A dispute on definition of “intermediary” puts $147 bn IT sector in a tax quandary

Source: The Economic Times, Sept 08, 2020

New Delhi: Country’s $147 billion IT and ITES industry including back offices of several multinationals such as Genpact and WNS Global has sent an urgent request to the government on denial of export status, which has made them liable to 18% goods and services tax (GST).

Industry fears it could cascade into denial of refunds on taxes paid on inputs, audits and investigation and tax recovery notices for tax.

The industry has sought immediate government intervention in the matter.

According to industry estimates, close to 200 plus companies have some form of dispute on the definition of “intermediary” services. There is no GST levied on goods or services exported, but intermediary services are taxed even if supplied to foreign entities. Back office services such as BO were in pre-GST regime treated as exports and not taxed.

GST authorities have started disputing the export status of different streams of revenue and seeking to treat the same as “intermediary” services.

Industry body Nasscom has represented the matter to the finance and commerce ministries for expeditious resolution.
“There are increasing cases where the GST authorities have aggressively interpreted the scope of intermediary services to cover ITeS/ BPM,” it said in a representation, seen by ET.

The implication of treating ITeS/ BPM as “Intermediary”, it said, is that the exports get taxed at 18%. “In the immediate refund claims on input credit of GST are denied. This is resulting in denial of refunds, excessive investigations, litigation and making ITeS/ BPM in India uncompetitive,” it added.

The issue arose following a Maharashtra Appellate Authority for Advance Rulings decision in case of VServe Global. The AAAR in February, 2019 upheld an AAR decision that ruled that back-office support services to overseas customers were intermediary services and hence liable to tax and not eligible for tax refunds.

The Central Board of Indirect Taxes and Customs (CBIC) attempted to clarify the issue via a circular in July, 2019, but that created more confusion as interpretation of whether the service would qualify as exports was left to tax authorities.

It led to issuance of a spate of notices and denial of credit by authorities.

The circular was subsequently withdrawn. A revised circular, as announced by the GST Council meeting in September 2019, is yet to be issued.

“NASSCOM has discussed this in detail with the CBIC and they seem to agree with our suggestion, but clarity is still awaited,” said Keshav Murugesh, group chief executive officer of WNS Global Services, a NYSE listed company in the Business Process Management business.

India has more than 500 global in-house delivery centres, employing over 350,000 people. As per industry, an 18% levy on these services will derail the cost dynamics of the back-office model that operates on thin margins and faces competition from other low-cost jurisdictions.

“It’s time due importance is given to ‘Served from India’ as ‘Make in India’ and necessary clarifications are issued to put to rest these disputes,” Bipin Sapra, partner, EY.

Genpact recently filed a writ in Punjab High Court.

“A more permanent solution could be to amend the GST law to carve out the IT-BPM sector in the GST “place of supply” provisions and clarify export status. This has been done recently for the Pharma R&D sector as well,” said Mahesh Jaising, Partner and National Leader Indirect tax, Deloitte India.

A Genpact spokesperson said regulatory clarity will help.

“The IT / BPM industry is a significant employment generator and source of revenue for India. This issue requires clarification, which will go a long way in enabling us to continue to be a country that is easy to do business with and a market of choice for multinational companies,” the spokersperson said.

Govt notifies tax rules for non-resident e-commerce players

Source: LiveMint.com, Jul 04, 2020

NEW DELHI: The income tax department has notified rules for levying 2% tax on non-resident e-commerce players which kicked in from April. Payment for the first installment is due on July 7.

Last minute changes were made to the tax filing form and the notification of Income-tax (16th Amendment) Rules, 2020 signed off on Friday and published on Saturday. This shows the government is going ahead with the new digital economy tax despite calls from global bodies, like the US-India Business Council, representing technology giants, seeking a delay in its implementation.

The Finance Bill 2020 expanded the ‘equalisation levy’ introduced in June 2016 on payments made to non-resident service providers for hosting online advertisements to include other supply of services such as online sale of goods by e-commerce operators. The levy is 6% for payments for hosting online advertisements, while it is 2% in the case of other e-commerce activities. This levy is not considered as income tax and is not covered by the tax treaties India has with various countries.

