Cut Copied & Pasted by

CA. Bhavik H. DholakiaFCA, DISA (ICAI), B.Com.

Levy of & Exemption from tax including Composition Scheme

GST Indirect Tax Committee of

ICAIThe Faculty Identification Programme - II

In any Taxation Laws, One needs to master the following aspects to be able to be a Successful Tax Expert…

What is the Taxable Event?Who should Pay the Tax?To whom the Tax is to be paid?How much Tax is to be paid?When to pay the Tax?How to pay the Tax?

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Levy of GST(The first and the foremost question in any Taxation Law)

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Levy of Tax or Taxable Event Any tax becomes payable only when the liability to pay tax arises;

Liability arises only on happening of; or occurrence of a Taxable Event.

So, determination of the taxable event in any tax law is of utmost significance as the levy of tax is based on occurrence of that event.

The charging section of any Tax Law deals with the Determination of The Taxable Event.

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Determination of Taxable Event One needs to dissect the Charging sections

of The Model GST Law, 2016 The Model IGST Law, 2016So as to determine the Taxable Event under the GST

The Model GST Law, 2016 Dissection of Charging Section 7(1):

There shall be levied a tax called CGST/SGST On all Intra-state Supplies of Goods and / or

Services @ the Rate specified in the schedule… To this act and collected in such manner as

may be prescribed. 5

Determination of Taxable Event The Model IGST Law, 2016 Dissection of Charging Section 4(1):

There shall be levied a tax called IGST On all supplies of Goods and Services made In the course of Inter-state Trade and Commerce @ the rate specified in the schedule of this Act And collected in such manner as may be

prescribed.

Dissection of Charging Sections of Present IDT Having looked at Charging Sections of CGST/SGST

and IGST, let us also look at Charging Sections of Present IDT 6

Taxable Event – Present Indirect Taxes Service Tax Taxable Event

Service provided or agreed to be provided by one person to another in the taxable territory

Section/Act Section 66B of the Finance Act, 1994

Relevant Provision There shall be levied a tax (hereinafter referred

to as the service tax) at the rate of fourteen per cent. on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed……..”

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Taxable Event – Present Indirect Taxes Central Excise Act, 1944 Taxable Event

Manufacture or production of goods in India Section/Act

Section 3 of the CEA, 1944 Relevant Provision

There shall be levied and collected in such manner as may be prescribed, 1(a) a duty of excise to be called the Central Value Added Tax (CENVAT), on all excisable goods (excluded goods produced or manufactured in special economic zones) which are produced or manufactured in India as, and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986)… 8

Taxable Event – Present Indirect Taxes Customs Act, 1962 Taxable Event

Goods imported into, or exported from, India Section/Act

Section 12 of the CA, 1962 Relevant Provision

(1) Except as otherwise provided in this Act, or any other law for the time being in force, duties of customs shall be levied at such rates as may be specified under the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force, on goods imported into, or exported from, India…...”

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Taxable Event – Present Indirect Taxes Central Sales Tax Act Taxable Event

Sale of goods in the course of Inter- State trade Section/Act

Section 6 of the CSTA, 1956 Relevant Provision

Subject to the other provisions contained in this Act, every dealer shall, with effect from such date as the Central Government may, by notification in the Official Gazette, appoint, not being earlier than thirty days from the date of such notification, be liable to pay tax under this Act on all sales of goods other than electrical energy effected by him in the course of inter-State trade or commerce during any year on and from the date so notified……

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Taxable Event – Present Indirect Taxes VAT Taxable Event

Sale of goods in the course of Intra- State trade Section/Act

Relevant Section of State VAT Act Relevant Provision As per the provisions given in respective State VAT

Acts, like under GVAT, Section 3(1) of the GVAT Act, 2005 provides that “(1).. Subject to the provisions of this Act, every dealer…. whose total turnover and taxable turnover in any year first exceed the thresholds of turnover…. shall be liable to pay tax in accordance with the provisions of this Act..

