AAR rules notional interest on security deposit taxable if it influences value of supply

This Tax Alert summarizes a recent ruling^[1] of the Karnataka Authority for Advance Ruling (AAR). The questions involved were: (i) whether property tax paid by the applicant is deductible from the value of renting services; and ii) whether notional interest on refundable security deposit would form part of value of supply. 

AAR noted that any taxes, duties, cesses, fees and charges levied under any law are to be included in the value of supply. Accordingly, property tax and other taxes levied by municipal authorities are not deductible from the value of supply. 

Further, refundable security deposit collected by applicant shall not be treated as consideration for supply of renting services. However, if the same is withheld at the expiry of lease tenure, then at that stage, the amount not refunded will be liable to GST. 

On the question of notional interest on security deposit, AAR observed it is a general practice that wherever the quantum of deposit is higher, the rent charged is less. In the present case, the applicant had not provided adequate information to decide whether notional interest influences monthly rent or not.  

Accordingly, AAR concluded that notional interest is to be included in the value of supply if it influences the monthly rent. 

Comments 

1. The Advance Ruling, though guided by the principles laid down by Supreme Court, reaffirms one of the key parameters to be borne in mind while valuing supply under GST.
2. The decision does not specifically prescribe the manner for determining whether the quantum of deposit influences the value of supply, however, the general practice prevalent in the industry may help in analyzing such impact.

Apart from the real estate industry, the ruling may also have an impact on other businesses where refundable deposits are given by the recipient. 

Due date of filing annual return for FY 2018-19 under GST extended till 31 October 2020

This Tax Alert summarizes a recent notification ^[1] issued by the Central Board of Indirect Taxes and Customs (CBIC) under Goods and Services Tax (GST).  

As per the said notification, the due date of filing annual return in Form GSTR-9 and reconciliation statement in Form GSTR-9C for the financial year 2018-19 has been extended by one month, till 31 October 2020. 

Earlier, the due date had been extended till 30 September 2020.

The extension provides much needed relief to taxpayers and is likely to facilitate tax compliance.

CBDT further extends due date for furnishing belated or revised tax return for tax year 2018-19 to 30 November 2020

Under the Income Tax Laws^[1] (ITL), a taxpayer is required to furnish tax return within a specified time. The ITL also provides that a taxpayer which fails to furnish their tax return within the specified time, may furnish belated tax return. Further, a taxpayer may revise their tax return so filed and furnish revised tax return in a case where any mistake or omission is discovered. Such belated or revised tax return can be furnished on or before the end of the subsequent tax year to which such tax return relates.
In view of the above, the original due date for furnishing belated or revised tax return for tax year 2018-19, as per the ITL, was 31 March 2020. However, due to the outbreak of COVID-19 pandemic in India, the said due date was first extended to 30 June 2020 vide The Taxation and Other laws (Relaxation of Certain Provisions) Ordinance, 2020 dated 31 March 2020^[2], then to 31 July 2020 vide Notification No. 35/2020 dated 24 June 2020^[3] and, lastly, to 30 September 2020 vide Notification No. 56/2020 dated 29 July 2020^[4].

On consideration of the genuine difficulties being faced by taxpayers due to the ongoing impact and spread of COVID-19 pandemic, the Central Board of Direct Taxes^[5], vide an order dated 30 September 2020, has further extended the due date for furnishing belated or revised tax return for tax year 2018-19 to 30 November 2020.

It may be noted that the due date for furnishing original tax return for tax year 2019-20 has already been extended to 30 November 2020, vide Notification No. 35/2020 dated 24 June 20203, for all taxpayers.

CBDT issues guidelines on provisions dealing with withholding tax on e-commerce operator and tax collection on sale of goods

This Tax Alert summarizes Circular No. 17/2020 dated 29 September 2020 (Circular) issued by the Central Board of Direct Taxes (CBDT) , which provides guidelines for removing certain difficulties on application of the newly introduced provisions on withholding tax on e-commerce transactions and tax collection on sale of goods, which come into effect from 1 October 2020.

As a measure to widen and deepen the tax net, Finance Act, 2020 (FA 2020) widened the withholding and tax collection provisions to, inter alia, include: (a.) Withholding on e-commerce transactions at the rate of 1% by e-commerce operators (EOP) on amounts received by resident e-commerce sellers on sale of goods or services facilitated by an EOP through its digital or electronic facility i.e., tax deducted at source (TDS). (b.) Collection of tax at the rate of 0.1% by sellers from buyers on receipt of amount of consideration for sale of goods, subject to certain specified thresholds and exclusions i.e., tax collected at source (TCS). The provisions also give power to the CBDT to issue guidelines, with the approval of the Central Government, to remove difficulties in application of these provisions. Such guidelines are binding on both the tax authorities and the taxpayers.  

