Mumbai: In light of the recent re-election of the Narendra Modi administration, the Hotel and Restaurant Association of Western India (HRAWI) has called for a critical reassessment of the Goods and Services Tax (GST) framework currently governing food and beverages in hotel-based restaurants, which is presently contingent upon room tariffs exceeding Rs. 7500.
HRAWI has passionately advocated for the implementation of a standardized GST rate across all dining establishments, whether they are housed within hotels or operate independently, to eradicate inconsistencies and promote fairness.
The association’s recommendation is to decouple the GST rates from room tariffs, a move aimed at fostering equitable competition and bolstering the long-term viability of the hospitality sector.
“We extend our heartfelt congratulations to the newly elected Union Government and remain hopeful about the burgeoning prospects for the tourism and hospitality sectors. With strategic policies and focused efforts, India stands on the brink of becoming a premier destination for both domestic and international tourists, thereby significantly bolstering the nation’s economic advancement,” stated Pradeep Shetty, President of HRAWI.
Shetty further implored the government to streamline regulatory frameworks to enhance the Ease of Doing Business within the industry. He emphasized that simplifying the process for obtaining licenses, reducing bureaucratic red tape, and clarifying existing regulations are critical steps that would drive growth and innovation in the sector.
Reflecting on the previous tenure of the NDA government, Shetty noted its substantial emphasis on advancing tourism and its infrastructure. “Hotels and restaurants are pivotal to this development and require equal focus. Any disparity between the two sectors could hinder our goal of attracting 100 million tourists by 2047 and realizing a USD 3 trillion tourism economy. We urge the government to persist in its efforts to develop tourist circuits, heritage sites, and transportation networks to improve accessibility and enrich the visitor experience,” Shetty concluded.
In summary, the HRAWI’s appeal underscores the necessity for a holistic and fair approach to GST structuring, regulatory reform, and infrastructural development to propel India’s tourism and hospitality industries towards unprecedented growth and success.
The advent of the Goods and Services Tax (GST) in India marks a pivotal transformation in the nation’s indirect tax structure, fostering a cohesive and streamlined market. Among the various sectors reshaped by GST, the realm of Online Information and Database Access or Retrieval (OIDAR) Services stands out due to its inherently digital nature and far-reaching impact.
OIDAR services encompass a broad spectrum of digital offerings, including online libraries, comprehensive databases, information retrieval systems, and access to diverse online content. These services, characterized by their automation and internet-based delivery, are indispensable for businesses and individuals in pursuit of timely and accurate information. The quintessential feature of OIDAR services lies in their digital format, enabling effortless cross-border dissemination without necessitating a physical presence within the consumer’s jurisdiction.
Since its inception under the erstwhile Service Tax regime, the concept of OIDAR services has sparked considerable debate. Initially, the scope of these services was relatively narrow, but the rapid evolution of the internet has significantly broadened their reach. This expansion underscored the necessity for a unified regulatory framework to govern and tax these services effectively, culminating in their incorporation under the GST regime.
To address this need, the Integrated Goods and Services Tax Act of 2017 (IGST Act, 2017) instituted specific provisions for the administration and collection of GST on OIDAR services. A comprehensive examination of these provisions is delineated below.
DEFINITION & SCOPE
Section 2(17) of the IGST Act, 2017 defines OIDAR services as:
“online information and database access or retrieval services” means services whose delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention and impossible to ensure in the absence of information technology and includes electronic services such as, –
(i)
advertising on the internet;
(ii)
providing cloud services;
(iii)
provision of e-books, movie, music, software and other intangibles through telecommunication networks or internet;
(iv)
providing data or information, retrievable or otherwise, to any person in electronic form through a computer network;
(v)
online supplies of digital content (movies, television shows, music and the like);
(vi)
digital data storage; and
(vii)
online gaming excluding the online money gaming as defined in clause (80B) of section 2 of the Central Goods and Services Tax Act, 2017 (12 of 2017);
(The strikethrough portion of the definition has been omitted by the Finance Act, 2023, effective from October 1, 2023.)
From the definition provided, it’s clear that OIDAR services encompass two main components: the meaning part and an illustrative list of transactions. These transactions include internet advertising, cloud services, online streaming services, and digital data storage services, among others. This clarity aids in understanding which services fall under OIDAR. However, for services not explicitly listed, taxpayers must rely on interpreting the meaning part of the OIDAR definition.