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Major Shift in Taxable Event(Learn, Unlearn and Re-learn – A Continuous Process for a Tax Professional)

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Major shift in Taxable Event A Uniform and Single Taxable Event

‘Supply’

Replaces - Multiple Taxable Events i.e. Manufacture;

Provision of service; and

Sale.

as prevalent in the Present IDT Regime13

Meaning of Supply

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Meaning of Supply (For C/S/IGST)Broad Category

Sub-section of Section 3

Meaning and Scope of Supply

1 “Supply” includes…Normal Supply of Goods and/or Services

1(a) All forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.

Import of Service

1(b) Importation of service, whether or not for a consideration and whether or not in the course or furtherance of business.

Supply without Consideration

1(c) A supply specified in Schedule I (Matters to be treated as supply without consideration), made or agreed to be made without consideration. 15

Meaning of Supply (For C/S/IGST)Broad Category

Sub-section of Section 3

Meaning and Scope of Supply

Supply of Goods Vs. Supply of Services

2 Schedule II (Matters to be treated as supply of goods or services), in respect of matters mentioned therein, shall apply for determining what is, or is to be treated as either supply of goods or supply of services.

Normal Supply of Goods and/or Services

2A Where a person acting as an agent who, for an agreed commission or brokerage, either supplies or receives any goods and/or services on behalf of any principal, the transaction between such principal and agent shall be deemed to be a supply.

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Meaning of Supply (For C/S/IGST)Broad Category

Sub-section of Section 3

Particulars

Powers of Central Government

3 Subject to sub-section 2, the Central or a State Government may, upon recommendation of the GST council, specify, by notification, the transactions that are to be treated as:-(i) a supply of goods and not as a supply of services; or(ii) a supply of services and not as a supply of goods; or(iii) neither a supply of goods nor a supply of services.

Branded Services by an Aggregator under trade of brand name

4 Notwithstanding anything contained in sub-section 1, the supply of any branded service by an aggregator, as defined in sec 43B, under a brand name or trade name owned by himshall be deemed to be a supply of the said service by the said aggregator.

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Widest possible Definition of Business: "business" includes –

(a) any trade, commerce, manufacture, profession, vocation or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any transaction in connection with or incidental or ancillary to (a) above;

(c) any transaction in the nature of (a) above, whether or not there is volume, frequency, continuity or regularity of such transaction;

(d) supply or acquisition of goods including capital assets and services in connection with commencement or closure of business;

(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members, as the case may be;

(f) admission, for a consideration, of persons to any premises; and

(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation; 18

“Supply” – Points to Ponder

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“Supply” – Points to Ponder “Supply” includes…..An Inclusive Definition Includes – Generally used to expand meaning of the word defined – SC – Doypack Systems P. Ltd, 1988 (36 ELT 201)

Manifestly, Inclusive nature of the definition of ‘supply’ as adopted by legislature, leaves the interpretation of the term ‘supply’ open for

Tax Payers; and The Centre & the State GovernmentsLeading to bizarre outcomes.

Prudent approach would have been to define such a dominant word in exhaustive manner [Canada – Malaysia…..Inclusive Definitions]

“To another person” – Phrase missing.. 20

“Supply” – Points to Ponder Any transaction having characteristics

mentioned in section 3 can be contemplated as “Supply”, sometimes unintended.

3(1)(a) also uses ‘Such as’ and goes on to include Barter and Exchange

This can lead to questions viz. Whose supply it is ?; and How to value the same ?

Suppliers Beware… Whether agreement to supply can be taxed? Captive Consumption? Charitable activities/Education/Health Services for a

consideration? Barter – Goods, Exchange Schemes, Supplies under

Warranty Voluntary Payments for restaurants supplies (Tips) 21

“Supply” – Points to Ponder Import of Services (With or Without

Consideration and whether or not in furtherance of Business)

Supplier located outside India Recipient is located in India Place of Supply is in India Supplier and Recipient of service are not merely

establishment of a distinct person Inter Branch Adjustment between Indian Co.

and Branch Office outside India?

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“Supply” – Points to Ponder Further, Schedule – I to the Model GST law

treats following transactions (Matters – as referred to in the title of Schedule – I) as supply even if without consideration.

