87. GST Law Amendment w.e.f. 1.2.2019

 Introduction:

28th GST Council meeting dated 21st July 2018 had recommended various changes in the GST Law consequent to which certain amendments in the Act were proposed. The amendments were passed by the Parliament and State Legislative Assemblies and has been made effective w.e.f. 1.2.2019. Some of the amendments have been given to retrospective effect while other have been made effective prospectively. However, some amendments have still not been made effective and therefore the same would be effective from a further date to be notified in this regard. 

 Several Notifications and circulars have been issued between 29th January 2019 to 1st February 2019 in line with the amendments which are tabulated below for easy reference.

 EXECUTIVE SUMMARY

 DETAILED DISCUSSION OF AMENDMENTS IN CGST ACT & SGST ACT

A. Scope of the term Supply

1. Section 7 of the Act which defines the term ‘supply’ has been amended to clarify the scope of supply (To be effective from July 1, 2017)

Schedule II of CGST Act provides list of certain transactions which shall be regarded either as supply of goods or supply of services. The reference of Schedule II was made earlier in section 7 (1) which was resulting in defining the meaning of “supply”. Accordingly, certain transactions were coming within ambit of supply by virtue of reference of Schedule II in the definition of “supply”. Hence a consequential amendment has been made here stating that certain activities or transactions, when constituting a supply in accordance with the provisions of subsection (1), shall be treated either as supply of goods or supply of services as referred to in Schedule II.

H&A Comments: The amendment has rectified the anomaly by providing that merely coverage of a transaction in Schedule II will not make it supply. First, it has to satisfy the test of ‘supply’ within clause (a) to (c) of section 7 (1). Having done so, reference would be made to Schedule II to determine as to whether it ‘supply of goods’ or ‘supply of services’. The amendment would require reconsideration of tax position taken on many transactions especially on the activities which have been considered as taxable under the entry “agreeing to obligation to refrain from an act or to tolerate an act or a situation or to do an act”.  

B. New Additions to Schedule III of the CGST Act

2. Transactions to be treated as no supply under Schedule III (To be effective from Feb 1, 2019)

 The following transactions to be treated as no supply (no tax payable) under Schedule III:

a. 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;

b. Supply of warehoused goods to any person before clearance for home consumption; and

c. Supply of goods in case of high sea sales.

 H&A Comments: The recommendation is sought to exclude from the tax net such transactions which involve movement of goods, caused by a registered person, from one non-taxable territory to another non-taxable territory.

 Further, in case of high sea sales and sale of warehoused goods, there was ambiguity as to levy of tax which was clarified by the circulars. Now it has been made as part of the Act itself by providing that such transaction shall be out of the Scope of Supply.   However, it is relevant to note that this is applicable only for goods and not for services. Though there is no specific mention as to the effective date of the amendment but in view of the circulars issued in the past where it has been held that such transactions are not exigible to GST, a view could be that the insertion in the entry is also retrospective.  

C. Composition Scheme

3. Supply of services (other than restaurant services) to be allowed to Composition Scheme Dealers (To be effective from Feb 1, 2019)

Composition dealers to be allowed to supply services (other than restaurant services), for upto a value not exceeding 10% of turnover in the State in the preceding financial year or Rs. 5 lakhs, whichever is higher.

H&A Comments: At present, registered persons engaged in the supply of services (other than restaurant services) are not eligible for composition scheme. As a result, manufacturers and traders supplying services were not able to opt for the scheme even if its percentage is very small as compared to the supplies of goods. With a view to enable these taxpayers to avail of the benefit of composition scheme, a new proviso is being added in order to allow them to be eligible for the scheme even if they supply services of value not exceeding 10% of the turnover in the preceding financial year in a State/Union territory or Rs. 5 lakhs, whichever is higher. This is a taxpayerfriendly measure and it is believed that small taxpayers would immensely benefit from this amendment. The limit is not applicable for restaurant services. However, the recipient of services from such dealers will face blockage of ITC credit which was available until now.  

4. Increase in turnover limit for composition scheme (To be effective from Feb 1, 2019) 

The upper limit of turnover for eligibility to opt for composition scheme is increased from Rs. 1 Crore to Rs. 1.5 Crore. Present limit of turnover can now be raised on the recommendations of the Council.

H&A Comments: The same was also recommended as per 23rd GST Council Meeting held on 10th Nov 2017, however no amendment to the act was done with respect to this recommendation of the council. By virtue of this amendment in the Act the power has been given to the Council to raise the threshold limit to Rs.1.5 Cr. However, it is important to note that the current threshold limit continues to remain at Rs.1 Cr to opt for the composition scheme. In the recent 32nd GST Council meet it has been recommended to increase such threshold limit to Rs.1.5 Cr w.e.f 1st April’19, however no notification to this effect has been issued by the Government.  

