GST: AAAR on Canteen Services

As  per  the  recent  judgement  of  Appellate  Authority  for  Advance Ruling1, Kerala it has been clarified that recovery of food expenses from employees for the canteen exclusively for employees provided by company comes under the definition of outward supplies and is therefore, taxable under Goods and Service Tax Act.

Issue under Consideration: – Whether the recovery of food expenses from employees for the running and maintenance of canteen run exclusively for employees by company falls under the definition of outward supplies and is taxable under Goods and Service Tax Act.

Facts of the Case: –

  1. Applicant is a Private Limited Company engaged in manufacture and sale of foot wear
  2. Applicant is providing canteen services exclusively for their employees and recover the running and maintenance expenses from employees without any profit

Analysis

Applicant’s Plea: –

  1. Company is not carrying out any business activity and it is according to the requirement of law – Factories Act, 1948 I.e. company is only facilitating the supply of food to the employees, which is a statutory
  2. requirement, and is recovering only the actual expenditure incurred in connection with the food supply, without making any profit.
  3. Schedule III, Clause 1 of GST Act 2017, services by an employee to employer in the course of or in relation to his employment is neither a supply of goods, nor a supply of services and that any consideration received by the employee from his employer is outside the purview of GST.
  4.  In the erstwhile Service tax regime as well, Notification 25/2012- ST in relation to Mega Exemptions wherein services in relation to supply of food or beverages by a canteen maintained in a factory covered under the Factories Act, 1948 was exempted.
  5. Press release issued by CBIC(CBEC) regarding clarification of applicability of Reverse Charge under section 9(4) of the GST Act, 2017 on the purchase of ornaments by a jeweller from a customer – Jeweller will not be liable to pay tax under reverse charge mechanism on such purchases as the sale of jewellery does not paramount to be in the course of furtherance of business of the individual and hence, do not qualify as a supply perse. Relying on this, appellant contended that if an activity is not in the course or furtherance of one’s business, it does not constitute supply unless it is import of service as per Section 7(1) of GST Act, 2017. Additionally, contended that supply of subsidized food is not the business of the appellant, in the same manner as supply of gold jewellery was held not to be the business of the consumer
  6. The assessee has relied upon judicial pronouncement by the Hon’ble High Court of Telangana in the case of M/s. Bhimas Hotels – stating that subsidized food to employees and realization of cost of wages is an industrial obligation it does not amount to service. Additionally, Government of India issued a press release on 10-07-2017, stating that supply by employer to employee is in the course of furtherance of business and comes under Schedule III, which is not liable to

Authority for Advance Ruling (AAR) and Appellate Authority for Advance Ruling
(AAAR): –

  1. Schedule II to GST Act – Activities to be treated as supply of goods or supply of services

Clause 6 – Following Composite Supply is declared as a supply of service

“Supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.”

Even  though  there  is  no  profit  as  claimed  by  the  applicant  on  the supply  of  food  to  its  employees,  there  is  ‘supply’  as  provided  in Section 7(1)(a) of the GST Act, 2017. Thus, the appellant would fall under the definition of ‘supplier’ under section 2(105)  of GST Act, 2017.

2. Consideration – Section 2(31) of GST Act, 2017 provides that any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by other person but shall not include and subsidy given by the Central Government or a State Government

Since the applicant recovers the cost of food from its employees, there is a consideration.

3. The decision of the High Court in Bhimas Hotels case pertains to the erstwhile Service Tax Law, when Service Tax and Value Added Tax stood on separate and independent footing. It was held that

“……the petitioner has paid the value added tax on the value of the food supplied to its workers. In respect of some assessment years, they have even been imposed with a penalty under the Andhra Pradesh value Added Tax Act, 2005. Therefore, once the State Authorities have treated the supply of food to the workers of the petitioner as sale, it is not open to the respondents to treat the same as service and impose a liability……”

4. Hence, the Hon’ble Court had decided upon a matter where the issue of double taxation was a relevant fact. As there is no possibility of such double taxation in the GST It is evident that the facts of the Bhimas Hotels case cannot be considered to be in part- materia with the facts of this case.

Our Remarks

Many companies follow the policy of providing meals to employees and deduct a certain amount from their respective salaries. The said judgement could increase the compliance burden many folds on the such companies and also increase the cost of doing business.

A wide definition of consideration under the GST Act, 2017 has and will lead to many non- business activities to fall under the ambit of supply and many corporates among other assessee will have to bear the burden of the same.

This can also have impact on the salaries of employees, since now either the company will bear the GST liability or will recover from the employees.

Since, in the above transaction major limb of it is involving Business to Consumers (B2C) transactions.

Also,  it  is  still  not  clear  the  above  transaction  would  be  taxable  at what rate, 5% (as canteen) without input credit or 18% as outdoor caterer with ITC.

In view of the order passed by AAAR, we will have to look on each and every aspect of employee benefits (perquisites) offered by employer to determine whether they are falling under the definition of supply and consideration. Therein, determining the taxability of such benefits.

Although, the above judgement is binding only on the applicant and the judicial authority, but it can be referred in other cases as well.

GST Audit

INTRODUCTION TO GST AUDIT

While the GST regime emphasizes self-assessment processes, the complexities involved in it make one wary.
At this juncture, it is clear that the GST law is not presently simple enough for an assessee to compute his total and taxable turnovers and duly report the same.
Thus, in order to ensure effective compliance with the various GST provisions and to ensure performance of audits in a systematic, transparent and fair manner, audit provisions have been incorporated under the GST Acts/ Rules.

Definition of the term “Audit”

Section 2(13) of the CGST Act/SGST Act provides

“Audit” means the examination of records, returns and other documents maintained or furnished by the registered person under the GST Acts or the rules made there under or under any other law for the time being in force to verify the correctness of turnover declared, taxes paid, refund claimed and input tax credit availed, and to assess his compliance with the provisions of the GST Acts or the rules made there under.

Audit under GST

audit under gst

Audit by a Chartered Accountant

Section 35(5) of the CGST Act/ SGST Act read with Rule 80(3) of the CGST/SGST Rules, 2017

  • Registered person having turnover during a financial year s. 2 Crore or more shall get his accounts audited by a Chartered Accountant or a Cost Accountant
  • The term “aggregate turnover” has been defined as under vide Section 2(6) of the CGST Act/SGST Act:

“Aggregate Turnover” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on  all  India  basis but excludes central tax, State tax, Union territory tax, integrated tax and cess

An    exhaustive    definition under  Section  2(6)  of  the CGST Act/SGST Act

Inclusions

  • Taxable supply
  • Exempt/ Nil rate supply

An    exhaustive    definition under  Section  2(6)  of  the CGST Act/SGST Act

  • Non-taxable supply –

Alcoholic Liquor for Human Consumption and five specified Petroleum Products i.e. Petroleum Crude, Motor Spirit (Petrol), High Speed Diesel [HSD], Natural Gas and Aviation Turbine Fuel [ATF]

  • Export of goods or services
  • Supplies to branches in other states having same permanent account number

However, certain Exclusions shall be made while computing the Value of Aggregate Turnover

i) Value of Inward supplies on which tax is payable by a person on Reverse Charge basis.

