India: Another Damaging GST Ruling; AAR Levies 18% GST On Liquidated Damages

Recently, the Maharashtra Authority for Advance Ruling (“AAR“) in the case of Maharashtra State Power Generation Company Limited (“Applicant“) held that Goods and Services Tax (“GST“) at the rate of 18% would be payable on liquidated damages (“LD“) received by the Applicant for delayed supply under a contract. The AAR has considered LD to be a consideration for agreeing to the obligation to tolerate an act or a situation, which is treated as a supply of service under para 5(e) of Schedule II of the Central Goods and Services Act, 2017 (“CGST Act“) / Maharashtra Goods and Services Act, 2017 (“MGST“) (as the provisions of CGST Act and MGST are almost identical, they are collectively referred to as “GST Act“).

This ruling is one among a series of unsettling GST rulings passed by state AARs in recent times. The ruling digresses from the legal and commercial understanding of LD as a measure of compensation for a pre-estimated loss from breach of contract, and not a fee for agreeing to tolerate an act or situation. This ruling poses a risk of GST scrutiny for parties enforcing LD clauses in a contract.

Facts

Applicant is a State Power Utility engaged in the generation of power with the objective to make power available to all at affordable rates. The Applicant enters into contracts with various contractors on a turnkey basis for (a) construction of new power plants or renovation of old plants, and (b) operation and maintenance activities (“Applicant Contracts“). The Applicant Contracts fix the period of completion and also stipulate the manner of calculation of LD payable by the contractor if there is a delay in completion on account of the contractor.

The sample contract examined in the ruling is one for erection, testing and commissioning of the main plant package (“ETC Contract“). As per the ETC Contract, the contractor is required to commence trial operation of two units within a stipulated period of time. In the event of delay for reasons attributable to the contractor, the ETC Contract provides for payment of LD at the rate of 0.5% of the contract price, up to a maximum of 10% of the contract price. The liability to pay LD is established after the delay in successful completion on account of the contractor is established.

The Applicant approached the AAR for a ruling, inter alia, on whether GST is applicable on LD in case of the Applicant Contracts, and if GST applies, whether it is covered under Schedule II entry no. 5(2)(e) under HSN Code 9997 – Other Services at the rate of 18%;

Relevant Provisions

GST is applicable on ‘supply’ of goods or services or both and is charged on the ‘value of supply’. Section 15(1) of the GST Act defines ‘value of taxable supply’ as the transaction value, which is the price actually paid or payable for the said supply where the supplier and the recipient of supply are unrelated and the price is the sole consideration.

Paragraph 5 of Schedule II to CGST Act provides a list of activities to be treated as ‘supply of services’ whichinter alia comprises – “(e) agreeing to the obligation to refrain from an act, or to tolerate an act or situation, or to do an act“.

Applicant’s Position

The Applicant argued that LD being a compensation towards deficiency of services reduces the value of the contract. Therefore, far from being a separate supply chargeable to GST, the consideration paid by the Applicant to the contractor reduces to the extent of LD, thereby reducing the tax base, i.e., value of supply on which GST is levied. The various facets of the Applicant’s submissions are set out below –

  1. Applicant relied on the definition of ‘value of taxable supply’ under Section 15 of the GST Act and concluded that the resultant price after payment of LD would be the transaction value. The Applicant placed reliance on the rulings of Customs, Excise and Service Tax Tribunal (“CESTAT“) in the cases ofCommissioner of Chandigarh v. M/s HFCL and Commissioner of Customs and Central Excise v. Victory Electricals Ltdwhere it has been held that LD reduces the contract price for the purpose of levying excise duty. Applicant argued that these rulings are based on the definition of ‘transaction value’ under the erstwhile Central Excise Act, 1944, which is similar in its construction to the definition of ‘value of taxable supply’ under the GST Act.
  2. Applicant relied on the legal position adopted in a public ruling by the Australian Tax Authority in respect of payment of damages on early termination of lease of goods. There it was clarified that such damages, if specified in the contract, would be considered as adjustment in relation to the earlier supply.
  3. Performance is the essence of a contract, while damages result from failure to perform as per agreed terms. LD is prescribed to deter or dissuade unsatisfactory performance or non-performance and is an expression of displeasure. Hence, LD cannot be said to be the desired income but is paid to compensate for loss suffered by the recipient.
  4. In determining the tax implications of a transaction, it is important to consider the intention of the contracting parties as gathered from the contract or conduct of the parties. In lump sum turnkey contracts like the Applicant Contracts, settlement amounts do not represent the primary intent of the parties and are only incidental to the primary intent and objective, which is to construct and deliver a power plant. These settlement amounts could at best be considered as an adjustment or reduction in contractual consideration. On the contrary, para 5(e) of Schedule II of the GST Act targets arrangements where the primary intention is to tolerate an act or situation.
  5. Deduction of LD from the consideration amount cannot be enforced separately and will always be preceded by delay in supply. Hence, it cannot be construed as a separate supply which is independently performed.

