbins/ heaps or nominated sites of Railway Colony and other Railway premises.
(h) Removal and disposal of Garbage etc from railway stations.
Conservancy contract for daily removal of solid waste/ rubbish/ refuse / hedge cuttings etc. from the dustbins/ heaps or nominated sites of Railway Station.
The broad conclusion on the above activities is as follows:
For cleaning of Roads, services relate to cleaning of public streets over which public has a right of way without any restrictions and charges. The issue whether property of such streets vests in Municipality is not relevant at all for performing the function.
Removal and Disposal of Garbage are functions entrusted to municipality under Article 243W of the Constitution of India.
In pursuance of the judgement of Hon’ble Apex Court in the matter of Rajkot Municipal Corporation, Guidelines have been issued by the Government of India, Ministry of Urban Development on dated 15th December 2009 with a specific Instruction that arrangement mentioned in point (2) of para 1 is specific to the State of Gujarat and State Governments have been requested to consider appropriate dispute resolution mechanism in respect of their States.
The Judgement specifically provides that demands of Municipality would only relate to service charges for direct services like supply of water and conservancy/sewerage disposal services, and other general services such as approach roads with street lighting, drainage etc. The Municipal Corporation also highlighted that there can be no property of Railways which can be termed as 100% self sufficient in regard to services, as common indirect services provided by the Municipal Corporation (like approach roads with street lighting etc.)will be enjoyed by them.
The Hon’ble Apex Court held that service charges will be paid at 75%, 50% and 33 1/3% respectively of the property tax levied on private owners, depending upon whether Union of India or its department is utilizing the full services, or partial services or nil services.
The activities like cleaning, water, light supply to such properties comes within the scope of the Municipal Activities although there property is not vested with Municipal Corporation.
Railway Colonies cannot be termed as private properties because if that had been the case then Railways would not have the option to avail the services of Municipal Corporation and they would have had to make their own arrangements for such services.
Provisions of services like water, drainage, cleaning, lighting are prima facie responsibility of Municipal Corporation and it’s at the option of the Railways to avail such facilities or not. If they decide to avail such facilities, then two scenarios are possible which are as follows:
Specific Services: In case of specific services like water, lighting and Scavenging services, they have to pay services charges if they avail such services and in case they do not want to avail such services they have to pay no service charges.
Common Services: In case of common services, as Municipal Corporation of Rajkot had pleaded before the Hon’ble Apex Court, there cannot be any scenario wherein Railways are not availing their services. Therefore, 75%, 50% and 33 1/3% respectively of the property tax levied on private owners, depending upon whether Union of India or its department is utilizing the full services, or partial services or nil services.
Therefore, if we analyse specific and common services, it’s the responsibility of the Municipal Corporation to provide services and it’s at the option of the Railways to avail such facilities or not. If the Railways had opted for such services then Municipality would have been bound to provide such services but the fact that Railways are not availing such services, would not make such services out of the scope of the function of the Municipality. Thus, to hold that these are responsibilities of the Railways is not correct. It’s the primary responsibility of the Municipal Corporation falling within the scope of the Municipal Corporation under Article 243W but availed by the Railways from other contractors.
Even if Railways had opted to get these services from a private contractor then also such services fall within the scope of the responsibilities entrusted to Municipal Corporation under Article 243W of the Constitution of India.. Mere availing of such services would not make these outside the scope of Article 243W of the Constitution of India. In fact Entry No. 3 of Notification No. 12/2017 dated 28th June 2017 clearly covers only such instances and is reproduced herein for further clarity:
Pure services (excluding works contract service or other composite supplies involving supply of any goods) provided to the Central Government, State Government or Union territory or local authority or a Governmental authority or a Government Entity by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution.
