GST Contemporary Issues in GST Integrity Knowledge Passion

GST – Contemporary Issues in GST Integrity | Knowledge | Passion

Agenda • • • Classification Valuation Input Tax Credit Anti – Profiteering Reconciliation Advance Ruling

Classification - Issues

Contracts for solar projects (1/5) Following renewable energy devices and parts for their manufacture 5% (a)Bio-gas plant (b)Solar power based devices (c)Solar power generating system (d)Wind mills, Wind Operated Electricity Generator (WOEG) (e)Waste to energy plants / devices (f)Solar lantern / solar lamp (g)Ocean waves/tidal waves energy devices/plants (h)Photo voltaic cells, whether or not assembled in modules or made up into panels

Contracts for solar projects (2/5) 1 2 3 Giriraj (AAR): Solar power generating system is immovable and hence works contract -18% Fermi (AAR): Works contract , even if separate contract for goods and services - 18% Dinesh Agrawal (AAR): Works contract-18%

Valuation of contracts for renewable energy devices (3/5) AMENDMENT: CGST Rate Notification No. 24/2018 Dated 31. 12. 2018: “Explanation: If the goods specified in this entry are supplied, by a supplier, along with supplies of other goods and services, one of which being a taxable service specified in the entry at S. No. 38 of the Table mentioned in the notification No. 11/2017 -Central Tax (Rate), dated 28 th June, 2017 [G. S. R. 690(E)], The value of supply of goods for the purposes of this entry shall be deemed as seventy per cent. of the gross

Valuation of contracts for renewable energy devices (4/5) AMENDMENT: CGST Rate Notification No. 27/2018 - Dated 31. 12. 2018: Entry inserted Service by way of construction or engineering or installation or other technical services, provided in relation of setting up of following: 18% a) b) c) d) Bio-gas plant Solar power based devices Solar power generating system Wind mills, Wind Operated Electricity Generator (WOEG) e) Waste to energy plants/devices f) Ocean waves/tidal waves energy devices/ plants “Explanation : - This entry shall be read in conjunction with serial number 234 of Schedule I of the notification No. 1/2017 -

Valuation of contracts for solar projects (5/5) • Amendments in Notification, contracts divided by legal fiction: - 70% as renewable energy devices and parts – 5% - 30% as services – 18% ISSUE: Is this valuation method compulsory ? Applicability on ongoing contracts?

Leasing or renting of goods (1/3) The United Nations Central Product Classification (UNCPC) has three clear buckets for services significantly involving goods: Heading 73: Leasing or rental services without operator Dry Lease Heading 66: Rental services of transport vehicles with operator Wet Lease Individual Headings - e. g. 86: support services to mining including operation of equipment on fee/ contract basis Supply of Service

Leasing or renting of goods (2/3) CGST Rate Notification: Heading 9966: Rental services of transport vehicles with or without operator Wet lease & Dry lease Heading 9973: Leasing or rental services with or without operator Wet lease & Dry lease Individual Headings - e. g. 9986: support services to mining including operation of equipment on fee/ contract basis Supply of service

Leasing or renting of goods (2/3) AMENDMENT: Ø Sub-entry (viia) inserted in Entry 17 (Heading 9973) of the CGST Rate Notification “Leasing or renting of goods” – Same rate as applicable to supply of goods Ø Residuary Entry – “Leasing or rental services, with or without operator, other than [preceding sub-entries]” – 18% ISSUE: Scope of the new entry Scope of the residuary entry post amendment

Leasing or renting of goods (3/3) POSSIBLE SCOPE OF NEW AND AMENDED ENTRY: Ø New entry applicable to leasing or renting of “goods”. Ø 18% for residuary entry – Other than goods, not covered elsewhere such as mining rights, royalty right set c. [held to be covered in 9973 by AAR ruling in Pioneer Engineers]

Parts of Motor Vehicle Entry No. 435 A of Schedule III – 18% 9401 (other than 94011000) - Seats (other than those of heading 9402), whether or not convertible into beds, and parts thereof, other than seats of a kind used for aircraft ; Entry No. 170 of Schedule IV – 28% 8708 – Parts and accessories of the motor vehicles of heading 8701 to 8705 (other than specified parts of tractors) Seat Adjuster Assembly Component whether part or accessory of motor vehicle or part of seat ? CCE v. Insulation Electrical Private Limited (SC) held that seats are complete without the adjuster. they are fitted in the motor vehicle merely to improve the efficiency and convenience of the seats, therefore, not classifiable as parts of seats under 9401.

