1. Clarification on charging of interest under section 50(3) of the CGST Act, 2017, in cases of wrong availment of IGST credit and reversal thereof
Let us first understand the issue before dwelling on to the clarification.
The issue that arose because of the manner of utilisation of credit of GST. ITC of IGST to be completely exhausted mandatorily as per Rule 88A of CGST Rules, 2017 before utilizing credit of SGST and UTGST.
As per Sec 50(3) read with Rule 88B of CGST Rules, 2017 interest is to be levied on amount of ITC wrongly availed and utilized. Because of the condition stated in Rule 88A as explained above, sometimes balance in SGST or CGST remains unutilized, which might lead to interest u/s 50(3) on wrongfully availed IGST credit by a registered person.
CBIC has clarified through Circular No. 192/04/2023-GST dated 17-7-2023 that "It is the total input tax credit available in electronic credit ledger, under the heads of IGST, CGST and SGST taken together, that has to be considered for calculation of interest under rule 88B of CGST Rules."
CBIC has also clarified that "As per proviso to section 11 of GST (Compensation to States) Act, 2017, input tax credit in respect of compensation cess on supply of goods and services leviable under section 8 of the said Act can be utilised only towards payment of compensation cess leviable on supply of goods and services. Thus, credit of compensation cess cannot be utilized for payment of any tax under CGST or SGST or IGST heads and/or reversals of credit under the said heads.Accordingly,creditofcompensation cess available in electronic credit ledger cannot be taken into account while considering the balance of electronic credit ledger for the purpose of calculation of interest under sub-rule (3) of rule 88B of CGST Rules in respect of wrongly availed and utilized IGST, CGST or SGST credit.
2. Clarification on availability of ITC in respect of warranty replacement of parts and repair services during the warranty period
Let's understand the warranty replacement of parts and repair services as per industry norms.
As per standard norms, if there is any defect in the goods supplied during the warranty period, replacement of parts is provided to the customer free of cost. The customer, may also take extended warranty of parts to secure himself for a further period of time on payment of stipulated amount.
Now, let's examine the GST law regarding "free supplies". Free supplies mean anything given without consideration. As per Section 7(1)(c), any supplies without consideration which are specified in Schedule I will only attract GST. After reading the entire Schedule I, one can concluded that the warranty supplies are not considered supply as it is not falling under any para of Schedule I and thus not chargeable to GST. This was clarified through Circular No. 195/07/2023-GST dated 17-7-2023.
One more issue that may arise is regarding reversibility of ITC in view of provisions of Sec 17(5)(h) which states that ITC needs to be reversed if "goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;" Looking at all the words used in this clause, one can say that goods are not falling under any of the words used in Sec 17(5)(h) i.e. they are not lost, or stolen or destroyed or disposed off. Analysing further the words 'Gift and free sample', one can say that gift is not a right of the recipient whereas warranty replacements are enforceable rights of the customers i.e. enforceable in a court of law. Thus, it can be said that warranty replacements are neither gift nor free samples. And thereby concluded that ITC in respect of these goods need not be reversed. This view was also affirmed through circular.
It was further clarified that if any sum of money is taken for warranty repair as service charges or goods supplied during warranty period, the same will be subject to GST.
3. The most important circular clarifying the taxability of services provided by an office of an organisation in one State to the office of that organisation in another State, both being distinct persons.
The third issue was regarding Cross-charge mechanism, which is a new concept and was introduced in GST Regime only.
What is cross-charge Mechanism?
Cross-charge means to bill to another distinct entity of the same person because of transfer of goods and service to such distinct entity. For example, say Y Ltd. Is registered under GST in Delhi and Mumbai using the PAN of Y Ltd.. Now when Y Ltd. transfers the goods or services from Delhi to Mumbai, then a GST invoice is to be raised and the IGST is to transferred from Delhi to Mumbai. This was done as in case of GST because it is a destination-based taxation system andto avoid accumulation of ITC at the originating branch when supplies are actually sold at another branch, the credit will be transferred through GST Invoice which will be raised between the persons having one PAN.
This concept works well in case of goods but department started asking for GST in case of internally generated services which one branch supplies to another. Like many a times, corporate houses some functions, like call centre, accounts department in one location and all the branches uses these services.
Now this circular no. 199/11/2023-GST dated 17-7-2023 has come to the rescue of these corporates and stated the following –
- In case of internally generated services which one branch supplies to another, the GST invoice need not be raised on another branch, if the receiving branch is entitled to full ITC of the same.
- In case of internally generated services, the cost of salary of employees need not be added to compute the value of services, even if the receiving branch is not entitled to full ITC of the same.
- In case of third-party services received by one branch, the benefit of which is taken by more than one branch, for example audit fees, credit may at present be transferred either through cross charge mechanism or ISD mechanism. i.e. transferring credit through ISD mechanism is not mandatory.
4. Clarifications regarding the applicability of GST on certain services
CBIC has clarified through circular no. 201/13/2023-GST dated 1-8-2023, that –
- When the director of a company provides any service to the company in personal capacity, the same will not be subject to GST on RCM. Only one example has been cited in the circular i.e. of renting of immovable property.
- Food or beverages supplied in cinema hallis taxable as restaurant service. It is further clarified that where the sale of cinema ticket andsupply of food and beveragesare clubbed together, and such bundled supply satisfies the test of composite supply, the entire supply will attract GST at the rate applicable to service of exhibition of cinema, the principal supply.
The CBIC addressed the long-pending and unnecessary disputes through these circulars in favour of the taxpayer but failed to address the new and also avoidable notices that the government is issuing regarding "Taxability of Guarantee of Director which the department is contending is a service supplied by director to the companies and should be chargeable @ 18% on RCM basis by the companies."