In response to representations received from stakeholders requesting clarifications on various issues relating to the above provisions, the Circular provides the following broad clarifications: 

• The transactions of securities or commodities traded on a recognized stock exchange or cleared and settled on a recognized clearing corporation and transactions of trading in electricity, renewable energy certificates and energy certificates on regulated power exchanges, are outside the ambit of TDS and TCS provisions.
• Payment gateways are not liable to withhold tax if an EOP which facilitates sale of goods or services or both, has applied TDS. To facilitate proper implementation, payment gateways may obtain an undertaking from the EOP in this regard.
• Where insurance agents or aggregators are not involved in a transaction between the insurance company and the buyer of the insurance policy after the first year, such insurance agents or aggregators would not be liable to apply TDS in subsequent years.
• For computing de-minimis exemption of INR0.5 million in the case of TDS on e-commerce transaction and INR 5 million in case of TCS on sale of goods for tax year 2020-21, the amounts paid/credited or received prior to 1 October 2020 are to be included.
• The new TCS on sale of goods (0.1%) and existing TCS on sale of motor vehicles (1%) are distinct in scope and ambit, with different thresholds. TCS on sale of goods will apply on sale of motor vehicles by manufacturers to dealers where the threshold of INR5m on aggregate basis is crossed. It will also apply on sale to consumers where the threshold for TCS on sale of goods (INR 5 million) is crossed on aggregate basis, although threshold of INR 1 million on individual sale for TCS at 1% is not crossed.
• Since TCS is applicable on receipt of amount of sale consideration, no adjustment on account of sales return, discounts and indirect taxes [including Goods and Services Tax (GST)] is required to be made for the purposes of TCS on sale of goods.
• TCS shall not apply in case of sale of fuel to non-resident airlines at airports in India.

TAX JOURNAL OCTOBER 2020.

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TAX JOURNAL OCT 2020Download

Tax due dates – October 2020.

S. No	Due Date	Related to	Compliance to be made
1	11.10.2020	GST	Filing of GSTR 1 for the month of September, 2020
2	20.10.2020	GST	-Payment of GST for the month of September, 2020 -Filing of GSTR 3B for the month of September, 2020
3	07.10.2020	TDS/TCS (Income Tax)	· Deposit TDS for payments of Salary, Interest, Commission or Brokerage, Rent, Professional fee, payment to Contractors, etc. during the month of September 2020. · Deposit TDS from Salaries deducted during the month of September 2020 • Deposit TCS for collections made under section 206C including sale of scrap during the month of September 2020, if any • Deliver a copy of Form 15G/15H, if any to CCIT or CIT for declarations received in the month of September 2020, if any
4	31.10.2020	TDS Return	Filing of 2nd Quarter (1st July to 31st September) TDS return. (This due date has been extended to 31-03-2021, vide CBDT notification no. 35/2020/F.No. 370142/23/2020)
5	15.10.2020	TCS Return	Filing of 2nd Quarter (1st July to 31st September) TCS return. (This due date has been extended to 31-03-2021, vide CBDT notification no. 35/2020/F.No. 370142/23/2020)

6. 31.10.2020 Income Tax Filing of Tax Audit Report, Form 3CEB etc.

Madras HC held refund of unutilized ITC on input services not available in case of inverted tax structure

This Tax Alert summarizes a recent Madras High Court (HC) ruling. In a writ petition, petitioners had challenged the constitutional validity of clause (ii) of proviso to section 54(3) of the Central Goods and Services Tax Act, 2017 (CGST Act) and Rule 89(5) of the Central Goods and Services Tax Rules, 2017 (CGST Rules) to the extent it disallows refund of ITC on input services.

The key observations of the HC are:

• Clause (ii) of proviso to section 54(3) of the CGST Act qualifies and curtails not only the class of registered persons who are entitled to refund but also imposes a source-based restriction on refund entitlement and, consequently, the quantum thereof.
• The term “inputs” and “input services” have been separately and distinctively used in various provisions of the CGST Act, thereby indicating the legislative intent to distinguish one from the other. Hence, “inputs” used in section 54(3) does not include input services.
• Although there has been a legislative trend towards a more uniform treatment between goods and services, the distinction has certainly not been obliterated as is evident on perusal of the CGST Act.
• Non-conferment of the right of refund of unutilized ITC on input services does not violate Article 14 of the Constitution.
• Restricting refund of unutilized ITC, which accumulated on account of input services is a valid exercise of legislative power.

