Background
1. In
business entities engaged in manufacturing and service sector, many a
times surplus money left is invested for the time in interest bearing
investments. From the said investment activities, interest income is
earned. In GST, it is called 'supply of service by way of extending
deposits, loans
or advances against consideration in form of interest'
("Interest Supply"). Interest Supply is exempted from GST chargeability.1
In
GST law, if your output supply is taxable then you will be eligible to
take benefit of input tax credit. However, if your output is exempted
then you shall not be allowed to take the benefit of input tax credit.
There can also be cases where an input is attributable to both taxable
output supply as well as exempt output supply. In such cases, amount of
input tax credit shall be restricted to so much input tax credit as is
attributable to taxable output supplies. To deal with such cases, method
for quantification of the amount of input tax credit attributable to
exempt supply and taxable supply, is prescribed in Rule 42 and Rule 43
of the Central Goods and Services Tax Rules, 2017 ("CGST Rules")
From
the above principle, input tax credit which is in relation to Interest
Supply, being an exempt supply, should also not be eligible. However,
one will appreciate that the assessee is not engaged into the business
of Interest Supply and it is just an investment of surplus money which
will be withdrawn when there is a requirement in the business. With this
intent, an amendment has been made to the CGST rules by the Central
Goods and Services Tax (Amendment) Rules, 2018 [Notification No. 03/2018
– CT dated 23.01.2018] ("Notification dated 23.01.2018"). Through the
said amendment, Explanation to Rule 43 was substituted with the new Explanation. In the new Explanation to
Rule 43, Government clarified that value of Interest Supply shall be
excluded from the aggregate value of exempt supply for the purpose of
Rule 42 and Rule 43 of the CGST Rules. As the Explanation to Rule
43 is in the form of clarification, whether a view can be taken that
the clarification being exclusion of value of Interest Supply from the
value of exempt supplies for the purpose of reversal of input tax
credit, shall be effective retrospectively from 1st July, 2017, i.e., the date when Rule 42 and Rule 43 of the CGST Rules came into force.
Applicable Legal Provisions and Judicial Analysis
2. As
discussed above, methodology to determine the input tax credit
attributable to taxable supplies and exempt supplies has been specified
in Rule 42 and Rule 43 of the CGST Rules. VideCentral Goods and Services Tax (Twelfth Amendment) Rules, 2017 [Notification No. 55/2017 dated 15.11.2017], Explanation was
inserted in Rule 43 ("Old Explanation") to provide for exclusion of
value of certain supply of service from the aggregate value of exempt
supplies. The said explanation reads as under
Explanation –
For
the purposes of rule 42 and this rule, it is hereby clarified that the
aggregate value of exempt supplies shall exclude the value of supply of
services specified in the notification of the Government of India in the
Ministry of Finance, Department of Revenue No. 42/2017-Integrated Tax
(Rate), dated the 27th October, 2017 published in the Gazette of India,
Extraordinary, Part II, Section 3, Sub-section (i), vide number GSR 1338(E) dated the 27th October, 2017
Vide Notification dated 23.01.2018, new Explanation substituted Old Explanation. New Explanation to Rule 43 ("New Explanation") reads as under:
Explanation: -
For the purposes of rule 42 and this rule, it is hereby clarified that the aggregate value of exempt supplies shall exclude: -
| (a) | the value of supply of services specified in the notification of the Government of India in the Ministry of Finance, Department of Revenue No. 42/2017-Integrated Tax (Rate), dated the 27th October, 2017 published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number GSR 1338(E) dated the 27th October, 2017; | |
| (b) | the value of services by way of accepting deposits, extending loans or advances insofar as the consideration is represented by way of interest or discount, except in case of a banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances; and | |
| (c) | the value of supply of services by way of transportation of goods by a vessel from the customs station of clearance in India to a place outside India. |
From the above, it is evident that vide Old Explanation and New Explanation,
Government has issued three clarifications, being exclusion of value of
certain supplies from the aggregate value of exempt supplies for the
purpose of Rule 42 and Rule 43 of the CGST Rules. One such clarification
is exclusion of value of Interest Supply from the aggregate value of
exempt supplies ("Relevant Clarification").