Permanent transfer/disposal of business assets. Assets not defined – What about Immovable Property,

Goodwill? Confiscation of Goods by Departments Surrender of damaged goods/assets by the insured to the

insurer Loss of assets by employee/theft/fire

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“Supply” – Points to Ponder Temporary application of business assets to a

private or non-business use. Supplier of Tents for its business, lending tents to its manager

for his son’s wedding? Use of motor vehicle/telephone by the employee for private

purposes without consideration. Use of motor vehicle by proprietor for its private purposes.

Services put to a private or non-business use. Foreign tour expenses of accompanying wife

Assets retained after deregistration. Assets retained by partner after dissolution of partnership? Deregistration in one state and Assets transferred to another

state? Deregistration on account of amalgamation/merger/business

transfer etc? Transfer as a going concern or otherwise?24

“Supply” – Points to Ponder Supply of goods and/or services by a taxable

person to another taxable or non- taxable person in the course or furtherance of business.

Stock transfers Inter branch adjustments for services availed at HO Corporate guarantee provided to related company Free issue of material by contractee to contractor Gift / Inheritance Laptop for personal use of employees Laptop for official use of employees

These transactions are actually intended to be “Deemed Supply of Goods and Services” akin to -

Deemed sale as per 366(29A); and Declared Services as per 65B(44)

Most of the above transactions will pose following problems:

Bifurcation of Personal and Business Use Valuation of Transactions

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“Supply” – Points to Ponder On one hand, the credit of GST will be

restricted to so much of the input tax as is attributed to the purposes of business only [as per Section 16 of the Model CGST/SGST Act],

However, On the other hand, GST would be payable on

business assets/services put to a private or nonbusiness use.

Thus, the assesses would have despairs from both the sides.

Will this not hamper – Seamless Credits?26

“Supply” – Points to Ponder Knowingly or unknowingly, the Model GST

Law has sown the seeds for another series of fresh litigation, which the present indirect taxation is crippled with,

When it comes to determining the test of manufacture for levy of Excise duty; or

Rendering of services to levy Service tax.

The law is striving hard even as on date to settle down after several decades of jurisprudence.

It would indeed be quite interesting to watch how the term supply is re-defined, amended, explained, substituted in the Final GST Law..

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Exclusions & Exemptions(One area where Real Expertise of a Tax Expert lies..) 0- Exclusions from Taxable Person (Section – 9 of CGST/SGST)Powers to Exempt under CGST/SGST and IGST- Power to Grant Exemptions (Section – 10 of CGST/SGST)- Exemption from Tax [Section 4(4) of IGST]

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Taxable Persons & its Relevance: Dissection of Charging Section 7(1):

There shall be levied a tax called CGST/SGST On all Intra-state Supplies of Goods and / or Services @ the Rate specified in the schedule… To this act and collected in such manner as may

be prescribed. Ideally, this section should have mentioned

By a Taxable Person (It seems to have been missed)

Nevertheless, 7(2) mentions: The CGST/SGST shall be paid by every Taxable Person In accordance with the provisions of this Act.

So, Taxable Person – A necessity for Levy 2(96) assigns the meaning as per section 9 Section 9 defines Taxable Person and excludes…….

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Taxable persons shall not Include: An Agriculturist;

A Registered person specified under paragraph 1 of Schedule III shall not be considered as taxable person until his aggregate turnover in a financial year exceeds Rs. Ten Lakh (Rs. Five lakh for NE states)

CG, a SG or any local authority in respect of activities mentioned in Schedule IV.

Any person providing services as an employee to his employer In the course of his employment, or In relation to his employment, or By any other legal ties creating the relationship of employer and

employee as regards working conditions, remunerations and employer’s liability

Any person exclusively engaged in non-taxable supplies

Any person liable to pay tax under Reverse Charge receives services for personal[non-business] use below the limit which is to be prescribed 30

Power to Grant Exemption from TaxCGST/SGST The Central/State Government may exempt goods and/or

services of any specified description from the tax leviable thereon either by way of Notification or Special order. In this connection, following points are worth mentioning:

Exemption is to be granted in public interest only. Exemption is to be granted on the recommendation of

the GST Council. Exemption can be from the whole or any part of the tax

leviable thereon Under circumstances of an exceptional nature (stated

in the order), exemption shall be granted by way of special order otherwise exemption shall be granted by way of Notification

The Government may insert an explanation in the Notification or Order within one year of issue of the above-mentioned Notification or Order

