Tax Planning in GST – Part -II

Part- I we had discussed the importance of drafting and the tax planning possible under the Constitution of India. In this part we examine the impact of legal maxims as an additional understanding of the law as it should be and even as areas where alternative defences could be researched for possible relief.

The working of several units in tandem whether defendable is also examined.

We also cover the understand the definitions and their tax planning possibilitie1. s.

I.??????????????????? Some Legal maxims

These are to be understood as they are aspects of the law which need not be proved. They are not and need not be a part of the GST law to be used or applied. They are in fact settled law of the past developed over centuries.

These can help us to take a decision in an easier manner and solve problems which appear unsolvable. They are persuasive in nature and are used by the judicial system while passing any decision. It helps us to decide on matters which have alternative actions possible.

(1) Ratio Decidendi

The ground or reason of decision which lead to a rule of law. While advisors read the law, they need to get the ratio instead of just the impact on the transaction. The ratio would be applicable in many ways. The common mistake is to only read the head notes which may at times not capture the essence of the judgment.

(2) Per Incuriam

A remark or observation made by mistake or by lack of regard to the facts or law related thereto. At times the Courts would decide an issue and while examining that they may observe something unrelated. This does not become a ruling and cannot be used as a precedent. Reliance on that type of decision can be successfully argued against. When relying on the decision, there is a need to confirm the issue being examined.

(3) Lex non cogit Ad Impossiblia, Impotentia excusat legem

The law does not force the impossibility-impossibility excuses the law-the need to ensure that all the suppliers pay the taxes and file the return in GST, classify, reconcile each line item in the invoice of supplier could possibly be instances. The Apex Court ?(State of MP Vs. Narmada Bachao Andolan?(2011) 7 SCC 639) has applied this maxim and held that where the law creates a duty or a charge and the party is disabled to perform it without any fault on his part and has no control over it, the law will in-general excuse him.

(4) Nemo punitur pro alino delicto

No one can be punished for the crime or wrong of another. Example: Denial of credit to recipient of goods/services for default by the supplier in paying the taxes or vendor not declaring/furnishing the invoice details in GSTR-1.

(5) Contemporanea exposition estoptima et fortissima in lege

The essence of law is in the spirit, not in its letter, for the letter is significant only as being the external manifestation of the intention that underlie it. The objective of GST is to avoid cascading of taxes and the restriction/denial of credit could be questioned as the intention was different. Further, the objective of GST law of enabling the compliant assesses is being disregarded by the Government while bringing out additional compliances and procedures like ensuring credit is availed when vendor has furnished invoice details in GSTR 1 and ITC reflected in 2B of recipient, which is focused on the tax evaders.

(6) Cuilibet in sua arte perito est credendum

Everyone who is skilled in his own art is to be believed. The trader/ manufacturer/service provider knows his calling better than the revenue officer. Expert opinions of authorities cannot be dismissed. This may be useful in case of doubts on the classification of goods.

(7) Delegatus non potest delegare

A delegate cannot delegate further. If Commissioner delegates the function to search or seizure to Jt. Commissioner and he further delegates the same to the Superintendent, this would be against this legally settled principle. The State GST officer have been usurping the powers of higher officers for some time with impunity. Court will rule this an illegal action.

(8) Generalia specialibus derogant

The provision of general statute must yield to those of a special one. Service tax law cannot overrule the GST law even in similar circumstances.

(9) Audi alteram partem

Listen to the other side or let the other side be heard as well i.e., the “Opportunity of Being Heard”. This is a principle of natural justice based on which many disputes have been remanded or dismissed.

(10) Vigilantibus et non dormientibus jura subveniunt

The law assists those that are vigilant with their rights and not those that sleep thereupon. However, this has not been followed by the Government where the Government has provided amnesty schemes [such as those which give waiver of penalty and late fee] to those who are non-compliant but not providing the same benefits to those who had filed the returns before notifying the amnesty scheme.

The understanding of these principles among many others would provide direction on which of the provisions/rules/circulars can be challenged and which cannot be. It could also aid in defending in case of disputes when the Act/Rules are not clear.

