Subject: Reverse Charge Taxation under Section 9(4) of the CGST Act – Pre and post-notification suspending reverse charge taxation
Querist is a registered person and has rented a commercial property in Meghalaya which is taken on rent from a landlord who is unregistered. The rent itself is above ₹ 10 lakhs. Is the Querist liable to pay tax on reverse charge basis even though the landlord is clearly liable to be registered (threshold registration limit in Meghalaya is ₹ 10 lakhs), but is not registering deliberately? What is the effect of the Notification No. 38/2017 – Central Tax (Rate) dated 13-10-2017 on this liability? Is the abolition of reverse charge tax retrospective?
i. Under Section 9(1) of the CGST Act, a “taxable person” is liable for payment of GST on any supplies made by him. The term “taxable person” is defined in Section 2(107) of the CGST Act to mean any person who is “registered” or “liable to be registered under Section 22 or 24” of the CGST Act. This is the normal method of taxation where the supplier is liable to pay the tax.
ii. In the present case, Section 9(4) is relevant which fixes liability on registered recipient to pay the tax when it acquires a supply from an unregistered supplier. In Section 9(4) the words used to describe such a supplier are a “supplier who is not registered”. There is no distinction in this case between a supplier who is unregistered because he is not liable to be registered and a supplier who is liable to be registered and still chooses not to take registration. The drafting of Section 9(4) should be contrasted with the drafting of Section 9(1).
iii. Thus, even if the supplier has not registered after crossing threshold limit for registration (₹ 10 lakhs for Meghalaya), he still remains an unregistered dealer qua Section 9(4) and the recipient, if he is registered, is liable for reverse charge taxation.
iv. Now, after the Notification No. 38/2017 – Central Tax (Rate) was issued on 13-10-2017, all intra-State supplies are exempt from reverse charge liability under Section 9(4) till 31-3-2018. Since the supply in this case was a local supply (renting of property), the notification will exempt the Querist from reverse charge taxation till 31-3.2018.
v. The Notification does not say that it is retrospective. As such, it is safe to say that it is prospective and liability which accrued before the Notification was issued is not affected.
Subject: Anti-Profiteering Problems
Querist is a manufacturer of FMCG products. Querist has following problems while computing anti-profiteering benefit to be passed on to consumers:
(1) In case of certain products, some of the inputs have become costlier due to increase in tax rates and some other inputs have become cheaper due to reduction in tax rates. A big customer insists that Section 171 obliges the Querist to pass on full benefit of reduction in tax rates on inputs and it cannot be set off against increased tax cost on other inputs. He says that the increased input tax cost must be absorbed by the Querist whereas the input tax savings must be passed on fully to him without any set-off. Is this a proper interpretation of Section 171?
(2) In case of some products, the output rate has gone up and while the tax rate on inputs has gone down. Whether the entire benefit of input tax saving is to be passed on to the customer or can the loss on increase in output tax rate be set-off against these input tax savings? What is the answer if the situation is reverse: that is, the output side tax rate has gone down, but the input side taxation has increased?
(3) In many cases, even though the input tax rates have gone down, the sellers of input materials have not reduced their prices. Is the Querist supposed to pass on benefit of reduction in input tax rate even if he himself has not received any benefit? Is the Querist under a duty to force his suppliers of input goods to reduce prices in such a situation?
i. The anti-profiteering mechanism is contained in Section 171 of the Central Goods and Services Tax Act, 2017 and pari materia provisions of the State Acts. Section 171 reads:
“171. Anti-profiteering measure
(1) Any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices.
(2) The Central Government may, on recommendations of the Council, by notification, constitute an Authority, or empower an existing Authority constituted under any law for the time being in force, to examine whether input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him.
(3) The Authority referred to in sub-section (2) shall exercise such powers and discharge such functions as may be prescribed.
ii. As of now, no method or formula has been prescribed for calculating the anti-profiteering benefit which has to be passed on to purchasers.
iii. Section 171 basically requires suppliers to pass on two types of benefits:
(1) Reduction in rate of tax on any supply;
(2) Benefit of input tax credit.
iv. With respect to the first query, there is no requirement in Section 171 that the benefit of input tax rate reduction on some of the inputs should be passed on in full to the customer when at the same time there is a loss on some other inputs due to increase in rate of input tax. The calculation of benefit of input tax credit has to be on a global basis, though restricted to a particular product. Therefore, it would be wrong to set-off the loss of input tax credit on inputs which are used in one product against input tax savings of another product. However, it is perfectly fine to set-off loss of input tax credit on inputs against benefit of input tax credit on inputs when both such inputs are used in the same product. There is nothing in Section 171 which obliges a supplier to burn his hands to protect the interests of the consumer. There is no requirement to absorb any input tax loss in such cases.