Ruling

The AAR ruled against the Applicant and held that LD under the Applicant Contracts constitute payment for a separate supply of service under the category of ‘agreeing to tolerate an act or situation’. It observed that deduction of LD from the contract consideration is a mere facilitation towards settlement of accounts and it does not actually result in reduction in the value of the main supply.

The AAR observed that the ETC Contract specifically mentions that the contractor’s liability for LD will be established once the delay in successful completion on part of the contractor is established. Hence, the ETC Contract contemplates two separate events. The obligation on the contractor to supply his deliverables under the contract is the first event. Occurrence of this event is followed by an evaluation of whether the deliverables were supplied within the timeframe agreed upon by the contractor. If such evaluation finds a delay, the contingent liability of LD translates into an actual recoverable liability, which is the second event. While the consequence of the first event is the payment of contract price, the consequence of the second event is the payment of LD. Accordingly, payment of LD is part of a separate event and constitutes a distinct supply.

The AAR examined specific clauses of the ETC Contract and held that deduction of LD from the contact price was only a means to recover LD from the contractor, and this cannot be construed to mean that the two are not distinct events. It ruled that the ETC Contract does not support the argument that LD reduces the contract price basis the following observations –

  • Clauses which define ‘contract price’ and ‘contract value’ only refer to the lump-sum payment made for the services plus price variations, if any. The clause which sets out contract price adjustment / variation also makes no reference to the levy of LD.
  • Clause 16 provides that the Applicant is entitled to claim all costs, damages, etc. which he may have paid for which the contractor is liable. The Applicant may recover these amounts by raising a bill on the contractor, which if not paid in time, would entitle the Applicant to deduct these from any amounts due or becoming due by him to the contractor. Hence, there are other mechanisms to recover damages apart from recovery by way of adjustment against contract price.
  • Clause 21 titled ‘Contractor’s Default’ provides that the Applicant may adjust the cost of employing another person to execute a work neglected by the contractor against any amount due by him to the contractor. The excess, if any, of such cost shall be paid by the contractor to the Applicant. This clause specifically provides that the payment of such excess amount is independent of LD for delay. The AAR construed this to mean that payment of LD is an independent liability under the ETC Contract and is not to be mixed with the payments due to the Applicant from the contractor.

Further, the AAR rejected the Applicant’s argument that neither the contractor nor the Applicant had intended the delay thereby causing the Applicant to tolerate it. In this regard, the AAR observed that the ETC Contract specifically provides for the eventuality of delay to result in a liability to pay LD, while the GST Act has also provided for this eventuality by specifically deeming the act of agreeing to tolerate an act or situation as a supply of service. Since the delay has taken place, the same is being tolerated by the Applicant in consideration for a price, i.e., LD and should therefore qualify as a supply of service by the Applicant in terms of para 5(e) of Schedule II to the GST Act.

The AAR distinguished the cases cited by the Applicant (please see above) and observed the holding of CESTAT that the “transaction value” for the levy of excise duty reduces on account of a price variation clause in cases where LD results in the taxpayer having to pay a lesser amount than an agreed price. The AAR held that this rationale cannot be applied to the instant case where the agreement does not contemplate a price variation or reduction of contract price / contract value owing to LD.

Having held it to be a supply of service, the AAR placed the supply in the category of Heading 9997 – ‘Other Services’ in Notification No. 11/2017 – Central / State Tax (Rate) (“Notification“) taxable at the rate of 18% [9% CGST + 9% MGST].

Analysis

The ruling has entangled two broad and independent aspects – (i) whether LD could be treated as a deduction from the contract price for the purpose of levying GST, and (ii) whether LD should itself be chargeable to GST. The AAR has failed to sufficiently differentiate these aspects in its ruling and has applied the same brush across both to rule that LD does not reduce the contract price because it is a distinct supply (or vice-versa) and hence chargeable to GST.

