Applicability of GST on Sale of Goods Located Outside India
Background: Under the current framework of the GST laws, there was a possibility of interpretation that, Integrated Goods and Services Tax (‘IGST’) is applicable even on sale of goods located outside India if effected by a supplier located in India. To put this into perspective let’s assume a situation where Jeweler A located in Surat sells a solitaire located in Belgium to Jeweler B located in Belgium. Although the goods (i.e., the solitaire) is located in Belgium (i.e., outside India) and the buyer is also located in Belgium, a view could have been entertained that IGST would still apply on the sale value. This creates following issues:
extra-territorial operation of the GST laws since tax would apply on sale of goods located outside India; non-availability of input tax credit (‘ITC’) of GST paid to the buyer located outside India; the goods would suffer double taxation (since tax on the solitaire located in Belgium could also apply under Belgian tax laws).
Conceptually, this was a major design flaw in the GST laws – contrary to global standard practice of non-applicability of indirect taxes on the goods located outside the country levying the tax.
Breaking Amendments Proposed by the GST Council in its 28th Meeting
It is important to mention here that under a similar fact situation, although the Authority for Advance Ruling (‘AAR’)2 of Kerala opined that such transactions are not subject to GST, but this conclusion was based on the circular3 concerning taxability of High Sea Sales transactions. Since, the ruling was not based purely on the relevant legal provisions, there was a possibility to arrive at a different conclusion by a higher forum. Proposal: For curbing the extra-territorial operation of GST, the GST Council has proposed to include the supply of goods from a place in non-taxable territory to other place in non-taxable territory without entering into India in the third Schedule of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) (i.e., activities or transactions which shall be treated neither as supply of goods nor supply of services). Once the above amendment is carried out, the transaction involving sale of goods located outside India would not be treated as a taxable supply and consequently GST would not be applicable on the same. This amendment will bring a major relief to Indian taxpayers having business operations of sale outside India
Taxability of High Sea Sales (‘HSS’) Transactions
Background: HSS transaction where goods are sold by a person in India even before they cross the customs frontiers of India (i.e., while they are still in-transit during an international transportation), were specifically made non-taxable under the erstwhile laws (i.e., Central Sales Tax as well as State specific VAT Acts). However, under the GST laws, in the absence of specific exclusion there was an ambiguity on taxability of HSS transactions, i.e.:
Whether GST applies on sale of goods that are not located in India (i.e., located at High Seas at the time of their sale)? Who is liable to pay tax on HSS transaction– the seller or importer who purchases goods on HSS basis and on what value? If the importer is liable to pay applicable GST, will this tantamount to double taxation (since the importer would again be liable to pay IGST at the time of customs clearance of the goods)? What is the mechanism to claim ITC of IGST paid on HSS transaction and utilise against the tax payable at the time of import of goods purchased on HSS basis?
To temporarily resolve this burning issue, Central Board of Indirect Taxes and Customs (‘CBIC’) issued a circular clarifying that GST on HSS transaction would be levied only once i.e., at the time of customs clearance. Basis the circular, the AAR, Maharashtra also laid down that HSS transaction would be subject to IGST only at the point of import. Although this circular and the ruling were beneficial for taxpayers, they lacked legal backing as regard to taxability of HSS transaction. Proposal: The GST Council has recommended to include the supply of goods in case of HSS in the third Schedule of the CGST Act. After the said inclusion, HSS transaction between a supplier and importer located after the goods have been dispatched from the port of origin but before clearance for home consumption in India would not be treated as supply of goods or services as per schedule III and no GST would be leviable on the same. This amendment would set at rest the ambiguity concerning taxability of thousands of sale-purchase transactions that are carried out on HSS basis. Supply of Warehoused Goods to Any Person Before Clearance For Home Consumption Background: Like HSS transactions, under the current indirect tax provisions, sale of goods lying in customs bonded warehouse (i.e., before they are cleared for home consumption) is conceptually treated as a sale of goods outside India since such sale happens before the goods cross the customs frontiers of India. Although no Customs Duty apply on such transactions, there is no similar exclusion currently under the GST laws. This omission resulted in double taxation of warehoused goods in the hands of importer clearing the goods from the warehouse, i.e., firstly, at the time of purchase of the goods from the original importer and secondly, at the time of customs clearance of the goods from the warehouse. Double taxation of such goods was initially confirmed by Customs in its circular. However, in a later circular, CBIC clarified that the sale of goods would be taxed only once – at the time of clearance from bonded warehouse for home consumption. Thus, even at Government’s end there were two contrary circulars issued as regards taxability of such transactions. Proposal: In order to resolve the controversy, the GST Council has proposed inclusion of the transaction involving supply of warehoused goods before clearance for home consumption in the third Schedule of the CGST Act. Once the amendment comes into force, such transactions would not be treated as a taxable supply, accordingly, GST would not be chargeable before the stage of customs clearance. Sale of goods lying in customs bonded warehouse is a common business practice and is preferred in cases involving assembly, treatment of goods before their clearance or to secure customs exemptions etc. This amendment will settle the ambiguity in the favor of taxpayers. Taxability of Services Provided by an Indian Office to its Overseas Entity Background: Under the erstwhile Service Tax law, services provided by an Indian Branch