ADV. Vaitheeswaran / Principles of assorted past landmark judgments

At the recent ‘GST Gyan Manthan’ conference at Sri Balaji University, Pune (SBUP), organised by GST and Indirect Taxes Committee of Institute of Chartered Accountants of India (ICAI) and hosted by Pimpri Chinchwad Branch of Western India Regional Council (WIRC) of ICAI, Adv. Vaitheeswaran talked on “Principles of assorted past landmark judgments, Tran – I Issues - Impact / relevance in GST regime”. He also talked about how is a sale defined, when should one approach Additional Ruling and his views on GST

GST for state and centre

I think we are in a point in time where the celebratory period for GST is over. Slowly you will find discorded notes from all parts of the country. When I say discorded notes, I mean discorded notes from states. So far we have discorded notes from professionals because they spend their time before the portal and forums trying to find something. You will soon see the full and true scope of the constitution amendment—is my gut feeling.

Contrary to the popular view that GST for state and centre will stay true, if you look at Article 246A, it doesn’t give that kind of impression. If we look at Article 246A (1), Parliament and legislature of each state shall have the power to make laws with respect to goods and services tax that is imposed by the Union or by such state. Therefore, it is not as if GST is dictated, orchestrated and then given to the State and Centre and State simply follows. States have gone along because they found some kind of rationale to it, some kind of acceptance to it. But slowly, the compensation issue is going to flair up. And once the compensation issue flairs up and the compensation is not settling down, then states will say, they need their revenues. And if they need their revenues, they have enough power under Article 246A (1) to say that if you do not increase the rate of tax, what stops you from increasing the rate of tax. There could be a differential SGST regime, is what is predicted in the next few weeks.

We have Article 246A (2) which says that Parliament has exclusive power to make laws with respect to Goods and Services Tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce. And then you have article 269A which says Goods and Service Tax shall be levied and collected by Government of India. So this is somewhat in par with the GST law where GST was created to ensure that the Parliament will prepare the law to ensure the states do not have much more power.

1956 sales tax law

Before the sales tax law of 1956 was born, let us say there is a seller in Pune, and from Pune he decides to sell the goods to Delhi. Then, the Maharashtra Government could say since the seller is in my state, I want to tax him. Delhi Government could say since the buyer is in my state, I want to tax him. So the nexus was applied either to the seller or to the buyer, there by creating a scenario where both the states said we have a valid claim to tax this transaction. And Supreme Court said both have the right. Therefore, there was a necessity to create 1956 law, where the CST Act (Central Sales Tax) was enacted to say this would be an inter-state sale transaction. If it is an inter-state sale transaction, then, only the original state can touch it, the other state cannot touch it. If the 1956 law was not created, there would have been absolute chaos.

How is a sale defined?

If a sale was subjected to VAT, then a sale is clearly defined as, transfer of property inputs-if the manufacturer was liable to excise duty, the manufacturer was defined. Now, supply is liable to GST. The meaning of supply are all forms of supply of goods or services or both, such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed for a consideration by a person in the course or furtherance of business. All these words are important but interestingly, none of them are defined except consideration. So what is sale then? You cannot refer to the sales tax law, so should we go to Sale of the Goods Act? If you go to the Sale of the Goods Act, it is only in the transfer of property and nothing else. What is a transfer, what is a barter, what is an exchange, what is a licence, what is a rental lease; everything will go into litigation, depending on the scenario.

The import of service for a consideration whether or not into the course or furtherance of business shall be considered as supply. It doesn’t matter if it is in course of furtherance of business, the government will tax it. If you import goods into the country, you pay basic custom duty, and in addition to that, you pay IGST on inputs. If we import a service into the country, you pay IGST on that service. Let us take the software, for example, I am bringing software in a package or a box and it comes from the US. The question arose whether you can put customs duty on it. Courts have said that as far as the goods are coming physically and cleared at the port, yes you can tax them, but if you download the software, you cannot put customs duty. If you cannot put customs duty, you cannot put IGST also, because the IGST is linked to customs duty as far as the import of goods is concerned. So what follows is, if software is considered as goods, you will end up paying applicable IGST. If the software is considered as service, you will pay IGST on services. With a catch—if a software is downloaded, you don’t.

Somebody might say that while the software is downloaded, customs cannot be levied and therefore IGST cannot be levied. There can be a massive difference between the download of software and software coming in a country. So, what is the import of goods and what is the import of service, itself will become a debate. That is because the biggest blunder is treating goods and services separately. Goods’ place of supply is determined through delivery, and services’ place of supply is determined through various proxies which include location. Therefore, the entire paradigm would change depending upon how you classify the item, whether it is goods or services, it will completely change. Then, activities specified in Schedule 1, made an agreement without consideration.

The Government will tax even if there is a consideration or not. So made or agreed to be made indicates that there will be GST but no GST on the advance of goods, while GST is applicable for the advance of services-this is unclear. I will explain with an example. I have a contract whereby I have to put up a solar plant or a windmill plant or wind power equipment. I have also to do commissioning and installation. So one AR (Additional Ruling) said, this is a single solar contract, and solar is the principle supply, therefore, commissioning, installation, etc. is incidental, therefore solar is five per cent, commissioning and installation is also five per cent. Another AR said, once the plant is fitted and commissioning and installation are done, it becomes immovable property, the entire thing is 18 per cent. Another AR said, solar is five per cent, commissioning installation is 18 per cent, it is a mixed-type supply, out of this whichever is higher will apply. Now where does the flaw lie? The flaw lies with the assessee for going to AR and seeking for a ruling, if you want to ensure some kind of decent justice is done to your client. If a client comes and says, I want to pay you your fees, please take me to AR, a good thing to do is to say don’t go to AR. Because if you go to AR, you will get a ruling against and you have to go to High Court-there is no other mechanism.

"There can be a massive difference between the download of software and software coming in a country"

Is GST applicable for compensation?

For instance, there was a ship which had a massive collision in the mid seas. You have taken a policy and through that policy you are receiving the compensation. Is the compensation liable to GST? Fundamentally, what most of us do when it comes to GST is, when a client comes and asks whether he has to pay GST or not, the temptation is to go through Schedule 3 and see if the transactions are listed there. If the transactions are listed there, you can straight away tell the client, it is not taxable. Then you will go to the exemption notification and see if the transaction is exempted if the transaction is exempted, the matter ends there. If it is neither in the Schedule 3 nor in the exemption list you tell them that it is taxable. You should look at the supply first, is it a supply when an insurance company pays compensation for the peril that happened in the sea. The collision is an accident. The company will get insurance compensation as per the policy, then can you say compensation is consideration? Does the asset exist post-transaction? The word transfer came in for interpretation in the Supreme Court in the case of a silk mills company, in income tax. Whether a compensation received for an accident that happens, can be liable to capital gains tax. At that time, Supreme Court said, a transfer would mean that from one person the asset should go and live or reside with the transferee. If the asset is not in existence it is not a transfer. Now we have a supply definition, which has the word transfer. So they nullify this for income tax by adding the word extinguishment of rights in the definition. That took care as far as income tax is concerned but GST transfer principles of silk mills company are still relevant. The asset must be in existence.