I. Introduction
The 53rd GST Council Meeting introduced a noteworthy recommendation: the insertion of Section 11A in the Central Goods and Services Tax (CGST) Act. This new section aims to grant the government the power to regularize instances of non-levy or short-levy of GST due to prevailing general trade practices. This development has significant implications for businesses, regulatory authorities, and the overall GST framework in India.
II. Background
There were multiple instances where certain taxpayers, following prevalent trade practices, failed to pay or underpay GST on specific supplies, such as corporate guarantees, online gaming, and employee secondment. As a result, GST authorities have responded by issuing bulk notices to recover taxes in the past leading to widespread litigation. It was a pleading of various industries including the insurance and other industries that while a new valuation mechanism or changes in the levy rate resolves certain issues going forward, the “as-is, where-is” basis is necessary for the past periods as the new tax position ought to be applied prospectively given that the differential tax cannot now be recovered from the customers. As the GST is a destination-based tax, and non-passing of the tax burden to the ultimate consumer would be contrary to the fundamental principle of GST law.
While the GST Council has time and again recommended regularising demands for the past periods on “as-is, where-is” basis, there was no legal mechanism provided in the CGST Act for such approach. It was thus essential to provide legal sanctity to the “as-is, where-is” basis in the GST law, which is in line with the pari materia provisions such as Section 11C of the erstwhile Central Excise Act, 1944 and Section 151A of the Customs Act, 1962.
However, the exclusion of online gaming from the purview of this legislation, leaves room for the community to pursue legal actions on the ground of the arbitrary and discriminatory classification, arguing it violates the right to equality under Article 14 of the Constitution of India.
III. Understanding Section 11A
Section 11A is designed to provide a legal mechanism for addressing situations where GST was either not levied or short-levied due to established trade practices. Based on the GST Council's recommendations, the proposed section empowers the government to make decisions that regularize such instances.
IV. Implications for Businesses
Relief from Retrospective Tax Demands: One of the primary benefits of Section 11A is the relief it offers businesses from retrospective tax demands. In the past, companies have faced significant financial and legal challenges due to retrospective tax assessments. This new provision provides a pathway for the government to acknowledge and regularize genuine instances of non-levy or short-levy of GST without penalizing businesses for adhering to common trade practices.
Reduction in Litigation: By granting the government the power to regularize GST shortfalls, Section 11A is expected to reduce the volume of litigation in the GST regime. Businesses often engage in prolonged legal battles with tax authorities over retrospective tax demands. With the ability to address these issues administratively, the provision can significantly decrease the burden on the judiciary and reduce legal costs for businesses.
Clarity and Predictability: Section 11A introduces a level of clarity and predictability in the GST framework. Businesses can operate with the assurance that genuine trade practices, even if they result in GST shortfalls, can be regularized. This fosters a more stable and predictable tax environment, encouraging compliance and reducing uncertainties.
V. Impact on Government and Tax Authorities
Enhanced Administrative Efficiency: The introduction of Section 11A empowers tax authorities to address GST shortfalls arising from general trade practices more efficiently. Rather than pursuing lengthy legal processes, authorities can regularize these instances through administrative measures. This enhances the overall efficiency of tax administration and allows authorities to focus on more deliberate tax evasion cases.
Alignment with Trade Practices: The provision allows the government to align the GST regime with prevailing trade practices. Recognizing that certain practices may have led to unintentional tax shortfalls, the government can regularize these instances without disrupting business operations. This alignment promotes a more harmonious relationship between tax authorities and businesses.
Improved Revenue Collection: While Section 11A relieves businesses, it also ensures that the government can still collect GST revenue from regularized shortfalls. By addressing these issues administratively, the government can secure revenue that might otherwise be tied up in legal disputes. This contributes to improved revenue collection and financial stability.
VI. Benefits for the GST Ecosystem
Promotion of Voluntary Compliance: Section 11A encourages businesses to voluntarily disclose instances of GST shortfalls arising from general trade practices. Knowing that such shortfalls can be regularized without punitive measures, businesses are more likely to come forward and correct their tax filings. This promotes a culture of voluntary compliance within the GST ecosystem.
Strengthening Trust and Cooperation: The provision fosters trust and cooperation between businesses and tax authorities. Recognizing and regularizing genuine trade practices, the government is committed to fair and transparent tax administration. This strengthens the relationship between stakeholders and enhances the overall credibility of the GST regime.
Reduction in Tax Uncertainty: Tax uncertainty is a significant concern for businesses. Section 11A mitigates this issue by providing a clear framework for addressing GST shortfalls related to trade practices. Businesses can operate more confidently, knowing that genuine shortfalls can be regularized, thus reducing the risk of unexpected tax liabilities.
VII. Challenges and Considerations
Defining General Trade Practices: One of the challenges in implementing Section 11A is defining what constitutes "general trade practices." Clear guidelines and criteria are necessary to ensure consistent application of the provision. Without clear definitions, there may be ambiguity and potential disputes over what qualifies for regularization.
Ensuring Transparency: The process of regularizing GST shortfalls must be transparent and accountable. The government should establish clear procedures and documentation requirements to apply the provision fairly and consistently. Transparency is crucial to maintaining the credibility of the GST framework.
Balancing Relief and Revenue: While Section 11A provides relief to businesses, balancing relief and ensuring revenue collection is essential. The government must carefully assess the financial impact of regularizing GST shortfalls and implement measures to safeguard revenue interests.
Ambiguity regarding online gaming sector: The notification prima facie does not include online gaming sector within its ambit. While the long-standing demand of genuine taxpayers to regularise non-levy or short-levy of GST due to prevailing general trade practices has been accepted, online gaming is not mentioned specifically. Hence, ambiguity remains in this sector and it is unclear whether the proposed amendment will have any provision for the online gaming sector.
Applicability on as is where is basis: tax experts highlight that this waiver under 11A applies only to cases where the decision is made on an "as-is, where-is" basis. this means, means that those who have paid the demand raised by authorities will not get a refund but those who have prolonged the disputes will.
VIII. Conclusion
The recommendation to insert Section 11A in the CGST Act marks a significant step towards a more pragmatic and business-friendly GST regime. The provision addresses a critical gap in the current framework by granting the government the power to regularize non-levy or short-levy of GST due to general trade practices. It offers relief to businesses, reduces litigation, and promotes voluntary compliance, all while ensuring that the government can still collect due revenue.
As the GST Council moves forward with this recommendation, it is essential to establish clear guidelines and procedures for implementing Section 11A. The government can ensure that the provision achieves its intended objectives and contributes to a more stable, transparent, and efficient GST ecosystem in India.
This new provision underscores the GST Council's commitment to continually refining and improving the GST framework, aligning it with the practical realities of the business environment. With careful implementation and monitoring, Section 11A has the potential to significantly enhance the overall effectiveness and fairness of the GST regime.