Model GST Law – ‘A Horror Show?’ – Part-II

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By Shailesh P Sheth, Advocate

[Author’s Note: The crucial term ‘supply’ – a ‘taxable event’ for the levy of GST – is not defined in The Constitution (122 nd Amendment) Bill, 2016. However, as expected, the definition of this term is provided under S.2 i.e. ‘definitions clause’ of the Draft GST Act, 2016. S. 2 contains total of 109 definitions of various terms/expressions. In this Part, the term ‘supply’ as defined and certain other important definitions and the implications thereof are briefly analysed.]

“Good laws lead to the making of better ones; bad ones bring about worse.” [Jean-Jacques Rousseau]

S.2(92) – “Supply” “Muddier and Murkier…!”

The all – important term “Supply” has been defined vide S.2(92) of the Model GST Act (“the Act”) as under:

“S. 2(92) – “Supply” shall have the meaning assigned to it in Section 3.”

Considering the importance of this crucial term, S.3 is reproduced below in its entirety for ease of reference and understanding:

“S.3(1) Supply includes

a) all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business,

b) importation of service, whether or not for a consideration and whether or not in the course or furtherance of business, and

c) a supply specified in Schedule I, made or agreed to be made without a consideration.

(2) Schedule II, in respect of matters mentioned therein, shall apply for determining what is, or is to be treated as a supply of goods or a supply of services.

(2A) Where a person acting as an agent who, for an agreed commission or brokerage, either supplies or receives any goods and/or services on behalf of any principal, the transaction between such principal and agent shall be deemed to be a supply.

(3) Subject to sub-section (2), the Central or a State Government may, upon recommendation of the Council, specify, by notification, the transactions that are to be treated as-

(i)   a supply of goods and not as a supply of services; or

(ii) a supply of services and not as a supply of goods; or

(iii) neither a supply of goods nor a supply of services.

(4) Notwithstanding anything contained in sub-section (1), the supply of any branded service by an aggregator, as defined in section 43B, under a brand name or trade name owned by him shall be deemed to be a supply of the said service by the said aggregator.”

Before the definition of the term “supply” and its coverage and implications are discussed, it must be borne in mind that the ‘taxable event’ for the levy of GST shall be “supply of goods, or services or both, except supply of alcoholic beverages for human consumption.” [Proposed Article 366 (12A) of the Constitution refers].   S. 7(1) of the Act (charging provision for CGST/ SGST) and S. 4(1) of the IGST Act (charging provision for IGST), inter alia, provide for the levy and collection of the CGST/ SGST on all ‘Intra-State supplies of goods and/ or services” or IGST on all “Inter-State supplies of goods and/ or services”, respectively.

With the advent of ‘Supply’ as an all – encompassing ‘taxable event’ under GST, the present-day ‘taxable events’ like ‘manufacture’ (for levy of excise duty), ‘provision of service (for levy of service tax) and ‘transfer of ownership in goods for a consideration’ (for levy of State VAT), which have held field for decades in Central/ State level indirect taxation, would be rendered irrelevant and relegated to the confines of history.   It is, therefore, absolutely essential – in fact, inevitable – that the term ‘Supply’ is defined in an explicit, unambiguous and crystal clear manner since the whole GST regime would be revolving around this core term.

Unfortunately, the ‘horrendous draftsmanship’ is visible here also! The definition starts with the words “1) Supply includes …….” and there can hardly be a worse way of defining a term! Netizens would be quick to realise that the draftsmen have been under undue influence (or is it intentional?) of the term ‘manufacture’ and the manner in which it is defined vide S.2(f) of the CEA (soon to be a part of history!) The sheer volume of the disputes that the ‘inclusive’ definition of the term ‘manufacture’ under CEA has created over last seven decades is mindboggling, to put it mildly! Though the meaning and scope of the term has been succinctly and clearly explained by the Supreme Court through its many landmark judgements, the disputes as to ‘What constitutes ‘manufacture?’ continue to surface with disturbing regularity! The innovative and fertile minds of the revenue officers have ensured that the disputes concerning the meaning and scope of this term never really end! The term is being interpreted and applied with total nonchalance and impunity so as to suit the Revenue’s purpose! For instance, if it is a matter of levy of excise duty, the Revenue’s contention would be that “the process amounts to “manufacture’!”, but if it is a matter of denial of Cenvat credit, then the argument would be that “the process does not amount to ‘manufacture’!” .