Before the amendment by the Finance Act, 2023, a critical requirement for qualifying as OIDAR services was that the service had to be “essentially automated and involving minimal human intervention.” The term “minimal human intervention” was not defined under GST Law, leaving ambiguity regarding the exact degree of human involvement needed to exclude a service from OIDAR classification.
This lack of clear guidance led to widespread uncertainty within the industry. To address this, the definition of OIDAR services was amended to eliminate such ambiguity. Following the amendment, the scope of taxable OIDAR services has significantly expanded. Now, it includes any services reliant on information technology and delivered over the internet or an electronic network, regardless of the level of human intervention involved.
Taxability of OIDAR Services
In the realm of Online Information Database Access and Retrieval (OIDAR) services, taxability hinges on the principle of destination-based tax, which mandates that tax revenue is allocated to the jurisdiction where the service is consumed. This ensures equitable distribution of tax revenues, benefiting the regions where the end-users are located, rather than where the service providers operate.
Both domestic and foreign providers delivering OIDAR services to Indian consumers fall under the ambit of GST. With an exception for e-books classified under Heading 9984, these services attract a standard GST rate of 18%. This rate aligns with the broader tax structure for goods and services in India, maintaining consistency and clarity for stakeholders.
The Integrated Goods and Services Tax (IGST) Act, 2017, under Section 14, stipulates the liability of non-taxable territory suppliers to remit tax when supplying OIDAR services to Non-Taxable Online Recipients (NTORs). Essentially, if a supplier from a non-taxable region provides OIDAR services to an NTOR, the onus to deposit IGST falls squarely on the supplier.
The term “NTOR” is specifically defined in Section 2(16) of the IGST Act, 2017. It encompasses unregistered individuals receiving OIDAR services in taxable territories, including entities registered solely for Tax Deduction at Source purposes (e.g., government departments, local authorities, and various government agencies). This definition clarifies that if the Indian recipient of OIDAR services is unregistered under GST or registered only for TDS purposes, the foreign service provider must remit IGST for the provided services.
Additionally, according to Notification No. 10/2017-Integrated Tax (Rate) dated 28-06-2017 (as amended), if any service is supplied by an entity in a non-taxable territory to any person (excluding NTORs) in a taxable territory, the GST liability under the Reverse Charge Mechanism (RCM) is triggered. This stipulates that the recipient of such services is responsible for depositing the applicable GST, ensuring compliance and proper tax collection within India’s jurisdiction.
When OIDAR services are provided by a foreign service provider to a registered recipient in India, the recipient is obligated to pay GST under the Reverse Charge Mechanism (RCM). This scenario is crucial in understanding the taxability framework for OIDAR services. Below is a concise summary:
Location of Supplier of OIDAR Services
Location of Recipient of OIDAR Services
Taxability
INDIA
INDIA
FORWARD CHARGE
OUTSIDE INDIA
INDIA (RECEPIENT IS NTOR)
FORWARD CHARGE
OUTSIDE INDIA
INDIA (RECEPIENT IS OTHER THAN NTOR)
REVERSE CHARGE
OUTSIDE INDIA
OUTSIDE INDIA
NO GST APPLICABLE
The table above highlights the diverse tax implications based on the geographical locations of both the service provider and the recipient. Understanding these nuances ensures compliance and optimizes financial operations within the OIDAR service landscape.
Place of supply
In the realm of OIDAR services, the determination of the place of supply for transactions between foreign service providers and recipients located in India is meticulously outlined by Section 13(12) of the IGST Act, 2017. According to this statutory provision, the location of the service recipient is pivotal in identifying the place of supply.
To elucidate, the Explanation to Section 13(12) delineates certain exceptions that, when met, mandate the place of supply as within the taxable territory. Crucially, if any two of these criteria are satisfied, the supply is deemed taxable within this jurisdiction. Noteworthy exceptions include scenarios where the recipient’s device IP address is situated within the taxable territory, or the billing address of the recipient falls within this domain. This precise legal framework ensures the accurate taxability of cross-border digital services, fortifying the integrity of the taxable territory.
Registration, Payment of Tax & Returns
Under the GST Law, it is imperative for all suppliers of Online Information Database Access and Retrieval (OIDAR) services, including foreign entities, to register for GST if they provide services to recipients in India. Domestic service providers are required to register once their Aggregate Turnover surpasses the designated threshold limit.