Now,
for examining whether the Relevant Clarification can be said to be
effective from 01.07.2017, one should understand the intent of
government behind providing the Relevant Clarification. The said
clarification was provided after discussion of GST Council in its 25th
meeting dated 18.01.2018. After perusal of the agenda for 25th GST
Council Meeting-Volume 2 (Page 18), we can observe that CII & FICCI
were proposing that the value of Interest Supply should be excluded from
the aggregate value of exempt supplies for the purpose of Rule 42 and
Rule 43 of the CGST Rules. CII and FICCI also gave justifications for
the said proposal and Fitment Committee was in agreement with the said
proposal. Relevant extract of the agenda for 25th GST Council Meeting is
reproduced below for ready reference:
| S. No. | Represented by | Proposal | Justification | Comments of Fitment Committee |
12
|
CII, FICCI
|
The
input tax reversal by way of Section 17(2) of the CGST Act should be
amended to exclude the value of supply by way of extending deposits,
loans or advances as was under Service Tax.
|
Explanation
I(e) to Rule 6 under CENVAT Credit Rules, 2004 provided that value of
exempt services for the purpose of reversal of Cenvat credit shall be
exclusive of value of the service by way of extending deposits, loans or
advances insofar as consideration is represented by way of interest.
This provision did not apply to a banking company and a financial
institute including a non-banking financial company, engaged in
providing services by way of extending deposits, loans or advances.
|
Position
in Service tax-Services by way of extending deposits, loans or advances
against consideration in the form of interest was in the Negative List.
Under the CENVAT Credit Rules, 2004 (CCR), services in the Negative
List were treated at par with exempted services for the purpose of
reversal of input tax credits [Rule 2(e) of CCR refers]. Therefore,
CENVAT credit of common inputs and input services used in exempted or
negative list services was required to be reversed proportionately.
However, as a business-friendly measure, it had been provided in the
CENVAT Credit Rules, 2004 [Explanation-I(e) to Rule 6], that
value for the purpose of reversal of common input tax credit shall not
include the value of service by way of extending deposits, loans or
advances against consideration in the form of interest. This provision,
which was incorporated in the CENVAT Credit Rules in June, 2012, was
meant for assessees in manufacturing and service sector who invested
surplus cash available with them for earning interest but did not engage
in advancing deposits, loans, advances etc. as their main or regular
economic activity.
Position in GST-
In
GST an identical exemption for services by way of extending deposits,
loans or advances, insofar as the consideration is represented by way of
interest or discount (other than interest involved in credit card
services) exists in notification No. 12/2017-CT(R) S. No. 27. However,
there is no provision for excluding the interest income earned by an
assessee by investing surplus cash available with him. This may result
in reversal of ITC disproportionate to the inputs and input services
consumed by him in the activity of investing or lending such surplus on
interest. In exercise of powers under section 17(3) of the CGST Act, it
may be provided in CGST rules that value of exempt supply under
sub-section (2) of section 17, in case of any person other than banking
company and a financial institution including a non-banking financial
company engaged in providing services by way of extending deposits,
loans or advances, shall not include the value of the service by way of
extending deposits, loans or advances, insofar as consideration is
represented by way of interest or discount. This will restore the
position as existed in service tax as on 30.06.2017.
Fitment Decision
Approved.
|
From
the above, it can easily be inferred that the reason for providing the
Relevant Clarification is to restore the position as existed in service
tax regime till 30.06.2017. In the service tax regime, Rule 6 of the
Cenvat Credit Rules, 2004 ("CCR") dealt with reversal of input tax
credit as attributable to exempt services. Further, Interest Supply was
covered under the scope of negative list in the service tax regime, i.e.,
not chargeable to service tax and for the purpose of reversal of input
tax credit, services covered under the scope of negative list were
treated at par with exempt services. However, on account of Explanation I
to Rule 6 of CCR, value of exempt services for the purpose of reversal
excluded the value of Interest Supply. As per the comments of Fitment
Committee as reproduced above, said provision of CCR as a business
friendly measure, was meant for assessees in manufacturing and service
sector who invested surplus cash available with them for earning
interest but did not engage in advancing deposits, loans, advances,
etc., as their main or regular economic activity.
