Tax Experts react to 39th GST Council meeting's announcements
Amidst the COVID-19 pandemic, the 39th GST Council meeting made a slew of significant announcements including the decision to increase tax-rate on mobiles, requiring Infosys to come up with solution for continued technical glitches, etc. While Mr. Nandan Nilekani, assured that he would personally monitor the progress of the GSTN project and also agreed to attend the IT-GoM for the next 6 months or till such time the initiatives are implemented, GST Council asked him to iron out the issues by July 2020.
On law and procedural front, Council gave a big sigh of relief by deferring the implementation of the new return system and e-invoicing. Further, Council approved introduction of “Know Your Supplier” (KYS) scheme. Council’s decision clarifying that delayed GST payment will attract interest on net tax liability, retrospectively from July 1, 2017 is definitely a welcome move.
“As per the GST Council decision interest on delay in payment of GST to be charged on net cash tax liability with effect from 1 st July 2017. While the provision to pay interest on net cash tax liability was introduced in Finance (No2) Act 2019, it was never notified as required by required by Section 1(2)(b) of the said Act. While the decision to make it retrospective from July 2017 is welcome, it will set in motion another round of legislative changes in Central and State laws.
Also the wording of the GST laws which allow refund would require a liberal interpretation to allow refund of interest only. While the RFD 01 makes it possible to file a refund claim only for interest, a round of avoidable litigation by overzealous officers interpreting the GST law narrowly cannot be ruled out. The Government should therefore come out with a circular that enables seamless processing of refund claims of interest only.”
GST council has taken some major decisions today (14 March), particularly on proposed new compliance framework.
The decision to defer the due date for filing the annual returns for financial year 2018-19 by 3 months was on expected lines and should provide much relief to the industry. While extension of due date for E-invoicing to October 2020 is a welcome step, given the quantum of change, industry should continue the preparation including engaging with vendors and customers.
'Know your supplier' is a great initiative which means that industry needs to be more diligent in onboarding the vendors and help the Government in creating a more compliant ecosystem. Decision to make a retrospective legislative change to levy interest on the net amount (after adjusting input tax credit) is important in view of conflicting court rulings, amounts involved and equity.
Increase of GST rate on mobile phones to 18%, arguably to correct the inverted duty structure, may lead to increase in prices. Given the current economic scenario, perhaps an option to provide quicker refund of input tax credit (including on input services which is not allowed currently) could have been explored.
The outcome of the 39th GST council meeting was eagerly awaited by the Industry in anticipation of announcement on deferment of E-invoicing. And the outcome did not disappoint at all, as the implementation of E-invoicing has been deferred by not one but two quarters with the new date of implementation being 1 Oct 2020. As implementation of E-invoicing is a critical business change involving activities such as undertaking ERP gap assessment, selection of technology partner, configuration of software patch, allocation of additional funds, resources, changes in SOPS etc., most dealers were not prepared for 1 April implementation, given the fact that notifications were issued as late as January and there were multiple changes in the E-invoice schema.
The new deadline of 01 October 2020, would give the Industry adequate time to prepare and ensure that an important statutory change of such magnitude gets its fair share of importance and management time.
Some other key announcements which gave a breather to the industry were deferment of new GST returns and extension of deadline for adhering with the GST annual compliances for FY 2018-19. It may not be a bad idea to continue with existing returns (i.e. GSTR-1 and GSTR-3B) for some more time as Industry has now become comfortable with the existing formats, ERPs have been aligned with these formats and from Government’s perspective, compliances for the current returns are also slowly picking up.
Another positive announcement was on continuing the benefits on imports under schemes such as Advance Authorization/Export Promotion Capital Goods /EOU upto 31 March 2021. Given the current geopolitical situation, this should give much needed certainty to the exporters, in these challenging times.
Further, with recent changes in the law mandating reconciliation with supplier invoices and limiting the availment of credit to certain percentage of matched credit, it is imperative for the taxpayers to know the compliance status of their supplier and vendors. ‘Know your supplier’ facility introduced by the Government would certainly help the taxpayers in determining the supplier/vendors’ compliance habits before selecting them for the business.
"Additional time for implementation of e-invoicing and revised GST returns provides the much sought after relief by businesses and also would help a more efficient implementation from a Government perspective; with additional time for a more effective testing by the Government, tax payers and system developers. Additional time for annual return and GST audit report of FY 18-19 further eases stress for buisnesses; especially given the year end pressures and their having closed similar FY 17-18 compliances only recently. The increased threshold to INR 5 Cr, for GST annual return and audit compliance would help ease compliances for small businesses; who would now have to only focus on quarterly/ monthly compliances, as the case may be.
A retrospective effect to the interest liability only triggering on net tax liability vis-a-vis gross liability is a highly welcome one by most businesses; especially given the profound litigation on this matter by the revenue authorities basis the internal advisory issued. This would help ease immediate cash flow burden for most companies as recovery notices were issued to a lot of businesses; demanding interest on gross liability.