Notably, foreign service providers must secure GST registration regardless of turnover if supplying OIDAR services to unregistered recipients in India. This registration can be facilitated through the Simplified Registration Scheme by submitting FORM GST REG-10. If a foreign service provider supplies services to Non-Taxable Online Recipients (NTOR) through an intermediary, the intermediary must register for GST and remit the applicable Integrated Goods and Services Tax (IGST).
Additionally, if there is a representative in India acting on behalf of the foreign service provider, this representative must obtain GST registration and remit the necessary IGST. In the absence of a physical presence or representative in India, the foreign service provider is obligated to appoint an Indian representative for the purpose of IGST payment.
Foreign service providers registered as OIDAR Service Providers are not entitled to claim Input Tax Credit of GST. They must file a monthly return using Form GSTR-5A by the 20th of the following month, ensuring all GST liabilities for the return period are settled. Even if there is no business activity during a tax period, Form GSTR-5A must be filed as a Nil Return.
Conversely, Indian service providers with GST registration are required to file regular returns using Form GSTR-1 and Form GSTR-3B, adhering to the prescribed schedules and compliance mandates.
Significant Judgments on OIDAR Services within the GST Framework
Amogh Ramesh Bhatawadekar
In a pivotal ruling, the applicant, Amogh Ramesh Bhatawadekar, engaged in the provision of e-goods through “Online Gaming.” The process began with the applicant soliciting lists of digital products—predominantly online games—from various suppliers. These digital products were transmitted to the applicant via email or instant messaging services, followed by a payout. Subsequently, the received digital goods were evaluated and stored on cloud servers, ready for delivery to customers who visited the applicant’s website and made payments. Upon payment, the online games were delivered to the customer via email from the cloud server.
Initially, the applicant did not obtain a GSTIN, assuming these transactions to constitute the export of digital goods. However, the Authority for Advance Ruling clarified that the provision of online games or digital goods qualifies as a supply of service, not goods, and falls under the classification of Online Information Database Access and Retrieval (OIDAR) services. Consequently, the applicant is mandated to remit GST on the transactions involving the purchase and sale of these digital goods.
NCS Pearson Inc
In another crucial judgment, the GST Appellate Advance Ruling Authority addressed the nature of services provided by NCS Pearson Inc. The case pertained to the company’s administration of online tests, specifically Type-3 tests. The authority observed that these tests employed a system where the reliability was gauged based on the agreement among human raters. Although human scorers were involved to ensure the AES program’s reliability, the primary objective was to evaluate candidate performance using an automated system.
The Appellate Authority concluded that the human element’s role in assessing essay responses constituted “minimum human intervention.” This minimal human involvement satisfied the criteria for the service to be classified as OIDAR. Thus, the Type-3 test conducted by NCS Pearson Inc. was deemed to fall under the purview of OIDAR services, necessitating compliance with GST regulations.
These rulings underscore the nuanced interpretation of digital transactions within the GST regime, particularly the classification of services as OIDAR, and highlight the imperative for businesses to meticulously adhere to tax obligations.
Conclusion
The taxation landscape of OIDAR services introduces a multifaceted array of challenges that necessitate continuous vigilance and flexibility from the Government. The revised definition of OIDAR services encompasses a broad spectrum of applicability and interpretation, inevitably leading to potential disputes between taxpayers and Revenue Authorities. It is imperative that the Government provides further clarity on this matter to mitigate such disputes effectively.
Additionally, the legislative intent behind the specific GST Law provisions aims to track foreign entities supplying OIDAR services to NTOR. However, enforcing GST compliance among these foreign entities presents distinct challenges. Addressing these issues requires a blend of technological innovations and robust regulatory frameworks. Through diligent oversight and proactive regulation, the Government can fully leverage the revenue and economic growth potential inherent in OIDAR services.
The Goods and Services Tax (GST) stands as a landmark reform in India’s indirect tax framework, drawing from the global experience of over 160 countries that implemented similar taxes. Designed as a destination-based consumption tax, GST consolidated numerous central and state taxes with goals to improve tax efficiency, reduce price inflation, and stimulate GDP growth. However, despite these intentions, the states relinquished substantial taxing authority, raising concerns over fiscal autonomy. To mitigate this, a compensation mechanism guaranteed a 14% growth in GST revenue for the initial five years. As GST nears its seven-year mark, it is critical to assess its performance against its initial promises and chart the course for future reforms.