5. Rate of tax for taxpayers registered under composition levy (To be effective from Feb 1, 2019) 

Notification No. 8/2017 has been amended to provide that the rates at which the taxpayer registered under composition scheme will be in accordance with Rule 7 of the CGST Rules, 2017. Further, vide Notification No. 3/2019 – central tax, Rule 7 of the CGST Rules have been amended to provide that the tax payable by supplier eligible for composition scheme shall be at the rate of 0.5 percent of the turnover of taxable supplies of goods and services in the state.

H&A Comments: The said changes have been made to bring the Rule 7 in line with the newly added proviso to section 10 which allows a composition dealer in goods to supply services up to a specified limit. Hence, while calculating the turnover for payment of tax, turnover of goods as well as services will have to be now considered.   

D. Reverse Charge 

6. Levy of GST under RCM on account of inward supplies from URD to be restricted (To be effective from Feb 1, 2019)

Levy of GST on reverse charge mechanism on receipt of supplies from unregistered suppliers, to be applicable to only specified goods or services. Such goods or services would be notified based on the recommendations of the GST Council.

H&A Comments: Reverse charge liability on the supply received from unregistered person has always been compliance nightmare for the registered persons.. This amendment in the section to provide that not all inward supply from unregistered persons would be liable to RCM. It would be confined only to:

• A class of registered persons (meaning thereby it would not be applicable to all registered persons but would be applicable only to specified class)

• Specified categories of goods or services (means all goods or services not covered. Only specified goods or services would be covered)

The Government has already deferred the applicability of RCM till September 2019 However, this notification has also now been rescinded (vide notification no. 1/2019 – Central Tax (rate), since the relevance of reverse charge on unregistered purchases is no more applicable therefore the notification to defer reverse charge on the same becomes null. Hence, going forward reverse charge u/s 9(4) would be applicable only on those classes of registered persons as the Government would notify. Nothing has been notified in this regard till now.

Note: Similar amendment made under section 5(4) of the IGST Act and similar notifications under IGST Act has also been issued.  

E.Time of Supply

7. Determination of time of supply on the basis of tax invoice – scope of tax invoice expanded (To be effective from Feb 1, 2019)

Section 12 and 13 have been amended to provide that the date of issue of invoice by the supplier to be the last date on which he was required, under section 31, to issue invoice with respect of supply.

H&A Comments: Earlier the provision was restrictive in so much so that the invoices issued under sub section (4) and (5) of section 31 for continuous supply of goods or services respectively was not linked to for the purpose in the scope of determination of time of supply. The anomaly has now been corrected.  

F. Input Tax Credit

8. Deeming provision extended to Services as well for “Bill To - Ship To” transactions (To be effective from Feb 1, 2019)

 Explanation to Section 16(2) has been amended as follows: 

For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services––

(i) Where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

(ii) Where the services are provided by the supplier to any person on the direction of and on account of such registered person. 

H&A Comments: One of the conditions for availing of credit by the registered person under the Act is the receipt of goods or services by him. In the case of “bill-to-ship-to” situations, for the purposes of availing of ITC on goods by the registered person, a deeming provision is present for goods. By virtue of this deeming provision, the registered person was deemed to have received the goods, even when the same were delivered to any other person. 

By virtue of this amendment, the above deeming fiction is now being provided for services as well. Hence, if the services are contractually agreed to by head office but services are physically rendered to the branch office, the vendor may be asked to raise invoice “bill to” head office and “hip to” branch office. The head office can take the ITC based on the such invoice.   

9. Scope of eligibility of Input tax credit amended (To be effective from Feb 1, 2019) 

Scope of input tax credit is being widened, and it would now be made available in respect of the following transactions:

Amendment related to MOTOR VEHICLES

H&A Comments: The scope of ITC has been expanded in case of motor vehicles having approved capacity of not more than 13 persons (including the driver) in case it is used for specified purposes. The amendment is sought to make it clear that input tax credit would now be available in respect of dumpers, work-trucks, fork-lift trucks and other special purpose motor vehicles. Now, input tax credit would be denied only in respect of motor vehicles for transport of persons having approved seating capacity of not more than 13 persons (including the driver), vessels and aircraft except when used in the similar line of business. 

An amendment is also being made to the effect that ITC will not be denied in respect of motor vehicles if they are used for transportation of money for or by a banking company or a financial institution. 

? Services of general insurance, repair and maintenance in respect of motor vehicles, vessels and aircraft on which credit is available (To be effective from Feb 1, 2019):

Credit on above services would be eligible in below cases only:

• Where availed in relation to the vehicles which fall within eligible category discussed as per above table. 

•  Received by manufacturer of such motor vehicles, vessels or aircrafts

•  Received by a taxable person engaged in the supply of general insurance services in respect of such motor vehicles, vessels or aircrafts insured by him

ITC on these services will not be available in all other cases.