Examples of supplies subject to Reverse Charge are- Services provided by way of Sponsorship to any Body Corporate or Partnership Firm, Services supplied by a Director of a Company or Body Corporate to the said company or Body Corporate

ii) Central Tax, State Tax, Union territory Tax, Integrated Tax and Cess

Statements and Documents

It shall be necessary for the registered person to submit to the proper officer the following Statements and Documents:

  • A copy of the Audited Annual Accounts;
  • Reconciliation Statement under Section 44(2) of the CGST Act/SGST Act e.

The aforesaid Reconciliation Statement shall be duly certified in FORM GSTR-9C, electronically through the common portal either directly or through a Facilitation Centre notified by the Commissioner.

  • Other prescribed documents in the prescribed form and prescribed

It is also to be borne in mind that the Government is yet to prescribe the format of the Audit Report and Annexures thereto. Further, it is also not yet clear, whether auditor is required to identify and report the discrepancies month-wise or annually.

Appointment & Removal

Appointing Authority of GST Auditor
  • In case of a company the appointment of the GST auditor shall be made by a resolution of the Board of Directors or by an officer of the company, if so authorized by the Board in this
  • In case of a partnership firm or proprietary concern, the appointment can be made by a partner or the proprietor or a person authorized by the assessee. The acceptance of appointment by the proposed GST Auditor shall also be communicated in writing to the
Removal of GST Auditor
  • Any resolution to remove a statutory auditor shall not be effective unless there are good and substantial grounds for the removal related to the conduct of the auditor with regard to the performance of his or her duties as auditor. However, the auditor cannot be removed on the ground that he has given an adverse or qualified Audit
  • In the event an auditor has been removed without any valid grounds, the Ethical Standards Board of ICAI or ICWAI, as the case may be, can intervene and it may direct the incoming auditor not to accept the audit

 

GST  has  been  implemented with  effect  from  01.07.2017.  As  a  consequence,  during the financial year 2017-18, GST remained in force only for a period of nine months from 01.07.2017 to 31.03.2018.

The point of consideration is whether the above-mentioned   annual  turnover   limit of  Rs.  2  crore  for  audit  purposes  shall apply  proportionately  in  the  given  case for  a  period  of  nine  months  or  whether the foregoing limit shall apply as it is for a period of nine months ?

A suitable and immediate clarification from the Government(s) is required in this regard. However, considering the old laws and the interpretation thereof the aggregate turnover shall be considered for the nine months only

It can be inferred that only for the purpose of determining the eligibility of the assessee who is required to get its accounts audited by a Chartered Accountant or a Cost Accountant, the all India based turnover shall be considered.

The   turnover   limit   of   Rs.   2   Crore   shall   be computed by including turnover in all the States or Union territories, as the case may be, i.e. on all India basis under same PAN

Furthermore,  the  foregoing  threshold  turnover limit of Rs. 2 Crore is same for assessee’s in all the States and Union Territories

Thus, it can be safely inferred that no separate threshold limit has been specified for Special Category States.

Since each of the State GST Acts also has the provisions relating to GST Audit, it appears that the GST audit shall be conducted state-wise

 

GST: Don’t miss the last chance to rectify errors of FY 2017-18

Nothing is more expensive than a missed opportunity – A penny saved is a penny earned

Any  rectifications  in  the  details  already  furnished  in  returns  of  July  2017  to  March  2018  may  be corrected/added  in  the  return  to  be  filed  for  the  month  of  September  2018.  Details  of  outward supplies can be modified on or before 31.10.2018 – due date for filing GSTR 1 and details of inward supplies on or before 20.10.2018 – due date for filing GSTR 3B.

·         Outward Supplies: –

  1. Invoice pertaining to FY 2017-18 missed in GSTR 1 – The invoice may be added in GSTR 1 along with invoices of September 2018 in Table 4 with original date. If the tax pertaining to invoice is also not paid, the same may be added to taxable value and tax of the month of September 2018 respectively and, pay the tax along with interest from due date of payment of tax till date of actual payment. However, the Annual return format i.e. GSTR 9 does not provide the facility to add these types of missing invoices but the most suitable disclosures may be made in Point 10 of Form GSTR
  2. B2B Invoice details wrongly entered in GSTR 1 –Here is a case where the invoice details are entered in GSTR 1 but some fields are wrongly mentioned. Some of the situations are:-
  3. Error in GSTIN i.e. Invoice is in name of Mr. A but GSTR 1 is filed mentioning GSTIN of Mr. B,
  4. Error in taxable value,
  5. Error in tax rate, ,

These details may be modified in Table 9A, 9B, 9C of GSTR 1. The same may be disclosed in Part V, Point 10 or 11 in GSTR 9.

  1. B2C details wrongly entered in GSTR 1–There will be again 3 types of errors in B2C details.
  • B2B invoice entered as B2C – If an B2B invoice pertaining to month of January 2018 entered as B2C in GSTR 1 of January 2018, this error can be rectified by adding the invoice details in GSTR 1 of September 2018 along with September B2B invoices and amending the B2C supplies of January 2018 using Table 10 of GSTR 1.

If the invoice is already declared in GSTR 3B correctly, the liability is not affected and the same will not be disclosed anywhere in GSTR 9.

  • B2C Intra-state supplies entered as Inter-state – If B2C supplies of an assessee from the state of Delhi entered as B2C supplies of Uttar Pradesh i.e. Intra state entered as inter-state, the same may be rectified using Table 10 of GSTR 1. However, if the same error is also continued in GSTR 3B too, the liability may be affected since IGST is paid instead of CGST+SGST. This can be rectified by paying CGST+SGST and claiming refund of IGST. The same needs to be disclosed in Part V, Point 10 of GSTR
  • B2C Inter-State supplies wrongly entered as different state– If B2C supplies made to Uttar Pradesh was entered as B2C supplies to Punjab by a supplier registered in Delhi; the tax liability doesn’t change but the state mentioned is wrong. This also doesn’t affect the liability, but the wrong details need to be rectified for correct

·         Inward Supplies: –

  1. Failed to avail ITC– Did you miss claiming ITC on any invoice pertaining to FY 2017-18, the same can be claimed upto the month of September 201 Include the same in

 

GSTR 3B of September 2018 and the ITC can be availed and utilised. These details are to be declared in GSTR 9.

