By G Gokul Kishore
The goods and services tax (GST) has brought perceptible change both in the way decisions are taken by the political leadership and implemented by the tax administration. Responsiveness is often cited as an attribute of the GST system that has attracted a word of praise from the stakeholders. The recent meeting of the GST Council proves this point, although certain pain points remain unaddressed.
Relaxation in credit availment
One of the significant decisions taken by the GST Council is the relaxation of time to avail input tax credit. Credit can be taken till April 20, 2019, with respect to invoices of FY18, and this means that industry will get six more months to take missed out credits. The current time limit for a particular financial year is the due date for filing September returns of the subsequent financial year. The period from July 2017 to March 2018 being the first year of the implementation of GST, in a large number of instances validly earned credits were lost due to various reasons. This measure may translate into some revenue loss. When the entire system is new and the taxpayers are still facing a lot of challenges, such extension is rather necessary.
Central authority for advance rulings
The interpretation of the law adopted and the rulings issued by the Authority for Advance Rulings (AAR) in various states are divergent. Such rulings are binding on the taxpayer who files the application and the jurisdictional officer. If a taxpayer has sought ruling in multiple states and the rulings are divergent, business decisions go awry. The problem gets compounded when the higher appellate authority for such advance rulings—also a state-level authority—affirms the view taken by the AAR.
Recently, the Karnataka AAR ruled that IIM Bangalore would not be entitled to exemption to certain programmes offered by it, while the AAR in West Bengal ruled in favour of IIM Calcutta on the same question. The issue of GST treatment of solar power projects is another case where the advance rulings could not offer any guidance to the industry. In certain cases, such projects are treated as works contract liable to GST of 18% on the entire project cost. If separate contracts exist for supply of goods and that of services, then tax treatment varies. Lack of certainty on the tax rate applicable on such contracts has impacted the industry adversely, rendering such projects unviable.
This issue of conflicting rulings by the AARs has now been taken care of by the GST Council, by proposing an amendment to the Central Goods and Services Tax (CGST) Act and the State Goods and Services Tax (SGST) Acts to create a centralised appellate authority for advance rulings. In these early years of GST when there is no jurisprudence, advance rulings offer a glimpse of both the department’s perspective and legal interpretation of the provisions.
The GST Council has decided to widen and clarify exemption to IIMs. Solar power generators will get positively impacted in view of notional basis to be provided for value of goods and that of services. Such measures are timely and should provide necessary relief to impacted sectors.
Anti-profiteering: Game sans rules
Certain issues troubling the industry await the GST Council’s attention. The first one is anti-profiteering. To check spurt in inflation post-GST, Section 171 of the CGST Act was brought, requiring companies to reduce price if there is a GST rate reduction or increase in availability of credits. The National Anti-profiteering Authority (NAA) has held, in many orders, industry as guilty of profiteering out of GST benefits. The authority has not accepted the reasons advanced by the industry for not effecting price reduction from day-one on all products.
Pricing is a complex function involving several factors. Absence of statutorily prescribed methodology has led to adoption of various methods by industry, such as increase in quantity, additional discounts, etc. All these are generally rejected by the NAA. With no appellate remedy against the NAA’s orders, industry is compelled to approach High Courts to invoke writ jurisdiction.
The GST Council should, in its next meeting in January 2019, approve certain methodology and norms to enable the industry to comply with the anti-profiteering provision in a manner the government expects them to.
Treating employee cost as taxable
The next issue requiring redressal is GST on shared intra-company cost. Registration under GST—an entity operating from multiple states is required to get itself registered in all such states from where it supplies goods or services. Such different registrations of the same company are termed as distinct persons. As per Schedule I to the CGST Act, supply of goods or services between distinct persons is chargeable to GST even if no consideration is involved. An establishment like a head office of an entity supports other offices or branches located in different states. As per the GST law, such support is a supply of service between distinct persons and, therefore, liable to GST.
The office or branch in a different state will take credit of tax paid and, therefore, except certain liquidity issues, such tax payment may not result in undue burden. However, the issue becomes complicated when one computes the taxable value or the base for computing tax payable. The tax authorities have adopted the position that even salary cost of employees in head offices need to be included in this value for payment of tax. The AAR Karnataka, in a recent ruling, affirmed such stand of the department.
Valuation in case of cross-charging, as this practice is called, is an expedition in non-chartered territory for both the tax department and the taxpayer. Rules provide for reckoning open market value. When supplies are between related or distinct persons, value declared in the invoice is deemed as open market value. But the issue of the items requiring inclusion or exclusion in such intra-company transactions is left open. No employee is an exclusive resource of a particular office but is an employee of the company as a whole. To seek tax on salary cost cannot be the intention of law.
The GST Council should approve issuance of appropriate guidelines based on cost accounting principles to provide clarity and certainty. Left unaddressed, this issue will result in demand notices involving huge sums.
(The author is an advocate. Views are personal)