COVID19: GST implications to watch out for

Authored by CA Vikas Shenoy

The COVID19 pandemic continues to disrupt lives of people across the world and has necessitated changes in various spheres of life. Businesses are not an exception to this and certainly not compliance requirements under taxation laws. In this article, a humble effort has been made to note and understand various implications under the GST law as triggered by the COVID19 pandemic.

Expiry of goods during the lockdown

In this era of technology, goods are manufactured on back-to-back order basis and are supplied on a just-in-time basis. Thus, in cases where the shelf-life of goods is short or where the final products do not meet the statutory manufacturing criterion, such goods can be said to be destroyed or expired. With increased expiry and destruction of perishable goods during the lockdown, a question has arisen as to the requirement of reversing input tax credit availed on the concerned goods.

One would recall that the entire GST law was promulgated based on the backbone of seamless availability of input tax credit. Turns out that the fruits are not all sweet and the availability of credit is subject to certain conditions and the GST law requires a taxpayer to, among others, reverse the credit of input taxes availed in respect of goods that are lost, stolen, destroyed, written off etc.

In this respect, given that the law specifically mandates reversal of credits availed in respect of goods that are destroyed, invariably the credits availed on such raw materials purchased would have to be reversed if they are destroyed. 

However, in case of destruction of finished goods, it can be said that the credits are availed in respect of the inward supplies, ie raw materials, and not in respect of the finished goods per se. This gives scope for an interpretation where it can be said that the destruction of finished goods does not require reversal of credit taken “in respect of” raw materials. This is supported by the observation of the Apex Court in the case of Swasthik Tobacco Factory, wherein it was observed that in the context of Indian tax laws the expression “in respect of” is synonymous of expression “on”.

It would be prudent to, however, point out that there is another school of thought that suggests the phrase “in respect of” has to be read widely to include finished goods that are manufactured out of the raw materials on which credits have been availed, and thus, reversal of credit on finished goods destroyed would also be required.

Discounts and bad debts arising due to the pandemic

During these testing times, it is observed that various vendors have resorted to discounts on their products with a view to induce demand and clear stock. In some other cases, while the vendors have not given any discounts to the buyers, the buyers themselves have defaulted from making payment to the vendors. In both these cases, the consideration previously agreed between the parties have either been reduced or been dishonored. A question arises as to the treatment of such discounts or bad debts under the GST law.

GST being a levy that is based on the contract entered into between the parties, the consideration as agreed between the parties would be the taxable value. Accordingly, any discount given before the time of supply would be reduced while computing the tax. 

However, the valuation provisions under the GST law provides that in case of discounts given after the supply has been effected, the discount would be reduced for the purpose of computing tax only if such discount can be established in terms of an agreement entered into at or before the time of such supply and are specifically linked to relevant invoices.

In this respect, it is relevant to note the ruling of the Authority for Advance Ruling, Maharashtra in the case of M/s Ultratech Cement Ltd, wherein it held that a post-sale discount cannot be reduced from the taxable value if such discount is open ended and not based on any criteria. It  further held that the supplier has to clearly mention the quantum of discount or percentage of discount which is to be worked out on the basis of certain parameters or certain criteria which may be agreed to between the supplier and the recipient and which are predetermined and mentioned in agreement in respect of supply of the goods.

Accordingly, a post-sale discount given during the pandemic, where such discounts could not be established in terms of an agreement entered into between the parties, the same cannot be reduced for the purpose of tax computation. In such cases, for the purpose of discounts, a financial credit note may be issued instead of a GST credit note.

Further, with respect to bad debts, it may be noted that by virtue of the provisions pertaining to the time of supply, GST liability generally arises at the time of issuance of invoice or at the time of receipt of consideration, whichever is earlier. Once GST becomes payable, there is no provision for adjustment thereof in cases such as non-recovery of the sale proceeds. Thus, in cases of bad debts no adjustment of GST liability would be possible.