  1. GSTR 2A Vs GSTR 3B – Monthly data of GSTR 2A can be downloaded in Excel format now. Many assessee have been ignoring the reconciliation of ITC as per GSTR 3B with details available in GSTR 2 This reconciliation exercise should be a continuous process since it is a time consuming one, but major outcomes are as under:-
    • Any missed credits i.e. supply on which ITC is available but not availed will come under notice when the reconciliation is done. It is important to note that the ITC pertaining to FY 2017-18 cannot be availed after the return for the month of September 2018 is
    • There may be situations where ITC has been claimed as per Invoice issued by the supplier, but the supplier failed to file GSTR 1. If supplier doesn’t file GSTR 1, the invoice details doesn’t appear in GSTR 2 This exercise helps us to follow up with the supplier and intimating/educating them to file their GSTR 1.
  2. Excess ITC claimed – There may be situations where excess ITC would have been claimed due to error. For example, instead of entering only tax amount in ITC IGST column in GSTR 3B, amount of purchases may be entered which inflates IGST ITC. The same may be rectified now by reversing the excess ITC availed by entering the amount to be reversed in Table 4(B)(2) of GSTR 3B for the month of September 2018 and the same may be disclosed in Part V Point 12 of GSTR

The situations discussed above are the most common issues which are required to be addressed in this September  return.  Now,  one  may  agree  that  September  month  is  made  crucial  even  from  indirect taxes point of view and hence please be cautious and re visit all the returns filed, reconcile with books of accounts and GSTR 2A and claim the missed ITC and rectify any errors that were made while filing the returns for FY 2017-18.

Proposed Direct Tax Amendments in Finance Bill 2018

Individuals, HUF, AOP, BOI

  1. No change in Tax Rate
    a) For a resident senior citizen (who is 60 yrs or more at any time during the previous but less than 80 yrs on the last day of the previous year)
Net Income range Income tax rates Surcharge Health and Education Cess
Upto                Rs.

3,00,000

 Nil Nil Nil
Rs. 3,00,000 – Rs. 5,00,000 5%    of    (total         income minus Rs. 3,00,000) Nil 4%    of    income         tax inclusive of surcharge
Rs. 5,00,000 – Rs. 10,00,000 Rs.   10,000   +   20%   of

(total income minus Rs. 5,00,000)

 Nil 4%    of    income         tax inclusive of surcharge
Rs.   10,00,000   –

Rs. 50,00,000

 Rs.  1,10,000  +  30%  of

(total income minus Rs. 10,00,000)

 Nil 4%    of    income         tax inclusive of surcharge

 

Net Income range Income tax rates Surcharge Health  and Education Cess
Rs. 50,00,000 –

Rs. 1,00,00,000

 Rs.  13,10,000  +  30%  of

(total income minus Rs. 50,00,000)

 10%          of income tax 4%    of    income         tax inclusive of surcharge
Above                        Rs. 1,00,00,000 Rs. 28,10,000 + 30% of

(total income minus Rs. 100,00,000)

 15%          of

income tax

 4% of income tax and surcharge

b) For a resident super senior citizen (who is 80 yrs or more at any time during the previous year)

Net Income range Income tax rates Surcharge Health  and Education Cess
Upto  Rs. 5,00,000 Nil Nil Nil
Rs. 5,00,000 – Rs. 10,00,000 20%    of   (total  income minus Rs. 500,000) Nil 4% of income tax inclusive  of surcharge

 

Net  Income range Income tax rates Surcharge Health  and Education Cess
Rs.   10,00,000   –

Rs. 50,00,000

 Rs.   100,000   +   30%   of

(total  income  minus  Rs. 10,00,000)

 Nil 4% of income tax inclusive                 of

surcharge
Rs. 50,00,000 –

Rs. 100,00,000

 Rs.13,00,000  +  30%  of

(total income minus Rs. 50,00,000)

 10%          of income tax 4% of income tax inclusive                 of surcharge
Above                        Rs. 100,00,000 Rs.  28,00,000  +  30%  of

(total  income  minus  Rs. 100,00,000)

 15%          of

income tax

 4% of income tax inclusive                 of surcharge

 

c) For any other resident individual, any non-resident individual, every HUF / AOP / BOI / artificial juridical person–

Net  Income range Income tax rates Surcharge Health   and Education Cess
Upto Rs. 2,50,000 Nil Nil Nil
Rs.  2,50,000  –  Rs. 5,00,000 5%    of    (total         income minus Rs. 2,50,000) Nil 4%   of    income         tax inclusive of surcharge

 

Net  Income range Income tax rates Surcharge Health  and Education Cess
Rs.  500,000  –  Rs. 10,00,000 Rs.   12,500   +   20%   of

(total income minus Rs. 5,00,000)

 Nil 4%   of    income         tax inclusive of surcharge
Rs. 10,00,000 – Rs. 50,00,000 Rs.  1,12,500  +  30%  of

(total    income             minus Rs.10,00,000)

 Nil 4%   of    income         tax inclusive of surcharge
Rs.   50,00,000   –

Rs. 1,00,00,000

 Rs.  13,12,500  +  30%  of

(total income minus Rs. 50,00,000)

 10%           of

income tax if income exceeds Rs 50,00,000

 4%   of    income         tax inclusive of surcharge
Above               Rs.

1,00,00,000

 Rs.  28,12,500  +  30%  of

(total income minus Rs. 100,00,000)

 15%           of

income tax

 4%   of    income         tax inclusive of surcharge

 

  1. It is proposed to provide a standard deduction of Rs 40,000 for salaried employees irrespective of the salary However, benefit of transport allowance of Rs 19,200 (except in case of differently abled persons) and Medical Reimbursement of Rs 15,000 under Section 17(2) of the Income-tax Act, 1961 (“the Act”) are being withdrawn.
  2. Any receipt whether capital or revenue in nature arising on account of any re- negotiation, termination or modification in the terms of any contract relating to employment shall be taxable as other income under section 56 of the
  3. Section 80D of the Act is proposed to be amended to raise the monetary limit of deduction from Rs 30,000 to Rs 50,000 in respect of premium paid for health insurance premium and medical treatment. Further, where insurance policies having cover of more than one year, it is proposed that the deduction shall be allowed on proportionate basis for the number of years for which health insurance cover is provided. The proposed enhanced limit will apply from AY 2019-20.
  4. Section 80DDB of the Act provides enhanced deduction to senior citizens for medical treatment of specified diseases. It is proposed to amend the provisions of section 80DDB of the Act so as to raise this monetary limit of deduction to Rs 1,00,000 for both senior citizens and very senior citizens. The proposed enhanced limit will apply from AY 2019-1
  5. A new section 80TTB from AY 2019-20 is proposed to be inserted to provide exemption to senior citizens (exceeding 60 years of age) from deduction of TDS on interest received up to Rs 50,000 from banks, FD, Terms
  6. Limit for withholding tax under section 194A on the interest payable to senior citizen exceeded from Rs 10,000 to Rs 50,000. Thus, where interest income is received by a senior citizen, no tax will be withheld upto Rs 50,000. Further, where the senior citizen is earning that interest on behalf of HUF, firm or any other person, the limit of Rs10,000 will only

