Don’t Go In Circles Over GST Circulars

FM Nirmala Sitharaman at GST Day briefing

Don’t Go In Circles Over GST Circulars

Understand the legal validity and binding effect

SIDDHARTH SURANA says it is always recommended to follow the circulars as they harmonize the procedures laid out by the GST authorities.

Pursuant to the recommendations of the 47th meeting of the GST Council, the Central Board of Indirect Tax and Customs (CBIC) has issued several circulars. Before we get to the contents of the circulars, it is important to understand the legal validity and binding effect of circulars issued by CBIC.

Binding effect

Circulars are instructions issued by the CBIC generally to clarify procedures or ambiguity. The general rule of thumb, based on judicial pronouncements in Service Tax (erstwhile indirect tax regime) is that circulars are binding on the tax authorities but may not be binding on the Courts and also on the taxpayer, if they are not in compliance with the Act and rules. In case such circular is not beneficial and in the view of the taxpayer is not beneficial, Assessee can choose not to follow them or challenge the issuance of the Circular.

As a general practice, it is always recommended to follow the circulars as they harmonize the procedures laid out by the GST authorities.

Recent Circulars issued by the CBIC: Important Clarifications for all Taxpayers

The CBIC has issued 7 recent circulars on procedural and clarificatory aspects of GST law. Below, we have presented some of the clarifications, which we believe have an impact on most taxpayers and therefore warrant attention of our readers:  

  1. Furnishing of information regarding inter-state supplies made to unregistered persons, composition taxpayers and UIN holders

Many taxpayers were not reporting such details correctly in the Form GSTR – 3B and the address of the customers in such transactions was not being correctly captured by the taxpayer in tax invoices. This issue was observed in those suppliers who were engaged in providing banking, insurance, finance, stock-broking, telecom, digital payment facilitation, OTT platform services and E-commerce operators. This was resulting in incorrect declaration of place of supply on not only the tax invoices but also the GST returns. As per the Circular, it has been advised to report these details accurately and place of supply wise in the GST monthly returns.

The taxpayers have been advised to update their customer database properly with correct state name and address, to ensure correct state and place of supply is appearing on the GST invoices issued to such persons and disclose all such transactions place of supply wise in the GST returns.

In our view, for certain industries like banking, telecom, finance, OTT etc which have large, unregistered customers in their database, updating these details and ensuring correct data capture would be a herculean task and would increase the compliance burden.

  1. Furnishing of input tax credit details

The Circular seeks to standardize the manner of reporting of input tax credit related details such as input tax credit availed, reversed, and not claimed. These provide guidance on bucketing of input tax credits to be reversed or not claimed and also guide on the presentation and disclosure aspects. Recently with effect from January 2022, the Form GSTR – 2B which auto populates the input tax credit details based on Form GSTR – 1 filed by suppliers (i.e. vendors of the taxpayer), was introduced and it was mandatory for taxpayers to reconcile their own input tax credit registers with this Form GSTR – 2B and restrict their input tax credit claims only to the extent the same reflected in Form GSTR – 2B. Thus, in our view, this Circular provides much needed clarifications on presentation and disclosure aspects including mismatches with Form GSTR – 2B and would streamline the government data collection.

  1. Clarification regarding demand and penalty provisions concerning fake invoices

Fake invoicing is a serious menace under the GST laws and the authorities are taking a tough stand on all instances where GST invoices are being issued without any underlying supply of goods or services. Industry sought clarifications on demand and penalty provisions for fake invoices.

In this regard, it was clarified that as person who has issued tax invoice, has done so without supply of any underlying goods or services, the same does not qualify as a supply within meaning of GST laws. As there is no supply in respect of such tax invoice, no proceedings for demand, recovery and payment of tax can be initiated against such taxpayer. The person shall however be liable for penal action under section 122(1) (ii) of the CGST Act for issuance of tax invoice without actual supply of goods or services. The minimum penalty for such offence is Rs. 10,000.

Further, it was also clarified that the recipient of input tax credit cannot take input tax credit against such fake invoices. Any input tax credit availed and utilized needs to be reversed along with applicable interest. Authorities may also demand penalty by issuing a show cause notice under section 74 of the CGST Act.

Considering these clarifications, it is important for taxpayers to identify such fake invoices and ensure that they do not claim input tax credit against such fake invoices.

  1. Perquisites provided by employer to employee under contractual agreement

Under the GST laws, services provided by an employee to employer in the course of employment, have been kept outside the ambit of GST as the same are neither a supply of goods nor services. It has been clarified by CBIC that perquisites provided by the employer to the employee under a contractual agreement shall not be subjected to GST when the same are provided in terms of the contract between the employer and employee. Thus, based on the Circular, it is advisable for companies to review that the employment letters issued to its employees clearly document and define all perquisites provided.  

  1. Utilisation of the amounts available in the electronic credit ledger and electronic cash ledger for payment of tax and other liabilities

It is clarified that any payment towards output tax, whether self-assessed in the GST return or payable because of any proceeding instituted under the provisions of GST Laws (for example, department audits, show cause notices etc.) can be made by utilization of the amount available in the electronic credit ledger of a registered person. Thus, one can use unutilized input tax credit balance for such tax paid and need not pay the same in cash. There are some restrictions on utilization of the input tax credit balance that are mentioned in the Circular. Readers are advised to go through the circular carefully before utilizing their credit ledger balances for payments other than tax. (The author is Director, RSM India)

Disclaimer: The above list of circulars is not exhaustive. In this article, we have only considered some circulars which we believe are relevant for all taxpayers in general. Views expressed by author are personal.

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