Emphasis Supplied
On this point would like to differ from the decision of Hon’ble AAR Delhi. In my opinion, any services which are in relation to functions entrusted to Municipality under Article 243W of the Constitution of India but for which services are provided by the supplier to the Central Government are exempt from levy of Tax. Therefore:-
Whether supplies of cleaning services in relation to Railway Stations and Railway Colonies are functions falling within the purview of Municipality under Article 243W: Yes
Whether the fact that Railways do not want to opt for such services from Municipalities as they are self sufficient would make such services outside the purview of Municipality under Article 243W of the Constitution: No
In case wherein Railways opt for services of private Contractor in respect of cleaning services, whether then such services would be outside the purview functions entrusted to Municipality under Article 243W of the Constitution: No
If such pure services of the contractor which are provided to Railways fall within the purview of responsibilities entrusted to Municipality under Article 243W of the Constitution of India, then whether such services should be exempted from the levy of tax by virtue of above entry of Notification No. 12/2017 dated 28th June 2017: Yes
Issue 3: Services provided to Railways for Properties vested with Railways and not open to enjoyment of public: Scope of the activities before AAR Delhi were as follows:
(a) Mechanized/ Comprehensive cleaning at Railway Stations.
Station Building Cleaning, Platform Cleaning, Track Cleaning, Office & Waiting hall cleaning, Toilet cleaning, Circulating area cleaning etc.
(b) Mechanized cleaning of sheds
Shed floor, pits, urinals, desilting of manholes, underground drains and open drains, disposal of Industrial waste to Dumping ground, Loading of Ferrous Scrap, Cutting of grass and shrubs and removal of cobwebs etc.
(d) Railway Building & Office cleaning.
Cleaning and upkeep of Office Chambers, rooms, cabins, corridors, Halls, roofing, circulating areas, toilets, metalled road and lawns etc.
This is a contentious issue. However, in my view and the on the basis of facts available as these are not public streets or places but buildings. These buildings vest with Railways and therefore in my view municipality is not entrusted with the responsibility for cleaning and maintenance of properties which are regulated and managed by any other entity, property of which is vested with any other person unless clearly specified. Municipality is entrusted with cleaning of public streets or places and not buildings whose property vests in others.
These are properties which are vested with Railways and regulated both in terms of entrance and management. In a similar matter a very interesting observation I found in Hindustan Times for cleanliness of Railway tracks and when posted for query both before BMC and Railways, the answer was as follows:
“The railways said the Brihanmumbai Municipal Corporation (BMC) should take away the garbage but the civic body said it was the railway’s responsibility to keep the tracks clean,” said Dharmesh Birai of the group. “The garbage is thrown by commuters and by residents of slums and buildings in areas that the BMC cleans. Why do the station masters need to be told about something the railways should be doing on a regular basis?”
There is a very thin difference between public streets, places and buildings. However for example, Municipality cleans public streets outside buildings but does not clean the buildings which might belong to a government organization. These are borderline and specific issues and unless until contrary brought on record, service provided would be taxable and would not fall in the purview of exemption.
Reduction in Tax Rate on services by way of “Job Work” from 18% to 12%-37th GST Council Meeting-Scope of the Amendment and Interpreting “Look alike” Entry 26(id) and 26(iv) of Notification No. 11/2017-Central Tax Rate
CA Arpit Haldia
There has been lot of confusion since the amendment and what is scope of entry 26(id) and 26(iv) and how they need to be interpreted. The article tries to decipher the controversy in view of the intention of the legislature dating back 28th June 2017 and subsequent amendments to Entry 26. Let’s try to take a deeper look to the entry and make sense through the intention of the legislature.
Overview to Entry No. 26-9988- Manufacturing services on physical inputs (goods) owned by others
Entry No. 26 of Notification no. 11/2017-Central Tax Rate Dated 28th June 2017 (as amended from time to time) provides tax rate on HSN-9988-Manufacturing services on physical inputs (goods) owned by others. GST Council in its 37th Meeting held on 20th September, 2019 recommended reduction of rate of GST from 18% to 12% on supply of machine job work such as in engineering industry, except supply of job work in relation to bus body building which would remain at 18%.
Insertion of New Entry 26(id) vide Notification No. 20/2019-Central Tax Rate Dated 30th September 2019
Notification No. 20/2019-Central Tax (Rate) Dated 30th September 2019, amended Entry No. 26 and inserted following entries in relation to the above proposed amendment.