Examination of the contractual clauses to see whether the contract price and price variation clauses account for LD should be relevant only for the purpose of the first aspect. To that extent, the AAR is not entirely off the mark in distinguishing the cases cited by the Applicant and holding that the contracts in the instant case do not envisage reduction of contract price / value by the amount of LD. In clauses where it is specified that LD shall be deducted from the total contract price, the AAR has understandably read this to only indicate a mechanism for recovery of LD. In the cases cited by the Applicant, namely Victory Electricals and HFCL (which relied on Victory Electricals), the CESTAT has stressed on price variation clauses and observed that –

wherever the assessee, as per the terms of the contract and on account of delay in delivery of manufactured goods is liable to pay a lesser amount than the generically agreed price as a result of a clause (in the agreement) stipulating variation in the price, on account of the liability to “liquidated damages”…………the resultant price would be the “transaction value”; and such value shall be liable to levy of excise duty, at the applicable rate.” [Emphasis added]

Therefore, we believe that there may be some merit in the AAR rejecting the Applicant’s argument to reduce the contract price.

On the second aspect, however, the AAR has missed the mark and has over-emphasized on literal interpretation of the contract while ignoring the fundamental concept of LD. The Indian Contract act, 1872 provides for both unliquidated damages (“UD“) and LD in Section 73 and 74 respectively. In case of UD, there is no pre-determined sum specified in the contract and actual loss caused due to the breach has to be proved in order for the court to grant appropriate damages. On the other hand, when LD is stipulated in the contract, the suffering party prima facie becomes entitled to a pre-determined sum of money upon breach by the other party. However, if a dispute arises, the court goes into the genuineness of the sum stipulated in the contract and grants reasonable compensation not exceeding such sum. Hence, while existence of loss or injury is still required to be proved in case LD, proving the extent of the loss may be dispensed with if the court finds that LD so stipulated is bona fide and a fair estimate of loss / injury arising from the breach. There may also be cases where disproportionate or exorbitant sums are prescribed as LD in the contract for the purpose of terrorizing or dissuading the other party from committing a breach. In such cases, courts identify such sums as being in the nature of penalty and not damages, in which case the court may require the party claiming damages to prove actual loss. Therefore, fundamentally damages represent compensation for loss or injury caused from a breach, whether they be pre-estimated or determined post-facto. This ruling places a misplaced connotation on the concepts of breach and damages in a contract. While acknowledging that damages are payable upon breach, the AAR has conceptually re-characterised damages as some form of consideration paid for agreeing to an obligation to tolerate a breach of contract. This is contrary to the concept of damages as being a compensation for loss, or in some cases, even a penalty. Even assuming that LD specified in the ETC Contract was one in the nature of penalty, it cannot be construed as a consideration for tolerating breach but is in fact a deterrence to ensure performance of the contract. A basic aspect which has been ignored by the AAR is that a contract is entered into for performance and not for breach. To classify payment of LD as a distinct supply in the contract is to read a contract to be agreeing to its breach.

The category of taxable service under para 5(e) of Schedule II to GST Act (agreeing to tolerate) has been followed from an identical category of ‘declared services’ under the former service tax regime. While there have always been academic debates on whether damages would fall under the ambit of service tax, there has never been a legislative clarification or judicial pronouncement on this until now. This ruling by the AAR increases the risk of GST scrutiny for entities enforcing LD clauses for breach of contract. While AAR rulings are only binding on the Applicant and the Revenue in respect of the particular issue in question, they are often considered as having a persuasive precedential value. Therefore, in light of this ruling, contracting parties may consider revisiting their LD clauses so as to clearly provide for reduction in contract price / value by the LD amount and to clearly state that payment of LD is not a distinct event in the contact. Further, parties may also consider protecting themselves from the burden of GST by providing for the defaulting party to bear the GST, if any, levied on LD.

Footnotes

1 2015-(11)-TMI-893-CESTAT

2 [2014] 43 GST 649 (Chennai – CESTAT)

3 AAR referred to the Scheme of Classification of Services annexed to the Notification which provides for the entry ‘Agreeing to tolerate an act’ against Service Code 999794.

4 From the Applicant’s submissions reproduced in the ruling, we believe that the concept of LD was not clearly elucidated as it was explained to represent both, compensation and penalty. Therefore, conceptually the difference between the two was blurred in the Applicant’s submissions. The Applicant could probably have been better off had the LD been pitched as compensation rather than penalty.

