Key Changes in Indirect Taxes Regime

A. Changes in Central Goods and Services Tax Act

A.1 Scope of Supply – Amendment to Section 7 and Schedule II

The term supply is defined by section 7 of the CGST Act. The Finance Bill seeks to insert, with retrospective effect from 01/07/2017, a sub-clause (aa) in sub-section (1) of section 7. The amendment proposes to bring within the scope of supply the activities or transactions, by a person, other than an individual, to its members or constituents or vice versa, for cash, deferred payment or other valuable consideration.

Further an explanation has been added that, notwithstanding anything contained in any other law for the time being in force or any judgement, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another.

Further clause no. 113 of the Finance Bill proposes to omit paragraph 7 of Schedule II of the CGST Act with retrospective effect from 1st July 2017. Paragraph 7 of Schedule II of the CGST Act is reproduced below:

The proposed amendment nullifies the decision of the Supreme Court in the Calcutta Club case wherein it was held that the transaction between an Association and its members is not leviable to Sales tax or service tax. However whether this decision is equally applicable to GST Laws is a debatable issue. The above amendments intend to put at rest any controversy on this issue.

Another issue which may arise because of this amendment is whether the transaction between a partnership firm and its partners represented by way of salary or share of profit will also constitute a supply. The usage of the words “activities or transaction by a person other than individual, to its members” is wide enough to cover the transactions between a Firm and its partners. It shall be in the larger interest of the trade and industry, if the CBIC comes out with a clarification/exemption notification in this regard.

A.2 Input Tax Credit – Amendment to Section 16

The Finance Bill proposes to insert clause (aa) after clause (a) in subsection (2) of section 16. Subsection (2) enumerates various conditions for claiming input tax credit. By the proposed amendment, one more condition is added for claiming Input Tax Credit that the details of the invoice or debit note has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37.

Presently the supplier furnishes the information of his outward supply by furnishing Form GSTR 1 which is communicated to the recipient in form GSTR 2A and GSTR 2B. GSTR 2A and 2B have got different characteristics. In GSTR 2A the information is reflected in the month in which the invoice is raised by the supplier. But GSTR 2B will reflect only the invoices furnished by the supplier in GSTR 1 which is filed up to 11th of the following month. If there is a delay on the part of the supplier in filing GSTR 1 beyond 11th of the following month, the corresponding invoices shall be reflected in the GSTR 2B of the recipient pertaining to the month in which GSTR 1 is actually uploaded by the supplier.

Presently under rule 36(4) the taxpayer can claim up to 5% over and above the credit reflected in GSTR 2B. With the above proposed amendment, which restricts the ITC to the amount reflected in form 2B, the benefit of 5% extra claim may be withdrawn by notification.

A.3 Audit and Annual Return – Section 35 and Section 44

Subsection (5) of Section 35 requires every registered person, whose turnover exceeds the prescribed limit, to get his accounts audited. The Finance Bill proposes to omit subsection (5) of section 35. Hence the audit requirement under CGST is dispensed with.

This amendment is to be read in conjunction with the modification of Section 44. Section 44 which prescribes filing of annual return is proposed to be substituted. The proposed amendment provides for furnishing a self-certified reconciliation statement, reconciling the value of supplies declared in the return furnished for the financial year, with the audited annual financial statements.

A.4 Charging of Interest – Section 50

Section 50(1) of the CGST Act provides for payment of interest for delayed payment of tax. There was an interpretational issue as to whether the interest is to be calculated on the gross tax before adjusting ITC or net tax paid by cash after adjusting ITC. The Finance Act, 2019 inserted a proviso in section 50(1) which clarified that the interest is to be paid only on the portion of the tax which is paid by debiting cash ledger subject to the following conditions:

1. Supplies made during a tax period and declared in the return for the said period
2. Such return is not furnished after commencement of any proceedings under section 73 or section 74

The above amendment was only prospective. Now the current Finance Bill proposes to make it retrospective from 01/07/2017. This is a welcome measure and a large number of members of trade and industry shall stand benefitted.

A.5 Recovery of Self-Assessed Tax – Section 75(12)

Subsection (12) of section 75 provides for recovery under section 79 of self-assessed tax as per return filed under section 39, if it remains unpaid or any amount of interest payable on such unpaid tax.

An explanation is proposed to be inserted in section 75(12) to define self-assessment tax that it shall include tax payable on outward supplies declared in Form GSTR 1 but not included in the return filed under section 39.

A.6 Extension of the Power of the Commissioner to Attach Properties – Section 83

Section 83 gives power to the Commissioner, during the pendency of certain proceedings, to provisionally attach any property including bank accounts belonging to the taxable person. The amendment proposes to extend this power to the properties belonging to persons specified in subsection (1A) of section 122. Such specified persons are: any person who retains the benefit of a transaction covered under clauses (i), (ii), (vii) or clauses (ix) of sub-section (1) of section 122 and at whose instance such transactions are conducted.