An increase in the rate of GST for mobile phones from 12% to 18% should help bettering the working capital costs for businesses manufacturing these goods. However, the prices of mobile phones could witness an increase if the industry players decide to pass on the rate increase to customers
The proposed amendments related to credit reversal on capital goods used for taxable and exempt supplies should help clarifying ambiguities in the current law and reducing hardships and related interest repercussions on non-compliance. While the check on refunds claimed in case of exports should help check tax frauds, the said should be implemented after careful thought to ensure no adverse repercussions on genuine tax payers"
The Council on 14th March 2020, in its 39th Council meeting deliberated on various issues faced by the industries at large and moving towards E-invoicing and new returns in a manner which shall cause less disruption to the normal ways of working by the businesses. In depth discussions were done by Infosys represented by Shri Nandan Nilekani on GSTN glitches and readiness for new returns and E-invoicing.
The most debated charge of interest on late payment of GST by the taxpayers was settled by announcing applicability of interest on net cash tax liability with retrospective amendment effective from 1st Jul 2017. Key relaxations in compliances paves way for the companies to gear up and get the systems ready in a seamless manner. These included –
1) Extension of annual return for FY 2018-19 till 30thJun 2020
2) Deferring implementation of E-invoicing till 1stOctober 2020.
3) MSME’s with turnover below 5 Cr are not required to file GSTR 9 9C
4) Small Taxpayers with turnover below 2 Crores will not be levied any penalty for late filing of GSTR 9 9C for FY 2017-18 and 2018-19.
5) Taxpayers who were not able to opt for the special composition scheme as per Notification No. 2/2019-Central Tax (Rate) which was typically for taxpayers having only B2C supplies can file opt to file CMP 02 instead of GSTR 1 for FY 2019-20.
6) Due date for GSTR 1, GSTR3B and GSTR 7 for Jul’19 to Jan’20 extended till 24th Mar 2020 for registered persons in the Union territory of Ladakh.
7) Insurance company, banking company, financial institution, NBFC’s, GTA, passenger transportation service etc were excluded from the scope of E-invoicing in entirety
Infosys presented the issues faced on GSTN portal and road map on ways of eliminating the same. To support the removal of glitches and to increase the threshold of GSTN from 1.5 lakh users at a time to 3 lakh users, the government has approved a deployment of additional 60 member team along with procurement of necessary hardware for ensuring readiness for E-invoicing. The council also mandated Mr. Nilekani to attend next 3 council meetings and give an update on the progress.
Mr. Nilekani also addressed the issue of implementation of new returns and suggested an incremental manner whereby GSTR 1 will initially be linked to GSTR 3B followed by linking of input tax credits with GSTR 2A which are currently claimed suo moto in GSTR 3B. This led to continuation of current process of filling GSTR 1 and GSTR 3B till September 2020.
To handle the issue of inverted duty structure, there were three rate changes announced which covers mobile phones from 12% to 18%, Matches to 12% which are currently ranging from 5% to 18% and Maintenance, Repair and Overhaul services in respect of aircraft from 18% to 5% with full ITC. “Know your supplier” facility is introduced by the council to give basic details of the vendors to address the dependence of availing ITC on GST compliance process followed by the vendors.
In a nutshell, most of the industry demands and expectations from this meeting got fulfilled. The upcoming days / months will bring more clarity on e-invoicing and new returns and the date when simplification will really kick in through simplified returns.
Council’s decision to defer rate changes on commodities such as footwear, textiles, etc is a sensible move considering the volatility in market condition and the delicate economic health of the Country. Hike in rates on mobile phones is a viable option to boost revenue considering year on year increase in demand of high-end phones manufactured foreign brands such as Samsung, Apple and Google.
The airline business in India is picking up, with many new international airports are coming up in the near future, domestic as well as international passenger / cargo traffic is on the rise, India is well poised to embrace a booming aviation sector in the next 5-10 years. The Maintenance Repair and Overhaul (MRO) industry is expected to grow to at rapid pace with influx of more and more airlines. MRO operators will be a direct beneficiary of this boom. MRO exports are also likely to see a healthy growth. It is therefore important to nurture and encourage existing MRO enterprises to grow by giving them necessary fiscal incentives. This will also make domestic MRO operators internationally competitive.
Numerous glitches and snags in the GSTN is causing undue pressure on businesses and it is becoming extremely difficult to manage compliances with a faulty IT framework. Therefore, it is extremely crucial for the government to closely test and monitor the IT firms managing the compliance framework. This will go a long way to improve compliance and in turn, revenue collection. Effectiveness of the e-invoicing mechanism and QR code system is yet to be tested in the Indian setup. Relaxation for Banks and Financial Institutions was expected.
The issue of interest on net cash tax liability on delayed payment of GST has been a litigious issue.Retrospective application of principles will now put those litigations to rest
Exemptions from IGST and Cess on the imports made under the AA/EPCG/EOU schemes were secured after multiple rounds of litigations in High Courts and the Supreme Court, argued by me. Extension to 31 March 2021 is a welcome move. Government should now consider making these exemptions permanent.