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Composition Levy

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Composition Levy Applicability

Subject to such conditions and restrictions as may be prescribed, the proper officer of the Central or a State Government on the recommendation of the Council may, permit a registered taxable person

Whose Aggregate Turnover during the Financial Year does not exceed Rs. 50 Lacs

Rate As may be prescribed But not less than 1% of the turnover (not

aggregate turnover) during the year

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Aggregate Turnover – Section 2(6)

"Aggregate Turnover" means the aggregate value of all

Taxable Non-taxable suppliesExempt supplies and

Exports of goods and/or servicesTo be computed on all India basis ,

and Excludes taxes, if any, charged under the CGST Act, SGST Act and the IGST

ActExplanation- Aggregate Turnover does not include:• Value of supplies on which tax is paid

under reverse charge• Value of inward supplies

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Ineligibility to opt for Composition Levy

Composition

Scheme is not

Applicable to These Cases

Taxable person

effecting any inter-

State supplies

Supply of goods and/or

services on which tax is payable on reverse charge basis

All the registered

taxable persons bearing

same PAN can not opt for

Composition Levy

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Switching to Composition by RTP

RTP who has

availed ITC [Input

Tax Credit]

switches to

Composition LevyRTP shall pay an

amount by way of debit in

electronic credit/cash

ledger, equivalent

to ITC availed on inputs held

in-Stock, semi-

finished or finished goods

Held on the day

immediately preceding the day on which RTP

switch over as RTP u/s 8

[Section 16(12)]

Registered Taxable

Person [RTP] u/s 8

[Composition Levy]

RTP who pay tax under

Composition Levy switches to Normal

Levy-Subject to conditions

and restrictionsEntitle to

take credit in respect of inputs* held in –Stock, semi-

finished or finished goods

On the day immediately preceding the date on which RTP becomes liable to pay tax under

Section 7[Section 16(3)]

*RTP shall not be

entitled to take ITC of inputs after the expiry of 1 year from th date of

issue of tax invoice

Mr. B – Taxable Person, Adopting Composition Scheme

Mr. C – Customer

Supplies Goods and/or services

Mr. C Shall pay to Mr. B only Consideration [No TAX]

Mr. A – Taxable Person u/s 7

Mr. A supplies goods/service

s to Mr. B, charging

CGST+SGST

Mr. B shall not be eligible to take any input credit of CGST+SGST paid on purchases made from Mr. A [Section 8(2)]

Mr. B, Shall deposit Tax to the Government in cash from his own pocket. Tax = Consideration received from Mr. C

*Prescribed Rate

Supply – Chain under The Composition Scheme

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Miscellaneous Provisions

Section 23(ii) A registered taxable person paying tax u/s 8 shall issue, instead of a tax invoice, a bill of supply containing such particulars as may be prescribed.

Section 27A(1)(b) Furnish the first return for the period starting from the date on which he becomes a registered taxable person till the end of the quarter in which the registration has been granted.

Section 27(1)Furnish a return for each quarter or part thereof, electronically, within 18 days after the end of such quarter

Section 21(2)(b)Proper Officer may cancel the registration from such date as he deems fit if RTP has not furnished returns for threeconsecutive tax periods

Miscellaneous Provisions

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Transition

Mr. A, Taxable Person in earlier law

Mr. opts for composition scheme u/s 8

Mr. A has carried forward unutilized eligible credit in a return, furnished under earlier law, in respect of the period prior to appointed day

In this situation,Mr. A shall pay an amount by way of debit in electronic credit/cash ledger, equivalent to Input tax credit in respect of inputs (not input services) held in-

Stock, semi-finished or finished goods Held on the day immediately preceding the day on which RTP switches over as RTP u/s 8 [Section 147 of CGST Act, 2016]

Penalty u/s 8(3)

SituationIf the proper officer has reasons to believe that a taxable person was not eligible to pay tax under Composition Levy,

Amount To Be Paid

Tax – As per Normal Levy u/s 7

Penalty- Equivalent to amount of Tax payable aforesaid

Cut Copied & Pasted by

CA. Bhavik H. DholakiaFCA, DISA (ICAI), B.Com.

I appreciate your patience.&Hats off to your tolerance.