Tax Vista Your weekly tax recap Edn. 36 - 22 February 2021 By Dr. G. Gokul Kishore

New GST incentive scheme for new units in J&K

A new GST incentive scheme called GST Linked Incentive (GSTLI) providing for 100% refund of GST paid by newly registered units in Jammu & Kashmir has been announced. The incentive is part of the Central Sector Scheme for Industrial Development of Union Territory of Jammu & Kashmir notified on 19-2-2021. Entire amount of tax paid, both by way of cash as well as by utilizing input tax credit, will be given as refund. It will be in force from 1st April, 2021 to 31st March, 2037. GSTLI benefit will not be available for products covered under the negative list like tobacco, pan masala, specified plastic carry bags, petroleum oil, power generating units and low value addition activities like storage, cleaning, labelling, relabelling, alteration of RSP, etc. For service sector, GST benefit will be restricted to only for positive list services like tourism and hospitality, entertainment parks, heritage property restoration, healthcare, IT, maintenance and repair, etc.

Unlike other incentives covered under this scheme, for GSTLI, the benefit will be available irrespective of value of investment in plant and machinery for manufacturing sector and construction of building and other durable physical assets for service sector. The quantum of benefit will be the same for eligible units in Zone A and Zone B. The incentive will have a cap of 300% of eligible value of investment. The incentive will be given for 10 years and if the new unit closes business within 5 years, entire incentive amount will be liable to be returned. In respect of exported goods or services, this incentive will not be applicable. The notification issued by Commerce Ministry states that all other Ministries / departments shall amend their Acts / Rules / Notification, etc., for giving effect to the policy. In the absence of any mention about ratification by the GST Council, it is not clear whether a scheme can be announced in this manner for refund of GST paid [Department of Promotion of Industry and Internal Trade - Notification dated 19-2-2021].

Non-filing of GST returns cannot be linked with non-receipt of refund from department

In this column, many orders highlighting highhandedness and arbitrary exercise of powers by the department are discussed. It appears that in certain cases, the tax authorities have been relatively merciful towards taxpayers. In a strange case, the taxpayer did not file returns (GSTR-3B) and did not pay tax for two financial years 2018-19 and 2019-20. The department, it seems, waited for two full years and then sent an e-mail in October, 2020 informing the taxpayer that e-way bill generation facility will be blocked if returns are not filed. The taxpayer filed writ petition in the High Court arguing that under the Budgetary Support Scheme whereby certain portion of refund is available to persons who were enjoying area-based exemption, refund of more than Rs. 14 crores was pending with the department. The High Court was not impressed with the reason of linking refund under certain other provisions of law with the requirement to file returns under GST. It said - "We are also of the view that the same stand of the petitioner cannot bestow a legal right upon them not to pay the required GST under the law or not to submit their returns for two given financial years." The Court directed the department to pass order on refund claim and till the time such order is passed, interim protection granted against blocking of e-way bill has been extended [2021-VIL-130-GAU].

Spot recovery during inspection / search - High Court directs CBIC to issue instructions

In a case wherein the taxpayer has alleged harassment, threat and pressure by tax authorities, the Gujarat High Court has passed two interim orders. In the first order (dated 16-2-2021), it has directed the CBIC to issue guidelines by way of circular / instructions on the subject of spot recovery during investigations and search operations. The Court has, in particular, directed that such circular should instruct officers to refrain from recovery by any mode during inspection / search proceedings and even if voluntary payment is opted, the taxpayer should be advised to make such payment the next day after search. If the person concerned is forced to make payment during such proceedings, then facility to lodge complaint should be provided. The second order dated 18-2-2021 reveals that the department has initiated inquiry into the allegations levelled against officers. The High Court has said that officers should not take law in their hands and they should perform their duties within the four corners of law. The need to issue appropriate instructions has been emphasized time and again. CBIC should implement the order by issuing instructions to unambiguously state that spot recovery should not be made in any circumstances [2021-VIL-127-GUJ].

Order without hearing and recovery action within one month of order, not sustainable

Certain facts are disputed but it seems the department did not provide hearing opportunity but passed the order confirming the tax demand. In the over-drive to mop up revenue, recovery action was initiated to attach factory premises of the taxpayer within one month of passing such order. The High Court quashed the adjudication order and also the attachment order. It directed the authority to hear and then pass order afresh. The Court noted that as per Section 75 of CGST Act, opportunity of hearing shall be granted if request for the same is received where any adverse decision is contemplated, and Section 78 seeks payment of tax amount payable as per order passed within three months failing which recovery action shall be initiated. The petitioner had requested for hearing but the Court has categorically noted that such hearing was not extended. It also held that no recovery proceedings can be initiated before expiry of three months from the date of service of the order. The issue related to sub-leasing of industrial plots based on sub-division wherein the department was of the view that such long-term leasing of land would be liable to GST whereas the taxpayer perceived the transaction as sale of land and not subject to GST [2021-VIL-120-GUJ].

Arrest after two years of investigation - High Court grants bail

Investigations commenced in the year 2018. Statements were recorded in 2018, 2019 and 2021. Suddenly, the 65-year old petitioner was perceived as a person capable of tampering witnesses or running away from the strong arm of law and the GST department arrested him in 2021. Though the charges are serious relating to fraudulent availment of input tax credit and also passing on such credit, the High Court held that the case is not in trial stage but in pre-trial stage where even formal accusation in the form of a first information or complaint has not been made. As per Section 69 of CGST Act, the Commissioner should have reasons to believe that the person has committed certain offences as specified in Section 132 to authorize an officer to arrest such person. The Court noted that the requirement of Section 69(1) is reasons to believe that not only a person has committed any specified offence but also as to why such person needs to be arrested. After perusing the reasons recorded by the Principal ADG, the Court observed - "We find that other than paraphrasing the requirement of section 41 Cr.P.C., no concrete incident has been mentioned therein recording any act of tampering of evidence by the petitioner or threatening / inducing any witness besides not co-operating with the investigation, not to speak of fleeing from investigation. In such circumstances, we are of the view that the Principal Additional Director General could not have formed a reason to believe that the petitioner should be arrested."