Particulars
Rate
“(ib) Services by way of job work in relation to diamonds falling under chapter 71 in the First Schedule to the Customs Tariff Act, 1975 (51of 1975);
0.75
(ic) Services by way of job work in relation to bus body building;
9
(id) Services by way of job work other than (i), (ia), (ib) and (ic) above;
6
Competing Entry to the newly inserted Entry 26(id)
No. 26 (iv) of Notification No. 11/2017-Central Tax Rate Dated 28th June 2017 (as amended from time to time) contains following entry:
Particulars
Rate
[(iv) Manufacturing services on physical inputs (goods) owned by others, other than (i), (ia), (ib), (ic), (id), (ii), (iia) and (iii) above
9
There has been much confusion since the amendment has been made on two counts i.e. firstly press release to 37th GST Council Meeting only provided for reduction in tax rate on “machine job work such as in engineering industry” from 18 to 12% and Secondly how would both entries 26(id) and 26(iv) would operate and coexist. On the first count, the amendment made in the tax schedule is a more broad-based amendment and furthermore press release to the GST Council Meeting are only broad indication of the amendment to be made. Therefore, as such there might not be a major issue therein but the who drafts the press release.
Entry 26 to Notification 11/2017-Cnetral Tax Rate covers Four “Look alike” but “Separate Activities”
For getting hold of the entire issue, we need to revisit Entry No. 26 of Notification No. 11/2017-Dated 28th June 2017 in its entirety. Broadly Entry No. 26 contains entries relating to four separate activities:
a) Services by way of job work in relation to-…
b) Services by way of any treatment or process on goods belonging to another person, in relation to-…
c) Tailoring
d) Manufacturing services on physical inputs (goods) owned by others, other than above
Since inception, Notification No. 11/2017-Central Tax Rate contained separate entry with separate nomenclature for “Services by way of Job Work” and “Manufacturing Services on physical inputs (goods) owned by others” which highlights the fact that since inception legislature had intended to mark a difference between what is covered by “services by way of job work in relation to” and what is covered by “Manufacturing services on physical (inputs) owned by others otherwise they could have used similar terms in both the entries.
The two other entries “Services by way of any treatment or process on goods belonging to another person, in relation to” and “Tailoring” were inserted subsequently and provide a sneak-peek to the intention of the legislature and discussed herein below in detail.
Making Sense of why Legislature has inserted Four “Look alike” but “Separate Activities”
The intention of the legislature and what they had in mind while inserting separate entry for “Services by way of Job Work” and “Manufacturing Services on physical inputs (goods) owned by others” got highlighted when Entry 26(ii) was inserted vide Notification No. 20/2017-Central Tax Rate dated 20th August 2017, which provided as follows:
Particulars
Services by way of any treatment or process on goods belonging to another person, in relation to-(a) printing of newspapers;(b) printing of books (including Braille books), journals and periodicals
2.5
The question was Firstly, why new entry was inserted with a new terminology “Services by way of any treatment or process on goods belonging to another person, in relation to” without using the existing terminology i.e. “Services by way of Job Work” or “Manufacturing Services on physical inputs(goods) belonging to others.
Secondly, Entry 26(i) already provided for “Services by way of job work in relation to- (a) Printing of newspapers” to be taxed at 5%. The new entry also covered newspaper by providing “Services by way of any treatment or process on goods belonging to another person, in relation to- (a) printing of newspapers” to be taxed at 5%.
The question arose that both entries were relating to Tax Rate on newspaper and both provided for levy of tax at the rate of 5% but why they were containing different nomenclature i.e. “Services by way of Job Work” and “Services by way of any treatment or process on goods belonging to another person”. So, what was the need for inserting a new entry when there was already an entry which provided for levy of tax @ 5% on service by way of job work in relation to printing of new paper.
The answer is given by the Agenda to 20th GST Council Meeting pursuant to which Notification No. 20/2017-Central Tax Rate was issued. The Agenda provided as follows:
S.No.
Proposal
Justification for Proposal
Recommendations of Fitment Committee
7.
