Indirect Taxes | Explore the potential implications of the proposed changes in the tax system. Gain insights into the evolving landscape of tax system
Honorable FM, Madam Nirmala Sitharaman delivered her 5th Budget speech, even though she didn’t announce any change in GST or Customs in her speech other than decriminalization of certain actions and few rate changes in Customs, there are some very important and far-reaching amendments proposed in the budget. Please note, these proposed amendments, especially in GST will take time to see the light of the day, may take even a year or more to implement, as all states need to simultaneously adopt these amendments in their respective SGST laws and pass it in their legislative assemblies, hence these are just proposals as of now. Gist of these changes and our views on them is as under:
Changes in GST Law
1. A Person Who Has Opted for Composition Scheme Can Trade in Goods Through an E-commerce Operator.
A person who had opted to pay tax under Composition Scheme he was not eligible to do his business through an E-Commerce Operator like Amazon or Myntra. Section 10 is now proposed to be amended to facilitate such taxpayers whereby they can do business on such E-commerce Platforms. However, only persons engaged supply of Goods shall only be allowed to do so, supplier of services will not be allowed. Lastly all other conditions of composition scheme shall apply, accordingly a Composition taxpayer is not be allowed to sell goods outside his state, this restriction shall apply and E-commerce operator will have to ensure that the goods are not sold outside the State of such taxpayer.
2. Reversal of Itc on Account of Non-payment to the Supplier Within 180 Days
Section 16 is being amended to bring it in line with the return filing system. Where a recipient does not pay the Invoice value and GST thereon to the supplier within 180 days, he is required to reverse the ITC proportionate to such pending payment. Currently said ITC amount is required to be shown as Output Tax liability and paid along with Interest. In the proposed amendment, it will be shown as reversal of ITC in GSTR 3B and paid along with Interest.
Another amendment provides that the recipient will be eligible to re-avail such reversed ITC once the pending payment has been paid to the Supplier, currently the law is silent on the aspect of whom the payment is required to be made. This cleavage has been plugged.
3. Input Tax Credit Blockage
a) Section 17 provides mechanism to reverse credits which are used for effecting exempt supplies. Certain supplies mentioned in Schedule III are not required to be treated as Exempt supply for the purposes of restricting ITC, however, value sale of land, even though mentioned in Schedule III, was required to be considered. Now the value of exempt supply for the purpose of section 17(3) shall also include supply of warehoused goods to any person before clearance for home consumption as mentioned in clause 8 (a) of schedule III.
b) List of blocked credit in section 17(5) is set to further increase. ITC in respect of goods or services procured to fulfil obligations under Corporate Social Responsibility (CSR) as per section 135 of the Companies Act, 2013 is proposed to be blocked. There have been various opinions on this issue of whether ITC on CSR activities is available or not, many judgements given by AARs of Uttar Pradesh, Tamil Nādu etc have said that ITC on CSR shall be available whereas many AARs of Gujarat, Kerala etc have denied this credit. The Government thought it prudent to settle this controversy by bringing in a specific amendment to block such credits. This amendment shall entail the following:
- It is made clear that ITC on CSR activities will be disallowed from the date on which this amendment is notified (most probably after 9-10 from today)
- ITC on CSR activities which was routinely being disputed by the dept will get legitimised till this amendment is notified.
- ITC on CSR already reversed by taxpayers either voluntarily or under instruction of the department can be re-availed.
- Those tax payers which have chosen to not avail the ITC on CSR activities can re-avail the same keeping in mind the timelines prescribed under section 16.
It is a settled legal principle that right to avail Input Tax Credit is not a birth right, rather it is a statutory right enshrined in the GST law, hence the government of the day has the right to restrict such rights as they deem fit. By this amendment, controversy on eligibility of ITC on CSR activities will be laid to rest and unnecessary litigation on this issue will be avoided.
4. Registration Provisions Tweaked. [Section 23]
Section 23 provided that following person were exempt from taking registration under GST:
- Person engaged exclusively in the business of supplying exempted goods or services.
- Agriculturist, to the extent of supply of produce out of cultivation of land.
However, there was a conflict between section 22 and 24 which provided for mandatory registration for persons supplying goods or services. This anomaly is being removed by amending section 23 and making is independent of section 22 and 24, hence now the persons mentioned above will not be required to register even though if they are covered by section 24 for taking compulsory registration.
This amendment is proposed to be made effective retrospectively from 1.07.2017 onwards.