The early years of GST saw concerns over revenue performance, but recent figures post-Covid-19 recovery tell a different story. In FY24, monthly GST collections averaged ₹1.68 lakh crore with an 11.6% growth rate, peaking at ₹2.1 lakh crore in April 2024. However, when comparing pre-GST and post-GST periods, the increase in the tax base remains elusive. From 2012-2017, the taxes subsumed under GST averaged 6.13% of GDP, which declined to 5.65% during 2017-2023, excluding GST compensation cess.
State performance under GST has been uneven. In 16 of the 17 major states, GST’s share in Gross State Domestic Product (GSDP) decreased post-GST, with Jharkhand as the exception. Furthermore, 15 states saw a decline in GST’s contribution to their Own Tax Revenue (OTR), with Maharashtra and Tamil Nadu bucking this trend. These discrepancies necessitate a closer examination of the factors at play and highlight the need for targeted reforms.
One key issue is the complexity of the GST rate structure, which has hindered compliance and facilitated fraudulent claims for input tax credit. The equal division of total tax revenue between the Union and the states also needs re-evaluation, particularly concerning the operation of Integrated GST (IGST). Consumption-based states like Kerala have reported lower-than-expected revenue, with the IGST-SGST ratio remaining low at 1.2.
Reforming GST involves simplifying the rate structure. Former chief economic advisor Arvind Subramanian advocated for a three-rate system—18% standard, 10% lower, and 40% demerit rates. Post-compensation, integrating cesses into the normal rate structure is crucial to avoid revenue distortions. Vijay Kelkar, a principal architect of GST in India, suggested a single rate, noting that 80% of GST-implementing countries, including Singapore and Japan, use this approach to enhance compliance and reduce disputes.
While rate reform is essential, it must not compromise the country’s already low tax effort. Reforms should not exacerbate consumption inequality or fuel inflation, as these disproportionately affect the poor. Adopting reforms from countries with higher tax efforts and more homogeneous socio-economic structures requires careful consideration. Effective reforms need robust research, yet the availability of relevant data remains limited. Addressing these issues with comprehensive, data-driven strategies is vital for the continued evolution and success of GST in India.
The Imperative of Regulatory Clarity and GST Resolution
In the evolving landscape of the online gaming industry, regulatory clarity and Goods and Services Tax (GST) resolution emerge as paramount concerns for industry stakeholders. Until October of last year, online gaming firms were subjected to an 18% GST on platform fees—the commission charged from participants entering a game. The recent amendment by the GST Council has since raised this rate to 28% on the full face value or deposits made by participants, effective October 1, 2023.
Retrospective Taxation and Financial Pressures
The retrospective taxation issue remains a critical point of contention, with the government demanding over Rs 1.5 trillion in GST from gaming companies. This matter, pending before the Supreme Court, has left the industry in a state of financial uncertainty. Many companies, which once enjoyed healthy margins, are now grappling with negative margins due to the inability to pass the tax burden onto users.
Roland Landers, CEO of the All India Gaming Federation (AIGF), which represents prominent companies such as First Games and Mobile Premier League, emphasizes the need for stability. “Clarity on prospective taxation policies and the resolution of retrospective tax notices are crucial for restoring stability in the sector,” Landers asserts.
The Impact of Increased GST
Since the GST amendment, the government has reportedly collected around Rs 10,000 crore till May—a staggering 430% increase compared to pre-amendment collections. However, this increased taxation has directed 40-75% of gaming companies’ revenues towards GST payments. The industry fears a wave of consolidations and potential shutdowns of smaller companies unable to sustain the financial pressure if current tax rates persist.
Strategies for Financial Sustainability
To navigate these challenges, gaming companies are exploring innovative strategies to enhance profitability. These include discouraging instant withdrawals and encouraging players to keep their GST bonuses within the system. Additionally, some companies are contemplating the introduction of payment gateway charges for small withdrawals. However, reducing marketing expenditures to improve margins could negatively impact the acquisition of new players, a crucial aspect of growth.
The Need for a Regulatory Framework
Beyond taxation, the industry is also advocating for a robust regulatory framework akin to the Securities and Exchange Board of India (SEBI). This includes a clear code of conduct, responsible gaming frameworks, player protection mechanisms, financial fraud prevention, and gaming certification protocols. Aruna Sharma, a policy advisor, highlights the necessity of recognizing self-regulatory organizations (SROs) and establishing parameters to distinguish games of skill from games of chance.