Services by way of job work in relation to – Printing of books (including Braille books), journals and periodicals falling under heading 9988 which attracts GST at 5%. However, printing services where paper is supplied by an un-registered person, shall attract GST @ 18% in view of definition of job work in section 2(68) of GST Act, according to which “job work” means any treatment or process undertaken by a person on goods belonging to another registered person and the expression “job worker” shall be construed accordingly
Supply of printed books, newspapers, journals and periodicals attracts GST at NIL rate. Therefore, suppliers of these goods, that is publishers, are not required to take registration. Job work services by way of printing of books (heading 9988) attract GST@ 5%. However, in view of definition of job work in section 2(68) of CGST Act according to which “job work” means any treatment or process undertaken by a person on goods belonging to another registered person, printing services provided by a printer to an unregistered publisher, where paper or other physical inputs are supplied by the publisher, will not be eligible for the 5% GST rate prescribed for job work services in relation to printing of newspapers, books, journals and periodicals.
GST rate on services by way of printing of newspapers, books (including Braille books), journals and periodicals using physical inputs owned by others [Sl. No. 26 (heading 9988) of CGST notification No. 11/2017-CT] may be prescribed at 5%.
Emphasis Supplied
Therefore, the entries might seem a “Look a like” but a clear distinction has sought to be made for Entry 26(i) which starts with words “Services by way of Job Work”. Since the entry contains the term “Job Work” and term has been defined under Section 2(68) of the CGST Act, 2017, therefore it is restricted only in cases where in any treatment or process is undertaken by a person on goods belonging to another registered person and any treatment or process carried out on goods belonging to an unregistered person, same would not fall in 26(i) but would fall in other entries. Had Entry 26(ii) not been inserted then services of printing of news paper on paper supplied by a registered person would have been taxed at 5% under 26(i) but on paper supplied by an unregistered person would have been taxed under the residual heading 18%.
Since 26(i), 26(ia), 26(ib), 26(ic) and 26(id) only covered treatment or process on goods belonging to registered persons, therefore there was a need to insert entries 26(ii) and 26(iia) with the nomenclature “Services by way of any treatment or process on goods belonging to another person” which is similar to the definition of “Job Work” but does not have the restriction of “Goods belonging to Registered person”.
Insertion of the new entry for Tailoring Services vide Notification No. 1/2018-Dated 25th January 2018
The intention of the legislature is again clarified on why there was a need to insert a separate entry for tailoring service when services by way of job work in relation to textiles was already being taxed at 5%. The relevant agenda to the meeting is specified hereinbelow:
S. No.
Represented by
Proposal
Justification
Comments of Fitment Committee
7
Darzi (India) LLP Jade Blue, Ahmedabad
To exempt tailoring services from GST.To reduce the GST rate on tailoring services to 5%
There is difference between the rate on the fabric and the tailoring service, and this often leads to misclassifying the service as supply of goods(fabric). Tailors are competing against suppliers of readymade garments who pay tax @5%/12%.
The service by way of tailoring, stitching carried out on fabric belonging to a registered person, being a service by way of job work in relation to textiles, attracts GST @ 5%. [“Job work” means any treatment or process undertaken by a person on goods belonging to another registered person and the expression “job worker” shall be construed accordingly.]Tailoring services provided to an individual un-registered customer is not a service by way of job work and attracts tax @18%. Mis-classification or mis-declaration of supply of service as supply of goods to evade taxes is an enforcement issue.However, there is merit in the argument that tailors have to compete against suppliers of ready- made garments who pay tax @5%/12%.There is no doubt that demand for tailoring services has reduced since advent of readymade garments manufactured by organized players in India during the last 2 decades.All fabrics falling under chapters 51 to 55 attract GST of 5%.In order to remove the arbitrage between the supply of goods (RMG) and service, reduction in GST rate on tailoring service to 5% may be considered.Fitment DecisionAgreed
Emphasis Supplied
Therefore it is very clearly evident that the scope of Entry 26(i), 26(ia), 26(ib), 26(ic) and 26(id) is only restricted to any treatment or process on goods belonging to registered persons. However, scope of entry 26(ii), 26(iia), 26(iiii) and 26(iv) extends to treatment or process on goods belonging to unregistered persons as well.