It is, therefore, rather distressing to see that the draftsmen have chosen to define ‘Supply’ in exactly the same inclusive manner as the term ‘manufacture’ is defined. It is as if they don’t give a damn if the definition turns out to be ‘a breeding ground for litigation’ in future! When the ‘hangover’ of the ‘past practice’ lingers on, the ‘legacy of disputes’ would certainly follow!

The opening part of the definition reads: “1) Supply includes (a) all forms of supply of goods and/ or services…..”. This description does not really make sense and is inside out, upside down, circular and with no middle!

The draftsmen ought to have realized that such core term needs to be defined in a clear manner beginning with “supply means….” to be followed by “…… and includes…. “ so as to make it expansive as would be   inevitable. This is also the international practice, obviously with a view to provide certainty to the taxing exercise.   Unfortunately, this has not happened.

At this stage, let us have a look at how the term “supply” is defined in other jurisdictions of GST world, both representing developed and developing countries.

European Union (“EU”)

Art. 14(1) of Recast VAT Directive (“RVD”) of EU [ex. Art. 5(1) of Sixth Directive] defines “supply of goods” so as “to mean the transfer of the right to dispose of tangible property as owner.” Art. 14(2) of RVD [ex. Art. 5(2) of Sixth Directive] then stipulates that each of the following shall be regarded as a supply of goods:

a) the transfer, by order made or in the name of a public company or in pursuance of the law, of the ownership of the property against payment of compensation;

b) the actual handing over of goods pursuant to a contract for the hire of goods for a certain period, or for the sale of goods on deferred terms, which provides that in the normal course of events ownership is to pass at the latest upon payment of the final installment;

c) the transfer of goods pursuant to a contract under which commission is payable on purchase or sale.

Art. 15(1) of the RVD [ex. Art. 5(2) of Sixth Directive] provides that ‘Electricity, gas, heat, refrigeration and the like shall be treated as tangible property’. Besides this, Member States may consider (i) the transfer of certain interests in immovable property; (ii) rights in rem giving the holder thereof a right to use over immovable property and (iii) shares or interests equivalent to shares giving the holder thereof de jure or de facts rights of ownership or possession over immovable property or part thereof [Art. 15(2) of RVD (ex. Art. 5(3) of Sixth Directive) refers].

On the other hand, “supply of services” is defined in Art. 16(1) of RVD (ex. Art. 6 of Sixth Directive) on a residual basis and means ‘any transaction which does not constitute a supply of goods.’ Art. 16(2) of RVD provides an exhaustive definition of ‘telecommunication service’.

According to Art. 25 of RVD, a supply of services may consist, inter alia, in one of the following transactions:

(a) the assignment of intangible property, whether or not the subject of a document establishing title;

(b) the objection to refrain from an act, or to tolerate an act or situation;

(c) the performance of services in pursuance of an order made by or in the name of a public authority or in pursuance of the law.

As per Art. 26(1) of RVD (ex. Art. 6(2) of Sixth Directive), the following transactions shall be treated as a supply of services for consideration:

(a) the use of goods forming part of the assets of a business for the private use of a taxable person or of his staff or, more generally, for purposes the than those of his business, where the VAT on such goods was wholly or partly deductible;

(b) the supply of services carried out free of charge by a taxable person for his private use or for that of his staff or, more generally, for purposes other than those of his business.

Paragraph 2 of Article 26 provides that the Member States may derogate from paragraph 1, provided that such derogation does not lead to distortion of practice.

UK VAT Act, 1994

Section 5(2) of the UK VAT Act, 1994 defines “supply” and “supply of services” as follows:

Section 5(2) – “subject to any provision made by that Schedule and to Treasury orders under sub-section (3) to (6) below-

(a) “supply” in this Act includes all forms of supply but not anything done otherwise than for a consideration;

(b) Anything which is not a supply of goods but is done for a consideration (including, if so done, by granting, assignments or surrender of any rights) is a supply of services.”

Canadian GST Law

Both, India and Canada have federal structure and therefore, it is normal that Indian GST Law would largely be based upon the Canadian GST Law.

Division 1 of Part IX of the Excise Tax Act of Canada defines the term “supply” as follows:

“supply means, subject to Section 133 and 134, the provision of property or service in any manner, including sale, transfer, barter, exchange, license, rental, lease, gift or disposition.”