Valuation : Issues

Valuation principle – “Transaction Value” � Value of taxable supply � � Transaction Value Price actually paid or payable Supplier and recipient of the supply are not related Price is the sole consideration for the supply

Trade Promotion Scheme � Types of Promotion Scheme � � Gifts Discounts & Marketing Schemes

Business Gifts � Schedule I - Activities treated as supply even if made without consideration � Permanent transfer or disposal of business assets where input tax credit has been availed � Section 17(5)(h) – ITC shall not be available in respect of goods disposed by way of gift or free sample • Calendar • Stationery • Display Boards • Physician samples • New products Whether gift and free samples will qualify as supply without consideration?

Discounts – Pre-supply � Discounts allowed on or before supply has been made � Duly recorded in invoice � Cash discounts Discount quantified on the basis of past performance whereas allowed as reduction in the subsequent invoices Ø Whether can be treated as discount allowed before supply has been made?

Discounts – Post-Supply � Discounts allowed after supply has been made � established as per agreement � known at or before the supply � specifically linked to invoice � Year end discount/ Turnover discount � Rate Difference Discount � Discounts given to T 1/ T 2 dealers %

Inclusions in Transaction Value Subsidy � Subsidies linked to supply � � � Grant/Subsidy affect price charged Sales Tax incentive schemes - Super Syncotex - 2014 301 ELT 273 (SC) Capital Investment incentives? Subsidy for electric vehicle? Subsidy given by brand owner to dealers/ retailer?

Input Tax Credit : Issues

ITC of renting of bus for employees Credit dependent on Seating capacity AC/Non. AC Recovery from employees (Transportation by non AC contract carriage exempted)

ITC of certain other goods/services Inward supply • Food & beverage • Outdoor Catering • Health services • Leasing of restricted vehicles Credit allowed: if ü Used for making outward taxable supply of same category; or ü As an element of taxable composite/mixed supply ü Obligatory for employer to provide goods/service to employee under any law

ITC of car for employees Recovery from employees Credit allowed No Recovery from employees Credit allowed if obligatory Hired Purchased Recovery from employees Credit allowed No Recovery from employees Credit not allowed even if obligatory

Canteen facility under factories act: ITC issues Outdoor catering service availed by company for providing canteen facility to employees: - Credit allowed? - Provision of food & beverage to employee: Whether statutorily required? Under Factories Act, canteen facility required for “workers” (Including contract labour). Under GST: credit allowed if facility required only for “employees” or contract labour also included? ? Provision of canteen facility in head office/to admin staff: Statutorily required? (Worker employed in work incidental to manufacturing process)

Goods lost, stolen, destroyed: ITC issues

Goods lost, stolen or destroyed: ITC on all input services barred? Input tax credit shall not be available in respect of : goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples Common Advertisement Services No specific exclusion in respect of any specific input service Whether reversal required if disposed of ?

Input Service Distribution Vs. Cross Charge

ISD Vs. Cross Charge : Concept Input Service Distributor : • Office of the supplier of goods/ services • Receives tax invoices towards the receipt of input services • Issues a prescribed document for distributing the credit to a supplier of taxable goods/services having same PAN ISD: Only an office, not providing any service to other registrations Distribution of credit under tax invoices issued by third parties Attributable ITC only to be Whether ISD is an alternative to Cross Charge: Supplies between distinct persons even without consideration: Deemed supply [Schedule I, Entry 2] Functions undertaken by Head Office/corporate office of entity: accounting, tax, finance, legal and HR Support service by Head Office Reverse situation: E. g: Service by R&D center to cross charge? manufacturing units

ISD Vs. Cross Charge : Issues • Cross charge: Whether applicable to 3 rd party services? • How to identify which 3 rd party services to cross charge? • Test to be applied: ISD Vs. Cross Charge • Typical services for which invoices are received at the HO: q Audit service

Cross Charge : Issues in valuation (1/3) • How to arrive at value for charging GST on support service? • Salary to be included in value of cross charge? • Impact of advance ruling in Columbia Asia [2018 -TIOL-113 -AAR-GST] upheld by Appellate authority [2018 -TIOL-31 -AAAR-GST] • Whether the ruling to the extent of valuation is applicable only where recipient registration is entitled to full ITC?