Optimism for Progressive Regulation
Anuraag Saxena, CEO of the E-Gaming Federation, underscores the need for a progressive regulatory framework to ensure the sustainability and safety of the burgeoning online gaming sector. “We are optimistic that the new government will foster an enabling environment through clarity around taxation and regulation,” Saxena states, advocating for measures that will support industry growth.
Recent Developments and Future Projections
The Ministry of Electronics and Information Technology (MeitY) amended the IT Rules in April 2023 to incorporate regulations for online gaming, specifically targeting games involving betting or wagering. However, implementation delays have persisted due to potential changes in the government’s stance on the SRO model.
Despite these challenges, the online gaming market has demonstrated robust growth. According to EY, the market grew at a compound annual growth rate (CAGR) of 28% from FY20-23 to Rs 16,428 crore and is projected to maintain a 15% CAGR till FY28. Nonetheless, the recent GST changes are expected to reduce the real money gaming segment’s market share from 84% in FY23 to 75.4% by FY28.
Conclusion
As the online gaming industry continues to expand, addressing regulatory and taxation challenges remains crucial for its sustainable growth. Clarity in regulatory frameworks and fair taxation policies will not only stabilize the industry but also foster innovation and consumer trust, ensuring a vibrant future for online gaming in India.
Officials from the Directorate General of GST Intelligence (DGGI) in Coimbatore have apprehended an individual involved in a massive fake input tax credit (ITC) scam. This person was found to have availed fake ITC amounting to ₹37.2 crore and further passed on ₹65.42 crore of fraudulent ITC.
In an official press release, the DGGI stated that they had carried out searches at the suspect’s residence and business premises on Wednesday after receiving intelligence reports. During these searches, officials seized a substantial amount of evidence, including 17 PAN cards, 20 Aadhaar cards, a weigh bridge printer, 21 bank passbooks, 41 cheque books, 16 firm seals, mobile phones, SIM cards, and debit cards.
Instant Flour Mixes and GST Classification The Gujarat Appellate Authority for Advance Ruling (GAAAR) recently clarified that instant flour mixes for dosa, idli, and khaman cannot be classified as chhatua or sattu. Consequently, these mixes are subject to an 18% GST.
Case Background Kitchen Express Overseas Ltd, based in Gujarat, contested the GST advance authority’s ruling. They argued that their seven types of instant flour mixes, which include gota, khaman, dalwada, dahi-wada, dhokla, idli, and dosa, are “ready to cook” rather than “ready to eat,” and should thus attract a 5% GST similar to sattu.
GAAAR’s Decision The GAAAR disagreed with Kitchen Express’s contention. They noted that the ingredients used in these instant flour mixes do not align with the GST rules applicable to sattu. According to a CBIC circular, only specific ingredients in small quantities qualify for a 5% GST rate when making sattu. The presence of additional spices and other ingredients in these instant mixes excluded them from this classification.
Expert Opinions Abhishek Jain, Indirect Tax Head & Partner at KPMG, highlighted that classification disputes are a frequent source of litigation under the GST framework. Despite existing circulars, varying interpretations often complicate these issues.
Rajat Mohan, Executive Director at Moore Singhi, affirmed the GAAAR’s decision. He stated that the significant inclusion of additives like sugar, salt, and spices in Kitchen Express’s products distinguishes them from simpler flours, which attract a lower GST rate of 5%.
Conclusion The GAAAR’s ruling emphasizes that the classification of instant flour mixes under GST is dependent on their composition. The presence of additional ingredients justifies a higher tax rate, underscoring the importance of adhering to specified ingredient lists for lower GST rates. This decision serves as a crucial reference for businesses dealing in similar products.
Virtual credit cards (VCCs) are revolutionizing digital transactions in India. Offering enhanced security for online purchases, VCCs serve as a digital counterpart to your physical credit card. Issued by banks, they provide a temporary card number linked to your actual credit card account, offering an additional layer of protection.
How to Obtain a Virtual Credit Card
To get a virtual credit card, you need an existing credit card or a bank account with a bank that provides VCC services. Many banks offer this option, and you can generate your virtual card through their online portal or mobile app.
Understanding the Temporary Card Number
Once created, your VCC will have a unique card number, CVV, and expiration date similar to a physical card. This number is temporary, usually valid for a single transaction or a short period, typically 24 to 48 hours.
Making Transactions
When shopping online, use the virtual card details instead of your real credit card information. The transaction amount is deducted from your linked credit card or bank account, keeping your main card details secure.