In this case, the petitioner had also opted for compounding of offences under Section 138 on payment of compounding amount. This has been highlighted by the Court to drive the point that CGST Act is primarily an enactment for collection of revenue and arrest is only incidental to achieve such objective. It further noted the consequence of compounding on abatement of prosecution proceedings. Continued detention was held as not justified and it directed release of the petitioner on bail subject to conditions. The facts that investigations were being stretched for a period over two years and after such long time, exercising of the power to arrest and compelling the person to move the High Court without deciding compounding application point to GST authorities becoming more of police officers in the name of safeguarding revenue [2021-VIL-113-BOM].

Investigations by multiple agencies - High Court declines to interfere

Last week, in this column, parallel proceedings by Central GST officers and State GST officers were discussed based on a court order in the backdrop of Section 6(2)(b) of CGST Act. This provision bars initiation of proceedings by Central GST officer when the same subject matter is pending with State GST officer. In a recent case before Punjab & Haryana High Court, the petitioner was aggrieved that they are being investigated by DGGI, Ludhiana, DGGI, Bhopal and also the jurisdictional CGST Commissionerate. But the High Court was informed that all the three investigations pertain to different matters and there was no overlap and therefore, the Court did not interfere. It was held that the investigations are not hit by Section 6(2)(b) [2021-VIL-102-P&H]

It appears an amendment to this provision is required to avoid multiple proceedings even by different wings of CGST department. The facts of the above case indicate allegation of fraudulent availment of ITC and passing on of such ITC though the companies to whom such benefit was allegedly passed on or from whom such benefit was stated as received are different. It is not known why the investigations by DGGI, Ludhiana and DGGI, Bhopal cannot be clubbed. Also, when jurisdictional Commissionerate is seized of the matter, revenue intelligence agency should ideally assign their investigation to such officers so that inquiry, summoning and conduct of proceedings are effective.

Detention of goods - CBIC under no obligation to consider representation

The facts, though not obvious, relate to cancellation of registration but the High Court was rather surprised to find that instead of challenging the same, the assessee filed representation with CBIC and State GST authorities seeking clarification on powers regarding detention of goods. It held that CBIC is not under obligation to advise the petitioner on the authority for interception of goods in movement, detention of the same and scope of verification of documents. It further said that instead of seeking legal advice from its advisors / advocates, CBIC cannot be asked to give legal opinion. Apparently to ensure that the petitioner is not left remediless, the Court directed the State GST authority to decide the representation / application under the Section 30 relating to revocation of cancellation of registration. One can only sympathize with the petitioner who must have been advised to file such representation and then also file a writ petition in High Court seeking direction as to action on the representation [2021-VIL-105-DEL].

Activity covered under job work even if material cost is substantial

The applicant is engaged in various types of metal coating on the material / goods sent by the principal. The work, it appears, relates to specialized engineering applications and therefore, metal powders, carbide powder and wire rods besides other consumables are used deploying processes like plasma spray, powder flame spray and wire flame spray. The applicant has stated that value of consumables and materials used in such coating work is substantial - nearly half the cost of service.

The Authority for Advance Rulings (AAR) has held that such activity is covered under treatment or process undertaken on goods belonging to another registered person and therefore, the same would be a job work which is treated as supply of service as per CGST Act. It has held that the applicable GST rate will be 12% with SAC 998873 as per Item No. (id) of S. No. 26 of Notification No. 11/2017 - Central Tax (Rate) which covers such job work services. It has further held that if such activity is undertaken on the physical inputs owned by persons not registered under GST law, then the rate of GST will be 18% as per Item No. (iv) of S. No. 26 of the said notification. It appears that the crucial issue was coverage under job work when the cost of material used during the activity is substantial but the AAR has opted to apply the entries in the notification literally [2021-VIL-136-AAR].

Supply of infrastructural services to hospitals classifiable under works contract service

The State GST department was before Appellate Authority for Advance Rulings (AAAR), Uttarakhand assailing the advance ruling wherein it was held that the applicant (before the AAR) was covered under exemption under Notification No. 12/2017 - Central Tax (Rate). The supplies / services involved were renovation of hospitals / public health centres, supply of medical equipment and manpower and other related services under PPP model by a private entity to the government nodal agency of the Health Department of the State Government. The AAAR allowed the appeal by the department seeking 12% GST and held that the advance ruling was not sustainable since the respondent was not a medical practitioner or clinical establishment (which are covered under the exemption) and they were dealing with patients to the extent of collecting user fee on behalf of the government whereas it is the government which is providing healthcare services. As the respondent was required to provide both goods and services and also renovate / construct the healthcare premises, it would be taxable as composite works contract. The services are provided by government health centres. An addition of tax cost, even if it is by the PPP contractor, will compel the government to hike the user fee. As observed in this column before, entries relating to public welfare activities need to be revisited for possible amendments [2021-VIL-08-AAAR].

(The author is an Advocate, Gokul & Subha Advocates, Chennai. The views expressed are personal)