India witnessed tax revolution in 2017 when Goods and Services Tax (“GST“) was implemented to subsume existing indirect taxes on production, provision of services, sale of goods, entry, etc. The intent clearly has been to provide seamless flow of credit and avoid multiple levies on same transaction. Unfortunately, due to Integrated GST (“IGST“) payable on import of good at the transaction value, (including transport value), as well as on the procurement of transportation services as a separate supply of service, there have been instances of GST being levied twice.
Background
The whole ruckus was created due to Notification No.8/2017- Integrated Tax (Rate) dated June 28, 2017, which stipulated that supply of specified services, including transportation of goods, from a place outside India up to the customs station of clearance in India, would attract 5% GST. Further, Notification 10/2017- Integrated Tax (Rate) dated June 28, 2017 dealing with reverse charge mechanism categorised an importer as the recipient of services liable to discharge GST on the supply of goods by a person in a non-taxable territory. These Notifications made an importer on record responsible for the payment of GST on import of transportation service, in addition to customs duty payable at the time of clearance of goods for home consumption.
Aggrieved by the dual taxation, Mohit Minerals and few other importers had filed a writ petition before the Gujarat High Court (“HC“) challenging the vires of aforesaid Notifications. The HC agreed with Mohit Minerals and held that in fiscal legislations, there is no place for any reasoning or intervention. When enacting the IGST Act, the legislature purposefully limited the government’s ability to collect tax on reverse charge basis from any person, constricting it exclusively to the recipient of the supply. The term ‘recipient’ must be interpreted in the way that it is defined in the law. The supposition that the importer is a direct or indirect recipient of the service would be against the spirit of GST legislations. The writ-applicant cannot be held accountable for tax. Several other taxpayers also challenged the aforesaid Notifications before different HCs[1] or filed for refund of GST paid relying on Mohit Minerals.
As massive loss of revenue was at stake, the Government reached out to the Hon’ble Supreme Court (“SC“) challenging the above-referred Gujarat HC decision.
Decision of the SC
The SC agreed with the decision of the Gujarat HC on the levy of GST on maritime freight.[2] While making the pronouncement, the decision also delved into a few more principles under the GST legislation to ascertain whether a notification levying GST on transportation services performed by a non-taxable person for goods entering Indian customs territory was ultra-vires. The Apex Court did not agree with the reasoning of the Gujarat HC. While the Notification was invalidated on other grounds, the SC held that the definition of recipient for GST purposes was wide and encompass every person who receives the requisite services even though there was no contractual link between the two parties or the consideration was not paid by it, and the importer of goods was the recipient of shipping services due to a legal fiction. The type of recipient in each category mentioned in the Notification is merely informative. The SC also held that extra territorial duty can be applied if there is a linkage with India.
The Apex Court observed that the GST Acts (i.e. CGST Act and IGST Act read with relevant state GST Acts) are supreme and the principles enunciated in them could not be ignored by passing notifications that are not in compliance with them. It was clarified by the SC that the GST Acts were introduced to avoid double taxation on both goods and services. The Apex Court was of the view that while transportation services can be regarded separately from supply of goods, it would be erroneous to depart from the composite supply principle[3].
This SC decision protects the interests of importers whose procurement costs could have been significantly impacted by the dual levy of GST. Indian importers will no longer be required to pay any GST and shall be entitled for a refund if they have already paid the tax.
The SC also delved into interplay between scope, power and functions of the GST Council. It observed that GST Council was established to provide a level playing field as GST absorbed indirect taxes in all States. The GST Council was expected to create an environment in which neither the Centre nor the States have dominance over one another. It provided a system where Centre’s vote accounted for 1/3rd and the States made up the rest. Technically, the Council’s decision was not required to be ‘unanimous,’ but rather a 3/4th majority of those present and voting would have been sufficient. However, most of these issues were getting settled by consensus in the spirit of collaboration. The functions of the GST Council, the Centre and the States in the GST legislations have also been clearly defined.