Key Security Features
Virtual credit cards offer significant security benefits. The temporary nature of the card number means that even if it is compromised, it cannot be used again. This greatly reduces the risk of unauthorized access to your main credit card account.
Benefits of a Virtual Credit Card
Enhanced Security: The primary benefit is added security. Since the card details are temporary, the risk of fraud is significantly minimized, which is ideal for frequent online shoppers.
Spending Control: Users can set transaction limits, helping manage spending and preventing overcharges.
Convenience: VCCs eliminate the need for carrying physical cards and allow instant generation of card details for online purchases.
Adhil Shetty, CEO of Bankbazaar.com, states, “Virtual credit cards provide an extra layer of privacy, ensuring your actual credit card details remain protected. They offer great control over your transactions for enhanced safety.”
Drawbacks of Virtual Credit Cards
Limited Usage: VCCs are primarily for online transactions and cannot be used in physical stores or for services requiring a physical card.
Validity Period: The temporary nature can be a hassle if multiple transactions are needed over a longer period, as new card details must be generated repeatedly.
Acceptance Issues: Not all online merchants accept VCCs, which can limit your purchasing options.
Should You Apply for a Virtual Credit Card?
Deciding to apply for a VCC depends on your online shopping habits and security priorities.
Frequent Online Shoppers: If you shop online often, a VCC provides significant security benefits and peace of mind.
Security-Conscious Users: For those who prioritize security and want to protect their primary credit card details, a VCC is a practical option.
Occasional Users: If you rarely shop online, the convenience and security of a VCC might still outweigh its temporary and limited usage.
Shetty further explains, “Virtual credit cards represent a significant advancement in digital payments, offering robust security features and convenience for online shoppers.”
Despite some limitations, the benefits of virtual credit cards often outweigh the drawbacks. They are a valuable tool for enhancing online transaction security. If you seek convenience and security without carrying a physical card, a virtual credit card can significantly improve your digital payment experience.
In January, Paytm faced a major setback when the Reserve Bank of India (RBI) ordered Paytm Payments Bank Ltd. (PPBL), its banking affiliate, to cease operations. This regulatory blow has significantly impacted Paytm, leading to a 55% drop in its shares. Furthermore, RBI mandated the removal of Renu Satti as the chief executive of PPBL, citing concerns about her leadership capabilities in the banking sector.
The regulatory challenges have taken a toll on Paytm’s position in the unified payments interface (UPI) market in India. Once a leader, Paytm’s market share has been declining for four consecutive months, dropping to 8.1% in May from 13% in January, as per data from the National Payments Corporation of India (NPCI).
UPI, managed by the NPCI, facilitates instant money transfers by linking banks with fintech apps like Paytm, PhonePe, and Google Pay. Despite the setback, the UPI network recorded a staggering 14.04 billion transactions in May, a 5.5% increase from the previous month. However, Paytm’s struggles have allowed competitors to gain ground, with PhonePe holding a dominant 49% share and Google Pay capturing 37%.
In response to the RBI’s order, Paytm’s founder and CEO, Vijay Shekhar Sharma, has sought to stabilize the company through strategic partnerships with top Indian lenders such as Axis Bank Ltd., HDFC Bank Ltd., and State Bank of India Ltd. These alliances aim to facilitate the instant money transfers that PPBL previously handled. Despite these efforts, the company acknowledges the financial impact of these disruptions. In the latest earnings filing, Sharma highlighted the anticipated short-term effects on Paytm’s revenue and profitability due to the regulatory challenges faced in Q4.
In a significant legal battle, M/S M. Trade Links brought forth a challenge against specific provisions of the Central Goods and Services Tax Act (CGST) and the State Goods and Services Tax Act (SGST) in the Kerala High Court. The core of the dispute centers on Sections 16(2)(c) and 16(4) of the CGST and SGST Acts, which stipulate the prerequisites for claiming Input Tax Credit (ITC).
M/S M. Trade Links argues that the current conditions under Section 16(2)(c) unfairly restrict the ability to avail ITC, creating undue hardships for businesses. Additionally, they contend that the retrospective application of Section 16(4) presents further complications and financial burdens. By challenging these provisions, they seek a more favorable interpretation that aligns with the broader goals of tax reform and business facilitation.
The Kerala High Court’s decision on this matter could have far-reaching implications, potentially reshaping the ITC landscape and providing much-needed clarity for businesses operating under the CGST and SGST frameworks. This case highlights the ongoing tension between tax authorities and businesses striving for a fair and equitable tax regime.
