GST Tax Planning- Part- III

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Tax planning involves the analysis of a financial situation or plan from a?tax?perspective. The purpose of?tax planning?is to ensure?tax?efficiency. Through?tax planning, all elements of the financial plan work together in the most?tax-efficient manner possible. Tax planning would be the most effective method to reduce the tax burden legally within four corners of the law. The last part of the series with the 1st being tax planning based on the Constitution of India followed by legal maxims and definition + specific areas. This article on balance specific areas.

Input tax credit

1.?????? Input tax credit on the receipt of goods along with an invoice from a genuine supplier to whom payment has been made in full [along with tax component] is available in full. This is even if the supplier defaults in filing his return or does not pay the tax. This may entail litigation.

2.?????? Alternatively, all suppliers to be graded for compliance. Such suppliers who fall under category ‘B’ may be paid only the value of goods/services and the relevant tax could be paid only when the same is reflected in Form GSTR-2A/2B. This would save cash flow and ensure compliance from the suppliers.

3.?????? The textile sector suffers from many captive uneducated job workers and distributors. Few job workers and distributors may not be educated enough regarding the GST procedural aspects. Accordingly, they would not have filed the GSTR-1 and GSTR-3B returns. In such case, the recipient may face issues to avail such credits which are not reflected in GSTR 2A/2B. Where the credit is not reflected in GSTR 2A/2B, it is suggested to retain the tax amount from vendor and pay only when it is reflected in GSTR 2A/2B. This would avoid disputes on credits.

4.?????? Registration in all States where there are outlets would ensure that all credits are captured and availed.

5.?????? For the future, the multi-locational traders/manufacturers may find that the registration as Input Service Distributor is necessary and would ensure that later there are no frivolous demands for not passing on credit on expenses such as advertising services to the States where they were consumed.? ISD mechanism is proposed to be made mandatory for distribution of credit on input services pertaining to multiple GSTIN’s of same legal entity vide Finance Act 2024 proposal, notified to be made applicable from 1st April 2025 onwards vide Notification No. 16/2024-Central Tax dated 06.08.2024

6.?????? The validity of section 17(5)(c) and 17(5)(d) has been under challenge by various courts. Input tax credit on inputs/input services used for construction of Textile factory/Construction of Malls rented out to textile shop could be availed to the extend used in the course or furtherance of business. Further, the Apex court has upheld the validity of Section 17(5)(c),(d) and Section 16(4). Moreover, it has been held that the input tax credit can be availed on the goods or services procured for the construction of “PLANT” and whether a mall or any other building can be classified as a plant is a factual question which has to be determined by applying the functionality test on a case-to-case basis. If the construction is of a building which is essential in supplying services, such as renting or leasing or other transactions which are covered by clause(2) and (5) of the Schedule II of the CGST Act, the building can be held to be a plant.

7.?????? It is also important to note in terms of section 16(4) ITC on RCM paid in March?2024 for say import of consultancy services from foreign vendor, pertaining to FY 17-18, can be claimed as a credit on the basis of self-invoice issued dated on? 31st March 2024.

8.?????? Restriction on availment of ITC to extent reflected in GSTR 2B. Recipient can take the credit of the eligible credit available on invoices and debit notes which have been furnished by the supplier in GSTR-1 and reflected in GSTR-2B of recipient.?Accordingly a new condition has been inserted in Section 16(2)(aa) of the GST Act to give legal backing in the GST law to the said requirement vide Finance Act 2021 and the said amendment is notified wef 1.1.2022 vide notification 39/2021-CT dated 21.12.2021. ?Going forward, taxpayer could avail only the ITC pertaining to the invoices reflecting in the GSTR-2B, considering the specific condition introduced in section 16(2)(aa) of the CGST Act.

The said amendment appears to be prospective in nature and hence its validity prior to the introduction of the said condition in Section 16 would be highly disputed.?