The term “taxable supply” is defined so as to mean “a supply that is made in the course of a commercial activity.”

Malaysia

Malaysia has adopted GST with effect from 1st April, 2015 and amongst the developing countries, it is the latest to join the ‘GST Club’ of the world. The General Guide issued by the Royal Malaysian Custom on ‘GST’ explains the concept of ‘supply’ and states that the definition of supply covers all forms of supply where goods and services are given in return for a consideration, either in the form of monetary payment or in kind (barter).

It will be observed from the above definitions / expositions of the term “supply” under certain other jurisdictions of the world that the draftsmen here, while constructing the definition of the term, have resorted to a clever blending of the definitions, to some extent from EU RVD and substantially from UK VAT Act, Canadian GST Law and Malaysian GST Law, amongst other foreign laws and then added ‘Indian (bureaucratic ) spices’ to it in good measure!

S.3- ‘Supply’ – ‘a brief analysis’

From the careful reading of clause (a) of S 3(1), it will be evident that though it seeks to cover various forms of supplies, the same must be made or agreed to be made for a ‘consideration’ by a person so as to come within the scope of the clause.

Clause (b) of S. 3(1) of the Act purports to include “importation of service, whether or not for a consideration and whether or not in the course or furtherance of business” within the scope of “Supply”. This ‘no-holds-barred’ clause may become a nightmare for the taxpayers, whether engaged in business or not, whether corporates or individuals. Its scope and implementation may pose a serious challenge as it seeks to cover, in effect, even ‘import of service without consideration and for a personal (non-business) use’ within the scope of ‘supply’!

Clause (c) of S. 3 (1) covers certain types of supplies, as specified in Schedule I, made or agreed to be made without consideration, within the scope of ‘Supply’. Schedule I is titled “matters to be treated as supply without consideration” and specifies five matters thereunder. At the outset, it must be pointed out that there is a clear dichotomy between the language of clause (c) of S.3(1) and the title of Schedule I. As per Clause (c), a supply, specified in Schedule I, if made or agreed to be made without consideration would, nevertheless, fall within the scope of “supply”. That being so, where is the need for ‘deeming fiction’ as the title to Schedule I suggests?   It shall be noted that even in case of a supply specified in Schedule I, if the same is made or agreed to be made for a consideration, it would be covered by Clause (a) of S. 3(1) and not Clause (c) thereof. However, going by the title of Schedule I, even in such a case, the ‘Supply’ would be treated as supply without consideration, notwithstanding the existence of ‘consideration’. This is anomalous and absurd!

The matter specified at Entry 5 of the Schedule I is also quite significant. The obvious intention is to cover branch/ stock transfer, self-supply, supply of samples, promotional items, etc. However, a darkness of sort envelopes the mind when the Entry is read under the glaring light of the title of the Schedule! Incidentally, the corresponding Entry 4 of the Schedule I of the EC’s Draft Law of September, 2015 read “Self-supply of goods and/ or services.”

It may be mentioned here that the proviso to present Entry 5 of Schedule I excludes the goods supplied by a registered taxable person to a job worker in terms of S.43A, though, there was no such exclusion in the previous version of the Schedule. 

Sub-section (2) of S.3 provides that Schedule II shall apply for determining what is or is to be treated as supply of goods or a supply of services, in respect of the matters specified in that schedule. Basically, S.3(2) read with Schedule II are in the nature of ‘deeming provisions’ since the matters listed in Schedule II are treated as ‘deemed supply of goods or services’ and will be subject to GST.

Sub-section (2A) of S.3 deals with the transactions between ‘principal’ and ‘agent’ and provides that if a person acting as an ‘agent’, for an agreed commission or brokerage, either supplies or receives any goods and/ or services on behalf of a principal, the transaction between such principal and agent shall be deemed to be a supply. This provision, as is worded and containing a deeming fiction, has far-reaching consequences since, applying the fiction, the transaction between a ‘principal’ and an ‘agent’ would then be regarded as one on ‘principal to principal’ basis. However, the deeming fiction would apply only if the agent ‘supplies or receives any goods and/ or services’ on behalf a principal. For instance, a consignment agent may physically receive and/ or supply the goods on behalf of his principal and in such a case, the deeming fiction would apply. However, in a case where a person acting purely as ‘commission agent’, does not physically receive and/ or supply the goods, then the deeming fiction would not come into play and only the commission charged by such person would attract GST. The deeming fiction provided in respect of the transactions between a ‘principal’ and his ‘agent’ would entail its own challenges, particularly in the context of the valuation, determination of ‘place of supply’, determination of ‘point of taxation’, determination of the nature of the transaction i.e. whether Intra-State or Inter-State, not to speak of the accounting related challenges. The conventional and commercial understanding of a relationship between a ‘principal’ and an ‘agent’ would go for a toss due to this deeming fiction! It is also difficult to visualise a situation where an ‘agent’ receives a ‘service’ on behalf of his principal as the phrase ‘on behalf of’ pre-supposes the existence of three parties and in that case, the privity of the contract of service would ordinarily exist between the third person i.e. service provider and the principal only and not between such service provider and the agent.