Making Sense of two residual entries Entry 26(id) and 26(iv) post amendment dated 30th September 2019
The two entries 26(id) and 26(iv) are being reproduced hereinbelow:
Particulars
Rate
(id) Services by way of job work other than (i), (ia), (ib) and (ic) above;
6
[(iv) Manufacturing services on physical inputs (goods) owned by others, other than (i), (ia), (ib), (ic), (id), (ii), (iia) and (iii) above
9
Entry (id) contains the words “Job Work”, therefore would cover the treatment or process on the goods belonging to registered persons which are not falling under the entry 26(i), 26(ia), 26(ib) and 26(ic). Any treatment or process on goods belonging to unregistered persons would not fall under 26(i), 26(ia), 26(ib), 26(ic) and 26(id) but would fall in other entries 26(ii), 26(iia), 26(iii) or 26(iv).
Post Amendment dated 30th September 2019, Entry 26(id) would act as the residual entry for any treatment or process on goods belonging to registered persons not falling under 26(i), 26(ia), 26(ib) and 26(ic). Entry 26(iv) would work more or less work as a residual entry for any treatment or process on goods belonging to unregistered persons not falling under 26(ii), 26(iia), 26(iii).
Sometimes making sense of “look alike” entries might be difficult-Would require clarification soon
Entry 26(id) covers “Job Work” which is any treatment or process on goods belonging to others but 26(iv) covers “Manufacturing Services” on goods belonging to others. Therefore, Entry 26(id) through the term “Job Work” might cover both activities which may or may not be manufacture but entry 26(iv) is only restricted to “Manufacturing Activity”. So what happens to treatment on goods belonging to unregistered persons which dos not happens to be a manufacturing activity. Whether the same falls in 9997 (residual entry to Notification No. 11/2017-Central Tax Rate).
Last but not the least, heading of 9988 covers “Manufacturing services on physical inputs (goods) owned by others” however entry 26(i) pertains to job work which also covers activities which do not amount to “manufacturing”. So what role does “heading plays while interpreting the “Entry” or can heading restrict the meaning of the entry provided. Interesting times ahead…
Concluding: Therefore it is very clearly evident the scope of Entry 26(i), 26(ia), 26(ib), 26(ic) and 26(id) is only restricted to any treatment or process on goods belonging to registered persons. However, scope of entry 26(ii), 26(iia), 26(iiii) and 26(iv) extends to treatment or process on goods belonging to unregistered persons as well.Post Amendment dated 30th September 2019, Entry 26(id) would act as the residual entry for any treatment or process on goods belonging to registered persons not falling under 26(i), 26(ia), 26(ib) and 26(ic). Entry 26(iv) would work more or less work as a residual entry for any treatment or process on goods belonging to unregistered persons not falling under 26(ii), 26(iia), 26(iii).
Today’s post would be covering discussion on Section 122(1)(v) of CGST Act, 2017. The relevant clause read as under-
“(1) Where a taxable person who––
(v) fails to deduct the tax in accordance with the provisions of sub-section (1) of section 51, or deducts an amount which is less than the amount required to be deducted under the said sub-section, or where he fails to pay to the Government under sub-section (2) thereof, the amount deducted as tax
Nature of Default covered by the Section
Fails to deduct the tax in accordance with the provisions of sub-section (1) of section 51-Sub-section (1) of Section 51 mandates for deduction of tax in certain circumstances. If the taxable person fails to deduct tax in accordance with the provisions of section 51, taxable person would be said to have committed an offence under the given clause.
Deduction of an amount which is less than the amount required to be deducted under the sub-section (1) of section 51:- Taxpayer is required to deduct tax under sub-section (1) of section 51 of CGST Act, 2017. If the taxable person deducts tax which is lesser than the amount required to be deducted, taxpayer would said to have committed an offence under the given clause.
Fails to pay to the Government under sub-section (2) of Section 51 of CGST Act, 2017, the amount deducted as tax-If the taxable person after deducting tax fails to pay the amount to the Government under sub-section (2) of section 51 of CGST Act, 2017, the taxable person would have said to have committed an offence under the given clause.
Meaning of the tern “Fail”
As per Bouvier’s Law Dictionary, the term “fail” has been defined as “to leave unperformed”; to omit; to neglect; as distinguished from refuse, which latter involves an act of the will, while the former may be an act of inevitable necessity.