The expansion of India’s digital economy tax comes at a time when there is little consensus on the issue among Organisation for Economic Co-operation and Development (OECD) nations. There is also a raging dispute between the US and some of the European nations on digital economy taxes targeting major US-based tech giants. “Taxpayers need to act immediately to determine their tax liability based on the material currently available, seeking appropriate advice where necessary, to ensure appropriate compliance with the law as it stands, so as to make the payment by 7 July 2020. Not doing so may needlessly invite not only interest but penalty consequences as well,” EY said in a note on the issue on 2 July, highlighting the need for more clarifications in the form of frequently asked questions.

E-way bill generation showing green shoots of economic recovery: GSTN

Source: Business Standard, Jul 05, 2020

New Delhi: E-way bill generation has signalled that the process of economic recovery has begun, GSTN said on Sunday. The IT infrastructure provider for GST said the data substantiates the indications given by the surge in GST collections in July.

In a statement, the Network said June 30, the last day of Unlock 1.0, ended with the generation of 1.83 million E-way bills worth over Rs 54,500 crore, which is the highest since the lockdown was enforced.

Bill generation, which used to be around two million a day normally, had drastically come down after the lockdown was enforced.

March 2020 recorded the steepest fall, plunging to a low of approximately 50,000 on the 25th of the month, the lowest on the first day of the nationwide lockdown, GSTN said.

Month-on-month, April had a sharp dip as the numbers reached 8.45 million bills worth Rs 3.90 trillion totally. As restrictions were eased, the number grew rapidly between May and June.

“The data substantiates that the Indian economy is gathering pace with the movement of goods rebounding close to pre-lockdown levels and goods and services tax (GST) collections rising sharply,” GSTN said.

GST collections stood at Rs 90,917 crore in June, recovering from Rs 62,009 crore the previous month and Rs 32,294 crore in April. However, a part of the reason for the surge in collections is that businesses filed the previous months dues in June due to relaxation in the filing schedule given by the government.

The upwards trend means Unlock 2.0 is going to have more reasons to cheer, the Network said.

“Based on the current trend, it is expected that the cargo movement will further accelerate in the Unlock 2.0, which along with other indicators is a healthy sign of an early economic recovery and stability,” it said. E-way bill is required to be generated by a registered GST taxpayer for the movement of goods if the value of the consignment exceeds Rs 50,000 for inter-state movement. For intra-state movement, limits vary from state to state.

Centre releases Rs 36,400-crore GST compensation to states

Source: Business Standard, Jun 04, 2020

New Delhi: Ahead of the Goods and Services Tax (GST) Council meeting next week, the Centre on Thursday released compensation worth Rs 36,400 crore to states for three months up to February 2020.

The much-delayed compensation comes at a time when state finances are under severe stress due to the Covid-19 lockdown.

“Taking stock of the current situation due to Covid-19 where state governments need to undertake expenditure while their resources are adversely hit, the central government has released the GST compensation for the period between December 2019 and February 2020 on Thursday,” the Ministry of Finance said in a release.

The GST compensation of Rs 1.15 trillion for April-November 2019 was released earlier, the government said. This stands against Rs 95,551 crore collected as cess in the compensation fund in 2019-20 (FY20).

The compensation mechanism to states under GST has come under strain due to inadequate cess collection amid bleak consumer demand.

Under the law, if states’ GST revenue does not grow by at least 14 per cent over the base year of 2014-15, the Centre pays them the difference, on a bi-monthly basis for the first five years of GST implementation.

States have been up in arms with the Centre over non-payment of compensation dues, while the Union government has conveyed its inability on account of cess shortfall.

Besides dwindling cess collection in the compensation fund, the rising dependency of states on the promised GST compensation amid sharp fall in revenue due to the Covid-19 pandemic has compounded the challenge.

In FY20, the Centre used Rs 47,271-crore surplus cess from 2017-18 and 2018-19.

The compensation cess is levied on luxury and sin items such as aerated drinks, coal, paan masala, cigarettes, and automobiles over the peak rate of 28 per cent.

The government is exploring a slew of options, including borrowing from the market and extending the cess period further, to repay.

The monthly GST compensation requirement is estimated at Rs 20,250 crore in 2020-21, against Rs 13,750 crore last year.