Firms:

  1. A firm is taxable at the rate of 30 percent for the assessment year 2019- Surcharge is 12 per cent of income-tax if net income exceeds Rs 1 crore. Health and Education Cess – 4% of income tax inclusive of surcharge

Income from property held for charitable or religious purposes:

  1. It is proposed to insert a new Explanation to the section 11 to provide that for the purposes of determining the application of income under the provisions of sub-section

(1) of the said section, the provisions of sub-clause (ia) of clause (a) of section 40, and of sub-sections (3)  and (3A) of section 40A, shall,  mutatis mutandis, apply as they apply  in  computing  the  income  chargeable  under  the  head  “Profits  and  gains  of business or profession

Accordingly, where a payment by an entity registered under section 11 is made in cash for more than Rs 10,000 as provided in sub-section 3 and (3A) of section 40, the cash so paid will be considered as a taxable income of such registered entity.

 

Likewise, where the payments made by an entity registered under section 11 requires withholding  of  tax  and  such  tax  is  not  withheld,  the  payment  so  made  will  not  be considered as accumulation of income as per the provisions of section 40(a) /(ia) and will be chargeable to tax.

Similar, explanation is proposed to be inserted in section 10(23C) of the Act.

The above provision is proposed to be applicable from assessment year 2019-20.

Corporates:

  1. Corporate Tax Rate
    i] Domestic Companies having total turnover or gross receipts not exceeding Rs. 250 crores in Financial year 2016-17 shall be liable to pay tax at 25% as against present ceiling of Rs. 50 crore in Financial year 2015-1
Company AY 2019-201
Where   its   total   turnover   or   gross   receipt   during   the previous year 2016-17 does not exceed Rs. 250 crores 25%
Where   its   total   turnover   or   gross   receipt   during   the previous year 2016-17 exceeds Rs. 250 crores 30%
any other domestic company 30%

 

ii] No proposed change in the tax rate of foreign company (i.e. 40% plus applicable surcharge and health & education cess).

 

11. No change in surcharge rate

Company If net income does             not

exceed       Rs.1

Crore

 If net income is in the range of Rs.1 Crore – Rs

10 crore

 If net income exceeds Rs.10 Crore
Domestic Company – 7% 12%
Foreign Company – 2% 5%

 

In other cases (including  sections 115-O (dividend distributed), 115QA (buy-back of shares),  115R  (distributed  income  to  unit  holders),  115TA  (distributed  income  to investors) or 115TD (tax on accreted income of trusts and institutions)), the surcharge shall be levied at the rate of twelve per cent.

 

12. Deemed dividend

 

  • Currently, deemed dividend under section 2(22)(e ) of the Act, is taxable in the hands of shareholders as per the applicable marginal rate. It is proposed to tax the deemed dividend in the hands of the company as part of divided distributed under section 115-O of the Act and is proposed to be taxed @ 30%. The proposed rate of 30% shall be the final rate and will not be further grossed up as is done in case of other dividend covered under the provisions of section 115-O of the

 

The above provisions are proposed to be applicable on transactions undertaken on or after 1 April 2018.

 

  • A new Explanation 2A proposed to be inserted under section 2(22) (e ) of the Act, to include the accumulated profit of the amalgamating company as on date of amalgamation as well to compute the total accumulated profit for taxing deemed dividend.

13. Business Connection

 

a) Section 9 of the Act provides the instances where income is deemed to accrue or arise in India. It includes the income which accrues or arise in India through a business connection in India. Explanation 2 to sub-section 1 of section 9 provides the inclusive definition of business connection. Clause (c ) of the explanation provides that any business activity carried out through a person who, acting on behalf of non-resident habitually exercises in India, an authority to conclude contracts on behalf of non-resident will be treated as a business connection in India. Accordingly, the income so derived from such business connection is taxable in

 

It is proposed to amend provide that “business connection” shall also include any business activities carried through a person who, acting on behalf of the non- resident, habitually concludes contracts or habitually plays the principal role leading to conclusion of contracts by the non-resident. However, the such contracts will be taxable in India only if the contracts should be-

i) in the name of the non-resident; or
ii) for the transfer of the ownership of, or for the granting of the right to use, property owned by that non-resident or that the non-resident has the right to use; or
iii) for the provision of services by that non-resident.

The above amendment is proposed to be in line with BEPS Action Plan 7 have now been included in Article 12 of Multilateral Convention to Implement Tax Treaty Related Measures

b) Currently, section 9 of the Act provides for physical presence-based2nexus rule for taxation of business income of the non-resident in India. Therefore, it is always litigated that emerging business specially in digitized businesses, which do not require physical presence of itself or any agent in India, is not covered within the scope of clause (i) of sub-section (1) of section 9 of the Act. Accordingly, there income even if generated from India, is not taxable in

 

To curb the above situation, it is proposed to introduce the concept of ‘significant economic presence’ in India.

The income of non-resident where the significant economic presence is established will be taxable in India only to the extent of the income attributed to such transaction (as falling in above two conditions) in India. Further, the significant economic presence will not be dependent upon the existence of residence or place of business of non-resident or the fact that no service is rendered in India.

The above amendment will not override the provisions of the Double Taxation Avoidance Agreements unless a specific amendment is made therein.

 

It is important to note that the government has already introduced the concept of equalization levy to withhold taxes on payment made for online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement to non-residents not having any permanent establishment in India. The above step is in furtherance to it.

The above amendments are proposed to be applicable from Assessment year 2019- 20.

14. Section 10(48A) of the Act, subject to certain conditions, provides an exemption to non-resident companies where the income is accruing or arising in India on account of storage of crude oil in a facility in India and sale of crude oil in India. The exemption from tax is currently available only in completion of contract and thus in case of termination of contracts, the sale proceeds of leftover is taxable in India. The amendment is proposed to include the event of termination of contract also as eligible condition for allowing the exemption on the proceeds of leftover

15. Section 28 of the Act is proposed to be amended to include any compensation received or receivable, whether revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract relating to the business of the assessee.

Accordingly, any receipt whether capital or revenue in nature arising on account of any re-negotiation, termination or modification in the terms of the business contract shall be taxable as business income.