9.?????? In case of shifting/transfer of business which falls within the purview of slump sale the transferor is required to transfer unutilized ITC by filing FORM GST ITC-02 only in those States where both transferor and transferee are registered and the hence ITC cannot be transferred from one State to another. In such case, it is suggested to take a local registration by the transferor State where the transferee is registered, and the business could be transferred to such new registration.

Refund and FTP benefits

The inverted duty structure refund is eligible for certain products where the ITC would be at a higher rate than the rate of tax on output. The accumulation can be obtained as a refund.

Usage of the ITC availed on capital goods as well as input services for other products where there is a normal tax rate may optimize the usage of ITC as well as the refund as the refund of such ITC cannot be claimed under inverted duty structure though there had been a favourable Gujarat High Court decision holding such credit is eligible on input services.

On the other hand, Madras High Court ruled that refund is a statutory right and section 54(3) provides refund of ITC on inputs only but not on input services and capital goods under inverted duty structure.

Since, two different High Courts had given conflicting decisions on the said provision the final view for the assessees has emerged from the Supreme Court of India reversing the decision of Gujarat High Court. This judgment in VKC Footsteps supra was reversed by the Supreme Court in [TS-472-SC-2021-GST].?

Exporters and suppliers of textile articles to SEZ and to merchant exporters have several benefits. The identification of the multiple benefits and receipt of the refund or benefit in time would help directly for enhancing the margin. In case of delayed refunds, interest can also be claimed.

Following are the amendments in Section 16 of IGST Act 2017 vide Finance Act, 2021 notified w.e.f. 1.10.2023 vide notification no.27/2023-CT dated 31.7.2023:

1.?????? Supply of goods and services to SEZ or SEZ developer would be treated as zero rated supplies only if provided for authorised operation. There was restriction in the Rules for claiming for refund of supplies to SEZ or SEZ developer only if supplied for authorised operation. However, such restriction was not provided in parent act which has now been amended to include the same. This would lead to increase in litigation.

2.?????? Refund option available for supplies of goods without payment of tax has been restricted to realisation of sale proceeds [substituted by FA 2021 notified wef 1.10.2023]. Where sale proceeds are not received within the time frame prescribed in FEMA 1999, be liable to deposit the refund so received under this sub-section along with the applicable interest under section 50.

3.?????? Supplies of goods and services with payment of taxes have been restricted vide notification issued by government specifying:

a.?????? a class of persons who may make zero rated supply on payment of integrated tax and claim refund of the tax so paid.

b.?????? a class of goods or services which may be exported on payment of integrated tax and the supplier of such goods or services may claim the refund of tax so paid.

Consequently, export with payment of IGST (automatic, system driven processing & sanctioning the IGST Refunds based on shipping bill) is no longer available for all such exporters, who have been restricted to claim refund with payment of taxes when exporting such notified goods. It is for the Government to give that option to specific person who is dealing with specific good or services.

Accounts and returns

The industry, especially the unorganized part has not maintained proper records for movement of goods, billing and filing the returns accurately and in timely manner. In GST the discipline of maintaining proper records, books and filing returns in a timely manner needs to be inculcated and followed. In case it is not done, there may be possibility of demands for differential taxes if any, interest, missing out ITC, penalties, detention, seizure and confiscation of goods and vehicle on non-generation of e-way bill.

Other benefits

Refund and FTP benefits

Rebate of State and Central Taxes and Levies (RoSCTL) scheme is a Ministry of Textiles scheme for exports under Chapters 61, 62 and 63 of Customs Tariff. The scheme rebates various Central, State and local duties/taxes/levies which were not refunded under other duty remission schemes. It is a budgeted scheme.