India introduced the GST regime to simplify indirect taxes, lessen cascading tax impacts, and unify the national market. The GST Council’s efforts, along with various amendments, have shaped the present tax structure. While the regime offers significant advantages, some provisions, notably those concerning Input Tax Credit (ITC), remain controversial.
Key Provisions in Question
Section 16(2)(c) of the Central GST Act, 2017, is crucial for taxpayers to understand. It mandates that a registered person can claim Input Tax Credit (ITC) only if the tax charged on the supply has been actually paid to the government by the supplier. This ensures that ITC claims are valid and that the tax cycle is complete and accurate. On the other hand, Section 16(4) sets a strict deadline for claiming ITC. It states that the ITC must be claimed by the earlier of two dates: the due date for filing the return for September of the following financial year or the date of filing the annual return. This provision ensures that ITC claims are timely and within the financial year’s purview.
Issue
The core of the issue was the petitioner’s challenge to the provisions of Sections 16(2)(c) and 16(4) of the Central GST Act, 2017. The petitioner contended that denying ITC based on the suppliers’ non-payment of GST was unfair and restrictive. This case underscored the ongoing debate over the balance between enforcing compliance and protecting taxpayer rights within the GST regime. The court’s ruling had significant implications for how ITC claims are managed and how taxpayers navigate compliance requirements.
Argument or Ground of Appeal by the Petitioner
The petitioner has put forward a compelling argument that denying Input Tax Credit (ITC) based on the suppliers’ failure to remit GST is fundamentally unfair, especially when the petitioner possesses valid tax invoices and has made the required payments. They assert that it is impractical for recipients to ensure their suppliers’ compliance with tax remittance.
01. Unfair Burden on Recipients
The core of the petitioners’ argument is the unfair burden placed on recipients. They argue that it is unjust to deny ITC to those who have fulfilled their tax obligations by paying their suppliers, simply because the suppliers did not remit the tax to the government. This policy forces recipients to monitor and enforce their suppliers’ compliance, which is unreasonable and impractical.
02. Violation of Constitutional Rights
Denying ITC due to supplier default is more than just unfair; it is also a violation of constitutional rights. Specifically, it infringes on Article 19(1)(g), which guarantees the right to practice any profession, trade, or business, and Article 14, which ensures the right to equality. This denial adversely affects business operations and undermines the right to property as protected under Article 300A of the Constitution of India.
03. Doctrine of Impossibility
The petitioner invokes the doctrine of impossibility, encapsulated in the maxim “lex non cogit ad impossibilia” (the law does not compel a person to do what is impossible). It is unreasonable to expect recipients to ensure their suppliers’ tax compliance, a task beyond their control and capability.
04. GSTR-2A and ITC Eligibility
Finally, the petitioners highlight issues with the GSTR-2A form, an auto-populated document that should not be the sole criterion for ITC eligibility. They argue that technical glitches or delays in updating this form should not affect the entitlement to ITC, emphasizing that reliance on a dynamic and sometimes flawed document is unjust.
Respondent’s Perspective on ITC Claims
The respondent asserted that claims for Input Tax Credit (ITC) should be valid only if the suppliers have actually paid the taxes to the government. This standpoint hinges on the principle that the law mandates recipients to ensure their suppliers’ compliance with tax payments. The argument emphasizes the responsibility of recipients to verify that their suppliers have fulfilled their tax obligations before claiming ITC.
Precedent Analysis
The petitioners brought forward Circular No.183/15/2022-GST along with a CBIC press release to emphasize that any discrepancies between GSTR-2A and GSTR-3B should not affect the entitlement to Input Tax Credit (ITC).
To bolster their argument, the petitioners cited several key cases:
Godrej & Boyce Manufacturing Company Pvt. Ltd. v. Commissioner of Sales Tax [(1992) 3 SCC 624]: This case examined tax credits as concessions, highlighting that these benefits are conditional.
Union of India v. VKC Footsteps (India) Pvt. Ltd. [(2022) 2 SCC 603]: This case tackled the issue of refunds for unutilized ITC, underlining the restrictive conditions imposed by GST laws.
Willowood Chemicals v. Union of India [2018 58 GSTR 310 (Guj)]: This judgment stressed that claims for tax credits must adhere to prescribed time limits to ensure no disruption to revenue.
