Parliament has now passed the 122nd Constitution Amendment Bill and the requisite number of State Legislatures are set to ratify the Bill by the 30th of August. GST will subsume Sales Tax (VAT), Service Tax, Excise and a host of other levies and turn India into a single unified market.
The Model GST Law has also been in the public domain for quite some time, and has indeed undergone some revision in June 2016. The Model Law is a sort of preliminary draft that the Empowered Committee have released for public comment. Herein-below are some of the potential issues that the authors feel would arise out of the provisions contained in the Model Law when they are sought to be applied to financial supplies. A word of caution: the views expressed herein are extremely generalized and should not be taken as a specific comment on any fact situation.
Supplies of Money
The taxable event under the GST law is a “supply made for consideration”, the supply being either of goods or services [Section 3 of the Model GST Law]. The terms “goods” as well as “services” are defined in Sections 2(48) and 2(88) respectively, and both have fortunately excluded “money”. The supply of money is thus completely outside the purview of the GST law.
Money is defined under Section 2(68) as:
(68) “money” means Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any such similar instrument when used as consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value;
This definition of money is a very wide one, much wider than what Courts consider to be the ordinary meaning of money. In context of the European Union Value-Added Tax law (one of the sources of our GST law), Bitcoin has been held to be “currency” on the premise that Bitcoin has no other purpose to serve except as a means of payment. [Skatteverket vs. David Hedqvist (Judgment dated 22nd October 2015 in Case No. 264/14)]. Even in the United States, Courts have held that Bitcoin is equivalent to money.
It is not clear whether, under the Model Law, digital currencies will qualify as “electronic remittance” given the context in which this phrase appears. Similarly, the words “similar instrument” also leaves much to be desired as far as digital currencies are concerned. It would be better if specific details were added to this definition with respect to digital currencies.
Furthermore, the exact purport of this exclusion of money from the definition of “goods” and “services” is not known as of now. It may be similar to what was known as “transactions in money” which were kept outside the definition of “service” in the Service Tax law. But what should happen if the dominant intention of parties was that A should supply money to B and such supply will create some incidental benefits or rights in hands of A (those benefits/rights being reducible to monetary value)? Will the transaction be a supply of money by A to B which is outside the scope of the GST law or will it be a supply of benefits/rights by B to A, with the supply of money being mere consideration for supply of the said benefits/rights? Will dominant intention of parties matter in such a case? Is the incidental nature of those benefits or rights even relevant? Some clarity is required from the Empowered Committee in this regard.
However, it is trite that supply of money will not include a supply in relation to money. Thus, where a service provider is engaged to transport money to and from a bank, the services cannot be said to be a supply of money. Such supplies will not escape taxation.
VAT/GST jurisdictions outside exempt the supply of loans and advances as well as interest earned on such loans and advances on the principle that the same are in the nature of supply of money. As a matter of law, interest is sometimes said to be consideration for the loan of money, at times being equated to hire charges for the lease (bailment) of goods. It is only because of the nature of the thing, that money cannot in any real sense be “hired” or “leased”. Property in the money passes the minute it changes hands, even if it is by way of a loan. All that the lender then is left with is an actionable claim that is known as “debt”.
The service tax law specifically included in the Negative List ““ and thus exempted – the extension of loans where the consideration was represented by interest. This was done despite the fact that “transactions in money” were kept outside the remit of definition of service. It is unclear whether the Empowered Committee have deliberately not included any similar specific exemption for making of loans in the Model GST Law. Though it is quite probable that extension of loans will still be outside the GST Law, being in essence a supply of money, some clarification in this respect is desirable, given the importance of the credit sector to our economy.
Issue of Securities
Securities have been specifically included in the definition of “goods” under the Model GST law. This is in contrast with the practice under Sales tax laws to exclude shares and securities from the definition of “goods”. The practice in Sales Tax evolved due to the reluctance of the Constitution makers to allow the many States to burden the financial markets with their respective sales tax levies. Though no such specific injunction was finally put in the Constitution, our States have always followed that tradition. The Model Law will now allow the States to make a departure and tax transactions in securities.
Since securities have been included in the definition of “goods”, Place of Supply provisions relating to goods are relevant. Place of Supply provisions are important, since Parliament is Constitutionally empowered to fix the situs of supply through such Place of Supply provisions which will act as a bar to States trying to tax supplies whose situs is outside the State. These Place of Supply provisions, so far as they relate to goods, have drawn a distinction between supplies of goods which involve movement of goods and supplies which do not involve movement of goods. Securities in physical form can be dealt with under the “movement” category. In fact, there are precedents from the United States Supreme Court considering the movement of physical securities from one state to another sufficient to place them under the inter-state commerce clause protection.
For supplies of goods which do not involve movement of the goods, the Model Law says that the Place of Supply is the location of the goods at the time of delivery to the recipient. This rule will create abnormalities when applied to shares stored in demat form.
It also seems that issue of shares for raising capital may also be taxable under the Model law. The European Court of Justice has struck down such attempts by member-countries on the principle that this violates the principle of a value added tax as a consumption tax. However, in India it may be possible that a potential shareholder who only supplies money (or capital) to the company in return for a owning a part of the company will be called upon to pay GST on such a supply.
The Model Law does not merely tax supplies which are made for monetary consideration. It also takes in supplies which are made for other than monetary consideration. Issues will crop up with respect to taxation of bond swaps etc. In such cases, as in all cases of non-monetary consideration, both parties will be liable to pay GST on their respective supplies.
Benefits related to bank accounts
Banks and financial institutions are known to give certain benefits to customers who open accounts in those banks or open accounts under certain schemes/categories. These benefits are mostly in the nature of free supplies. Now, the Model GST Law contains contradictions on whether or not consideration is required for a supply to be taxed. Even though the levy is on a “supply made for consideration”, the charging provision goes on to say that certain supplies without consideration will still be taxed. These supplies are listed out in Schedule I, which states that a supply will be taxed irrespective of whether it is made for consideration or not.
It is expected that the Empowered Committee will take a final view on whether or not they want to make the requirement of consideration a cornerstone of the levy. They can decide that the levy should apply to all supplies even if they are free supplies. The pitfalls are severe, particularly in the context of the wide remit of the term “supply” which includes “tolerance, obligation to act, refraining from act” etc. In fact, it is possible that every small restriction or obligation under the contract for maintaining an account may be characterized by the Tax department as a supply even though it never concerned the customer. The Valuation rules may then be invoked to value each such alleged supply separately.
All in all, the Empowered Committee have to come out with a more clearer regime for financial supplies, including those for guarantees, indemnities etc. In fact, other jurisdictions have lengthy provisions which lay down rules for all sorts of transactions concerning the financial sector. If the Empowered Committee were to leave these matters to be decided by the various States and the Union without any guidance in this behalf, taxation of financial supplies will likely descend into a chaos similar to what we have seen in sales tax regime, with each state pulling in a different direction. Given the nature of operations of financial sector, this would be something which would ultimately undermine the efficacy of the Goods and Services Tax regime in the long run.