5 Krithika Jaganathan and V. Pandhanthan, Why tax liquidated damages?, https://www.lakshmisri.com/News-and-Publications/Publications/Articles/Tax/why-tax-liquidated-damages

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Source: http://www.mondaq.com/india/x/705974/sales+taxes+VAT+GST/Another+Damaging+GST+Ruling+Aar+Levies+18+GST+On+Liquidated+Damages

Exporters GST refund: Second phase of fast track clearance drive from Thursday

NEW DELHI: With an estimated Rs 20,000 crore exporters’ refund still stuck, the government will launch the second phase of refund fortnight beginning May 31 to fast-track clearances.

“Special Refund Fortnight” to be organised from May 31 to June 14 in which Center and state GST officers will strive to clear all GST refund applications received on or before April 30, 2018,” GST@GoI, which is the official twitter handle for GST related matters, tweeted.

Federation of Indian Export Organisations (FIEO) President Ganesh Gupta earlier in the day said refund of over Rs 20,000 crore is pending on account of IGST (integrated GST) and ITC (input tax credit).

“Many exporters have not been able to file the refund of ITC due to technical glitches as input tax credit and exports happened in different months,” Gupta said.

In the first phase of refund fortnight observed between March 15 to March 30, the Central Board of Indirect Taxes and Customs (CBIC) had cleared refunds totalling Rs 17,616 crore.

This comprised Rs 9,604 crore of Integrated GST refunds, Rs 5,510 crore ITC refund by the Centre and Rs 2,502 crore ITC refund by states.

GST@GoI in another tweet said that the “Special Refund Fortnight” is for all GST refunds, including refund of IGST paid on export of goods and all refund claims submitted in FORM GST RFD-01A on or before April 30, 2018.

“All exporters are encouraged to approach their jurisdictional tax offices during the “Special Refund Fortnight” to clear any pending GST refund claims which were submitted on or before April 30, 2018,” it said.

It further asked exporters that refund application in Form GST RFD-01A will not be processed only after a copy of the application is submitted to the jurisdictional tax office along with supporting documents. “Mere online submission is not enough,” it added.

The FIEO president also said that since the GST refund process had considerably “slowed down”, the federation has urged the Finance Ministry to look into the refund problem and organise a clearance drive to liquidate the pendency and bring the refund process on track.

A majority of the problems, Gupta said, relate to ITC refund which have to be done by the states as well.

Source: https://economictimes.indiatimes.com/news/economy/finance/exporters-gst-refund-second-phase-of-fast-track-clearance-drive-from-thursday/articleshow/64373471.cms

India outpaces China in Q1 2018: Fastest GDP growth since demonetisation, GST, says poll; what lies ahead

GDP expanded an annual 7.3 percent in the first three months of 2018, the May 24-29 poll of 55 economists predicted, a touch faster than the 7.2 percent achieved in the last three months of 2017.

India’s economy probably gained a little momentum in the first three months of 2018 which should ensure that it remains the world’s fastest growing major economy, a Reuters poll found. Gross domestic product expanded an annual 7.3 percent in the first three months of 2018, the May 24-29 poll of 55 economists predicted, a touch faster than the 7.2 percent achieved in the last three months of 2017 — and well above China’s pace of 6.8 percent for the quarter ending in March. Forecasts ranged from 6.9 to 7.7 percent.

If the poll is right, January-March would have the fastest expansion since before the government’s surprise decision in November 2016 to scrap high-value currency notes and a botched implementation of a goods and services tax (GST) in July last year stalled growth. “Domestic dynamics are very strong and external volatility won’t derail the current economic recovery,” noted Hugo Erken at Rabobank, one of the most accurate forecasters on India GDP, and whose view is that growth reached 7.7 percent on a normal basis, well above the 7.3 percent median. On a gross value added basis, he expects growth of 7.5 percent, higher than the 7.1 percent median in a Reuters poll for that metric.

GDP data will be released on Thursday at 1200 GMT. Economic Affairs Secretary Subhash Chandra Garg said on Monday it was expected that annual growth was between 7.3 and 7.5 percent in the March quarter. Monsoon rains hit the southern Indian state of Kerala on Tuesday, a few days earlier than normal, the country’s weather office said, a development that potentially brightens the outlook for agricultural output and the economy. After growth slowed sharply for much of 2017, India regained its status as the world’s fastest-growing major economy for the October-December quarter.

Growth pace to continue?

Around two-thirds of economists in the poll who answered an extra question said growth would continue at roughly the same pace through the fiscal year that began on April 1. The remaining one-third said it would pick up. That overall steady – but strong – view was supported by expectations for manufacturing activity to have slowed only slightly in May.