Tax officers have been grappling with the menace of fake invoices for long. Introduction of GST has made it easier to crack down on offenders. Introduction of KYC requirements, physical verification of premises for new registrations will further aid in checking the rampant misuse of GST invoices to evade taxes.
I was arguing a writ petition highlighting the difficulties faced by a corporate debtor, under Insolvency Process due to the absence of a special procedure under the IBC or the GST Act. The GST Council has proactively responded to this issue and by prescribing a special procedure for corporate debtors under IBC, undergoing the corporate insolvency resolution process (CIRP), so as to enable them to comply with the provisions of GST Laws during the CIRP period. The fine prints are yet to be seen and it will be interesting to see whether refund provisions have been incorporated for GST liability adjusted for pre-CIRP period, against future GST payments sought to be made by an IRP.
The 39th GST Council meeting was full of postponement of some important reforms that were to be implemented from April 2020:
1) E-Invoicing deferred to October 2020
2) New return formats deferred to October 2020
3) E-wallet scheme for operationalizing Advance Authorisation, EPCG and EOU scheme, deferred to April 2021 (E-wallet scheme is in limbo for more than 2 years)
The above multiple postponements reflect continuing lack of IT readiness of Government on GST front. On IT issues faced by taxpayers in GST regime, Mr. Nandan Nilekani (on behalf of Infosys) made a presentation before the Council. He assured that all these issues will be set right by July 2020. One important change that will be made is linking of GSTR-1 with GSTR-3B (for output liability) and GSTR-3B with GSTR-2A (for input tax credit). This will be a big operational change and bring its own set of challenges for taxpayers. This also raises a larger question mark on GST Council’s commitment to introduce new returns from October 2020 - what was the need of making these changes when new return formats are likely to be introduced in near future.
The Council has approved introduction of “Know Your Supplier” (KYS) measure wherein some basic information of vendors will be provided. The efficacy of KYS is yet to be seen since such basic information of vendors is already available on GST portal. Similarly, effectiveness of measures of furnishing of Information Return by Banks and verification of new taxpayers (physical premises and financial KYC) will be tested in times to come. In any case, these measures are likely to increase compliance burden of the taxpayers.
The Council took few positive steps as well. Interesting controversy on levy of interest on “gross liability” or “net liability” has been put to rest. Interest will be levied on “net liability” retrospectively from July 2017. This issue was marred by contradictory High Court judgments, an amendment in law which was not notified and the authorities raising demands of interest of more than Rs.46,000 Crores across India.
The exemption from E-Invoicing to sectors like banking, insurance etc. will be a big compliance relief for these sectors.
The last date for undertaking GST Audit for FY 2018-19 has been extended from March 31, 2020 to June 30, 2020. Also, the taxpayers having turnover between Rs.2 crore – Rs.5 crore have been exempted for FY 2018-19. Seemingly the Government’s definition of small taxpayers has changed from threshold of Rs.2 crore to Rs.5 crore in a short span of time. The Government would have done well by exempting such taxpayers from audit of FY 2017-18 as well.
"Deferment of introduction of new Return formats and E-invoicing to October 2020 should give enough time to the industry for getting their systems in place.
Announcement on retrospective application of interest on net liability is also an industry friendly move and will ensure closure to the pending litigations on this issue. While increasing GST on mobile phones will certainly help mobile phone manufacturers to improve cash flows by fully utilising input credits, they need to ensure that benefits, if any, on costing should be commensurately passed on to the consumers."
1) Extending the due date and enhancing the monetary limits for filing annual returns and waiving penalty for delayed filing of returns are on expected lines.
2) Interest liability on net tax is a welcome measure and is long pending. When the matter is sub-judice in Telengana and West Bengal, how this clarification will be made applicable would be of interest.
3) Increase in tax rate on mobiles would be negative for economy.
4) Decrease in tax rate for MRO with ITC being available is a good news.
5) Extending the benefits for imports against AA/EPCG etc is welcome provided there is clarification issued for the prior period imports post introduction of GST, where lot of litigation is still pending in various forums.
6) Deferring new returns and e-invoicing rollout to October 2020 is appreciated, but when existing technical glitches are expected to be resolved by end of 2020, it makes sense to introduce them in FY21-22 onwards by doing away with electronic e-way bill in the process. Similarly GST rates applicable may also be system driven in e-invoice validation process on the lines of ICEGATE in case of imports, wherein based on CTH, the system will give the taxes applicable.
7) There is lot of confusion about B2B, B2C and pharma sector QR codes. B2B is need of GST. B2C is need of income tax amendment. Pharma sector regulator (Drug Controller General of India) wants QR code in order to have traceability of goods in the supply chain. It is suggested that all wings of government sit together and announce such measures so that industry will have clarity. Otherwise an invoice in Pharma will end up with multiple QR codes printed on invoice leading to wastage of paper.
8) SEZ online system should also be linked to GSTN on the lines of ICEGATE linkage to GSTN so that physical endorsements on SEZ supplies can be done away with. This is a long pending demand from SEZ assessees.