H&A Comments: There were different interpretations on eligibility of input tax credit on these expenses, therefore by virtue of this amendment such disputes and differential interpretation is put to rest. However, considering this amendment department may raise disputes even on the credits taken for the period prior

01.02.2019 which could lead to unnecessary litigation.   

?  Leasing, renting or hiring of motor vehicles, vessels or aircraft (To be effective from Feb 1, 2019)

ITC on leasing, renting or hiring of motor vehicles, vessels or aircraft would be admissible in following cases:

• When used for the purpose specified in Table above

•  Where inward supply of such service is used by the registered person for making an outward taxable supply of same categories of goods or services

• When inward supply of such service is used by the registered person for making as an element of a taxable composite or mixed supply

• Where it is obligatory for an employer to provide such services to its employees under any other law time being in force

• Where such services are availed in respect of motor vehicles where credit on such vehicles are allowed without any restriction as mentioned in table above

H&A Comments: Even in this case, there were different interpretations on eligibility of input tax credit on these expenses, therefore by virtue of this amendment such disputes and differential interpretation is put to rest. However, considering this amendment department may raise disputes on the credits taken for the period prior 01.02.2019 which could lead to unnecessary litigation.  

?             Employee welfare related goods or services or both (To be effective from

Feb 1, 2019)

Credit on employee welfare related goods or services or both shall be available as per below:

H&A Comments: This is a taxpayer-friendly amendment. Presently, in accordance with the provisions of section 17(5)(b), ITC is not available in respect of food and beverages, health services, travel benefits to employees etc. This sub-section is being amended to allow ITC in respect of such goods or services or both where the provision of such goods or services or both is obligatory for an employer to provide to its employees under any law for the time being in force.   

10.Input tax reversal not required on transactions covered in Schedule III (To be effective from Feb 1, 2019)

Explanation has been inserted in section 17 (3) to the GST Act to state that if a person is engaged in taxable supplies as well as transactions covered in Schedule III (not treated as supply), there is no need of reversal of input tax credits to the extent it pertains to transactions covered in Schedule III (high sea sale, international merchanting transactions, supply in bonded warehouse, transaction in actionable claim etc.). However, reversal would be required attributable to transaction covered in schedule III which are in the nature of sale of land or building (sold after occupation).

H&A Comments:  There were some advance ruling where it has been held that sale of goods under high sea sales are non taxable supply (covered under exempt supply) and hence there is need for reversal of common credits. However, that may not be intention of the law as these transactions are out of the scope of supply. Accordingly, the amendment has provided that there is no requirement of reversal of ITC on attributable to the turnover of these out of the scope of supply transactions.  

11. Amendment in determination of value of turnover for the purpose of distribution of ISD credit (To be effective from Feb 1, 2019)

Earlier, determination of “turnover” for the purpose of distribution of Input service by the Input service distributor did not include any duty or tax levied under entry 84 of List I of the Seventh Schedule to the Constitution and entries 51 and 54 of List II of the said Schedule. This explanation has been amended to exclude the amount of tax levied under entry 92A of List 1 also i.e. CST leviable on the goods which are outside the scope of GST. 

Further, consequential amendment is also made in explanation to Rule 42(1)(i) and Rule 43 (1)(g) to provide for the same.

H&A Comments: The impact of this amendment would be that all type of taxes

(central excise duty, VAT or CST) levied on the goods which are outside the scope of GST i.e. petrol, diesel, liquor etc. would not be included in the computation of turnover for the purpose of distribution of credit by ISD.  

12. Cross utilisation of ITC rationalised (To be effective from Feb 1, 2019) The order of cross-utilization of input tax credit has been rationalized. It provides that the credit of State tax or Union territory tax can be utilised for payment of integrated tax only when the balance of ITC on account of central tax is not available for payment of integrated tax i.e. CGST balance needs to be fully exhausted for payment of IGST, only after that SGST balance can be utilized for payment of IGST.

Further a new section 49A has been inserted, which states that the balance of IGST to be first utilized against payment of IGST, CGST & SGST/UTGST only when the balance in IGST is fully exhausted only then can the balance in CGST & SGST can be utilized.

H&A Comments: This amendment is carried out to ease the process of settlement of taxes with the states since a portion of integrated tax is to be distributed to the respective State Government. However, the amendment could result in the credit accumulation. New utilization pattern could be understood with the help of following illustration:  

ILLUSTRATION:

UTILISATION OF CREDIT FOR MAKING PAYMENT

A. Before Insertion Of Section 49A

IGST ITC balance = `80,000/- (2,00,000 – 1,00,000 – 20,000) 

CGST ITC balance = `30,000/- (1,30,000 – 1,00,000)

SGST ITC balance = NIL (80,000 – 80,000)

B. After Insertion Of Section 49A