Ministry of Textiles had notified the initial Rebate of State and Central Taxes and Levies (RoSCTL) scheme vide notification No. 14/26/2016-IT dated 07.03.2019. The rates for this scheme were notified by MoT on 08.03.2019. MoT’s further notification No. 14/26/2016-IT dated 02.05 .2019 elaborated on the nature of rebate, mechanism of issue of scrips, etc. under RoSCTL scheme. Government later decided to extend the RoSCTL scheme w.e.f. 01.01.2021 to 31.03.2024 for apparel/ garments (under Chapter 61 and 62) and madeups (under Chapter 63), in exclusion of RoDTEP for these Chapters. As per MoT’s Notification No.12015/11/2020-TTP dated 13.08.2021 issued for the extended RoSCTL scheme, RoSCTL eligibility remains unchanged. The rates as notified by Ministry of Textiles vide notification No. 14/26/2016- IT(Vol.II) dated 08.03.2019 were also continued.

Further, the Government has decided to continue the RoSCTL scheme for a period of 2 years beyond April 01, 2024 and upto March 31, 2026 for apparel/garments (under Chapter 61 and 62) and Made-ups (under Chapter 63) in exclusion of RoDTEP for these Chapters.

The Scheme is implemented by Department of Revenue with end to end digitization for issuance of transferable Duty Credit Scrip, which will be maintained in an electronic ledger in the Customs system. Duty Credit Scrip under RoSCTL Scheme shall be issued without insisting on realization of export proceeds.

The guidelines issued vide this Ministry’s notification No. 12015/11/2020-TTP dated August 13, 2021 would continue for continuation and implementation of the RoSCTL scheme till March, 2026.

The RoDTEP scheme had been introduced for the exporters of goods wherein the embedded Central, State and local duties/taxes would be refunded which can be converted into a credit scrip for the purpose of payment of BCD on imported goods. The goods and rates eligible under RoDTEP scheme are notified by the Government, the exporters must indicate their intent for claim at the time of Shipping Bill filing itself.

The RoDTEP scheme would refund to exporters the embedded duties/taxes that were so far not being rebated/refunded. For example, VAT on fuel used in transportation, Mandi tax, Duty on electricity used during manufacturing etc. These would be covered for reimbursement under the RoDTEP Scheme. The rebate would be claimed as a percentage of the Freight on Board (FOB) value of exports.

An exporter desirous of availing the benefit of the RoDTEP scheme [applicable to Chapters 51, 52, 53 to 60] shall be required to declare his intention for each export item in the shipping bill or bill of export. The RoDTEP shall be allowed, subject to specified conditions and exclusions. The rates would be applicable from 01-Jan-2021.

As the rates are notified, System would automatically calculate the RoDTEP amounts for all the items where RoDTEP was claimed. No changes in the claim will be allowed after filing of export general manifest.

The Scheme will encompass all sectors (excluding textiles goods covered in Chapter headings of 61,62, 63), with priority given to labour intensive sectors which are enjoying benefits under MEIS Scheme at 2%, 3% or 5% of the export value.

Credit on plant and machinery

In yarn and fabric manufacturing factory, the construction of special foundation for the heavy machinery, special columns etc. using steel, cement etc. for installing factory machinery, lifts, hoists, blowers, furnaces, air conditioning systems, being classified as plant and machinery would be eligible for input tax credit as it is not barred by section 17(5).Proper classification of the product following Ind AS in the financials would support the availing of eligible ITC. Reiterated by the Supreme Court in the Safari Retreat decision of 2024.

Exports of textile products

Global trade of textile goods where the goods do not enter India would not entail any payment of GST nor any reversal of ITC u/r 42/43 of the CGST Rules, 2017.This is equally applicable in the case of high sea sale of goods and the sale of goods in bonded warehouse.

Pure agent exclusions

In case of pure agent transactions, exclusion from GST could be availed only in case where the terms of the agreement are in line with the definition and conditions of pure agent. Where a textile businessman is engaged as a pure agent of the other person being the recipient, it is important for him to ensure that he satisfies all the conditions of pure agent to claim exclusion from value of the supplies of services done by him.

This article is adapted from the tax planning chapter from our book- Practical Guide to GST in Textile Industry (2024 edition slated for release next month.). Feedback at [email protected] or [email protected]