No Time limit provided in the clause for the act of non-deduction or short deduction or failure to pay be treated as an offence
Unlike Section 122(1)(iii) wherein failure to the pay the amount collected as tax is treated as an offence only beyond the period of three months from the date on which such payment becomes due; Section 122(1)(v) treats failure to pay the amount deducted as tax as an offence if the same is not paid by the due date. Therefore, no additional time limit has been provided as has been provided under Section 122(1)(iii) and 122(1)(iv).
No intent to evade tax required to be proved for identifying that whether offence has been committed or not The offence provided in the clause is for failure to deduct or deduction of an amount lower than amount required or failure to pay to the government. There is no intent of mens-rea being incorporated into the offence under Clause 122(1)(v) and a simple failure to pay the tax deducted or short deduction or lesser deduction might amount to offence under the clause without the intent to evade tax being there.
Today’s post would be covering discussion on Section 122(1)(iv) of CGST Act, 2017. The relevant clause read as under-
“(1) Where a taxable person who––
(iv) collects any tax in contravention of the provisions of this Act but fails to pay the same to the Government beyond a period of three months from the date on which such payment becomes due
The clause seeks to cover the situation wherein any amount has been collected as tax in contravention of the provisions of the Act but the person fails to pay the same to the Government beyond a period of three months from the date on which such payment was due. The clause is attracted provided two conditions are satisfied which are as follows:
Condition-1-Amount is collected as tax in contravention of the provisions of the Act.
Provisions of Section 32 of CGST Act, 2017 provides for prohibition of unauthorised collection of tax. The section provides as follows:
Prohibition for an unregistered person from collecting any sum by way of tax- A person who is not a registered person shall not collect in respect of any supply of goods or services or both any amount by way of tax under this Act. Therefore, unregistered person is completely prohibited from collecting any sum by way of tax under the Act in respect of any supply of goods or services made by him.
Prohibition for a registered person from collecting tax except in accordance with the provisions of the Act-No registered person shall collect tax except in accordance with the provisions of this Act or the rules made thereunder.
For e.g. Section 10(4) provides that a person who for composition levy under section 10 of CGST Act, 2017 shall not collect any tax from the recipient on supplies made by him. Further similarly explanation to section 11 of CGST Act, 2017 provides that where an exemption in respect of any goods or services or both from the whole or part of the tax leviable thereon has been granted absolutely, the registered person supplying such goods or services or both shall not collect the tax, in excess of the effective rate, on such supply of goods or services or both. Therefore, if a registered person has collected tax on any of the situation mentioned in the above two provision say for e.g. levied tax @ 12% on goods which are absolutely exempted form levy of tax, then it would be treated that he has not collected tax in accordance with the provisions of the Statute and has committed an offence as per the provisions of Section 122(1)(iv) of CGST Act, 2017.
Thus, any unauthorised collection of tax by a taxable person i.e. a person who is registered or liable to be registered would be covered under the provision of Section 122(1)(iv) of CGST Act, 2017.
Condition-2-The person fails to the pay the amount so collected to the account of the Government beyond a period of three months from the date on which such payment becomes due.
Meaning of the tern “Fail”-As per Bouvier’s Law Dictionary, the term “fail” has been defined as “to leave unperformed”; to omit; to neglect; as distinguished from refuse, which latter involves an act of the will, while the former may be an act of inevitable necessity.
Failure beyond a period of three months from the date on which such payment becomes due-The failure to pay the tax collected should be for a period beyond three months from the date on which such payment becomes due. The question is when the amount becomes due.
For registered person, whether amount so collected in contravention of the provisions of the Act becomes due to be paid from the date when GSTR-3B is required to be filed or since it is unauthorized collection therefore, it becomes due from the date when it was collected. There is no clarity in this respect, however the amount which is collected in excess of the amount which could have been legally collected, it should become due from the date when it was collected in contravention of the provisions of the Act and rest of the amount which is collected in accordance of the provisions of the law should become due from the date when GSTR-3B was required to be filed.
Further since the provision of Section 122 are also applicable on person who is liable to be registered but not registered, the issue would be when such tax becomes due for them whether it becomes due from the day when it was collected since he is not required to file return under section 39 and entire amount collected by him is unauthorized collection. There again seems to be lack of clarity in this respect but since the entire amount collected by way of tax by him is unauthorized collection and therefore it should become due from the date when it was collected.
A clarity in this regard by the Government would be welcome.