Cross Charge : Issues in valuation (2/3) • 2 cases: q Case-1: Recipient registration entitled to full ITC q Case-2: Recipient registration not entitled to full ITC • Eligibility to avail full ITC: How to decide? Qua the support service or at the recipient registration level?

Cross Charge : Issues in valuation (3/3) • Case-1: Adopt invoice value • Case-2: Valuation when recipient not entitled to ITC q Open market value q Value of like service q Cost based method (110% of cost of provision of service) q Reasonable means consistent with valuation principles • Salary: Part of cost of provision of service? • If salary included, accumulation of ITC

Anti - profiteering : Issues

Statutory provisions–section 171 of CGST Act, 2017 T e r m s U s e d Reduction in rate of tax Benefit of input tax credit Recipient Commensurate reduction in prices

Statutory framework Rule 133 of CGST Rules - National Anti-profiteering Authority (NAA) may order Ü Reduction in prices Ü Return to recipient amount equivalent to benefit not passed on with interest Ü Deposit amount Welfare Fund in Consumer

NAA order and appellate mechanism • Based on DGAP Report, determine the amount of profiteering • Directing DGAP to investigate for future period • Notice for levy of penalty • Appeal against NAA order? • No appellate mechanism prescribed • Writ petition before High Court – Which High Court has jurisdiction? • High Court dealing with submissions on facts and law in writ proceedings?

4 4 Commensurate reduction in prices & passing the benefits – Increase in quantity (additional grammage) Ü NAA’s Order in Sharma Trading (Para 19) § Quantity increased and same MRP charged after rate reduction § HELD: Distributor is not manufacturer and not in a position to enhance quantity § Contention on additional quantity not acceptable Ü NAA’s Order in HUL (Para 64 & 68) § Section 171 to be purposively construed - Due regard to be given to trade practices § Extra quantity for same price is benefit to consumers and can be a mode of passing the benefit § Deduction (in part) given as anti-profiteering measures incorporated in tax law for first time – In future, price to be

4 5 Passing the benefits – Discounts and distributors’ claims Ü NAA’s Order in HUL (Para 70) § Claims from distributors settled (credit notes) for differential price § HELD: Benefit to consumer not substantiated § No benefit to consumer till MRP revised on packs and bar codes changed Ü NAA’s Order Harish Bakers (Para 17) § Distributor extended discount to retailer § HELD: Benefit not passed on to customer § Retailer to pass on benefit whether or not discount given by distributor

4 6 Passing the benefits – Input tax credit Ü Ü NAA’s Order in Pyramid Infratech (Para 31 & 32) § ITC available to builders which was not available in pre-GST regime § Computation taking ratio of ITC to taxable turnover instead of cost of construction, correct § Benefit arising out of availability of ITC to be passed on NAA’s Order in Hardcastle Restaurant (Para 39) § Increase in base price by 12. 38% while ratio of ITC loss was 9. 11% § Increase exactly equal to tax reduction and effected on same night when tax rate was reduced

4 7 Passing the benefits – Increase in production cost Ü NAA’s Order in Hardcastle Restaurants (Para 34 & 41) § Increase in prices of food articles, electricity, fuel, rent, royalty & commission § No mandate for DGAP to consider such factors § Issues of market conditions, demand supply, rising input costs not required to be taken into account to determine profiteering Ü NAA’s Order in Pyramid Infratech (Para 33) § Provision for price escalation based on increase in price of raw material absent in agreement § Cost increase of raw material cannot be considered [ Recent Notification – Tax rate reduced to 5% without ITC for Residential Construction – Anti-profiteering? ]

4 8 Passing the benefits – Netting off between SKUs Ü NAA’s Order in HUL case (Para 67) § Additional benefit given to one recipient cannot be offset with denial of benefit to another recipient Ü Hardcastle Restaurants (Para 41) § Benefit to be passed on at product level as recipient in each supply different Ü Kunj Lub Marketing (Maggi) (Para 12) § Benefit given to one set of customers cannot be arbitrarily enhanced and set off against another - No such adjustments permissible under CGST Act Ü Jubilant Foodworks (Para 57)

4 9 Price control or price regulation? – Certain questions Ü NAA Orders directing DGAP investigation till date / future period – How long one needs to pass on? Ü Whether a company is not entitled to any price increase? Ü NAA Orders rejecting contention on absence of methodology – Is this sustainable? Ü Can reduction of losses be held as profiteering? Ü Can NAA order compliance with Legal Metrology provisions?