office/ Project office/Liaison office etc. to its overseas entity were not chargeable to tax since the place of provision of such services was treated to be outside India. Therefore, even though such services did not qualify as ‘export’, Service Tax was not applicable on such services. However, the current framework of the GST laws is such that supply of services by an Indian Branch office etc. to its overseas entity is treated as an inter-state supply and at the same time they do not qualify as ‘export’. To add complications, even services provided without consideration in such cases are deemed as ‘supply’ and require payment of tax on value computed in accordance with valuation provisions. This interplay of current GST provisions causes huge escalation in the cost of overseas entity on account of GST charged at the rate of 18% by Indian Branch office etc. towards cost in India plus profit margin, if any. Owing to this non-viability, many overseas entities converted their Branch Offices etc. into a subsidiary company. But this too was not a very viable option as formation and operation of subsidiary involves heavy compliance costs. Proposal: Pursuant to the recommendations of the GST Council, services supplied by an establishment of a person in India to any establishment of that person outside India have been exempted, provided the place of supply of the services is outside India. Consequently, with effect from 27th July 2018, the services supplied by any Branch office etc. to its overseas entity shall not attract GST. As a fallback, GST paid by such offices on their procurements would be a cost, but from the standpoint of the overall enterprise cost that would be much less than the cost on account of GST applicable on the gross amount chargeable by the Indian Branch office etc. Undoubtedly, through this amendment Branch offices of overseas banks, Project offices of oil companies and several other similar establishments of overseas entities will stand benefitted as their cost of doing business in India would reduce significantly.
ITC on Transactions Included in The Third Schedule of The CGST Act
Background: Under the GST laws, ITC on goods or services used by tax payer attributable to exempt supplies is required to be reversed. Exempt supplies are not just limited to the supplies that are exempt through a notification, but also include ‘non-taxable’ supplies. ‘Non-taxable’ supplies mean supply of goods or services which are not leviable to tax under the GST laws. On a combined reading of the above provisions, in a current ruling issued by the AAR, Maharashtra12, it was held that ITC is required to be to be reversed in the case of HSS transactions. This caused a big hue and cry among the taxpayers undertaking HSS transactions entailing huge values (as the same would have wiped-off their entire ITC due to this technical issue, that was otherwise eligible). Proposal: The GST Council has recommended that ITC reversal is not required on the transaction specified in the third Schedule of the CGST Act, other than transaction relating to sale of land and completed building. Even though under the current provisions it was possible to take a position that ITC reversal was not required on the activities covered in the third Schedule of the CGST Act (except sale of land and completed building), this amendment would certainly save the taxpayers from long-drawn litigation in case their eligibility to take ITC was challenged by the tax department. Non-reversal of ITC on transaction such as HSS, sale of goods located in bonded warehouse or outside India, certain actionable claims is a desirable amendment in the GST design which will immensely benefit many taxpayers.
Other Relaxation in ITC Provisions
Background: Under the current provisions, ITC in respect to motor vehicles and other conveyances (vessel, aircraft etc.) was restricted on all kinds of motor vehicles irrespective of their seating capacity, except when they were used for specified purposes (e.g. further taxable supply of such vehicles, etc.). This restriction caused denial of ITC for vehicles, even though they were used for genuine business purposes. Similarly, ITC is presently restricted on certain items (food etc.) even though in some cases it is mandatory under the law for an employer to provide the same to its employees. Proposal: The GST Council has proposed to limit the restriction on ITC availability with respect to motor vehicles having seating capacity of up to 13 passengers (including driver). With this relaxation the taxpayers shall be able to claim ITC on buses, minibus etc exceeding the specified seating capacity. (for example, a factory purchasing bus for transportation of staff/ workers etc.) subject to fulfillment of other applicable conditions. For goods or services that an employer is under a legal obligation to supply to its employees, the GST Council has allowed the benefit of ITC. Accordingly, ITC can be claimed on expenses such as food for factory workers if the same is obligatory under the law.
Enlargement of Composition Scheme
With a view to provide relief to small taxpayers from GST compliances, it has been recommended by GST Council that the threshold for eligibility under the composition scheme applicable to supplier of goods be raised from INR 1 crore to INR 1.5 crores. At the same time, in order to make the composition scheme more practically workable it has been further recommended that the suppliers of goods would still be eligible to opt for composition if they provide services up to 10% of their turnover in the preceding financial year or INR 5 lakhs whichever is higher.
Reduction of Rates on Various Goods or Services
Implementing the recommendations of the GST Council, gst rates on various goods and services have been reduced/ rationalized. Accordingly, prices of various consumer durable items such as television, washing machine, refrigerators etc. are being reduced (due to reduction in the rate from 28% to 18%). This measure is seen as major relief for end consumers. Apart from the above key recommendations primarily requiring amendments in the GST Acts, there are also important announcements concerning procedures, i.e., with respect to GST returns, gst registration etc. It was desirable that the amendment in GST law specially concerning taxability of HSS transaction, warehoused goods etc. are made retrospective. Nevertheless, the amendments would make the GST laws more certain, reduce the rigor of GST and reduce the cost of compliance burden for a large number of taxpayers, once they are implemented.