16.It is further proposed to amend to include the fair market value of inventory on the date of conversion of such inventory into the capital asset as business income under newly  proposed  clause  (via)  to  section  28  of  the  Act.  The  fair  market  value  so considered as business income will be treated as cost of acquisition of inventory at the time of computing capital gain on sale of (converted inventory) capital asset.

Further, clause (42A) of section 2 of Act is also proposed to provide that the period of holding  of  such  capital  asset shall  be  reckoned  from  the  date  of  conversion  or treatment.

17.Section 43(5) of the Act provides the transactions from which the income is considered as speculative in nature. It also provides an exception list to consider various transactions as non-speculative nature even though the contracts are settled otherwise than by the actual delivery or transfer of the commodity or Clause (e) of section 45 of the Act provides that a transaction in respect of trading in commodity derivatives carried out in a recognized association which is chargeable to commodities transaction tax will not be considered as speculative transaction.

Currently, commodities transaction tax is payable only on non-agricultural commodity derivatives thereby leaving agricultural commodity products to be out of ambit of commodities transaction tax. Accordingly, the transactions in agricultural commodity products is treated as speculative transaction

It   is   proposed   to   include   agricultural   commodity   products   as   well   liable   for commodities transaction tax and thus to be considered as non-speculative transaction from Assessment Year 2019-20.

18.Section 79 of the Act provides for carry forward and set off of losses in case of certain companies. It provides that carry forward and set off of losses in a closely held company shall be allowed only if there is a continuity in the beneficial owner of the shares carrying not less than 51 of the voting power, on the last day of the year or years in which the loss was incurred.

The   Companies   undergoing   reconstruction   or  rehabilitation   undergo   change   in shareholding which extends to more than 51% of the voting power.   It is proposed to relax the rigors of section 79 in case of such companies, whose resolution plan has been approved   under   the   Insolvency   and   Bankruptcy   Code,   2016,   after   affording   a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner. The amendment will be applicable from Assessment Year 2018-19.

19.Section 80 JJA of the Act provides additional deduction of an amount equal to 30 percent of additional employee cost incurred for three assessment Additional

employee is defined to include an employee who has been employed during the previous year and whose employment has the effect of increasing the total number of employees employed by the employer as on the last day of the preceding year.

However, the following employee are not eligible to be considered for this benefit—

  • an employee whose total emoluments are more than twenty-five thousand rupees per month; or
  • an employee for whom the entire contribution is paid by the Government under the Employees’ Pension Scheme notified in accordance with the provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952); or
  • an employee employed for a period of less than 240 days during the previous year; or
  • an employee who does not participate in the recognized provident fund

Further, the minimum number of employment period for apparel industry is 150 days instead of 240 days.   It is proposed to reduce the minimum number of employment period for footwear and leather industry as well from 240 days to 150 days.

There were instances where the minimum employment period of 240 days is not met by the employee in the year of employment. Thus, it is also proposed to extend benefit for a new employee who is employed for less  than the  240  days  during the year of employment but continues to remain employed for the minimum period in subsequent year.

20.Section 80P of the Act provides 100% deduction in respect of profit of cooperative society which provide assistance to its members engaged in primary agricultural activities.

The similar benefit is proposed to be extended to Farm Producer Companies (FPC). Accordingly, a new section 80PA is proposed to be inserted to provide deduction in respect of certain income of producer companies having a total turnover up to Rs. 100 Crore, whose gross total income includes any income from-

  • the marketing of agricultural produce grown by its members, or
  • the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or
  • the processing of the agricultural produce of its members

 

The benefit shall be available for a period of five years from the financial year 2018-19.

Presumptive Taxation

21.  Special Provision for Computing profits and gains of business of plying, hiring or leasing goods carriages.

Section 44AE of the Act provides special provisions for computing profits and gain of business of plying, hiring or leasing goods carriages. Currently, the profits and gains shall be deemed to be an amount equal to seven thousand five hundred rupees per month or part of a month for each goods carriage or the amount claimed to be actually earned by the assessee, whichever is higher.

The only condition for applicability of the benefit is that the assessee should not have owned more than 10 goods carriages at any time during the previous year.

It is proposed to amend section 44AE of the Act to provide that, in the case of heavy goods vehicle (more than 12MT gross vehicle weight), the income would deemed to be 1,000 rupees per ton of gross vehicle weight or unladen weight, as the case may be, per month or part of a month for each goods vehicle or the amount claimed to be actually earned  by  the  assessee,  whichever  is  higher.  The  vehicles  other  than  heavy  goods vehicle will continue to be taxed as per the existing rates.

For other than heavy goods vehicle, the existing value of 7,500 rupees for every month or part of a month during which the goods carriage is owned by the assessee in the previous year or an amount claimed to have been actually earned from the vehicle, whichever is higher will continue.

The expressions “goods carriage”, “gross vehicle weight”, “heavy goods vehicle” and “unladen weight” are also proposed to be defined to provide clarifications. The above amendment will be applicable from assessment year 2019-20.

 

Alternate Taxes

22. As per section 115JB of the Act, while computing book profit, a Company is allowed to claim a deduction in respect of the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of However, in case any of the two i.e. loss brought forward or unabsorbed depreciation is Nil, the deduction is also reduced to Nil.

Post implementation of Insolvency and Bankruptcy Code, 2016 many rehabilitating companies  are  seeking insolvency  resolution.  Thus,  it  is  proposed  to  allow  the Companies  which  have  filed  the  application  for corporate  insolvency  resolution process under the Insolvency and Bankruptcy Code, 2016 and the application has been admitted by the Adjudicating Authority, deduction of sum total of loss brought forward and unabsorbed depreciation to the extent of book profit.  The proposed amendment is applicable from assessment year 2018-19.

23.There are special provisions enacted under the Act which provide for determination of income of foreign company or non-residents on particular basis. The income derived from the source covered by the respective provision and computed in accordance with such provision shall be deemed to be the Profit and Gains of such business chargeable to tax under the head “Profit and Gain of Business or

It was always litigated that profit calculated under presumptive income provision is nevertheless income computed in accordance with the provision of this Act under the head income from Business or Profession and thus tax payable on such presumptive income together with income under other heads shall be compared with tax payable under section 115JB of the Act and then the liability shall be determined.

A retrospective clarificatory amendment (applicable from assessment year 2001-02) is proposed in section 115JB of the Act to provide that the provisions of section 115JB of the Act shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, if its total income comprises solely of profits and gains from business referred to in section 44B or section 44BB or section 44BBA or section 44BBB and such income has been offered to tax at the rates specified in the said sections.

24.Alternate Minimum Tax payable by a unit located in an International Financial Service Center under section 115JC of the Act, is proposed to be reduced to 9% as against current applicable rate of 18.5%.