Under the GST structure, taxes are levied under 5, 12, 18, and 28 per cent slabs. The GST Council in its meeting held in March deliberated on whether it could go for borrowing if the compensation cess collections fall short of the requirement of states. It will seek opinion on various legal issues – who will give guarantee to the borrowing, how will it be repaid, how interest is to be paid, impact on the fiscal responsibility and budget management Act, etc.

Double whammy for service companies: Required to pay GST on defaults, bad debts

Source: The Economic Times, Jun 04, 2020

MUMBAI: As customer defaults mount due to the Covid-19 crisis, Indian services companies have been dealt a twin blow: Of unpaid bills, and Goods and Services Tax (GST) liabilities on those incidents on non-payment.

Under the current GST framework, there is no provision to allow adjustments of GST paid on supplies for which recoveries are not made. Companies have to pay GST when they raise the invoice or generate the bill, which often is at least a month or two before the customer pays the money.

As companies struggle with cash flows, they have to pay GST out of their own pocket even when the customer has defaulted. So, companies are seeking relief.

“The absence of a provision for allowing adjustment of GST paid on supplies for which recoveries are not made (bad debts) is a double whammy for businesses,” said Abhishek Jain, Tax Partner, EY. “It leads to a loss on account of consideration for supply not being received, coupled with an outflow of GST from their own pocket. While this has been a concern for businesses historically, in the current economically depressed times, the government should consider relief on this aspect.”

Customer defaults have been on the rise due to the Covid-induced job losses, salary cuts, business closures, and a general breakdown in corporate payment cycles.

“Companies have to pay GST based on point of taxation and the tax payout precedes the receipt of consideration for the supply. Often, leads to a situation when the supplier ends up paying the tax for which consideration is either not received or received after significant delay, thereby causing great financial and working capital issues for several service sectors and MSMEs,” said Abhishek A Rastogi, partner at Khaitan & Co.
Once a services company, such as a telecom or credit card company, raises the invoice, it has to pay GST to the government.

For instance, a telecom company generates a bill of Rs 1,000 to a consumer in the month of February, and levies Rs 180 as GST on that. The tax is paid in March by the company. However, if the consumer refuses to pay or delays the payment, the company is stuck with the outgo of Rs 180 in taxes and Rs 1,000 in unrealized revenue.

FinMin notifies retrospective amendment in CGST Law

Source: Business Standard, May 17, 2020

New Delhi: The Finance Ministry has notified retrospective amendment in the Central Goods and Services Act (CGST Act 2017). With this amendment the Centre has bought itself to disburse the pending input tax credit.

With this amendment in Section 140 of the Central Goods and Services Tax Act relating to transitional arrangements for input tax credit has formally been made effective, so as to prescribe the time limit and the manner for availing input tax credit against certain unavailed credit under the existing law. This amendment shall take effect retrospectively from July 1, 2017.

This amendment is expected to pose problems to every one except the petitioner of that ruling for claiming all pending transitional credit (technically known as input tax credit or ITC) till June 30. The Notification for the amendment says: May 18, 2020 is the date on which the provisions of section 128 of the said Act (Finance Act 2020, shall come into force.

The fine print of this amendment makes it clear that the power to prescribe a timeline now emanates from a law enacted by Parliament and not from the sub-ordinate legislation (read law). Since the Delhi High Court order focusses on rule, that is why notification will impact the claim settlement for number of businesses except the petitioners in the matter decided on May 5.

Rajat Mohan, Partner with AMRG, said that Delhi High Court’s landmark decision on Transitional Credits in favour of taxpayers would lose its grip in light of the defect occurring due to retrospective amendments brought in by the Finance Act, 2020. The Court had reasonably declared that the time limit of 3 years under the Limitation Act was relevant for transitional credit benefit, enabling all taxpayers to claim legitimate CENVAT credit till June 30, 2020.

“This ruling would have a far-reaching impact on the stressed revenue streams of the exchequer, however, now with the retrospective amendments, the tax authorities have tightened their grip around transitional credit,” he said.

Transitional credit refers to use of tax credit accumulated up to June 30, 2017, that is, last day of the erstwhile central excise and service tax regime.