“Law is a bottomless pit.” [John Arbuthnot]

“Securities” – ‘Goods or Service?’ – ” On a rather insecure ground, indeed !”

The term ‘supply’ as defined in S.3 includes “all forms of supply in goods and/ or services…..”The term “goods” has been defined vide S. 2(48) of the Act as under:

“S. 2(48) – “goods” means every kind of movable property other than actionable claim and money but includes securities, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under the contract of supply;

Explanation. – For the purpose of this clause, the term ‘moveable property’ shall not include any intangible property.”

  As will be observed, the main part of the definition is almost identical to the definition of ‘goods’ currently prescribed vide S. 65B (25) of the FA, except the contextual replacement of the word “sale” by “supply” in the definition under GST vide S. 2(48). However, the Explanation to S.2(48) is a significant insertion and is non-existent in the current definition of the term given vide S. 65B (25) of the FA.

The definition of “goods” in S. 2(48) of the Act also includes “securities”, as is the case with the definition of the term “goods” vide S. 65B (25) of the FA. However, unlike S.65B (43) of the FA that defines the term “securities”, no definition of this term is provided under the Act. The Explanation appended to S.2(48) states that the term “moveable property” for the purpose of this clause, shall not include any “intangible property”. The term “intangible property” is defined vide S.2(59) of the Act so as to “mean any property other than tangible property”.   S.2(93) of the Act defines the term “tangible property” so as to mean “any property that can be touched or felt.” (emphasis provided).

From the conjoint and harmonious reading of the above relevant definitions, it will be observed that any property that cannot be touched or felt is to be considered as ‘intangible property’ and outside the scope of the term “goods”. Now, the term “goods” as defined, though includes “securities” also, the “securities” like shares, stocks, debentures, bonds, etc. are now-a-days issued and held only in a dematerialised form.   Such securities in dematerialised form can neither be touched nor felt.   Consequently, the same cannot be regarded as “tangible property” in terms of S.2(93) of the Act and would fall within the scope of the term “intangible property” in terms of S.2(59) of the Act. But then, as per the Explanation appended to S.2(48), ‘any intangible property’ is excluded from the scope of the term ‘moveable property’ and, therefore, would also not come within the scope of the term “goods”.   There is, thus, a clear conflict between the main provision of S.2(48) and the Explanation appended thereto, in so far as the inclusion or otherwise of “securities” within the scope of the term “goods” is concerned. Further, what about the various kinds of securities which are still held in physical form by the Investors? I do not even wish to apply my mind to this conundrum!

And the conflict will not rest here. The term “services” is defined vide S.2(88) of the Act so as ‘to mean anything other than goods’.   Consequently, the supply of ‘ any intangible property’ being not covered within the scope of ‘goods’, would necessarily be regarded as “supply of services” as per S. 2(88) of the Act. Therefore, the ‘securities in dematerialised form’, being an ‘intangible property’ would fall within the purview of “services”, as it does not come within the scope of “goods” as explained above. This will give rise to that perennial question, often arising in the context of “software” and that is – “whether “supply of securities” is a “supply of goods” or “supply of service”? This issue may assume significance if both, ‘goods’ and ‘services’ are subjected to varying rates of GST. Moreover, even where both are liable to GST at the same rate, the issue will be relevant in the context of ‘Place of Provision’ and ‘Point of Taxation’.

“Bad laws are the worst sort of tyranny.” [Edmund Burke]

S. 2(28) – “Consideration” – “Please bestow some consideration on this….. !”

S.2(28) of the Act defines the term “consideration” but, once again, the definition is an inclusive one. This another important term is not defined at present under the Central/ State indirect tax legislations but that really does not justify the definition of the term in an inclusive and wide-ranging manner under GST.