No intent to evade tax required to be proved for the purpose of arriving at the conclusion that whether offence has been committed or not
The offence provided in the clause is for failure to pay the collected tax to the government beyond a period of three months from the date on which such payment becomes due. There is no intent of mens-rea being incorporated into the offence under Clause 122(1)(iv) and a simple failure to pay the tax might amount to offence under the clause without the intent to evade tax being there.
However, another important aspect would be quantifying the penalty. The clause itself might not have the intent to evade present at the time of identifying the offence but whether the quantification clause contains the provision of mens-rea or not is equally important to arrive at the amount of penalty. The manner of quantification of penalty would be discussed later on in the series of article.
The big question going around has been that what is the exact nature of services rendered by a director which are covered under Reverse Charge.
That the article restricts itself to the analyze the scope of the term “services supplied by the director” covers in its scope only such services which are related to manual, clerical, technical, supervisory or administrative work or it covers other services like personal guarantee wherein director pledges his credit and does not provide any manual, clerical or technical services..
At the outset, it would be worth to highlight that the provisions should be construed in context of other clauses to make consistent reading of the entire enactment. In this context, Hon’ble Apex Court in the matter of Padmausundara Rao (Dead) &Ors vs State Of T.N. & Ors on 13 March, 2002 emphasised that provision should be construed together and in context of statute and other clauses to make consistent reading of entire enactment. Relevant extract of judgement is as follows:
“for that purpose all the parts of a statute or section must be construed together and every clause of a section should be construed with reference to the context and other clauses thereof so that the construction to be put on a particular provision makes a consistent enactment of the whole statute.”
The relevant Entry in the Notification is being reproduced hereunder for ready reference as follows-
The relevant entry under Notification No. 13/2017-Central Tax (Rate) Dated 28th June 2017 reads as under:
S. No.
Category of Supply of Services
Supplier of service
Recipient of Service
6.
Services supplied by a director of a company or a body corporate to the said company or the body corporate.
A director of a company or a body corporate
The company or a body corporate located in the taxable territory.
The question is whether the term “services supplied by a director” as provided under Entry No. 6 covers only services provided by virtue of being a director or whether it covers all service provided since he is a director.
The question before Hon’ble Delhi High court in the matter of Suessen Textile Bearings Ltd. And … vs Union Of India And Ors. on 14 November, 1983 Equivalent citations: 1984 55 CompCas 492 Delhi, 1987 (12) DRJ 29, 1984 RLR 262 was
Having examined the nature of the contract of guarantee it requires to be determined whether the guarantee commission payable to a director for his having stood as a surety for the company, the principal debtor, is remuneration for services rendered by him for the Company within the meaning of Section 309 of the Act.
It was held by the Hon’ble Court that
Here the Company is in need of the finances. The financial institutions are not prepared to advance money on the credit of the Company. It agrees to advance the amount on the condition that the director/directors stand surety for the amount. In other words, it is prepared to advance the money and advances the money on the credit of the company plus the credit of the director/ directors. The directors thus assume the liability of the principal debtor which liability, as observed earlier, is co-extensive. He pledges his credit. The payment in consideration of the pledging of the credit or assuming the financial liability would not be remuneration paid for services rendered within the meaning of Section 309. A director by entering into a contract of guarantee does. not do any manual, clerical, technical, supervisory or administrative work. He gets the commission for the pledge of his credit and not for any services’ rendered. The guarantee commission payable to a director, therefore, is not remuneration for the services rendered and, consequently, no approval of the Board was required.
Similar ratio was held in the matter of India Jute Co. Ltd. vs Commissioner Of Income-Tax on 24 February, 1989 Equivalent citations: 1989 178 ITR 6 by Hon’ble Calcutta High Court.
That the difference between service provided as director and service provided for pledge of credit is pretty evident from the above decision. That the amount paid as guarantee commission is not amount paid as remuneration for services provided as director and director by entering into a contract of guarantee does not do any manual, clerical, technical, supervisory or administrative work. He gets the commission for the pledge of his credit and not for any services rendered of manual, clerical, technical, supervisory or administrative work.