The poll predicted the Nikkei Manufacturing Purchasing Managers’ Index, compiled by IHS Markit, would be 51.5, a tad weaker than April’s 51.6 but still comfortably above the 50-mark that separates growth from contraction.

With growth proving robust and prices on the rise, the Reserve Bank of India may change its policy stance next week. Annual retail and wholesale inflation accelerated in April, mainly due to higher fuel and food prices.

In response, some economists changed their views to expect a more hawkish central bank at its June policy meeting. “The RBI will hold steady next month – the Bank will likely want to wait for further clarity on the monsoon outturn and the increase in minimum support prices (MSP) for summer crops,” noted Charu Chanana at Continuum Economics. “A change in stance from neutral to ‘withdrawal of accommodation’ remains likely at the June 4-6 meeting.”

Source: https://www.financialexpress.com/economy/india-outpaces-china-in-q1-2018-fastest-gdp-growth-since-demonetisation-gst-says-poll-what-lies-ahead/1186879/

Goods and services tax: Rs 14,000-crore exporters’ refunds pending, says finance ministry

Under GST, exporters are required to pay IGST on exports and then claim refunds. The second type of refunds to exporters under GST involve refund of GST paid on purchase of inputs

Refuting industry claims of refunds worth Rs 20,000 crore stuck under the goods and services tax (GST), the finance ministry on Wednesday said that only Rs 14,000 crore of refunds are pending with the government. The Federation of Indian Export Organisations (FIEO) on Tuesday had claimed that refund clearance has slowed and pegged pending refunds at over Rs 20,000 crore.

The finance ministry also denied the slowdown in the sanction rate for refunds to exporters, saying that Rs 8,000 crore of refunds were cleared during May. Till now, Centre and state governments have sanctioned over Rs 30,000 crore as refunds under GST, out of which Rs 16,000 crore is on account of Integrated GST (IGST) paid on exports and Rs 14,000 crore of Input Tax Credit (ITC), the ministry said in a statement.

“Refund claims to the tune of Rs 14,000 crore (Rs 7,000 crore on the IGST side and Rs 7,000 crore on account of ITC) are pending with the government as on date, as against the figure of Rs 20,000 crore projected by FIEO in the press reports,” the statement said.

Under GST, exporters are required to pay IGST on exports and then claim refunds. The second type of refunds to exporters under GST involve refund of GST paid on purchase of inputs.

The government will start a second ‘special drive refund fortnight’ from May 31-June 14 to facilitate all types of refund claims. “…Customs, central and state GST officers will strive to clear all GST refund applications received on or before April 30, 2018. This will include refunds of IGST paid on exports, refunds of unutilised ITC and all other GST refunds submitted in FORM GST RFD-01 A,” the ministry said.

In the first phase of refund fortnight observed between March 15-31, the Central Board of Indirect Taxes and Customs (CBIC) had cleared refunds totalling Rs 17,616 crore. This included Rs 9,604 crore of IGST refunds, Rs 5,510 crore ITC refund by Centre and Rs 2,502 crore ITC refund by states.

The CBIC is also implementing a solution whereby the refunds held in GSTN, in cases where the exporters have mistakenly declared their export supplies as domestic supplies, would now be transmitted to Customs EDI system. If no other errors are committed by exporters, the customs system would automatically process the refunds for sanction on receipt of the records from GSTN, the ministry said.

Besides, it has also issued circular to clarify matters related to refund claims by an input service distributor, composition dealer, exports of services and supplies made to SEZ. The government has clarified that the refund of accumulated credit of compensation cess will be granted to exporters along with the refund of accumulated credit of CGST, SGST and IGST even if the end product does not attract compensation cess. Also, the exporters of exempted or non-GST goods do not need to submit LUT or bond for exports and such exporters will also be eligible to claim refund of unutilised GST credit.

The ministry, however, said that mere online submission of refund application will not be sufficient. “All claimants may note the refund application in FORM GST RFD-01A will not be processed unless a copy of the application, along with all supporting documents, is submitted to the jurisdictional tax office,” it said. It asked all exporters with pending GST refund to approach their jurisdictional tax authority for disposal of any of their refund claims submitted on or before April 30. “In case the jurisdiction (i.e. Centre or State) has not been defined for a particular claimant, he/she can approach either of the jurisdictional tax authorities,” it said.