The Proviso to S.2(28), inter alia, provides that “a deposit, whether refundable or not given in respect of the supply of goods and/ or services shall not be considered as payment made for the supply unless the supplier applies the deposit as consideration for the supply.” (emphasis provided)

While the objective and logic behind the Proviso is understandable, the interpretation and application thereof may be dispute-prone. Generally, most deposit payments represent consideration as they are normally offset against the purchase price once the supply is made. The above highlighted portion of the Proviso, therefore, justifiably declares such deposit whether refundable or not, as payment made for the supply i.e. taxable value if the supplier adjusts such deposit against the payment for the supply made.

However, in such cases where deposit is adjusted against purchase price for the supply at a later date, the dispute may arise as to what shall be the ‘point of taxation’ for the purpose of discharge of tax liability? Is it the date of receipt of deposit or the date of adjustment of deposit towards the payment for the supply? The question about the tax liability may also arise if the contract for supply is cancelled and nothing is supplied thereunder but the deposit is not returned. Can ‘forfeit deposit’ be regarded as ‘consideration for supply’ so as to attract the tax liability or does it constitute a payment of compensation for breach of contract? A similar question may arise in case of ‘security deposit’ e.g. deposit taken against the safe return of goods on hire or loan.

Ss. 2(20) (54) and (55) “Capital goods”, “Inputs” and “Input Services” – “Why are they here…?”

The Act, incongruous as it may sound, continues to retain the distinct concepts of ‘capital goods’, ‘inputs’ and ‘input services’ as are currently existing in the CCR. S.2(20), S.2(54) and S.2(55) of the Act define the terms ‘capital goods’, ‘inputs’ and ‘input services’, respectively. As stated earlier, the definition of ‘capital goods’ is almost a verbatim reproduction of the definition of the same term given in R.2(a) of CCR. On the other hand, the term ‘inputs’ and ‘input services’ are defined as under:

“S.2(54) – “Inputs” means any goods other than capital goods, subject to exceptions as may be provided under this Act or the rules made thereunder, used or intended to be used by a supplier for making an outward supply in the course or furtherance of business.”

“S.2(55) – “Input Services” means any service, subject to exceptions as may be provided under this Act or the rules made thereunder, used or intended to be used by a supplier for making an outward supply in the course or furtherance of business.”

At the outset, it must be stated that the distinction sought to be drawn from ‘capital goods’ and ‘inputs’ is highly distortive and totally unwarranted. The so called ‘capital goods’ and ‘inputs’ are not likely to have, God forbids, a different GST rate. That being so, where is the need for such distinction? The ‘inputs’ as defined excludes ‘capital goods’ (as is the case at present) which will only create further complications.   Significantly, when no such distinction between ‘capital goods’ and ‘inputs’ is drawn in the IGST Act, why is there such distinction in the GST ACT?

It is also interesting to note that the Act separately incorporates the concept of ‘capital asset’ which is defined vide S. 2(19) as under:

“S.2(19) – “Capital assets” shall have the meaning as assigned to it in the Income Tax Act, 1961 (43 of 1961) but the said expression shall not include jewellery held for personal use or property not connected with the business.”

The definition is largely based upon the similar definition contained in S.2 (5) of MVAT Act. However, though separately defined, the term has been used only once elsewhere and that is, in clause (d) of S.2 (17) of the Act that defines the term ‘business’. The concept of ‘capital asset’ as defined vide S.2(14) of the Income Tax Act, 1961 stands well explained and well settled through the prism of judicial wisdom over the decades.   So why can’t the same concept be adopted and applied for GST, if at all any distinction is necessitated between ‘inputs’ and ‘capital goods’?

It is also significant to note that S.16 of the Act, that prescribes the ‘manner of taking input tax credit’ provides, inter alia, vide sub-section (1) thereof that every registered taxable person shall be entitled to take credit of input tax admissible to him. The term ‘input tax’ is defined vide S.2 (57) of the Act as under:

“S.2 (57) – “Input tax” in relation to a taxable person, means {IGCST and CGST} charged on any supply of goods and/ or services to him which are used, or are intended to be used, in the course of furtherance of his business and includes the tax payable under sub-section (3) of section 7.”