Further, that scope of a similar entry pertaining to “Services supplied by a DSA” covers only scope of services provided as “DSA” and payment made as commission to them. If the intention of bring entry of DSA under RCM is limited only to the extent of commission payable to them for services rendered in the capacity of DSA then all similar entries referring to the services provided in a particular capacity should be restricted to services provided as such in that capacity and not to all services provided for which being a director or insurance agent or recovery agent or DSA was not at all necessary.
Thus on a combined reading of the notification and the relevant entry and surrounding similar entries to the entry for services provided by director, it pretty well seems that the intention for other similar entries in the notification is that amount paid for services provided by the person in the specific capacity as DSA, Insurance Agent are covered and not all services provided by such person, then the same principle should also be applied for the entry relating to the services provided by Director.
Therefore, in view of the author, only such amount which is paid for manual, clerical, technical, supervisory or administrative services should be covered under the liability for reverse charge and not amount for any other services which is not related to only manual, clerical, technical, supervisory or administrative services provided by the person as director.
Further similar articles on the applicability of reverse charge on services by director are as follows-
Today’s post would be covering discussion on Section 122(1)(ii) of CGST Act, 2017. The relevant clause read as under-
“(1) Where a taxable person who––
(ii) issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act or the rules made thereunder;
Meaning of the Word “Bill”
The clause contains the word “Invoice” or “bill”. The word invoice has been defined under the Statue but the term “bill” has not been defined under the Statute. Although the term “bill” has been used sparingly in the statute. Apart from being used in section 122, the term has also been used in 132(1)(b) and 132(1)(c) of the CGST Act, 2017. Although Section 132(1)(b) does not throw any light on the meaning of the term “bill”, however section 132(1)(c) throws some light.
Section 132 contains punishment for certain offences and amongst them one of offence is in cases wherein recipient claims input tax credit using invoice or bill which has been issued without supply of goods or service or both in violation of the provisions of this Act, or the rules made thereunder leading to wrongful availment or utilization of input tax credit or refund of tax. Therefore, it seems that by the use of the term “bill”, legislature is referring to the document on which Input Tax Credit can be claimed by the recipient. Thus, it seems that the word “bill” has been used as a synonym to the word “invoice”.
Issue of invoice without supply of goods or services or both
The offence specified in the section relates to issue of invoice or bill without supply of goods in violation of the provisions of CGST Act, 2017 or rules made thereunder. The offence for supply of goods without issue of invoice or against an incorrect or false invoice is covered under section 122(1)(i) of CGST Act, 2017. This provision covers where no supply has been made but invoice or bill has been issued without supply of goods in violation of the provisions of CGST Act, 2017 or rules made thereunder. For example, Mr. Y issued invoice to Mr. X without supply of goods or Mr. Y had supplied goods to Mr. “X” but invoice was issued in the name of Mr. “Z”.
It would be apt to highlight that for offence under this para to be applicable Issue of Invoice or bill should be without supply of goods or services or both. Therefore, in cases wherein supply of goods or services or both has been made against an incorrect or false invoice, then in such case present clause would not be applicable and it would fall under clause (1) of sub-section (1) of section 122 of CGST Act, 2017. For e.g. Mr. Y has supplied goods to Mr. X worth Rs 2 Lakh. However, Mr. Y issues invoice of Rs 4 Lakh to Mr X. In such case it’s a case of issue of false invoice falling under clause (i) of Section 122(1) of CGST Act, 2017 rather than in the present clause.
Further, the condition provides that issue of invoice without supply of goods or services or both should be in violation of the provisions of CGST Act, 2017 or the rules made thereunder. The conditions for issue of invoice have been provided under section 31 read with Rule 46 of the CGST Rules, 2017. For e.g. violation of condition of Section 31 takes place wherein invoice has been issued without supply of goods to the recipient as section 31 only mandates to issue invoice on making taxable supply of goods.
However, it would be pertinent to highlight that Section 31 allows issuance of invoice before the supply of goods or services or both. Thus, for cases wherein the invoice has been issued before the supply of goods or services or both but supply would be made later on, such cases would not fall within the ambit of issue of invoice without supply of goods or services both in violation of the provisions of CGST Act, 2017 or rules made thereunder. The cases which would be falling would be wherein the provisions are violated and invoice is issued by violating such provisions.