Penal Provisions

25.Section 276CC of the Act provides penal provisions where a person willfully fails to furnish in due time the return of fringe benefits which he is required to furnish under sub-section (1) of section 115WD or by notice given under sub-section (2) of the said section or section 115WH or the return of income which he is required to furnish under sub-section (1) of section 139 or by notice given under clause (i) of sub-section (1) of section 142 or section 148 or section 153A, he shall be punishable,

  • in a case where the amount of tax, which would have been evaded if the failure had not been discovered, exceeds 25 lac rupees, with rigorous imprisonment for a term which shall not be less than 6 months, but which may extend to 7 years and with fine;
  • in any other case, with imprisonment for a term which shall not be less than 3 months, but which may extend to 2 years and with

The section provides an exception that where the tax payable by person on the total income determined on regular assessment, as reduced by the advance tax, if any, paid, and any tax deducted at source, does not exceed 3,000 rupees, the penal provisions will not be attracted.

It is proposed to withdraw the exception from Companies. Thus, in the case of willful default, the Companies may be subject to the liability as well as prosecution prescribed.

26. Section 271FA of the Act provides where a person fails to furnish a statement of financial transaction or reportable account under sub-section (1) of section 285BA of the Act, penalty of 100 rupees for every day during which such failure continues is leviable.

It is proposed to increase the penalty for non-filing financial return as required under section 285BA from Rs 100 per day to Rs. 500 per day.

27. A compliance amended has been proposed to allow assessee to file appeal before the Appellate tribunal against the order of CIT(A) under section 271J of the Act where any penalty is imposed for furnishing of inaccurate information in any report or certificate by an accountant, merchant banker or a registered

Benefit for Start-ups

28.  Special Provision in respect of specified business

Finance Act 2016 inserted Section 80-IAC which provides that deduction under this section shall be available to an eligible start-up for three consecutive assessment years out of seven years at the option of the assessee, if-

  • it is incorporated on or after the 1st day of April 2016 but before the 1st day of April 2019;
  • the total turnover of its business does not exceed twenty-five crore rupees in any of the previous years beginning on or after the 1st day of April 2016 and ending on the 31st day of March 2021; and
  • it is engaged in the eligible business which involves innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual

It is proposed to extend the benefit to the to start ups incorporated on or after the 1st day of April 2019 but before the 1st day of April 2021. Further, the requirement of the turnover not exceeding Rs 25 Crore would apply to seven previous years commencing from the date of incorporation.

Currently, the term eligible business which can claim the benefit of section 80-IAC of the includes, business which involves innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property. It is proposed to extend the benefit and include the business engaged in innovation, development or improvement of products or processes or services, or a scalable business model with a high potential of employment generation or wealth creation as well.

 

The above amendment is proposed to be applicable from Assessment Year 2018-19.

Capital Gain

29.  Introduction of new section 112A to tax long term capital gain arising on sale of equity-oriented fund or a unit of a business trust

 

  • Section 10(38) of the Act provides exemption on long term capital gain arising on sale of equity shares. It is proposed to withdraw exemption under section 10(38) in respect of transfer listed Securities Transaction Tax (“STT”) paid equity shares or a unit of an equity-oriented fund or a unit of a business trust transferred on or after 1 April 201
  • A new section 112A is proposed to be introduced to tax long term capital gains arising from transfer of long term asset e. equity share in a company or a unit of an equity-oriented fund or a unit of a business trust.
  • The gain under section 112A shall be taxed at 10 per However, the tax will be computed on the capital gain exceeding one lakh rupees.
  • The concessional rate of 10 per cent will be available without providing the benefit of
  • Further, the equity shares sold or acquired shall be those on which the STT is already paid. Thus, the tax under section 112A shall be over and above STT paid/deducted.
  • The cost of acquisitions in respect of the long-term capital asset acquired by the assessee before the 1st day of February 2018 shall be deemed to be the higher of –
  1. the actual cost of acquisition of such asset; and
  2. the lower of –
  • the fair market value of such asset3; and
  • the full value of consideration received or accruing as a result of the transfer of the capital

 

3  (a) in a case where the capital asset is listed on any recognized stock exchange, the highest price of the capital asset quoted on such exchange on the 31st day of January 2018. However, where there is no trading in such asset on such exchange on the 31st day of January 2018, the highest price of such asset on such exchange on a date immediately preceding the 31st day of January 2018 when such asset was traded on such exchange shall be the fair market value; and

b) in a case where the capital asset is a unit and is not listed on recognized stock exchange, the net asset value of such asset as on the 31st day of January 2018.

30.STT at the time of transfer of long term capital asset, being a unit of equity -oriented fund or a unit of business trust, shall not apply if the transfer is undertaken on recognized stock exchange located in any International Financial Services Centre (IFSC) and the consideration of such transfer is received or receivable in foreign currency.

31.It can be understood through an example:

 

Particulars Amount in INR
Shares sold on or before 31 March 2018 Nil Nil
Shares purchased before 31 January 2018 but sold after 31 March 2018
Purchase  Price  where  share  purchased before 31 January 2018 100 100
Highest price as on 31 January 2018 130 110
Sale Price as on 1 April 2018 110 130
Total LTCG as on 1 April 2018 20 20
Exempt LTCG 20 10
Taxable LTCG Nil 10 (tax @ 10%)

32.Tax on STT paid long term capital Gain will be 10% under Section 112 Further, where the total income comprises of long term capital gain taxable under section 112A and income under the other heads, the deduction under Chapter VIA4 will be restricted to the income under the other heads. Similarly, no rebate under section 87A of the Act will be available on such long-term capital gain income.

33.As per section 115R of the Act, income distributed by the specified company or a Mutual Fund to its unit holders of equity-oriented funds, is not chargeable to It is proposed that where dividend is distributed by a Mutual Fund being, an equity-oriented fund, the mutual fund shall be liable to pay additional income tax at the rate of ten per cent on income so distributed. The amendment is to bring all equity-oriented funds in line with the provisions of proposed section 112A of the Act.

34.Similarly, post introduction of section 112A, long term capital gain earned by FIIs on equity-oriented funds under currently exempt under section 115AD, will also be chargeable to tax at 10 per cent only in respect of amount of such gains exceeding one lakh rupees.

4 Section 80C, 80CCD, 80D, 80EE etc

35. It is proposed to amend section 47 of the Act to include the following transactions not to be considered as transfer by a non-resident for computing capital gain. However, the transaction shall be undertaken on a recognized stock exchange located in any International Financial Services Centre:

  • bond or Global Depository Receipt, as referred to in sub-section (1) of section 115AC; or
  • rupee denominated bond of an Indian company; or
  • derivative

Further, the consideration for the transfer shall be paid or payable in foreign currency.