A.7 Release of Goods and Conveyance Detained or Seized – Section 129

Section 129 provides for levy of tax and penalty for release of detained/seized goods and conveyances in transit, while they are in transit in contravention of the provisions of the CGST Act and rules. The existing provision provides for levy of tax and penalty for release of such goods and conveyance, whereas the amended provision contemplates only levy of penalty. Both the existing provision and proposed amendment contemplate two situations and the relevant provisions are explained below:

Sub-section (3) of section 129 lays down the procedure for issue of notices and passing of an order for payment of tax and penalty. But the existing provision does not have a time limit. The proposed amendment sets out a time limit for issue of notice and passing an order. Notice shall be issued within seven days of such detention or seizure. The notice shall specify the penalty payable and the order shall be passed within a period of 7 days from the date of service of notice.

The existing sub-section (6) of section 129 provides that where there is a failure to pay the amount of tax and penalty within 14 days of detention or seizure, further proceeding shall be initiated in accordance with the provisions of section 130. The proposed amendment delinks this provision with section 130 and provides as follows:

• The time limit for payment of tax has been increased to fifteen days from the date of receipt of the copy of the order.
• Where the detained or seized goods are perishable or hazardous in nature or are likely to depreciate in value with passage of time, the said period of fifteen days may be reduced by the proper officer.
• In the case of default of payment within the specified time limit, the goods or conveyance so detained or seized shall be liable to be sold or disposed of to recover the penalty.
• However, the conveyance can be released on payment by the transporter the amount of penalty or one lakh rupees, whichever is less.

A.8 Appeal – Section 107

A proviso is proposed to be inserted in sub-section (6) of section 107 of the Central Goods and Services Tax Act to provide that no appeal shall be filed against an order under sub-section (3) of section 129 (order levying penalty for release of detained/seized goods and conveyance) unless a sum equal to twenty-five per cent (25%) of the penalty has been paid by the appellant.

A.9 Levy of Fine and Penalty for Confiscation of Goods and Conveyance – Section 130

As per the 2nd proviso of sub-section (2) of section 130, the fine and penalty leviable under section 130 was linked to sub-section (1) of section 129. The proposed amendment delinks the above provision from sub-section (1) of section 129 and independently provides that the fine and penalty leviable shall not be less than 100% of the tax payable on such goods.

B. Changes in Integrated Goods and Services Tax Act

Under the existing provision 16(1)(b), supply of goods or services or both to a special economic zone developer or a special economic zone unit is considered as zero rated supply. This section is proposed to be amended to make supplies for authorised operations only, as Zero rated supply.

Existing provision 16(3) is being completely overhauled. As per the existing provisions, a registered person making zero rated supply has got two options to claim refund:

• Option 1: Make supply of goods or services or both without payment of IGST under bond or LUT and claim refund of unutilised ITC.
• Option 2: Make supply of goods or services or both on payment of IGST after adjustment of ITC and claim refund of IGST paid.

Under the proposed amendment, Option 1 is retained with an added condition that the registered person making zero rated supply of goods shall, in case of non-realisation of sale proceeds, be liable to deposit the refund so received along with the applicable interest within thirty days after the expiry of the time limit prescribed under the Foreign Exchange Management Act, 1999 (FEMA) for receipt of foreign exchange remittances.

Option 2 is withdrawn. Instead, sub-section (4) has been added which empowers the Government, on the recommendations of the Council, to specify by notification:

1. A class of persons who may make zero rated supply on payment of integrated tax and claim refund of the tax so paid;
2. A class of goods or services which may be exported on payment of integrated tax and the supplier of such goods or services may claim the refund of tax so paid.

C. Changes in Central Sales Tax Act

As per the existing section 8(3)(b) of the C.S.T. Act, a dealer can make interstate purchases of goods at a concessional rate if the said goods are specified in his registration certificate and are used for the following purposes:

1. Intended for resale
2. Manufacturing or processing of goods for sale
3. In the telecommunication network
4. In mining
5. In generation or distribution of electricity or any other form of power

The concession given to telecommunication networks, mining, and generation and distribution of electricity or any other form of power is proposed to be withdrawn.

In the present scenario, after the implementation of GST, only specified petroleum products are chargeable under CST. Before the proposed amendment, these specified petroleum products could be purchased at a concessional rate even if used for purposes mentioned in (c), (d) and (e) above. Hence, after the amendment, one cannot purchase the specified petroleum products at a concessional rate for use in telecommunication networks, mining, or generation and distribution of electricity/power.

D. Changes in Customs Law

D.1 Prescription of Expiry Date for Conditional Exemptions

Section 25 of the Customs Act, 1962 gives powers to the Central Government to exempt generally either absolutely or subject to such conditions from the whole or any part of duty of Customs. The Bill seeks to insert sub-section (4A) in section 25 to provide that any conditional exemption granted, unless otherwise specified, shall be valid only up to 31st day of March falling immediately after 2 years from the date of such exemption.