II.??????????????? GST Act and Rules

A comprehensive study of the GST law along with rules thereunder and a detailed study of notifications, circulars and clarifications under GST, High Court/Supreme Court and tribunal rulings under GST, important judicial decisions in the earlier regime are imperative to capture the tax planning areas within the ambit of law. For the sake of brevity, we will examine tax planning options in the activities limited to this industry as under:

1.????? Registration issues

The largest number of small retailers and small service providers in India are from this industry. Some of them do not even have a shop and sell on the pavements. Traditionally smaller businesses also have several related entities to plan for lower rate of income tax which is an accepted practice. All the entities maybe managed by one or more elders. In GST the threshold limit to register for sale of only goods [other than few exceptions] is normally Rs.40 lakhs and if there are 5 entities in the family with different PAN then under GST also the same number of entities would be existing. Therefore, within the family, the turnover without payment of GST could be Rs.2 Crores.

Similarly, in the Composition option where there can be multiple registrations for the small distributors/retailers with a single premise. The concessional rate of 1% without ITC may be preferable when selling to the final consumer. Again if 5 GSTIN are there in the family, the concessional rate would be available for up to Rs.7.5 Crores. Larger families would have exponentially higher number of entities with different PAN.

GST law at present does not have any provisions for clubbing of clearances as was prevalent under central excise. However, the practice of shifting orders or fragmenting businesses as they reach the threshold/composition limit may be said to be using colorable devices and disputes could arise in due course of time. However, for entities existing and new entities formed without the main objective of taking advantage of the law, there may be no problems.

2.????? Important definitions

Understanding the relevant definitions for alternate views and being able to comply and pay the appropriate tax is important. Some important definitions which are relevant to the textile sector are examined below:

i)??????? Business

Section 2(17) has defined the term “business”. Religious, educational, health care or charitable activities done by a charitable not for profit institution may or may not be a business. However, activities which are done in the course or furtherance of business for a consideration would be liable to GST.

Illustrations and tax implication of textile supply would be as under:

1.?????? Auction of sarees/clothes by a religious institution:

·???????? All the activities undertaken by a religious institution cannot be said to be exempt. Auction of sarees is not in the nature of advancement of religion. Thereby, GST would be levied on auction of sarees by a religious institution.

·???????? However, where the clothes are given for free by a religious institution to unrelated persons, in absence of consideration, levy under GST may fail.

2.?????? The sale of school uniforms:

·???????? The school sells the school uniforms to students as part of the exempted educational services, where it is forming part of the composite supplies, GST may not be levied on the sale of uniforms by schools to its students.

·???????? However, where the school uniforms are sold by the textile trader, there is no exemption available under GST.

3.?????? The sale of sacred threads is exempted but the sale of blessed idols in shops near the religious premises are not.

4.?????? Independent shops owned by the religious institutions selling devotee apparel needs such as lungis, sarees:

·???????? Exemption cannot be claimed.

5.?????? Renting of bed sheet and blankets within the ashram for devotees to sleep.

·???????? There is no specific exemption for the said activity under GST.

3.?????? Goods and services:

Section 2(52) and section 2(102) of the Act define the terms “goods” and “services” respectively. The definition of service excludes goods. Therefore, it is clear that the definitions of goods and services are mutually exclusive.

4.?????? Composite supply

Section 2(30) defines composite supply. The provision sets out that the tax is payable on the principal supply in case two or more taxable goods or services are supplied in conjunction with each other and they are naturally bundled.

In case of special pooja wherein textile adornments (sarees embroidered scarfs etc.) are supplied as a part of the package for Rs.10,000/-, it would be exempt as the principal supply is the religious ceremony.

In case of religious events there may be a consolidated amount which entitles one to accommodation, 1 piece of textile apparel, bed sheets/blankets etc. In this case, it may be disputed by GST dept that it is not a composite service- not naturally bundled and are a mixed supply, taxable at the highest rate applicable for all the items including the religious event.

5.?????? Consideration

Section 2(31) defines the term “consideration”. This definition excludes subsidies and deposits until they are applied by supplier towards the supply. The deposits in this industry could be rental/space deposit, distributors/retailers deposit of fixed amount to supplier (taken to mitigate risk of no payment). As long as the amount is not an advance, GST would be payable only on its utilization/disbursal.

6.?????? Continuous supply of services

Section 2(33) defines the term “continuous supply of services”. Continuous supply of services in textile industry could be in the form of textile fiber manufacturing services, textile weaving services, textile finishing services, knitted and crocheted fabric manufacturing services, made-up textile article manufacturing services, carpet and rug manufacturing services, cordage, rope, twine and netting manufacturing services and other textile manufacturing services. The thorny problem of job workers running bills on which various deductions due to quantity, quality etc. are made before payment is resolved and only once the statement is final [weekly or monthly], the GST is payable. If contract provides monthly billing and settlement, this could be used to issue invoice once a month etc.