Ministry denies slowdown in sanction

* The finance ministry denied the slowdown in the sanction rate for refunds, saying `8,000 cr of refunds were cleared during May

* Till now, the Central and state governments have sanctioned over Rs 30,000 crore as refunds under GST, out of which Rs 16,000 crore is on account of Integrated GST paid on exports and Rs 14,000 crore of input tax credit, the ministry stated

Source: http://indianexpress.com/article/business/economy/goods-and-services-tax-rs-14000-crore-exporters-refunds-pending-says-finance-ministry-5197840/

Malaysia to Start Sales Tax in September to Shore Up Budget

  • Cabinet agrees to cancel KL-Singapore high-speed rail, MRT3
  • Spending cuts planned as liabilities exceed 1 trillion ringgit

Malaysia will implement a new sales tax in September to replace the consumption levy that it’s scrapping next month as Prime Minister Mahathir Mohamad looks for ways to temper concerns on the nation’s budget.

The government is studying a 10 percent rate for the sales and services tax, he told reporters in Putrajaya after a Cabinet meeting. Ministers also agreed to cancel a proposed multibillion-dollar high-speed railway link to Singapore and the third phase of a mass rapid transit line in Kuala Lumpur, he said.

Mahathir is seeking more fiscal space to fulfill election pledges that include reducing living costs and fuel subsidies after finding the state saddled with debt and contingent liabilities exceeding 1 trillion ringgit ($251 billion). The government will satisfy one such promise when it sets the goods and services tax at zero on June 1.

“We find that the situation is worse than we thought when we were preparing the manifesto,” Mahathir said. “That’s why the promises will be fulfilled, but they must take into account the financial situation.”

While Malaysia must take drastic short-term steps to restore fiscal strength, it won’t set aside programs to boost growth, Economic Affairs Minister Azmin Ali said in a statement. The government will revise development plans for the rest of the decade in line with election pledges and will continue projects that have a large impact on the economy, he said.

Humane Economics

The revised framework “will focus on a free-market and investor-friendly economy as well as an emphasis on humane economics based on social justice programs,” Azmin said.

The government will review the Bandar Malaysia property project conceived by 1MDB, while the high-speed rail and other major projects will be revisited when the country is in a better financial position, Mahathir said.

As a celebration marking the end of the Muslim fasting month approaches, Mahathir said civil servants will get a 400 ringgit bonus payment, while road users will enjoy a 50 percent discount on tolls in the two days leading up to the Eid al-Fitr festival, which is set to fall in mid-June.

The government will keep prices for diesel and RON95 gasoline unchanged, while the RON97 grade of petrol will move according to market prices, the premier said.

Source: https://www.bloomberg.com/news/articles/2018-05-30/mahathir-to-start-sales-tax-in-september-to-shore-up-budget

Govt promises to disburse exporters’ Rs 20,000 crore refund

HIGHLIGHTS

  • While the finance ministry has repeatedly promised to address the issue, it has refused to act decisively
  • The ministry has said it will launch the second phase of refund in the fortnight beginning May 31 to fast-track clearances

NEW DELHI: After sitting on GST refunds of close to Rs 20,000 crore, the government on Tuesday promised to clear the dues after a top industry lobby group protested against holding back of funds .

Federation of Indian Export Organisations (Fieo) president Ganesh Gupta said refund of over Rs 20,000 crore was pending on account of IGST (integrated GST) and ITC (input tax credit). “Many exporters have not been able to file the refund of ITC due to technical glitches as input tax credit and exports happened in different months,” Gupta said, reiterating a concern that exporters have expressed for over six months now.

While the finance ministry has repeatedly promised to address the issue, it has refused to act decisively. On Tuesday, the ministry said it will launch the second phase of refund in the fortnight beginning May 31 to fast-track clearances.

“Special Refund Fortnight to be organised from May 31 to June 14 in which Centre and state GST officers will strive to clear all GST refund applications received on or before April 30, 2018,” the government tweeted from the official handle for GST-related matters.

In the first phase of refund fortnight observed between March 15 to March 30, the Central Board of Indirect Taxes and Customs (CBIC) had cleared refunds of Rs 17,616 crore. This comprised Rs 9,604 crore of Integrated GST refunds, Rs 5,510 crore ITC refund by the Centre and Rs 2,502 crore ITC refund by states.

Exporters have repeatedly said the finance ministry’s position and the lack of support from the commerce department has resulted in a significant increase in their working capital requirements and impacting their competitiveness in the global market.

The Fieo president said since the GST refund process had considerably “slowed down”, the lobby group has urged the finance ministry to look into the refund problem and organise a clearance drive to bring the refund process on track. A majority of the problems, Gupta said, relate to ITC refund, which have to be done by the states as well.