5. GST Returns Can Be Filed Up to 3 Years From the Due Date of That Return.
It is proposed that following GST Returns will now be allowed to be filed only up to 3 years from the due date of that return:
- GSTR 1
- GSTR 3B
- GSTR 9 and 9C (Annual Return and Reconciliation Statement)
- GSTR 8 (TCS by E-Commerce Operator)
6. Refund of Input Tax Credit
Section 54 currently provides that refund of ITC shall be given excluding the amount of input tax credit provisionally accepted. Said provision is now proposed to be amended to align the same with the present scheme of availment of self-assessed input tax credit by matching the credit availed in books with Form 2B. Accordingly ITC reflecting in GSTR 2B which is availed GSR 3B shall only be eligible for Refund.
7. Manner of Computation of Interest on Delayed Refunds
Section 56 currently provides that in cases of delayed refund, interest is payable from the end of 60th day from the date of receipt of refund application till the date of actual refund of such tax.
Now, Section 56 is proposed to be amended so as to provide for an enabling provision to prescribe manner, conditions and restrictions with respect of computation of interest. Once this provision becomes part of GST law and is notified, rules under this section will have to be further notified to provide for the exact mechanism of calculation of interest.
8. Penalty for E-commerce Operators
Section 122 is being amended to provide for penalty on E-Commerce operator of an amount of Rs. 10,000 or an amount equivalent to the amount of tax involved, whichever is higher in following contraventions:
- Allows a supply of taxable goods or services through it by an unregistered person.
- Allows an inter-State supply of goods or services by a Composition scheme taxpayer through it
- Fails to furnish the correct details in GSTR 8 of any outward supply of goods effected through it by a person exempted from obtaining registration under this Act,
9. Decriminalisation of certain offences
A) Following offences which are liable for prosecution in the current law have been decriminalised, in other words no prosecution will be launched in such cases:
- Obstructs or prevents any officer in the discharge of his duties under this Act.
- Tampers with or destroys any material evidence or documents.
However, in cases where any person falsifies or substitutes financial records or produces fake accounts or documents or furnishes any false information with an intention to evade payment of tax due under this Act shall be punishable by way of imprisonment for a term which may extend to 6 months.
B) Currently all offences listed in section 132 where the tax involved is between 1 crore to 2 crores are liable to prosecution and are punishable by way of imprisonment for a term which may extend to 1 year with fine. This provision is sought to be amended in this budget whereby only cases involving bogus invoicing would fall in this. Accordingly, cases involving issuance of invoices without any supply of goods or services where the tax involved is between 1 crore to 2 crores are liable to prosecution and are punishable by way of imprisonment for a term which may extend to 1 year with fine.
C) Rest all provisions remain same.
10. Compounding of Offences
A) Any offence under the GST, either before or after the institution of prosecution, may be compounded by the Commissioner on payment prescribed compounding amount. In other words, if any person accused of an offence which is liable for prosecution and imprisonment under the GST law can be let off if he agrees and pays the amount as ordered by the Commissioner by way of an order. Section 138 provides for minimum and maximum limit of compounding fee, which is sought to be amended as under:
|Minimum Compounding Fee||Rs. 10,000 or 50% of tax involved, whichever is higher.||25% of tax involved.|
|Maximum Limit||Rs. 30,000 or 100% of tax involved, whichever is higher.||100% of the tax involved|
B) Person involved in fake billing shall not be allowed to take the benefit of Compounding Scheme.
11. Sharing of Portal Information With Notified Systems
GST data uploaded by a taxpayer in during the process of applying for registration or filing of GST Returns or making E-way bill / E-invoices or any other data (as may be prescribed) shall be shared by GST portal with notified systems with the consent of supplier and recipient in the manner as may be prescribed.
12. Retrospective Effect (From 1.07.2017) Given to Certain Transactions Listed in Schedule III.
Following transaction which were listed in Schedule III as neither supply of goods nor supply of services from 1.02.2019 have been now made effective retrospectively from 1.07.2017:
- Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India
- Supply of warehoused goods to any person before clearance for home consumption.
- High Sea Sales
13. Change in Definition of Non-taxable Online Recipient
Currently the term “Non-taxable Online Recipient” (NTOR) means any Government, Local Authority, Government undertakings, Individuals and unregistered person located in India who avail Online Information and Database Access or Retrieval Services (OIDAR) where such services are used for non-commercial purposes. When an overseas entity supplies OIDAR services to NTOR then such Overseas Entity is liable to pay GST and not the recipient.
Hence, if any person listed above received OIDAR services for commercial purposes, then he would be liable to pay IGST thereon under RCM.