Reconciliation : Issues

Legal provisions & requirement Section 35(5): Requirement to get accounts and other records audited by a CA/CWA if turnover during a financial year exceeds prescribed limit. Reconciliation & Audit Section 44(2): A reconciliation statement to be furnished along with annual return for the registered person required to get the accounts audited. Annual Return Section 44(1): A registered person is required to furnish an annual return. Legal Provisions Annual Return and Audit Report to be furnished on or before 30. 06. 2019 for the FY 2017 -18. Due Date

Reasons for non matching of taxable turnover

Reasons for mismatch Reported in Financial turnover but not in GST Returns Reported in GST return but not in financial • Commercial Credit note • Cross Charge of services • Miscellaneous incomes like liquidated damages, recovery from employees, etc. • Stock transfer of goods • Over reporting in GST returns and not adjusted till date • ITC reversal shown as turnover in GSTR 3 B • Under reporting in GST returns • GST Credit note – ITC taken instead of adjustments Miscellaneous • Foreign exchange rate fluctuation • Valuation issues – third party consideration • Second hand goods – GST on Margin

Auditor’s responsibility Difference of opinion between registered person and auditor for: a) GST rate on goods or services. (e. g. Solar Power Supplies 5% vs 18%) b) RCM applicability. (Purchase of goods from unregistered person till 13. 10. 2017) c) Taxability - Notice pay / Liquidated damages

Possible actions against assessee • Scrutiny of Return by proper officer (Section 61) • Audit by tax authorities (Section 65 and 66) • Demands and Section 74) recovery (Section • Penalty (Section 122) • Prosecution (Section 132) Note: Nodal Officer (GST) can also have access to assesse’s data/information furnished to specified Income Tax Authority 73 and

Possible actions against auditors • Penalty upto Rs 25, 000 for aiding and abetting of offences Section 122(3) of CGST Act) • Prosecution for aiding and abetting offences (Section 132 of the CGST Act) • Professional Misconduct (CA Act) of

Prosecution • Offences specified • Certain offences made cognizable and non-bailable – 5 crore and above: – Supply goods or services in violation of provisions of Act with intent to evade tax – Issue invoice or bill without supply of goods or services leading to wrongful availment/utilization of credit – Avail input tax credit using invoice referred in (b) above – Collects any amount as tax but fails to pay the same to the Government beyond a period of three months from the date on which such payment becomes due Tax amount involved 100 -200 lakhs 200 -500 lakhs Above 500 lakhs Imprisonment Upto 1 year Upto 3 years Upto 5 year Fine Yes Yes

Advance Ruling : Issues

Advance Ruling • Meaning: A decision provided by the Authority or the Appellate Authority to an applicant on matters relating to any supply being undertaken or proposed to be undertaken • Applicant: Any registered person, or one desirous of obtaining registration under this Act • Constitution: To be constituted under the SGST and UGST Acts and shall comprise of: – One member each from Officers of Central and State Tax. • Orders of Advance Ruling: – Binding on the Applicant and Concerned / Jurisdictional Officer – Orders Appealable before Appellate Authority within 30 days of receipt (extendable to further 30 days)

Advance Ruling • Issues eligible for Advance Ruling Classificati on Applicabilit y of Notification Liability to pay tax Time and value of supply Requirement of registration Admissibilit y of ITC Qualificatio n as ‘supply’

Updates AARs have been constituted in every state. More than 450 rulings have been issued and reported as on date 1 2 3 Appellate Authority for Advanced Ruling – constituted in 18 states and 66 orders have been passed till date Proposal for centralized AAR or 4 regional AARs to avoid divergent rulings on identical issues

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