Source: https://timesofindia.indiatimes.com/business/india-business/govt-promises-to-disburse-exporters-rs-20000-crore-refunds/articleshow/64377656.cms

Pharmaceutical companies offering freebies may come under GST lens

MUMBAI: Pharmaceutical companies offering buy-one-get-one-free schemes or 20% extra for the same price may have to pay goods and services tax (GST) on the extra quantities, raising prospect of the principle being applied to a broad spectrum of consumer products, said people with knowledge of the matter.

The tax heads of firms such as Novartis IndiaNSE 0.00 %, Sun PharmaNSE -0.18 %, CiplaNSE -1.47 %, LupinNSE 0.20 % have been summoned for meetings with tax officials, they said. The Director General of GST (Intelligence), an arm of the indirect tax department, has begun investigations and sought details of incentives given to distributors, stockists and customers by about 30 companies.

Demand may Lead to Litigation: Experts

The tax authorities want them to either pay GST or reverse input tax credits on the extra quantities.

“We did receive a query from the Director General of GST (DGGST) regarding trade discounts offered to stockists in one jurisdiction,” a Novartis spokesman said. “We have responded to the query and believe that we are in full compliance with the law.”

Cipla, Lupin and Sun Pharma did not respond to ET’s queries.

People with knowledge of the matter said the tax department is set to extend its purview and more companies could get queries and tax notices in the coming months. “The approach is to either induce payment of tax on quantity given as bonus or have reversal of input tax credit,” said one of them. “The view that the tax department holds is that bonus quantity not ‘in furtherance of business’ and tax credit needs to be reversed.”

Experts said the practice has been followed by pharma companies for several years and the demand is likely to lead to litigation.

“Often pharma companies dish out promotional schemes, which is a business decision, and such transactions should typically neither be subjected to GST nor trigger reversals of credit,” said Suresh Nair, partner, EY India. “If demand notices are issued, this could lead to litigation across the industry and could have a pan-India impact.”

It could lead to similar tax demands on such programmes run by the fast-moving consumer goods sector (FMCG) and others, said Pratik Jain, partner, national leader, indirect tax, PwC India.

“This issue is not only limited to pharmaceutical companies but applies in wide spectrum of industries including FMCG, consumer electronics and so on,” he said. “Therefore, this issue should be examined and appropriately clarified by the government.”

Under the earlier tax regime, tax was not applicable on free samples as the law said there needed to be a monetary consideration for goods to be taxed.

However, many states had provisions that allowed the reversal of input tax credit for free samples. This was limited to value-added tax (VAT).

It is understood that many tax officials are equating freebies doled out by pharma companies with ‘gifts’ under the GST framework. There are specific regulations regarding gifts and in some cases GST is applicable or input credits need to be reversed for such items.

Source:https://economictimes.indiatimes.com/industry/healthcare/biotech/pharmaceuticals/pharmaceutical-companies-offering-freebies-may-come-under-gst-lens/articleshow/64377769.cms

Centre promises to refund textile GST dues in 20 days

MUMBAI:  The Centre has promised to refund the entire pending claims of textile exporters under GST and IGST (Integrated GST) in 15-20 days.

In a meeting held recently with the Textile Export Promotion Council (Texprocil) and other associations, Union Finance Minister Piyush Goyal agreed to clear the dues arising out of ROSL (Refund of State Levies) of textile exporters in 15 days by providing the required funds. He also said all pending claims under GST and IGST will be refunded in 15-20 days.

Further, Goyal promised to consider the Pillai committee recommendations on duty drawback and examine issues of embedded taxes for all textile products.

Review of ROSL rates

The Centre will review ROSL rates for made-ups and look at alternative export promotion schemes in consultation with the Commerce Ministry, said Texprocil Chairman Ujwal R Lahoti in a statement on Tuesday.

Speaking at the meeting, which was also attended by Textile Minister Smriti Irani, Lahoti said cotton textiles exports, which rose 7 per cent to $11 billion last fiscal, can touch $20 billion in five years if the Centre supports the sector. This could include policy measures such as refund of embedded taxes as recognised by the Economic Survey 2017-18, extension of ROSL scheme (which refunds State levies such as VAT on fuel used in transportation and generation of captive power, mandi tax, duty on electricity and stamp duties on export documents), as well as speedy refund of GST, IGST claims.

India is blessed with an end-to-end textile value chain, Lahoti said, adding that a holistic and integrated approach is needed to ensure all the segments in the value chain, such as yarn, fabrics and made-ups, get the tax benefits.