With the proposed amendment, the definition of NTOR is proposed to be amended whereby it shall include only Unregistered person and Entities who have taken compulsory registration for deducting GST TDS (which are mainly Governments and Government bodies) who receive OIDAR services whether for commercial or non-commercial purposes.
Hence, where an Overseas Entity provides OIDAR services to NTOR irrespective of its end use, the supplier (overseas entity) would be liable to pay GST.
14. Change in Definition of Online Information and Database Access or Retrieval Services (Oidar) Services.
Currently OIDAR means services whose delivery is mediated by information technology and where such supply is essentially automated and involving minimal human intervention and the supply is impossible in the absence of information technology.
This definition is proposed to be amended whereby OIDAR shall mean services whose delivery is mediated by information technology and the supply is impossible in the absence of information technology. The need for minimal human intervention is being removed, which shall mean that any service involving information or database access provided through the internet shall now be classified as OIDAR.
Earlier services like Online Astrology services, Online yoga classes, Online music classes and the likes were not classified as OIDAR because these involved considerable human intervention, now classification of such services shall become contentious especially if the service provider is located outside India.
15. Place of Supply in Case of Transportation of Goods [Section 12 (8) of IGST]
Proviso to Section 12(8) of the IGST Act which was inserted w.e.f. 01.02.2019, provides that where the transportation of goods is to a place outside India, the place of supply of the said service shall be the place of destination of such goods. Many issues with respect to this proviso were raised including eligibility of ITC to the recipient. All these issues were clarified vide circular 184/16/2022-GST dated 27.12.2022. As the said proviso created an anomaly whereby the place of supply ended up being in contravention of the main section, hence it is proposed to be deleted in this budget.
II. Changes in Customs Law
Changes in Customs Act shall become effective once the Finance Bill receives the assent of the President.
1. Time Limit of Exemption From Levy of Customs Duty
Section 25 of the Customs Act provides for mechanism for granting of exemption from levy of Customs Duty. Sub-section 4A thereof provides that where any exemption is granted under Section 25(1), such exemption shall be valid up to 31st March falling immediately after 2 years from the date of such exemption, unless anything to the contrary is notified.
An amendment is proposed in this sub-section whereby the above time restriction shall not apply in to exemptions granted in relation to:
- any multilateral or bilateral trade agreement;
- obligations under international agreements, treaties, conventions or such other obligations including with respect to United Nations agencies, diplomats and international organisations;
- privileges of constitutional authorities;
- schemes under the Foreign Trade Policy;
- the Central Government schemes having validity of more than two years;
- re-imports, temporary imports, goods imported as gifts or personal baggage;
- any duty of customs under any law for the time being in force, including integrated tax leviable under sub-section (7) of section 3 of the Customs Tariff Act,1975, other than duty of customs leviable under section 12.
2. Time Limit for Issuing Order by Settlement Commission is Prescribed.
Any person against whom any Show cause notice is issued, and which is pending before an adjudicating authority, can file an application with the Settlement Commission u/s 127B of the Customs Act. Vide this budget, it is proposed to prescribe a time limit for issuance of order by the Settlement commission, gist of this proposed amendment is as under:
- Settlement Commission is required to pass a final order within 9 months from the last day of the month in which the application was filed.
- Settlement Commission for reasons to be recorded in writing can extend the time limit for a period not exceeding 3 months. Hence, an order has to be issued in maximum 12 months from the last day of the month in which the application was filed.
- If, no order is passed within the said period, the settlement proceedings shall abate, and the adjudicating authority before whom the proceeding at the time of making the application was pending shall adjudicate the matter as if no application was made with the Settlement Commission.
- In respect of applications pending with the commission as on the date on which the Finance Bill, 2023 receives the assent of the President, the said period of 9 / 12 months shall be reckoned from the date on which the said Finance Bill receives the assent of the President.
This budget has come against a backdrop of an uncertain international economic outlook, entire US and Europe as well as China and South East Asian economies are facing inflationary pressures. India has proved to be a bright spot amongst the gloom all over, this budget promises to sustain the Capex momentum to sustain growth.
Amendments in GST with regards to disallowance of ITC for CSR activities are regressive in nature and could have been avoided. Decriminalisation of certain offences is a step in the right direction, overall the amendments are good but much more could have been delivered with respect to decrease in compliances and discretionary powers. Hope this idea dawns on someone somewhere, lower compliances and lesser intervention by the department (other than fake invoicing) can reap much bigger benefits in terms of quality of GST collection figures.