The above being said, given that Force Majeure was in force during the lockdown period, any supply that was agreed but wasn’t fulfilled by either of the parties, would become a non-performable contract and become void as per the Contract Act. In such a case, it can be said that the service itself wasn’t provided and taxes paid by way of invoices issued already for that period could be reversed by way of issuing credit notes. This would become relevant specifically in case of renting or leasing of immovable properties.

Delay in payment of consideration

While on one hand businesses are facing the issue of recovery of sale proceeds, on the other hand they are lacking liquidity to settle their own liabilities. A taxpayer incurs expenses for running of his business, which may be classified as inputs, input services and capital goods for the purposes of GST. The taxpayer would be eligible to claim credit of taxes paid by him on such expenses and the same could be utilized for the payment of tax liability on his outward supplies.

It must, however, be noted that the GST law requires a taxpayer to reverse or payback the input tax credit availed by him on expenses, where the consideration for such expenses along with the tax amount thereon is not paid to the supplier by the recipient taxpayer within a period of 180 days from the date of issue of respective invoices.

This is one of such few cases where a taxation law has extended its jurisdiction into the operations of a business and requires the taxpayer to make payment of non-tax amount within a specified period.

Nonetheless, this becomes one of the important compliances to be kept track of by a taxpayer.

Delay in realization of export proceeds

Recently, at the same time as the lock down was announced, that is in the last week of March, certain amendments were carried out in the GST rules. One such amendment was the insertion of a new rule, whereby an exporter would be required to pay back refund received by him on account of exports, to the extent it pertains to export proceedings not realized by him within the time period allowed under the Foreign Exchange Management law.

Therefore, an exporter now has an additional task of keeping track of all the export realizations, in order to comply with the new rule. This rule, while aimed at restricting export related benefits to the extent of actual exports realized, is certainly not welcome at a time when exports are facing supply chain issues and lower foreign demand.  

Additional expenditure incurred due to the pandemic

With the COVID19 pandemic, organizations worldwide have been forced to provide for the safety of its fellow members and staffs. Towards this end, the businesses have incurred additional expenditure. Some of these expenses could have been mandated by law, whereas some expenses were borne voluntarily by the businesses. These could be expenses such as masks, sanitizers, sanitizing tunnels, medical insurance policies, etc. A brief analysis of availability of credit of GST paid on these expenses is made in the ensuing paragraphs.

Firstly, it may be noted that the GST law specifically restricts, inter alia, credit of taxes paid on goods and services meant for personal consumption and on health insurance.

On the first glance, it would appear that masks, sanitizers, sanitizing tunnels et al are consumed by the employees individually and can be said that these are items of personal consumption. However, on a conjoint reading of the relevant provisions, it is forthcoming that the intent behind imposing restriction with respect to personal consumption is to provide credit only on business related expenses. It is significant to note then, that in the times of the pandemic, any expenditure incurred to prevent and protect its employees should inevitably be considered as a business expense. This stand is further corroborated by the fact that the usage of these items at workplace is mandated under a law, ie the Disaster Management Act, and is enforced by the MHA.

Further, with regard to the credit of GST paid on medical insurance, it may be noted that for the purpose of GST a medical insurance is a part of health insurance and the credit of taxes thereon would not be available to the taxpayer.

The above being said, it is pertinent to note that the GST law permits availing of credit of taxes paid on expenses such as insurance if they are mandated by a law to be paid by an employer. In this respect, attention is drawn to Annexure II of the Order of the MHA dated 15 April 2020, which mandated medical insurance of workers. Therefore, for such period when the said order was in effect, it can be said that the medical insurance has been mandated by law and that GST credit should be allowed thereon.

Conclusion

As the GST law is still a nascent law with various surprises in its kitty, it would be prudent for taxpayers to undertake a compliance check from a legal and regulatory perspective. This would be more relevant now as exceptional circumstances such as the COVID19 pandemic would trigger exceptional requirements that would otherwise not be applicable.

This article was published in August 2020 issue of the KCCI Journal