It will be observed that the definition nowhere uses the expressions ‘capital goods’, or ‘input’ or even ‘input services’ but instead, uses the general expressions viz. ‘goods and/or services’. Even sub-section (9) of S.16 carves out various exceptions in respect of entitlement to ‘input tax credit’ from ‘goods and/or services’ and not from ‘capital goods’ or ‘inputs’ or ‘input services’. At the same time, sub sections (2), (2A) and (3) of S.16, which are in the nature of transitional provisions governing (i) new registrant [S.19 (1) refers] ; (ii) voluntary registrant [S.19 (3) refers} and (iii) Person who ceases to pay tax under ‘composition levy’ [S.8 refers], respectively, employ the expression ‘inputs’. This inconsistency in drafting is quite serious and may lead to disputes.

One may, therefore, have to look for some logic for drawing the distinction between ‘capital goods’ and ‘input’. One probable reason could be to ensure that there is no double benefit of ‘depreciation’ under Income Tax Act, 1961 and ‘input tax credit’ under GST Act in respect of the GST paid on the items which are in the nature of capital goods. Necessary safeguard in this regard is provided in sub-section (10) of S.16 of the Act. However, the purpose can otherwise also be achieved without drawing a specific distinction between ‘capital goods’ and ‘input’.

The other probable reason could be the issue of ‘tax treatment’ i.e. reversal of credit   in case of the ‘removal of capital goods’ on which input tax credit has been taken. At present, provisions in this   regard are contained in R. 3(5) and 3 (5A) of the CCR that, inter alia, provide for the ‘reversal of Cenvat Credit’ in case of ‘removal of capital goods as such’ and such ‘ removal after use’, respectively. Somewhat similar provision is contained in sub-section (14) of S.16 of the Act, that inter alia, provides that in case of supply of capital goods on which input tax credit has been taken, the amount to be paid/reversed shall be equal to the credit taken reduced by the percentage points as may be specified or the tax on the transaction value, whichever is higher. It is interesting to note that this clause does not distinguish between the removal of capital goods on which input tax credit has been taken, as such or after use!

Lastly, the distinction between ‘capital goods’ and ‘input’ may have been resorted to with a view to provide smooth and uninterrupted benefit of ‘input tax credit’   at the time of migration from the existing law to GST law on the ‘appointed day’ i.e. the date on which Section 1 of the Act comes into effect. This may be necessary since at present, the Cenvat Credit on ‘capital goods’ is allowed in a staggering manner, that is, 50% in the year of receipt and balance 50% in the subsequent years. Consequently, it may happen that on the “appointed day”, the Registered taxable person may have ‘unavailed cenvat credit’ on ‘capital goods’. The necessity to distinguish between ‘capital goods’ and ‘input’ may have been felt for this reason.

While one may strenuously look for the logic or reasons behind maintaining the distinction between ‘capital goods’ and ‘inputs’ and may come up with the above and/or a few more answers, the distinction drawn still looks baffling and makes one uneasy. The taxpayers may also harbour a dreadful thought and that is, “whether such distinction would mean the continuation of the current staggering input tax credit regime for ‘capital goods’?” Though, this seems unlikely but with bureaucracy, one can never be sure!

“Bureaucracy defends the status quo long past the time when the quo has lost its status.” [Dr. Laurence J. Peter]

S.2 (44) “Export of Services”- “Why this craving for ‘foreign exchange?”

  S.2 (44) of the Act contains the provision relating to “Export of Service”. Actually, the provision, as will be noted, is worded like a ‘deeming fiction’ and its placement under ‘Definitions clause’ appears somewhat inappropriate. Similar is the case with the provisions of S.2 (52) that deals with ‘import of service’.

Be that as it may, S.2 (44) relating to “Export of Service” is almost a replica of the existing Rule 6A of the STR with some contextual changes. S.2 (44), just like R.6A, also prescribes ‘receipt of payment’ in ‘convertible foreign exchange’ as one of the pre-conditions for a ‘supply of service’ to be treated as ‘export of service’.

This insistence on ‘payment in convertible foreign exchange’ in today’s fast changing economic world seems quite absurd and awkward. It may be stated here that neither under Central Excise Law nor under State VAT laws, the ‘receipt of payment in convertible foreign exchange’ is a pre-requisite in case of ‘export of goods’. Why then such differential attitude in case of ‘export of service’? Why can’t we change our mindset and think of ourselves like a ‘Developed economy’ shedding this burden of past baggage? Moreover, if India were to embrace ‘full capital convertibility’, what would be the relevance of this condition?’