36.Section 50C of the Act provides that where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government (hereafter in this section referred to as the “stamp valuation authority”) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of computing capital gain, be deemed to be the full value of the consideration received or accruing as a result of such transfer.

Provision of Section 50C is also proposed to be amended to allow a variation up to 5% of sale consideration in comparison to stamp duty value.

However, where the variation between sale consideration and stamp duty value is more than 5% of the sale consideration, the taxability of differential sum will continue both in the hands of seller as well as buyer.

Particulars Pre Amendment Post Amendment
Sale Price 86,00,000 86,00,000
Stamp Duty Value 90,00,000 90,00,000
Fair Market Value as per valuer 75,00,000 75,00,000
Difference in Stamp Duty value and sale price 400,000 400,000
Variation % on sale price 4.65% 4.65%
Capital Gain as on 1 April 2018 400,000 Nil (variation being less than 5% of sale

price)

37.Section 54EC of the Act provides benefit of capital gain exemption if investment in specified Bonds is made. It is proposed to restrict the exemption only if Capital gain is arising from sale of land and building only. Further period of holding being increased from 3 years to 5 years. By means of this amendment it has been proposed is to withdraw exemption hitherto available in respect of all other capital assets such as shares, jewellery etc.

Method of Accounting 5

38.Section 145 of the Act empowers the Central government to notify Income Computation and Disclosure Standards (“ICDS”). In pursuance the central government has notified ten such standards effective from 1st April 2017 relating to Assessment year 2017-1These are applicable to all assesses (other than an individual or a Hindu undivided family who are not subject to tax audit under section 44AB of the said Act) for the purposes of computation of income chargeable to income-tax under the head “Profits and gains of business or profession” or “Income from other sources”.

 

In order to bring certainty in the wake of recent judicial pronouncements on the issue of applicability of ICDS, it is proposed to —

5 Taken as-it-is from Memorandum of Finance Act 2018.

  • amend section 36 of the Act to provide that marked to market loss or other expected loss as computed in the manner provided in income computation and disclosure standards notified under sub-section (2) of section 145, shall be allowed
  • amend 40A of the Act to provide that no deduction or allowance in respect of marked to market loss or other expected loss shall be allowed except as allowable under newly inserted clause (xviii) of sub-section(1) of section
  • insert a new section 43AA in the Act to provide that, subject to the provisions of section 43A, any gain or loss arising on account of effects of changes in foreign exchange rates in respect of specified foreign currency transactions shall be treated as income or loss, which shall be computed in the manner provided in ICDS as notified under sub-section (2) of section 1
  • insert a new section 43CB in the Act to provide that profits arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method except for certain service contracts, and that the contract revenue shall include retention money, and contract cost shall not be reduced by incidental interest, dividend and capital gains.
  • amend section 145A of the Act to provide that, for the purpose of determining the income chargeable under the head “Profits and gains of business or profession, —
  • the valuation of inventory shall be made at lower of actual cost or net realizable value computed in the manner provided in income computation and disclosure standards notified under (2) of section 1
  • the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of
  • inventory being securities not listed, or listed but not quoted, on a recognised stock exchange, shall be valued at actual cost initially recognised in the manner provided in income computation and disclosure standards notified under (2) of section 14
  • inventory being listed securities, shall be valued at lower of actual cost or net realizable value in the manner provided in income computation and disclosure standards notified under (2) of section 145 and for this purpose the comparison of actual cost and net realizable value shall be done category-wise.
  • insert a new section 145B in the Act to provide that
  • interest received by an assessee on compensation or on enhanced compensation, shall be deemed to be the income of the year in which it is received.
  • the claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realisation is
  • income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income of the previous year in which it is received, if not charged to income tax for any earlier previous

Country-by-Country Reporting

39. Section 286 of the Act contains provisions relating to specific reporting regime in the form of Country-by-Country Report (CbCR) in respect of an international group. 31 March 2018 will be the due date for filing of first CbCR for financial year 2016-1 Following clarificatory amendments to be in line with Rules already prescribed are proposed to be made so as to improve the effectiveness and reduce the compliance burden of such reporting

  • the time allowed for furnishing the Country-by-Country Report (CbCR), in the case of parent entity or Alternative Reporting Entity (ARE), resident in India, is proposed to be extended to twelve months from the end of reporting accounting year. Currently, the time prescribed is on or before due date of filing of
  • constituent entity resident in India, having a non-resident parent, shall also furnish CbCR in case its parent entity outside India has no obligation to file the report of the nature referred to in sub-section (2) in the latter’s country or territory;
  • the time allowed for furnishing the CbCR, in the case of constituent entity resident in India, having a non-resident parent, shall be twelve months from the end of reporting accounting year;
  • the due date for furnishing of CbCR by the ARE of an international group, the parent entity of which is outside India, with the tax authority of the country or territory of which it is resident, will be the due date specified by that country or territory;
  • Agreement would mean an agreement referred to in sub-section (1) of section 90 or sub-section (1) of section 90A, and also an agreement for exchange of the report referred to in sub-section (2) and sub-section (4) as may be notified by the Central Government;
  • “reporting accounting year” has been defined to mean the accounting year in respect of which the financial and operational results are required to be reflected in the report referred to in sub-section (2) and sub-section (4).

 

Assessment

40. Finance Act 2018 proposes a new procedure for scrutiny assessment under section 143(3) of the Act. It is also proposed to insert two new provisions under sub-section (3A) and (3B) of section 143 for enabling the government to prescribe the new scheme for scrutiny assessments or any modification therein, by way of notification in the Official

However, such modifications/directions shall be issued up to 31 March 2020.

41. Sub-clause (vi) of Sub-section (1) of section 143(1) provides for adjustment in respect of addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the

It is proposed to insert a new proviso to the said clause to provide that no adjustment under sub-clause (vi) of the said clause shall be made in respect of any return furnished on  or  after  the  assessment  year  commencing  on  the  first  day  of  April  2018.  The amendment will be applicable for Assessment Year 2018-19.

Others

42.PAN as (Unique Entity Number) to be obtained by all entities including HUF other than individuals in case aggregate of financial transaction in a year is Rs 2,50,000 or more. All directors, partners, members of such entities also to obtain

43. For AY 2019-20 – Education cess (2%) and Secondary Education cess (1%) discontinued. However, a new cess by the name of Health and Education cess levied @ 4% levied on tax inclusive of

44.Deductions in respect of certain incomes provided under Chapter VIA – Part C of the Act shall not be allowed unless the return of income is filed by the due Deduction under Chapter VIA includes specific deductions provided under section 80IA, 80IB, 80 IAC, 80JJA containing special benefits provided. The proposed amendment will be effective from assessment year 2018-19.