Accordingly, the HC upheld the constitutional validity of clause (ii) of proviso to section 54(3) and Rule 89(5).

Comments

1. The ruling could be seen as a setback to taxpayers facing inverted tax structure where accumulation is largely due to input tax credit attributable to the services procured. This is particularly after the ruling of the Gujarat HC allowing the refund w.r.t. input services.
2. Since there are contrary rulings in the matter, businesses may need to carefully analyze the same before deciding the way-forward.
3. It is quite likely that both the rulings may be challenged before the Supreme Court. In such case, it would be interesting to see the final outcome on refund provision.
4. In the meanwhile, the industry impacted due to inverted tax structure, may also engage with the government to grant refund of ITC on input services through necessary amendment in the provisions of the CGST Act and Rules.

CBDT amends income-tax rules to make Indian branches of foreign reinsurers eligible to obtain certificate of interest or other sums received without tax deduction

Indian branches of foreign banks are eligible to approach their jurisdictional assessing officer and obtain a certificate authorizing them to receive interest and other sums of money without the payer requiring withholding of income-tax therefrom.

Foreign reinsurance companies set-up reinsurance branches in India under the Insurance Regulatory and Development Authority of India (IRDAI) (Registration and Operations of Branch Offices of Foreign Reinsurers other than Lloyd’s) Regulations, 2015. These companies could receive premia from Indian cedents only after deduction of tax at 40% (plus applicable surcharge and cess), which was a big drain on their cash flows. These reinsurance branches were therefore, approaching assessing officer and obtaining the certificate of lower tax withholding which was never at ‘Nil’. In fact, it had a limit of premia that they could accept without tax withholding.

On account of onerous conditions of inter-alia carrying on business in India continuously for not less than five years prior to the date of application, unlike Indian branches of foreign banks, the Indian branches of foreign reinsurance companies were not eligible for obtaining a ’Nil tax  withholding’ certificate under section 195(3) of the Income-tax Act, 1961 (Act).

With an objective of providing relief to Indian branches of foreign reinsurance companies (including Llyod’s and its members), the Central Board of Direct Taxes (CBDT), the apex administration body of direct taxes in India, has amended Rule 29B of the Income-tax Rules, 1962 (Rules) . The new rule provides an enablement for Indian branches of foreign reinsurers to also become eligible to obtain ‘Nil tax withholding’ certificate. This Tax Alert summarizes this amendment of the Rules by the CBDT.

CBIC extends time limit of issuing invoices for goods out of India sent on approval basis

This Tax Alert summarizes recent notifications^[1]  issued by the Central Board of Indirect Taxes and Customs (CBIC) under the Goods and Services Tax (GST).

The key changes are as follows: 

• As per section 31(7) of the Central Goods and Services Tax Act, 2017 (CGST Act), where the goods being sent or taken on approval for sale or return are removed before the supply takes place, the invoice shall be issued before or at the time of supply or six months from the date of removal, whichever is earlier.

In case the time limit for the issuance of invoice in respect of goods being sent or taken out of India on approval for sale or return falls between 20 March 2020 to 30 October 2020, such completion or compliance of action shall stand extended till 31 October 2020. The extension does not cover the goods sent or taken on approval basis in case of domestic transactions.

• Late fee in excess of INR500 has been waived for delayed filing of Form GSTR-4 (return by composition dealers) for the period July 2017 to March 2020, provided the same is furnished between the period from 22 September 2020 to 31 October 2020. It is important to note that the due date of filing GSTR-4 for the period April 2019 to March 2020 has been already extended till 31 October 2020, and hence payment of late fee for the said period may not arise.

Further, late fee is fully waived if the tax liability is NIL.

• Similarly, late fee in excess of INR 500 has been waived for delayed filing of Form GSTR-10 in case the same is furnished between the period from 22 September 2020 to 31 December 2020.

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CBIC issues instructions for recovery of interest on net cash tax liability

Please find below update in relation to the GST Council in its 39th meeting had recommended that the interest on delay in payment of the GST should be charged on the net tax liability. Further, the Council also recommended that the said provision should be made effective retrospectively from 1 July 2017.

The government has now issued certain administrative instructions in order to implement the decision of the GST Council as under:

1. For the period 1 July 2017 to 31 August 2020: The authorities have been instructed to recover interest only on net cash tax liability.

Show cause notice (SCN) issued on gross tax payable: In cases where SCNs have been issued on gross tax payable, the same shall be kept in call book till retrospective amendment in the provision is carried out