It is high time that a re-look is taken to this pre-condition that needs to be dispensed with.

S.2 (44) and (52)- “Export/Import of Service”- “Dance of the ‘Drafting Demons’!”

S.2(44) of the Act provides for the conditions subject to which ‘the supply of any service’ shall be treated as ‘export of service’. Similarly, S.2 (52) of the Act provides for the conditions subject to which ‘the supply of any service’ shall be treated as ‘import of service’. Both these provisions do not really define the respective terms, but prescribe the conditions subject to the fulfilment of which the ‘supply of service’ shall be treated as ‘export of service’ or ‘import of service’, as the case may be. Therefore, the provisions ought not to have been placed under the ‘definitions clause’ and instead, could have been made as independent provisions.

Clause (e) of S.2(44) of the Act reads as under:

“S.2 (44) (e)- “the supplier of service and recipient of service are not merely establishments of a distinct person”.

This condition would mean that if an establishment of a person situated in India supplies a service to another establishment of the same person situated outside India, ‘the supply of service’ in such a case will not be considered as ‘export of service’. An identical condition is contained vide clause (f) of R. 6A of STR and the logic is quite understandable. Going forward, the Explanation to S.2 (44) provides as under:

Explanation – For the purposes of clause (e), an establishment of a person in India and any of his other establishment outside India shall be treated as establishments of distinct persons.”

It will be observed that the Explanation is similar to the provision contained in item (b) of Explanation 3 of clause (44) of S.65B of FA. However, unlike clause (f) of R.6A of STR that refers to the said Explanation under S.65B of the FA, the clause (e) of S.2(44) under discussion, does not refer to the Explanation appended at the end of the Section. This disconnect between clause (e) and Explanation in S.2(44) unnecessarily creates confusion. It shall be noted that clause (e) is worded negatively whereas Explanation is assertive in nature. Consequently, a sort of contradiction creeps in when both are read together. It would have been ideal if clause (e) also refers to the Explanation at the end of the provision i.e. S.2(44) in the same manner as clause (f) of R.6A refers to item (b) of Explanation 3 to S.65B(44) of the FA.

Coming to ‘import of service’, clause (d) of S.2 (52) reads as under:

“S.2 (52) (d)- “the supplier of service and the recipient of service are not merely establishments of a distinct person”.

Explanation 1 to S.2 (52) reads as under:

“Explanation 1- An establishment of a person in India and any of its other establishment outside India shall be treated as establishments of distinct persons.”

An apparent contradiction or dichotomy between clause (d) and Explanation 1 will not be lost on the Netizens. Explanation 1 rightly declares two establishments of a person, one in India and another outside India, as ‘establishments of distinct persons’. The objective is to treat the ‘supply of service’ from such foreign establishment in India as ‘import of service’ and subject to GST under ‘reverse charge’ in consonance with the Destination principle. However, clause (d) appears to nullify this objective as it appears to be in direct conflict with Explanation 1. To make the matter worse, neither clause (d) refers to the Explanation 1 nor the latter refers to the former and there is as such a complete disconnect between the two. Therefore, when read independently, confusion is bound to arise.

It appears that the draftsmen have been victims of ‘cut-n-paste syndrome’ as both, clause (d) of S.2 (52) and Explanation 1 thereto are verbatim reproduction of clause (e) of S.2 (44) and the Explanation thereto, respectively, relating to ‘Export of Service’! In the process, the draftsmen have failed to realise that the objective behind clause (e) of S.2 (44) is to ensure that a ‘supply of service’ by an Indian establishment of a person to his other establishment outside India is not considered nor claimed as “export of service”. This is further taken care of through the Explanation appended to the section. However, in case of ‘import of service’, the objective is exactly opposite which is sought to be achieved by Explanation 1 and which is same as Explanation to S.2 (44) for obvious reasons.

Clause (d) in S.2 (52) is therefore, inappropriate, unwarranted and needs to be omitted or the clause and even Explanation 1 may have to be replaced by a suitable clause/Explanation or re-drafted.

“When I hear any man talk of an unalterable law, the only effect it produces upon me is to convince me that he is an unalterable fool.” [Sydney Smith]

[To be continued..]

Source: http://www.taxindiaonline.com/RC2/inside2.php3?filename=bnews_detail.php3&newsid=27

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