“By ensuring an integrated approach, India can increase its share in world trade in cotton textiles from the present 10 per cent to 15 per cent in five years. This will in turn spur higher investments and employment generation,” he added.

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Rs 20,000 crore GST refund pending with government: FIEO

NEW DELHI: As much as Rs 20,000 crore is pending with the government on account of GST (Goods and Services Tax) refund, creating liquidity crisis for exporters, FIEO today said.

Federation of Indian Export Organisations (FIEO) President Ganesh Gupta said the delay in refund is mainly impacting small exporters who provide jobs in labour intensive sectors.

“Liquidity is a major area of concern particularly for MSME exporters who constitute the bulk of exports in high employment intensive sectors. The challenges on GST front are continuing though the fortnight clearance drive, which was highly successful, gave us the hope that refund will be provided on real time basis,” he told reporters here.

While claims of over Rs 7,000 crore were cleared in March, the amount in April is little over Rs 1,000 crore, he said.

“As per our estimate, refund of over Rs 20,000 crore are pending on account of IGST (integrated GST) and ITC (input tax credit) and many exporters have not been able to file the refund of ITC due to technical glitches as input tax credit and exports happened in different months,” he added.

Gupta said that the GST refund process has considerably “slowed down” and the federation has urged the Finance Minister to look into the refund problem and organise a clearance drive to liquidate the pendency and bring the refund process on track.

Majority of the problems, he said relate to ITC refund which have to be done by the states as well.

The manual intervention in the refund process has added to the transaction time and cost of exporters, he added.

“The provision that 90 per cent of ITC refund will be issued within seven days is not being implemented by tax authorities. Some of the states say that they do not have funds to clear the refund,” Gupta said.

Further, he said after the incidents of bank frauds, banks have become extra cautious while providing credit to exporters.

Withdrawal of letter of offer and letter of comfort after the Nirav Modi fraud, has added to the cost of funds for exporters by 1-3 per cent, he said adding that while banks should adhere to the procedure, they have to be pro-active to the needs of the sector

Source: https://timesofindia.indiatimes.com/business/india-business/rs-20000-crore-gst-refund-pending-with-government-fieo/articleshow/64371269.cms

GST to be levied on goods stored in customs warehouse only on final clearance: CBIC

The Central Board of Indirect Taxes and Customs (CBIC) has asked its field offices to levy GST on goods in customs warehouse only at the time of final clearance.

The move is aimed at ensuring ease of doing business for importers, experts said.

In a circular to principal chief commissioners and chief commissioners, the GST policy wing of the CBIC said, “transfer/sale of goods while being deposited in a customs bonded warehouse” is a common trade practice whereby the importer files an ‘into-bond’ bill of entry and stores the goods in a customs bonded warehouse.

The importer then supplies such goods to another person, who then files an ‘ex-bond’ bill of entry for clearing the said goods from the customs bonded warehouse for home consumption.

The CBIC said that the Customs Tariff Act has been amended with effect from March 31, 2018, to state that the valuation for the purpose of levy of Integrated GST (IGST) on warehoused imported goods at the time of clearance for home consumption would be either the transaction value or valuation done at the time of filing the ‘into-bond’ bill of entry, whichever is higher.

The circular said that integrated tax shall be levied and collected at the time of final clearance of the warehoused goods for home consumption, which means at the time of filing the ‘ex-bond’ bill of entry.

However, the value addition accruing at each stage of supply would be accounted for, on which Goods and Services Tax (GST) would be payable at the time of clearance of the warehoused goods

“The supply of goods before their clearance from the warehouse would not be subject to the levy of integrated tax and the same would be levied and collected only when the warehoused goods are cleared for home consumption from the customs bonded warehouse,” the CBIC said.

This circular would be applicable for supply of warehoused goods, while being deposited in a customs bonded warehouse, on or after the April 1, 2018, it added.

AMRG & Associates Partner Rajat Mohan said the tax authorities has finally given in to the demands of importer lobby by rectifying a major anomaly on account of supply of warehoused goods which was loaded with a double tax since July, 2017.

“This course correction is a laudable effort and would go a long way in easing the liquidity crunch of importers,” Mohan said.

EY India Tax Partner Abhishek Jain said “this clarification brings a sigh of relief for various businesses. However, given its applicability from April 1, there still remains ambiguity on supplies made prior to April”.

Source: https://economictimes.indiatimes.com/news/economy/policy/gst-to-be-levied-on-goods-stored-in-customs-warehouse-only-on-final-clearance-cbic/articleshow/64340572.cms