By leveraging these precedents, the petitioners aimed to strengthen their position that discrepancies between GSTR-2A and GSTR-3B should not hinder ITC entitlement.
Court Judgment: A Landmark Ruling by the Kerala High Court
The Kerala High Court has delivered a significant ruling, emphasizing fairness in the GST regime. The court stated that it is unjust to deny Input Tax Credit (ITC) to genuine recipients simply because their suppliers did not comply with tax regulations. Instead, the court insisted that actions should target the defaulting suppliers, not the innocent recipients.
ITC as a Right
The court firmly recognized that ITC is a right for registered persons under GST, as long as they adhere to the Act’s conditions. This right should be upheld without unfairly shifting the compliance burden onto recipients.
Compliance Burden
The ruling highlighted that the compliance burden should not fall on the recipients who have already met their obligations by paying the necessary taxes to their suppliers. Penalizing these compliant recipients for the suppliers’ faults is inequitable.
Need for Equitable Measures
The judgment called for measures that ensure compliance without punishing bona fide recipients. It urged tax authorities to take stringent action against defaulting suppliers rather than denying ITC to those who have complied with their tax responsibilities.
The Kerala High Court’s decision addresses critical issues raised by the petitioners, emphasizing a fair and just tax system. The court underscored the importance of a balanced approach in implementing GST provisions, ensuring that genuine taxpayers are not unduly burdened by others’ defaults. This ruling aims to protect the constitutional rights of taxpayers while upholding the integrity of the GST framework.
The advent of a new coalition government has introduced complexities to the anticipated economic reform centered around GST rate rationalization. This pivotal reform faces potential delays, driven by concerns over inflationary impacts and the delicate balance of political interests. Nonetheless, a segment of experts maintains cautious optimism regarding the reform’s future.
Committee Dynamics
A seven-member committee, spearheaded by Suresh Kumar Khanna, the Finance Minister of Uttar Pradesh, has been meticulously analyzing the rationalization of rates for 1,200 categories of goods and services. Excluding those on the negative list, the committee’s findings will be scrutinized by the Fitment Committee. Subsequently, the GST Council will finalize recommendations, upon which the Centre and States, including three Union Territories with legislative assemblies, will issue official notifications.
Proposed Rate Adjustments
A significant proposal under consideration is the reduction of main GST rates from four to three. This adjustment could involve merging the 12% and 18% rates to form a 15% rate or combining the 5% and 12% rates to create an 8% rate. While some items may become more affordable, others would shift to higher tax brackets, potentially fueling inflation. This concern has previously deferred rationalization efforts, and experts now predict heightened challenges in implementing such changes.
Political Considerations
Prateek Bansal, Tax Partner at White and Brief, underscores the influence of political allies on the GST rate rationalization agenda. Despite the BJP-led NDA securing a majority in the Lok Sabha elections, the interests of coalition partners like JD(U) and TDP must be considered. This dynamic suggests that the GST rate adjustment may be deferred to avoid exacerbating inflationary pressures on various industries and the general populace.
Challenges and Uncertainties
Rajat Mohan, Executive Director (Indirect Tax) at Moore Singhi, highlights the intricate challenges posed by new political configurations. Political shifts can delay policy decisions, introduce legislative complexities, and amplify stakeholder pressures, thereby complicating the GST rate adjustment process. The interplay between taxation policy and evolving political landscapes adds layers of uncertainty to this endeavor.
Sector-Specific Impacts
Industries with lower tax rates, such as food, clothing, education, healthcare, agriculture, transportation, electricity, and water supply, are poised to exert significant pressure against rate increases. Given GST’s nature as a transactional tax, any rate changes will necessitate a market recalibration, leading to further uncertainty.
Optimistic Perspectives
Vivek Jalan, Partner at Tax Connect Advisory Services, presents a more optimistic view. With Odisha and Andhra Pradesh under BJP or its allies’ governance, the NDA’s enhanced voting power in the GST Council could expedite rate rationalization decisions. For instance, the long-pending request to reduce the GST rate for Fly Ash blocks might finally see progress, reflecting the NDA’s influence on the Council’s decisions.
Conclusion
The path to GST rate rationalization is fraught with economic, political, and sector-specific challenges. However, the evolving political landscape and strategic interests of coalition partners will significantly shape the trajectory of this critical reform. The discourse around GST rate adjustments continues to be a dynamic interplay of policy, politics, and economic imperatives, with potential implications for inflation and market stability.