45.Under the existing provisions of the clause (12A) of section 10 of the Act, an employee contributing to the NPS is allowed an exemption in respect of 40% of the total amount payable to him on closure of his account or on his opting out. This exemption is not available to non-employee In order to provide a level playing field, it is proposed to amend clause (12A) of section 10 of the Act to extend the said benefit to all subscribers.

46.At present, similar to the provisions of section 50C of the Act, while taxing income from business profits (section 43CA) and other sources (section 56) arising out of transactions in immovable property, the sale consideration or stamp duty value, whichever is higher is adopted. The difference is taxed as income both in the hands of the purchaser and the seller. Provision of Section 43CA and 56(2)(x) is also proposed to be amended to allow a variation up to 5% of sale consideration in comparison to stamp duty

However, where the variation between sale consideration and stamp duty value is more than 5% of the sale consideration, the taxability of differential sum will continue both in the hands of seller as well as buyer.

47.Interest on compensation, enhanced compensation. Claim or enhancement claim and subsidy, incentives to be taxed in the year of receipt only as per new Section 14

48.National Technical Research Organization (“NTRO”) is proposed to be exempted from withholding on the payments in the nature of Royalty or fees for technical services covered under section 195. Accordingly, a new clause 6D is proposed to be inserted under section 10 of the Act exempting NTRO from withholding any tax.

49. Section 140 of the Act is proposed to be amended to provide that during the resolution process under the Insolvency and Bankruptcy Code, 2016, the return shall be verified by an insolvency professional appointed by the Adjudicating Authority under the Insolvency and Bankruptcy Code, 201

50. New Rules – Rule 1 to Rule 11 for computing agricultural income referred in sub-clause

    • of Clause (1A) of Section 2 of the Act proposed. In consonance with the rules proposed, agricultural income proposed to be computed considering it as income chargeable to income-tax under the Act under the head “income from other sources” and deductions provided under section 57 to 59 shall

 

 

 

 

1  plus applicable surcharge and health & education cess

2  Either in the form of business connection, permanent establishment or place of effective management

Interest Rates Under GST

Through GST, Government has tried to digitize entire tax system to make it user friendly and easily accessible for everyone. As the system is automated, it will be calculating interest and late fee in case of any default.

If any registered person “fails to pay the taxes” to government or deposits the taxes after the due dates, then the registered person has to pay the interest as prescribed under different sections of GST Acts. Similarly, if the registered person has “claimed excess input credit” or “claimed input credit without their eligibility”, in such scenario also the registered person will be liable for interest payment.

There can  be  multiple reasons where  liability for  payment of  interest  can arise.  Defaults in  payment of output tax, excess credit availed & reversal of credit are some of the examples. Under GST regime, there are 2 rates have been prescribed for levy of interest. Section 50(1), which deals with late payment of output tax, interest rate chargeable will be 18% p.a, and under section 50(3) which deals with excess or undue input credit interest payable will be @ 24% p.a.

a) Situation covered under section 50(1) of CGST Act:

Tax Deposited after due date:

If     registered     person     has reported their correct  output tax liability in return but fails to pay on or before date, then taxpayer will be liable to  pay interest at the rate of 18% per annum. Such       period       of interest  calculation will  start from the next date of due date and  will  end  on  the  date  of payment.

Example: The        registered person  reported  tax  liability in      his      return      of      INR 10,00,000  for  the  month  of August  2017  for  which  due date was 20 September 2017 but made the payment of INR 10,00,000 on 1 October 2018, here   the   registered   person will be liable for interest for 11 days from 21  September to  1 October @18% per annum.

Output tax determined wrongly

If   the   registered   person   has under reported their output tax liability in return then they will be  liable  for  interest  @  18%, whenever   they   or  any   officer finds   that,   registered   person has  short  paid  tax  previously then  he  has  to  pay  taxes  along with interest of 18% per annum.

Example: Reason     for     such under reporting of liability can be  that  the  registered  person had  forgot  to  incorporate  one invoice  in  their  return  having tax   liability   of   2,00,000   and paid   the   tax   liability   as   per return only.

In  these  cases,  where  taxpayer under reported their output tax liability  then  they  have  to  pay interest @ 18% per annum1.

Input Credit wrongly availed

Whenever    registered    person availed   Input   credit   wrongly then  he  has  to  pay  interest  @ 18% per annum from the date of such excess claim to the date of payment.    Reasons    for    such excess   claim   can   be   Invoices received for having input credit of  200  (CGST+SGST)  but  the registered  person  claimed  400 (200+200) input credit.

Example: The registered person claimed input credit on food    and    beverage    services whereas  input  credit  on  such services  is  not  allowed  as  per section  17(5)  of  CGST  act.  In that  case  the registered person will be liable to pay interest @ 18% per annum from the date of input   credit   till   the   date   of payment.

b)  Situation covered under section 50(3) of CGST Act i.e. excess or undue Claim of Input Credit:

Whenever registered person availed excess Input credit on account of mismatch with actual inward supplies then he has to pay interest @ 24% per annum from the date of such excess claim to the

 

date  of  payment. Reasons  for  such  excess  claim  can  be  that  taxpayer  didn’t  receive  the  inward supplies but claimed input credit or supplies received in later months but claimed credit in current which is again will mis-match with vendors information for same month. Higher rate of interest is prescribed under that section is to avoid fake input credit without receiving actual supplies and to make the registered person disciplined to report their correct inwards supplies, which is match with vendors  records. Hence  whenever  input  credit  doesn’t  match  with  information  submitted  with vendor then higher rate of 24% per annum will be applicable.

 

Example: If recipient of supplies avails the input credit on the basis of actual supplies received but the supplier didn’t report such invoices in their GSTR 1, which results excess claim of input in the books of recipient, this case would be the case of Section 50(3), hence recipient will be liable for interest @24% per annum.

 

Other scenario where interest liability can arise and corresponding interest rate

  • Reversal of input tax credit in the case of non-payment of consideration to supplier within 180 days from the date of invoices, Interest rate will be 18% per annum, the Interest period will start from the date of availing credit on such supplies till the date when the amount added to the output tax liability
  • Inputs or capital goods that are not returned to the principal within year or 3 years respectively from the date of received by the Job worker, Interest rate will be 18% per annum, the Interest period will start from the date of delivery challan issued to the Job worker by the Principal till the date of reporting in output liability
  • Any other defaults for short payment/non-payment or erroneously refunded, Interest rate will be 18% per annum for default
  • If the registered person was required to pay IGST but wrongly paid CGST/SGST or vice versa then it will not be treated as default, hence interest liability will not

 

1 Basis for calculation of days will remain same as mentioned in above example.