The Bill also seeks to provide that in respect of such conditional exemptions which are in force as on the date on which the Finance Bill, 2021 receives the assent of the President, the prescribed period of two years shall be reckoned from the first day of February, 2021. It may be noted that this time limit for exemption is prescribed only in respect of conditional exemptions and not in respect of general or absolute exemptions.

D.2 Time Limit for Issue of Notice Where Audit, Search, Seizure or Summons Are Initiated

Section 28 of the Customs Act provides a time limit for issue of notice for recovery of duties not levied etc., within a period of 2/5 years as the case may be from the relevant date. The law provides for different relevant dates under different circumstances in explanation (1). However, it does not provide for the relevant date for calculating the time limit for issue of notice under section 28 of the Customs Act in circumstances where audit, search, seizure or summons have been initiated.

Now the Bill provides that the time limit of two years shall be calculated from the date of initiation of audit, search, seizure or summons, as the case may be. The amendment also gives power to the Principal Commissioner / Commissioner of Customs to extend the said period for a further period of one year.

D.3 Time Limit for Presenting the Bill of Entry

Presently the Law allows presenting the bill of entry before the end of the next day following the day (excluding holidays) on which the aircraft or vessel or vehicle carrying the goods arrives at a customs station. Now the Bill seeks to provide for presenting the bill of entry before the end of the day preceding the day on which the aircraft or vessel or vehicle carrying the goods arrives at a customs station.

Further the Board is being given the power to prescribe different time limits for presentation of the bill of entry. However, the power to prescribe the time limit cannot go beyond the end of the arrival of such vessel, aircraft, etc.

D.4 Confiscation of Goods – Section 113

Section 113 of the Customs Act provides for confiscation of goods attempted to be improperly exported. It specifies the various circumstances under which export goods can be confiscated. The Bill adds one more situation by inserting sub-clause (ja) in section 113. As per this clause, any goods entered for exportation under wrong claim of remission or refund of any duty or tax or levy in contravention of the provisions of the Customs Act or any other law for the time being in force can also be confiscated.

D.5 Penal Provisions – Section 114AC

A new section 114AC is proposed to be inserted in the Customs Act to provide for penalty where any person has obtained any invoice by fraud, collusion, etc., in order to utilise input tax credit for discharging any duty or tax on goods that are entered for exportation under claim of refund of such duty or tax. Such person shall be liable for penalty not exceeding five times the refund claimed.

D.6 Amendment of Documents Submitted – Section 149

Section 149 of the Customs Act provides that the proper officer may authorise any documents to be amended after they have been presented to the customs house. The proposed amendment provides that authorisation/amendments can be done electronically also. Further, it provides that such amendments, as may be specified by the Board, can be done by the importer or exporter on the common portal.

D.7 Countervailing and Antidumping Duty

Countervailing Duty is levied under Section 9 of the Customs Tariff Act to protect the interest of domestic manufacturers. The following amendments are made with regard to levy of countervailing duty:

1. Section 9(1B): Inserted to provide for modification of Countervailing Duty:
   • (i) where such duty is found to be ineffective as indicated by a decrease in the export price of an article without any commensurate change in the resale price in India of such article imported;
   • (ii) under such other circumstances as may be provided by rules.
2. Section 9(2A): Inserted to provide that levy of countervailing duty is not applicable to an article imported by a hundred per cent export-oriented undertaking (100% EOU) or a unit in a special economic zone (SEZ), unless:
   • (i) it is specifically made applicable in such notification or to such undertaking or unit; or
   • (ii) such article is either cleared as such into the domestic tariff area (DTA) or used in the manufacture of any goods that are cleared into the domestic tariff area. The countervailing duty shall be imposed on that portion of the article so cleared or used, as was applicable when it was imported into India.
3. Anti-Dumping Duty (Section 9A): Sub-section (1B) is inserted and sub-section (2A) is substituted with a new section to provide for modification of anti-dumping duty in similar circumstances and similar ways as provided in proposed section 9(1B) and section 9(2A) above in respect of countervailing duty.

E. Agriculture Infrastructure and Development Cess (AIDC)

The above cess is proposed to be levied under two clauses, clause 115 and clause 116 of Finance Bill, 2021. The purpose of the levy is to finance agriculture infrastructure and other development expenditure. The details of the levy are as follows:

Conclusion

The above amendments aim to set right various controversies like taxability of transactions between clubs/associations and their members, charging of interest on net cash payment, etc. The levy of agriculture, infrastructure and development cess and corresponding adjustment in basic customs and duties will ensure availability of more funds to the agriculture sector without increasing the cost of imports.

However, the deletion of the audit provision under Section 35(5), which was of immense help to taxpayers in ensuring their proper and timely compliance with various provisions of the GST Acts, is a retrograde step.