v. With respect to the second query, where the tax rate on output has gone up and the tax rate on the inputs has gone down, the input tax benefits can be set-off against the output rate increased tax costs and only the net savings should be passed on. If there is a net loss, then the price can be increased to that extent. There is no bar to such increase in price. The same answer will apply for a reverse situation where the output rate has gone down but the inputs rates have increased.
vi. With respect to the third query, it is not necessary to pass on any benefit of input tax which is not actually received. Even if the rate of tax on inputs has decreased, however if the seller of input goods has not passed the benefit of input tax to the Querist, the Querist is not obliged to pass on any such benefit to his customer. Furthermore, there is nothing in the Section 171 which mandates that the Querist must force his suppliers to give benefit of input tax credit so that he can pass on benefit to his own customers. Neither law nor equity requires any such exercise. However, it would be good sense to talk to supplier of input goods to pass on the benefits of input tax reduction since it will otherwise make Querist’s products uncompetitive if rivals have managed to get such a benefit and reduce the prices.
Subject: Whether medicines supplied by doctor to patient in course of treatment are supplies of goods or services?
Query: Querist is a doctor who had approached a Central Excise Officer on clarification as to the exemption offered to Healthcare services. The Officer has opined that under Schedule II Clause 1(a) any “transfer of title in goods” is deemed to be a supply of goods. The Officer has advised Querist to pay tax on cost of medicines plus gross profit margin and only avail the exemption for health care services for the services elements of diagnosis, consultancy etc.
Querist seeks to know whether this opinion is sound in law
i. Entry 74 of the Notification No. 12/2017 – Central Tax (Rate) has exempted the following services:
“Services by way of-
(a) health care services by a clinical establishment, an authorised medical practitioner or para-medics;
(b) services provided by way of transportation of a patient in an ambulance, other than those specified in (a) above”
ii. That Notification defines “health care services” in Clause 2(zg) thus:
“(zg) “health care services” means any service by way of diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognised system of medicines in India and includes services by way of transportation of the patient to and from a clinical establishment, but does not include hair transplant or cosmetic or plastic surgery, except when undertaken to restore or to reconstruct anatomy or functions of body affected due to congenital defects, developmental abnormalities, injury or trauma.”
iii. It is true that the exemption is given in respect of services, however, the supply of drugs and medicines has always been held to be incidental and ancillary to the supply of medical services. See the following authorities:
(1) Bharat Sanchar Nigam Ltd. v Union of India [(2006) 3 SCC 1]
(2) Hemendra Surana, Dr. v State of Rajasthan [(1993) 90 STC 251 (Raj.)]
(3) International Hospital Pvt. Ltd. v. State of UP [2014 SCC Online All 1956]
(4) Fortis Health Care Ltd. v. State of Punjab [2015 SCC Online P & H 2018]
iv. Now, an incidental supply of goods will take on the character of the principal supply as per Section 8 of the CGST Act. The incidental supply will lose its character and be regarded as if it is part and parcel of the principal supply itself. Supply of medicines and drugs will thus lose their identity and merge into the identity of the principle supply which is the supply of medical services.
v. Hence, there is no separate supply of goods when drugs and medicines are used in medical treatment.
vi. As far as the contention of the Central Excise Officer is concerned, that the supply of drugs and medicines will amount to a deemed supply of goods under the deeming provisions of Schedule II
Clause 1(a), the same is an incorrect proposition.
vii. Firstly, there is no transfer of title in drugs and medicines which are used in treatment. These drugs and medicines are consumed and destroyed in process of treatment. As the Supreme Court has said in case of food served in restaurants in Northern India Caterers v. Lt. Governor of Delhi [(1978) 4 SCC 36] :
“Before consumption title does not pass. After consumption, there remains nothing to be subject of title”.
Similar analogy will apply in this case.
viii. Even otherwise, it is our considered view that Schedule II Clause 1(a) dealing with “transfer of title in goods” does not deal with incidental transfers of title or incidental transfer of property. It must be remembered that Schedule II Clause 1(a) is to be read along with the rules for composite and mixed supply in Section 8 of the CGST Act. Under Section 8, an incidental transfer of title or an incidental transfer of property will automatically lose its identity and be merged with the principal supply. Schedule II
Clause 1(a) cannot be said to override
ix. Thus, when Schedule II Clause 1(a) speaks of transfer of title in goods, it must be taken as a transfer or title in goods in a chattel qua chattel fashion where the transfer of title or the supply of goods is the dominant intention of parties. In this sense, the Sale of Goods Act, 1930 requirement of dominant intention of chattel qua chattel transfer still remains alive when interpreting Schedule II Clause 1(a) even though that clause does not expressly spell out any such requirement or does not expressly use the word “Sale of goods”. Wheresoever the transfer of title is not made with a dominant intention of a chattel qua chattel transfer of title, in such cases the transfer of title will always be incidental to some other supply and will lose its separate character. As such, Schedule II Clause 1(a) will never apply to such incidental transfers of title.