"The Goods and Services Tax (GST) regime has largely stabilized as the major bumps and roadblocks have already been addressed. Over these years, despite some teething troubles, the GST regime has brought a sea change in how business is done in India and has also strengthened the idea of co-operative federalism with the GST Council".
-GST Council
In its endeavour to simplify the GST regime in the country, GST Council meetings have more often than not resulted in rate rationalization accompanied by regularisation of past practices adopted by the industry. However, the absence of a specific provision for such regularisation injected ad hocism in the way in which past practices were regularised. Thus, with a view to streamline the same, Finance (No.2) Bill, 2024 proposes to introduce a new provision i.e., Section 11A in the Central Goods and Services Tax Act, 2017 ('CGST Act'). This article examines the need and scope of the provision, and the potential challenges foreseeable by insertion of Section 11A.
Need for Section 11A – Non-existence of provision for regularisation
During the course of seven years of the implementation of GST law, taxpayers have faced numerous issues arising from genuine interpretational issues and ambiguity in the provisions of GST law, as a result of which tax was not paid/short paid. Time and again, taxpayers have approached the GST Council for relief, as a result of which the Department has issued Circulars to regularise the past practices followed by taxpayers.
Insertion of Section 11A in the CGST Act stems from the doubts arising from the modus operandi adopted by the Department for regularising past practices viz. by issuing circulars on the basis of recommendations of GST Council.
Notably, the circulars besides settling thorny issues, have regularised the past practices adopted by the industry on 'as is basis'. Even though the term 'as is basis' has not been clarified in all the circulars, it seems that the Government intends to convey that the taxpayers who had paid tax in the past will not be allowed to avail refunds whereas no tax was/will be demanded from taxpayers who failed to discharge tax in the past.
Notable examples of this method include GST rate on supply of ice cream by ice cream parlours, un-fried or un-cooked snack pellets, imitation zari thread or yarn, fibre drums, 'rab' in the 49th Council Meeting, by-products of milling of dal/pulses such as chilka, khanda and churi/chuni.
However, the above practice of regularising by way of circulars led to doubts being cast over the validity of such directions since no specific provision empowered the Government to regularise past practices. Now, with the proposed insertion of Section 11A, the Government seems to have allayed the above doubts by specifically clothing the Government with the power to regularise past practices.
Section 11A: A legacy provision
Section 11A of the CGST Act is a legacy provision inasmuch as the same finds mention not only in Central legislations like the Customs Act, 1962 (Section 28A), Central Excise Act, 1944 (Section 11C), Finance Act, 1994 (Section 83) but also in State laws such as Bombay Sales Tax Act, 1959 (Section 45A).
A comprehensive reading of the above provisions reveals that these clauses exempt 'generally prevalent' practices.
It is notable that the proposed Section 11A of the CGST Act is similar to the legacy provisions in many respects. Accordingly, in the following paragraphs, we examine if the past still holds precedent for what could follow.
Anticipated challenges
Extent of coverage
The provision clearly spells out that the provision can be invoked when the tax was not being paid/short paid by taxpayers as a result of the general practice. In such cases, a Notification under Section 11A can be introduced waiving the tax which was not paid or short paid as a result of genuine doubts and general practice.
There have been many instances wherein the transaction was not considered as a supply or was considered out of the purview of GST by taxpayers and no tax was being paid. Some prominent examples of the same are non-levy of GST on ENA, taxability in cases of insurance services jointly supplied by the lead insurer and the co-insurer, services provided by insurer to re-insurer. Though the ambiguity is sought to be resolved by amending Section 9 and Schedule III of the CGST Act respectively, the fate of the past transactions will be in jeopardy if the said amendments are inserted prospectively. An important aspect to consider in such cases is whether the taxpayers can take shelter of Section 11A to avoid past liabilities.
Refund of tax paid in the past?
One of the most notable features of Section 11A is that it does not contain any provision with respect to refund of tax already paid by the taxpayer. On account of the above, the possibility of claiming refund as a consequence of relief provided by Section 11A, becomes bleak. The problem is further compounded by the fact that the Circulars issued in past and Press Release issued in the aftermath of the 53rd Council Meeting specifically prohibited refund as a consequence of Section 11A.
The above provision constitutes a departure from the past insofar as the said provision specifically existed under 11C of the Central Excise Act. However, as enacted, Section 11C of Central Excise Act also did not provide for refund of tax paid. Notwithstanding the same, the Apex Court has allowed refunds for tax paid in such cases.
Since there is no specific bar under the proposed Section 11A to claim refund, the possibility of claiming refund in terms of Section 54 of the CGST Act is not precluded. The same can be explored in view of the standpoint of jurisprudence developed during the Excise regime and the lack of any explicit restriction on refund contained in the proposed provision.
Absence of procedure for implementation
One of the foremost issues confronting the industry at the moment in the context of Section 11A is the lack of clarity in the manner of its implementation. During the Excise regime, the benefit of Section 11C was extended upon fulfilment of a survey wherein details regarding industry practice were compiled and collated by the Department. Amongst other things, the Department evaluated the revenue implications before offering relief under Section 11C and the existence of a generally prevalent practice in the industry. Thus, where the industry was not in position to establish the 'general prevalence' of a practice, the Department refrained from issuing a notification in terms of such provisions.
In the case of Section 11A, the Finance Bill does not disclose any procedure preceding the grant of exemption. One point which is very clear is that the existence of industry practice should be established in respect to the issue for which the Notification under Section 11A of CGST Act is being sought.
Since no specific procedure has been prescribed, it remains to be seen if the procedure of floating a survey would be carried forward in the GST regime or not. If no procedure is notified, whether filing the representations in the individual capacity or as an association would be sufficient to seek relief will have to be seen.
Possibility of knocking on the doors of High Court?
In case the Government refrains from granting relief, whether the doors of the High Court can be knocked, directing issuance of a notification under Section 11A is a point to ponder. In many cases, the Courts in erstwhile regime have held that the same would be tantamount to stepping into the shoes of the executive and thus, have refrained from giving such directions, holding that it is a discretionary power of Government to issue such directions. Since Section 11A of the CGST Act is also couched in discretionary terms, the possibility of routing relief in terms of the proposed Section 11A through writ courts will have to be explored.
Relief amongst ongoing investigations/demands?
The other open issue which requires consideration is whether there is a possibility of approaching the Government once the investigation/proceedings have been initiated by the authorities. Though the same appears to be feasible considering the past trends wherein the representations were filed by the industry after the issues were raised or the demands were confirmed, the acceptance of the authorities of the same in the GST law will have to be seen.
No coercive actions were taken in the erstwhile regime when the survey was floated by the Board. The extent of the applicability of the same in GST regime is itself a big question considering no procedure has been laid down for the surveys. Thus, it will be worth noting as to whether the proceedings or the recoveries would be kept in abeyance if the matter is being examined by GST council.
ITC reversal
Another concerning aspect is the silence of Section 11A of the CGST Act regarding ITC reversal qua tax declared as exempt in terms of the proposed provision. This question would assume relevance in the context of taxpayers who had not paid tax during the period covered under Section 11A and had availed ITC on the same. It is possible for the Department to foist a demand for reversal of ITC on the ground that supplies made during the past qualified as exempt supply once the notification is issued. Thus, clarity is awaited on the above aspect.
It is evident, therefore, that Section 11A of CGST Act is a benevolent provision insofar as it eradicates ad hocism from tax administration by providing a sense of certainty with respect to regularization of past practices. However, the provision, as it stands today, suffers from certain lacunae which may require the Government's attention. To this end, an intervention from the Government will go a long way in improving the ease of doing business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.