After the introduction of Goods & Services Tax (GST), a special provision was made for credit accumulated under VAT, excise duty or service tax to be transited to GST. However, there were some conditions set. The credit will be available only if returns for the last six months — from January 2017 to June 2017 — were filed in the previous regime (that is if VAT, excise and service tax returns had been filed). And Form TRAN I (to be filed by registered persons under GST, may be registered or unregistered under the old regime) has to be filed by December 27, 2017, to carry forward the input tax credit which further March 31, 2019.

Later Commissioners were authorised to extend the date for submitting the declaration electronically in Form GST TRAN-1 but not beyond December 31, 2019. The Court had ruled that the time limit for transitional credit was only ‘directory’ and not ‘mandatory’ and not only the petitioner but all assessees can claim all pending transitional credit (technically known as input tax credit or ITC) till June 30. A ‘mandatory’ rule means it must be strictly complied while ‘directory’, means it would be sufficient for it to be substantially complied.

Govt mulls tax holiday for companies making new investments in India

Source: Business Standard, May 12, 2020

New Delhi: Even as the Narendra Modi-led central government looks at measures to support the economy amid a global coronavirus crisis, the Union commerce and ministry could be planning a tax holiday for companies that bring new investments, suggests a Bloomberg report citing unnamed sources.

The finance ministry is said to be evaluating the proposed tax holiday of 10 years, which might apply to companies making more than $500 million worth of new investments.

According to Bloomberg, the companies will need to start operations within three years from June 1 and cover sectors like medical devices, electronics, telecom equipment and capital goods to be able to avail of the benefits.

The report also speaks of another plan, where a four-year tax holiday would be given to companies investing upwards of $100 million in labour-intensive sectors like food processing, textiles, leather and footwear. Additionally, a lower corporation tax is said to be planned for next six years, at the rate of 10 per cent. The finance ministry has yet to take a final decision on this, says the report.

CBDT amends rule for speedy resolution of tax disputes under treaties

Source: Business Standard, May 08, 2020

New Delhi: The Central Board of Direct Taxes (CBDT) has amended a rule to settle disputes expeditiously under the mutual agreement procedure (MAP), which is a dispute resolution process under tax treaties. It has also revised form 34F, which is used to make an application to invoke the MAP.

The direct tax board has amended rule 44G of MAP in this regard. The amended rule states that the competent authority in India will endeavour to arrive at a mutually agreeable resolution of tax disputes, in accordance with the agreement between the country and others, within an average of 24 months.

The amended rule further states that once a resolution is arrived at, the assessee concerned should communicate his acceptance or non-acceptance within 30 days of receiving the communication.

Upon acceptance, the assessee will withdraw any appeal filed in this regard and pay the tax determined by the assessing officer.

The amended rule requires the competent authority in India to call for relevant records from the income tax authorities, assessee in the country, and also understand the action taken by authorities that are not in accordance with the terms of the agreements between New Delhi and that country.

The revised form 34F seeks details of remedy sought along with documentary evidence, in addition to assessee-specific information contained in the earlier form.

MAP is an alternative dispute resolution process under the tax treaties. Under it, competent authorities of respective countries enter into discussions to resolve the dispute, which has arisen due to any action of a tax authority not in accordance with the treaty.

Sudin Sabnis, director at Nangia Andersen, said: “The indicative timeframe of an average 24 months to resolve the dispute under MAP would encourage taxpayers to hope for a speedy dispute resolution mechanism.”

Amit Maheshwari, tax partner at AKM Global, said the MAP proceedings are increasingly becoming popular with MNCs, even as the time taken to complete them is an issue.

“Post this amendment, MAP will increasingly be used by MNCs to resolve contentious issues.”

Income Tax refunds worth Rs 4,250 crore issued in a week: CBDT

Source: Financial Express, Apr 15, 2020

The Income Tax department has issued over 10.2 lakh refunds worth Rs 4,250 crore within a week, the Central Board of Direct Taxes (CBDT) said on Wednesday. The Finance Ministry had last week said it will fast track issuance of pending income tax refunds up to Rs 5 lakh, which will benefit around 14 lakh taxpayers, to provide relief to individuals and businesses hit by COVID-19 outbreak.

The CBDT has already issued over 10.2 lakh refunds totalling to around Rs 4,250 crore as on April 14, 2020. About 1.75 lakh more refunds are in the process of issuance in this week, an official statement said.

The CBDT, which is the apex body on matters relating to personal income and corporate tax, had in last fiscal issued 2.50 crore refunds totalling Rs 1.84 lakh crore.

