GST revenues soar amid unclear laws

If ambiguities aren’t fixed, GST tribunals, expected to start functioning soon, will be flooded with appeals

The average Goods and Services Tax (GST) collection for the April-November period this year is around Rs 1,66,000 crore per month. The buoyancy in GST revenues can be attributed to many factors — a general increase in economic activity during the festival season, taxpayers getting accustomed to the inevitability of GST, restrictions in availing input tax credit and aggressive tax collection by the department for 2017-18. GST revenues are expected to maintain these levels through most of 2024 since pre and post-election circumstances would ensure that no drastic measures are introduced.

The GST law in its present shape and form is very different from the one taxpayers saw in July 2017. There are a number of restrictions on input tax credit; registrations can be cancelled if returns are not filed and taxes paid; assessments are becoming aggressive and notices are being issued with gay abandon. The only common factor between the present day and July 2017 is that the GST tribunals are still not up and running. There are some sectors where the law is still not clear. Online gaming companies were at the receiving end once the GST was imposed on the full value of the bet. Custodial services provided by banks to non-resident entities are emerging as a topic capable of being challenged all the way to the Supreme Court. The banks are of the opinion that it is an export of service and is hence exempt, but the department feels that this is not an export of service. The Maharashtra GST department has been busy sending out notices to every major banker demanding tax on custodial services provided to non-resident clients. The amount of tax involved is stated to be significant.

Section 2(6) of the IGST Act defines export of service to be the supply of a service in which the service provider is located in India but the service recipient is not. In addition, the place of supply of the service is not in India and the consideration for the service has been received in convertible foreign exchange. Section 13(8) of the IGST Act confirms that in the case of a banking company, the place of supply of the services would be the location of the supplier of the services. The GST Department is reading these two sections together and taking the stance that the services are rendered in India. However, this interpretation could lead to an incorrect conclusion that just because a bank is located in India, all services provided to global customers are subject to GST. In other geographies where GST has been introduced, such as Australia and Canada, there are specific provisions exempting GST for custodial and other services provided to clients not located in India. Canada (on which our GST law was supposed to have been modelled but wasn’t) has been carrying this exemption right from their VAT days.

The GST Council would do well to take some of these instances and attempt to bring the same to India. In case the law is left as it is, GST tribunals that are expected to start functioning in the next few months would be filled with appeals regarding custodial and other services which could only add to the traffic pile-up that is expected before the tribunal.

Companies in other sectors have also been receiving notices demanding taxes on substantial amounts. The Life Insurance Corporation of India received one for Rs 37,000 crore. Reliance General Insurance got one for Rs 922 crore. One of the demands in these notices was that of GST on reinsurance commission and co-insurance premiums. Companies operating in the infrastructure sector have been receiving notices demanding GST on the entire annuity value of the contract and not on what they earn annually. In earlier years, real estate companies were receiving notices on the taxability of joint development agreements though the law is quite clear now. Though GST is based on a single concept of supply, it is obvious that each industry would have subtle nuances that need to be factored in for the purpose of taxation. The Harmonised System of Nomenclature (HSN) code provides the GST department with the power to tax the same supply at different rates depending on the industry. The present GST laws have different provisions for the export of services, supplies to SEZ units, deemed exports and supplies subject to GST on a reverse charge basis. The GST Council may want to take a relook at the basis of charge and rate of tax on these transactions and provide industry-specific exemptions and rebates.

Assessments for the financial year 2017-18 are in the process of being completed. Taxpayers are bracing themselves for the next set of notices for financial years 2018-19  onwards. The GST Department would do well to send out instructions to the field staff and advise their officers as to how to conduct win-win assessments. 

(The writer is a Bengaluru- based tax expert)