After
understanding the above intent of excluding the value of Interest
Supply from the value of exempt supplies for the purpose of reversal of
input tax credit in service tax regime, the said provision should also
be continued in the GST regime. However, there was no such corresponding
provision in the GST regime. Therefore, to restore the positing in GST
regime, necessary amendment took place in Rule 43 of the CGST Rules.
From
the aforesaid analysis, one can reasonably infer that the nature of the
Relevant Clarification is curative in nature. It has been held in
various judicial precedents Allied Motors (P.) Ltd. v. CIT [1997] 91 Taxman 205/224 ITR 677 (SC); CIT v. Alom Extrusions Ltd. [2009] 185 Taxman 416/319 ITR 306 (SC); CIT v. Calcutta Export Co. [2018] 93 taxmann.com 51/255 Taxman 293/404 ITR 654 (SC) that
amendments to the legislation which are curative in nature should be
treated as retrospective in effect and should be applicable for earlier
years also. Therefore, one can reasonably take a view that Relevant
Clarification being curative in nature shall be considered to be
effective from the period from which cure was required in the law, i.e., date from which Rule 42 and Rule 43 are effective.
Furthermore,
from the above reading, it is evident that through the Relevant
Clarification, benefit to the assessee has been conferred by the
legislature by way of not including the value of Interest Supply in the
value of exempt supplies for the purpose of reversal of input tax
credit. Accordingly, if value of exempt supply is less, reversal of
input tax credit shall also be proportionately less. Hence, the benefit
is in the form of increase in the quantum of eligible input tax credit.
Since the Relevant Clarification is for the benefit of the assessee, it
should be applied retrospectively CIT v. Vatika Township (P.) Ltd. [2014] 49 taxmann.com 249/227 Taxman 121/367 ITR 466 (SC).
The
aforesaid view can also be substantiated by one more reasoning. As per
the provisions of Rule 42 and Rule 43 of the CGST Rules, input tax
credit in relation to exempt supply is required to be determined every
month as per the method prescribed therein. After the end of financial
year, amount of input tax credit in relation to exempt supply shall be
determined finally for the financial year as per the method prescribed
therein. Accordingly, it can be inferred that month-wise calculation of
input tax credit in relation to exempt supply is on provisional basis
which shall be finalized at the end of financial year. Any difference in
the final calculation and provisional calculation shall be adjusted in
the month not later than the month of September following the end of
financial year.
In
the issue under consideration, the reversal made in the month of July,
2017 to December, 2017 was on provisional basis. During such time,
Interest Supply was considered as an exempt supply for the purpose of
reversal of credit. While making the final calculation for the period
starting from July 2017 to March 2018, the Relevant Clarification has
been made part of the law book. Therefore, while finalizing the
provisional calculation of reversal of input tax credit in relation to
exempt supply for the period starting from July 2017 to March, 2018,
value of Interest Supply shall be excluded from the value of exempt
supply, in turn, making Relevant Clarification effective from 01.07.2017
and any excess reversal on account to inclusion of value of Interest
Supply in the value of exempt supply shall be made good.
Conclusion
3. From
the above one can take a view that Interest Supply shall not be
included in the value of exempt supply for the purpose of reversal of
input tax credit with retrospective effect from 01.07.2017. Therefore,
while making the final calculation of input tax credit for the FY
2017-18, one can consider the aforesaid view and any excess reversal of
input tax credit on account of treating Interest Supply as exempt supply
can be made good. However, last date of making the said adjustment
shall be due date for furnishing of return for the September month
following the end of financial year and due date of GSTR 3B of
September, 2018 is 20.10.2018.
1 comment:
Superb article!! Extremely useful!
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