Q.1. Eligibility to ITC
I have a question related to GST ITC claim. A Petrol Pump dealer who is registered under GST Act and totally engaged in retail sale of petrol and diesel which is Non-GST sale under the GST Act. The same dealer purchased a tank lorry and paid GST along with purchase cost of tank lorry. Then the he entered into a contract with Indian Oil Corporation. As per the contract the tank lorry will run for the transportation of petrol and diesel and the dealer will get the amount of transportation. The transportation income is taxable under GST. But the Indian oil Corporation is deducting the GST under RCM so the dealer has no obligation to collect and pay tax. But in that case will the taxes paid on tank lorry be available for ITC to the dealer.
Under GST, ITC is available as per Section 16 of CGST Act. The said section prescribes criteria for eligibility to ITC.
Section 17 prescribes the apportionment of credit as well as blocking of credit.
Section 17(1) to (3) reads as under:
“17. (1) Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.
(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.
(3) The value of exempt supply under sub-section (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.”
It can be seen that as per Section 17(3) where RCM is payable by recipient the supply will be classified as exempt supply.
Rule 43(1)(a) prescribes manner of claiming credit in respect of Capital Goods when used for exempt supply. The said Rule is as under:
“43. Manner of determination of input tax credit in respect of capital goods and reversal thereof in certain cases.- (1) Subject to the provisions of sub-section (3) of section 16, the input tax credit in respect of capital goods, which attract the provisions of sub-sections (1) and (2) of section 17, being partly used for the purposes of business and partly for other purposes, or partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies, shall be attributed to the purposes of business or for effecting taxable supplies in the following manner, namely,-
(a) the amount of input tax in respect of capital goods used or intended to be used exclusively for non-business purposes or used or intended to be used exclusively for effecting exempt supplies shall be indicated in FORM GSTR-2 and shall not be credited to his electronic credit ledger; …”
It can be seen that where capital goods are exclusively used for exempt supply, no ITC can be available or it is blocked.
In the present query, the lorry is exclusively used for transportation service, where the Recipient is paying RCM.
Accordingly, the supply gets classified in to exempt supply and the ITC on lorry purchase becomes ineligible due to above rule. Accordingly, I opine that no ITC on lorry purchase.
Q.2. Interest and Valuation
A supplier has supplied goods to recipient at agreed amount. The supplier is covered by MSME Act. The recipient delayed payment to supplier and hence he has to pay interest as per MSME Act to the supplier. Whether supplier is liable to discharge liability on such interest under GST Act?
The taxable value under GST Act is also referred to as consideration.
Section 15 of CGST Act provides meaning of Valuation to find out taxable value of supply. Section 15(1) & (2) reads as under:
“15. (1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.
(2) The value of supply shall include–––
(a) any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier;
(b) any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both;
(c) incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services;
(d) interest or late fee or penalty for delayed payment of any consideration for any supply; and
(e) subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments.
Explanation. – For the purposes of this sub-section, the amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy.”
It can be seen that as per section 15(2)(d), interest for delayed payment is part of valuation. It is true that there is no agreement for payment of interest by recipient to supplier and it is being received by supplier as per statutory scheme of MSME Act. However, simply because such interest is received as per MSME Act, it cannot get any separate treatment.
Ultimately, for supplier it is receipt of interest. The word ‘interest’ used in Section 15 is not qualified by any specific kind of interest. So interest of any nature can be covered in said term. In our opinion, the said interest is part of valuation and the supplier will be liable to discharge GST on same.
Q.3. Rule 35 and tax collection
Supplier has not mentioned GST separately on invoice and has not paid tax, considering goods supplied as exempt. Subsequently, due to different interpretation tax has become payable on said supply. Whether the supplier can claim deduction of tax element from invoice value (reverse working) for calculating tax on net reduced value? It will save tax on tax?
Normally the supplier is liable to tax on transaction value as per Section 15. The transaction value is exclusive of GST, if it is charged separately. This position is clear from Section 15(2)(a).
Therefore, where tax is charged separately, tax element is not to be included for calculating tax.
However, when tax is not collected separately, reference can be made to Rule 35. Said Rule is reproduced below:
“35. Value of supply inclusive of integrated tax, central tax, State tax, Union territory tax.-Where the value of supply is inclusive of integrated tax or, as the case may be, central tax, State tax, Union territory tax, the tax amount shall be determined in the following manner, namely,-
Tax amount = (Value inclusive of taxes X tax rate in % of IGST or, as the case may be, CGST, SGST or UTGST) ÷ (100+ sum of tax rates, as applicable, in %)
Explanation.- For the purposes of the provisions of this Chapter, the expressions-
(a) “open market value” of a supply of goods or services or both means the full value in money, excluding the integrated tax, central tax, State tax, Union territory tax and the cess payable by a person in a transaction, where the supplier and the recipient of the supply are not related and the price is the sole consideration, to obtain such supply at the same time when the supply being valued is made;
(b) “supply of goods or services or both of like kind and quality” means any other supply of goods or services or both made under similar circumstances that, in respect of the characteristics, quality, quantity, functional components, materials, and the reputation of the goods or services or both first mentioned, is the same as, or closely or substantially resembles, that supply of goods or services or both.”
As per the rule, where the value of supply is “inclusive”of IGST/CGST etc., the benefit of said rule can be taken. In present case, by no stretch of imagination , it can be said that the supplier has mentioned amount in invoice as inclusive of tax. It is supplied as exempt.
Therefore, there cannot be said to be intention to include tax in value charged in invoice. Subsequently, though tax has becomes payable, the value cannot be said to be inclusive of tax when it was charged in invoice. There should be some positive indication to show that value in invoice was inclusive of tax, like in invoice “inclusive of tax”. However, being sold as exempt, there cannot be such possibility and hence no application of Rule 35.