They say, there is nothing called a free lunch. For argument’s sake, let’s suppose there is. Can that be taxed too?
Mr. Legal Eagle is among the top Chartered Accountants of the country, he represents only the who’s - who of the business world. Success is his second name, and his charges are in millions. In a rare deviation, he argued a case for Philanthropy Philia, an NGO catering to orphan children. Given the noble cause, he did it free of cost, won the case (needless to say!) and lunched with the trustee of the NGO.
The trustee, a renowned business tycoon, engaged him for an identical case concerning his business. Our friend charged the usual millions, no charity there. And of course discharged the taxes on those millions. However, to his utter astonishment, he receives a notice from the tax dept, accusing him of evading taxes on the services to the NGO!
Sounds rather fanciful or fictional? Once upon a happy time, one could have been forgiven for assuming so. That could very well be the reality staring under GST, unless clarified.
As always, the devil is in the detail. Schedule 1 to the GST Law, envisions circumstances which are to be treated as a supply without consideration. Clause 5 of this Schedule is reproduced below:
“Supply of goods and / or services by a taxable person to another taxable or non-taxable person in the course or furtherance of business.”
“….In the course or furtherance of business.” Who exactly determines that, is it the business owner or the taxman?
Ideally, it has to be the businessman. Who else but the businessman knows his business or his intentions? The taxman cannot and should not step into the shoes of the businessman and sit in judgment. But in an environment where fencing and revenue safeguards form the foundations of the law, the last word is always with the taxman. And the taxman faithfully believes in 2 of Murphy’s laws; first: “If something can go wrong, it will”, second: “Left to themselves, things tend to go from bad to worse”.
In the analogy above, the taxman will undoubtedly argue that the intention of Mr. Legal Eagle was furtherance of business. The pro bono representation was no free lunch: it was meant to secure business opportunities, and it did! Can such oblique nexus be sufficient to conclude business intentions? Should the law leave it to the discretion of the individual taxman? If yes, shouldn’t there at least be safeguards to prevent flimsy and clumsy inferences?
Still not convinced? Alright, I’ll speak like Mr Legal Eagle. Let’s look at Section 123 of the Model GST law,
“If any person claims that he is not liable to pay tax under the Act in respect of any supply of goods and/or services, or that he is eligible for input tax credit under section 16, the burden of proving such claim or claims shall lie on him.” - Section 123
You see, there’s really no such thing called a free lunch. Assuming that the taxman still insists on taxing Mr Legal Eagle’s philanthropy, how will he value it? Lets’ save that for the next post, I’m hungry.
(P.S. I’m buying my lunch!)
Alternative interpretations or views are of course possible, one is welcome to voice them. Please feel free to share your thoughts in the comments section below!
The author is a Chartered Accountant who writes at http://www.justangle.com and can also be reached at taxfountain@gmail.com
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