In around 1.74 lakh cases, email responses are awaited from taxpayers regarding reconciliation with their outstanding tax demand for which a reminder email has been sent asking them to respond within 7 days so that the refund can be processed accordingly, CBDT added.

“It may be noted that these reminder emails from I-T department are in fact for the benefit of taxpayers as it seeks them to confirm their outstanding demand, their bank accounts and reconciliation of defect/mismatch prior to issue of refund,” CBDT said.

It asked taxpayers to provide a response to such emails at the earliest so that refunds could be processed and issued at the earliest.

Taxpayers can login to their e-filing account and respond to the I-T Department.

GST collection slips below Rs 1 trillion in March after four months

Source: Business Standard, Apr 02, 2020

New Delhi: Goods and services tax (GST) collection fell below the Rs 1-trillion mark in March after a gap of four months, even as disruptions caused by the coronavirus-induced lockdown will get captured only in the coming months.

The numbers pertain to GST paid in February but collected in March, suggesting that collections might turn grimmer going forward.

The GST mop-up in March stood at Rs 97,597 crore, down 8.4 per cent on a year-on-year basis, the data released by the Ministry of Finance showed on Wednesday. The government had targeted a collection of Rs 1.25 trillion in March. GST collection grew by a meagre 3.7 per cent in the full fiscal year 2019-20.

The dismal collection in March is despite the stringent anti-evasion measures introduced by the government, including the blockage of e-way bill and restricting input tax credit to 10 per cent in the case of failure of invoice uploads by suppliers.

Already hit by an economic slowdown, the country went into a 21-day lockdown from March 24 to prevent the spread of Covid-19. All industries that were struggling have become non-operational, which will reflect in the April GST collection figures.

Kerala Finance Minister Thomas Isaac told Business Standard that the April numbers, which would essentially be transactions in March would only be about 15-20 per cent of the March figures.

Pratik Jain, partner, PwC India, said, “It seems that many businesses may not have been able to pay GST because of liquidity issues being faced after the lockdown. As the second half of March 2020 has been significantly impacted due to the Covid-19 outbreak, collections in April are likely to be substantially lower.”

In a major relief for businesses facing lockdown due to coronavirus, the last date for GST return filing for March, April and May 2020 has been extended to June 30, with no interest, late fee and penalty, for companies with up to Rs 5 crore turnover and subsidised interest of 9 per cent, and no penalty or late fees for bigger companies.

M S Mani, partner, Deloitte India, said it was necessary for businesses to conserve cash in order to enable resumption of operations once the lockdown ends. Hence, any deferral of the GST payment timelines by a few months would significantly assist them in this process, Mani said.

Central GST collection for FY20 at Rs 4.95 trillion fell Rs 18,188 crore short of revised estimates for the fiscal year. The finance ministry, in Union Budget 2020-21, had lowered the CGST collection target for FY20 to Rs 5.13 trillion from Rs 5.26 trillion estimated in July.

Of the Rs 97,597-crore revenue in March, the central GST collection stood at Rs 19,183 crore, state GST at Rs 25,601 crore and integrated GST at Rs 44,508 crore, which included Rs 18,056 crore collected on imports, the finance ministry said in a statement.

GST collection on domestic transactions witnessed an 8 per cent decline, while GST collection on imports posted a negative growth of (-)23 per cent, indicating the beginning of Covid-related supply and demand disruption.

In order to plug revenue leakages, the Council allowed blocking of input tax credit in the case of fraudulent invoices and blocking of e-way bills in the case of non-filing of returns for three straight months.

The Council in its meeting on March 14 deferred the new simplified returns and e-invoicing till October, which was to be launched from April 1. Meanwhile, in order to improve collections, the government is aiming to correct inverted duty structure. It raised the GST on mobile phones to 18 per cent from 12 per cent, bringing the rate on a par with the inputs. Lower-than-expected revenues are also putting pressure on the Centre to compensate states for the revenue shortfall. The compensation cess collection stood at Rs 8,306 crore during the month, much smaller than the approximately Rs 14,000-15,000 crore compensation required by states on a monthly basis. States are up in arms with the Centre over a delay in payment of compensation dues and are planning to drag Centre to the Supreme Court.