7.?????? Fixed establishments

Section 2(50) defines the term “fixed establishment”. All fixed establishments need not be registered unless engaged in making supply of goods/services. Further the manufacturers may get work at any location in India, but finished goods moved to customer from the fixed establishment. In addition, the goods procured within that State and the local services at each location may lead to a need for the registration as a fixed establishment. If not registered, there may be demands made and denial of the input tax credits.

8.?????? Capital goods

Section 2(19) defines the term “capital goods”. This definition talks of the goods being capitalized. Credit maybe availed on say plant machinery which is capitalized, to extent used to make taxable supplies by registered textile manufacturer, provided the assessee has not claimed the benefit of depreciation even on the GST component under the provisions of Income Tax Act.

9.?????? Location of supplier of services

Section 2 (71) defines the term “location of supplier of services”. The registered place from where the supply is made.

10.?? Concept of supply

a.?????? The supplies made in furtherance of business without consideration other than those set out in Schedule-I, would not be liable to tax. Further the supply of goods by principal to his agent who undertakes to supply such goods on behalf of the principal or by an agent who receives goods on behalf of the principal is a common distribution channel in the textile industry. However, under GST the same business practice would be liable to GST in accordance with Schedule I of the CGST Act, 2017.

b.?????? Schedule II contains the list of activities or transactions which are to be treated as supply of goods or supply of services. Based on the amendment in the CGST Act, 2018, the term ‘supply’ is amended to exclude activities/transactions listed in Schedule II. This is to ensure that only where the activities/transactions constitute a supply, thereafter as per Schedule II shall be treated either as the supply of goods or services. This change has been notified on 1st Feb 2019 to be effective retrospectively from 01stJuly 2017. The activities in Schedule II relating to textile industry are-

???????????????????????? i.?????? treatment or process to another person’s goods [for example, job work] would be a supply of service.

?????????????????????? ii.?????? agreeing to an obligation to refrain from an act would be a supply of service.

Whether these aspects would be again facing a challenge is an answer the Courts would provide in the future.

c.?????? Schedule III specifies the list of activities or transactions which shall be treated neither as a supply of goods nor a supply of services under GST. It includes the supply of goods from a non-taxable territory to another place in non-taxable territory would not be covered under the scope of supply where the goods do not enter into India. Included in this are high sea sales and bonded warehouse sales. Further, when it comes to transactions between employer and employee, the same needs to be examined if the same would be out of ambit of GST, as the services provided by employee to employer in terms of the employment contract is not considered as supply of goods or services under GST.

d.?????? The question of what is a composite supply, whether GST is payable at principal supply rate and what is a non-composite supply i.e. GST payable at rate applicable to each supply, may need to ensure that the contracts, purchase orders or work orders are drafted clearly to capture the reality of the transactions and do not leave room for disputes. Exempted textile articles when moved may incur insurance, transportation expenses. This being a composite supply, the entire transaction would be exempt.

e.?????? The cross charge for internally generated services between GST registered branch offices of same legal entity, is one aspect where there is low compliance. Ensuring that the cross charge is done regularly between the same PAN but different GSTINs for multi locational entities would avoid demands later with attendant penalties and interest costs.

Beneficial Circular 199/11/2023-GST has clarified that it is not mandatory to distribute the common input service credit [such as ITC on? audit fees] through ISD mechanism and can instead cross charge to recipient branch by head office/HO. Similarly in respect of the cross charge for internally generated services [such as HR/Finance function] supplied between Head office(HO) and Branch office(BO)? it has clarified when recipient BO can avail ITC [as recipient makes taxable supplies] the value would be deemed to be declared as nil and no GST implication. Also when cross charging, it is not required to include salary costs for services supplied between HO and BO’s.

The circulars have binding effect on the department officers. Similarly held in Dhiren Chemicals case (2002 (143) ELT 19 (SC)].

However, it is significant that the Finance Act 2024 has proposed that the distribution of credit on input service invoices received by an office of a legal entity, but wherein such input services are attributable to other branches of said entity, would be mandatorily required to be done through ISD mechanism. The effective date of the said proposal is notified set to be applicable wef 1.4.2025 onwards.

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]