As stipulated in Article 279A, the GST Council is required to make its recommendations through coordinated deliberation among various arms of the Central Government as well as the various state Governments. Unlike other parts of the Constitution that require suggestions to be presented to the President or Governor, Article 279A requires recommendations to be made to the ‘Union and the States.’ It clarified that although the government is bound by the Council’s recommendations while exercising its rule-making power under the GST Acts, it does not mean that all recommendations made by it would translate into legislation. The SC also held that the GST Council’s recommendations were simply persuasive and did not become law unless passed by both States and the Centre since both arms have the powers to legislate on GST. The principle of ‘cooperative federalism’ would be violated if the Centre decided to legislate unilaterally and treating them as enforceable edicts would jeopardise the Central Government as well as the State Governments’ commitments to fiscal federalism.
Ramifications of SC Judgment
Impact on importers
The Supreme Court’s judgement will assist several taxpayers who had purchased or will purchase items especially when the seller is responsible for shipping, insurance, and freight costs. The taxpayers may find it relevant to analyse whether the refund would be time- barred in cases where GST was paid in FY 2017-18 and the importer had not opted to challenge the Notifications. The judgment would also be blessing for sectors like oil and gas, alcohol, power and agriculture, etc. as they do not have to pay any additional GST. These sectors had blockage of funds since input tax credit was unavailable on account of exempt supply. They may explore options for claiming refund which may provide incremental cash flows to these companies who are reeling from the effects of bad economy.
There have been several pending investigations for non-payment of GST on supply of transportation services. It is hoped that the benefit of this verdict is provided automatically by the department and pending investigations are stopped. The CBIC may quash the proceedings through a clarification to prevent harassment to genuine taxpayers.
Impact on future of GST
While the verdict will have a favourable impact as stated above, certain remarks by the SC may prove detrimental to the taxpayers in the long run. The Apex Court has expanded the definition of recipient on cross-border extra territorial supply. The department may rely on this observation heavily to collect tax from individuals / entities who have a limited nexus with India.
The tax authorities as well as the judiciary have to be more circumspect while interpreting GST legislations because the taxpayers may challenge a number of decisions taken by the GST Council on multiple grounds.
Nonetheless, with SC holding that the recommendations would be non-binding unless the requisite amendments are made to the primary legislation, some States might fail or might not want to revise or enact it. With increasing political polarisations, it is possible that certain state governments may play to the gallery and decide to cherry pick the recommendations. While no state has used its ability to reject the GST Council’s decision in the last five years, the impending closure of the Central Government’s pledged compensation to the States can possibly ignite a battle that may undermine the one-nation-one-tax premise. Such a unilateral decision may have far-reaching consequences for our economy. It may also have a negative impact on taxpayers who do business in many States and without the uniformity in the state laws, the idea of uniform tax will fall apart. It is, in this regard, the Apex Court has specifically talked about the spirit of collective federalism and persuaded the Centre as well as the States to go above political considerations and implement the changes and modifications after adequate discussions and debate.
It is hoped that both the Centre and the States give heed to the SC’s advice before enacting any amendments or adjustments after thorough research, consultations, and discussions.
For further information, please contact:
S.R. Patnaik, Partner, Cyril Amarchand Mangaldas
sr.patnaik@cyrilshroff.com
[1]Rajshila Synthetics Pvt. Ltd. v. Union Of India & Anr, 2020 (2) TMI 281 – DELHI HIGH COURT; MCPI Private Ltd. & Another v. Union Of India & Others, 2020 (3) TMI 725 – CALCUTTA HIGH COURT; Lakhpat Trading And Industries Private Ltd v. Union Of India, 2021 (7) TMI 864 – RAJASTHAN HIGH COURT; M/S. Shree Mahesh Oil Products v. Union Of India, Ministry Of Finance, 2021 (7) TMI 742 – RAJASTHAN HIGH COURT; M/S. Indian Farmers Fertilizers Co-Operative Ltd. v. Union Of India And Others 2021 (4) TMI 1031 – ORISSA HIGH COURT
[2] Union Of India & Anr. v. M/S Mohit Minerals Pvt. Ltd, 2022 (5) TMI 968 – SUPREME COURT
[3] A composite supply is a supply made by a taxable person to a recipient consisting of two or more taxable supplies, or any combination thereof, which are naturally bundled and supplied in combination with each other in the ordinary course of business, with one of them being the main supply.
