[Analysis] 52nd GST Council Meeting | Recommendations

Table of Contents

1. Background
2. Providing mechanism of valuation of corporate guarantee
3. Providing amnesty scheme for filing appeal against demand orders issued upto 31.03.2023
4. Automatic restoration of provisionally attached property after completion of one year
5. Allowing receipt in INR in special Vostro account for export of services
6. To provide that ECOs would not be liable to pay tax u/s 9(5) for the bus operators organized as companies
7. No GST on ENA used for manufacture of alcoholic liquor for human consumption
8. Providing clarification on PoS in respect of specified categories of services
9. Allowing refund route on supplies made to SEZ with payment of tax
10. Conditional exemption to foreign flag foreign going vessels converted to coastal run
11. Exemption provided to certain specified services supplied to Government Authorities
12. To clarify that DMFT is to be treated as a Governmental Authority for the purpose of GST exemption
13. Rate changes in goods
14. 5% GST on job work in relation to converting barley to malt
15. Taxing all supplies by Indian Railways under Forward Charge Mechanism (‘FCM’)
16. ISD mechanism for distribution of common ITC on third-party invoices is to be made mandatory prospectively
17. Changes in age limit of appointment of President & Member of the GSTAT

1. Background

The 52nd GST Council meeting, which took place on 7th October 2023, provided recommendations to address key contentious issues and announcements in respect of trade facilitation measures. Some of the key developments are the implementation of the amnesty scheme for filing of appeal in respect of orders passed till 31st March 2023 with enhanced pre-deposit of 2.5%, providing clarity on taxability of corporate guarantee provided by directors and group companies which is expected to put an end to ongoing litigation on the matter, giving heads-up to the India Inc. to prepare themselves to comply for ISD mechanism. This will allow sufficient time to companies to undertake necessary IT and compliance changes for a smooth transition. Also, circulars clarifying the determination of the place of supply for transportation of goods services, advertisement services, and co-location services will avoid any possible litigation in the future.

2. Providing mechanism of valuation of corporate guarantee

• It is recommended to clarify that where a personal guarantee is offered by a director of a company to the bank/financial institutions for sanctioning the loan, the same would not be taxable, if no consideration is payable to the director. However, where a consideration is payable to the director, the same will be taxed at the transaction value
• It is further recommended to clarify that where a guarantee is offered by a related party, the same will be taxable at, 1% of the value of the loan/limit or the actual consideration, whichever is higher

2.1 TAXMANN’s Comments

In the case of extending corporate and personal guarantees for extending loans or limits, there exist a conflict as to whether it constitutes a supply or not.

Recently, the Hon’ble Supreme Court [1] held that consideration can be in monetary and/or non-monetary form. Where the assessee has not received any consideration from its group company for providing the corporate guarantee, the same would not be liable to Service Tax as there is no consideration involved.

However, the GST Law provides [2] that where a supply is made to the related parties [3], the same would be treated as a supply [4] even if made without consideration. Given this, the settled position on the taxability of corporate guarantee by the Hon’ble SC may not apply under the GST regime in the case of related party transactions.

In view of the above, the GST Council has recommended to undertake necessary amendments in CGST Rules, 2017 (CGST Rules) to provide for the taxability and valuation of corporate guarantee in the below manner:

(a) Where a personal guarantee is provided by the director of the company without consideration, the market value of such services is to be considered as zero. Hence, no GST is payable on such guarantee.

(b) Where guarantees are provided by related parties, including corporate guarantee provided by the holding company for a subsidiary company, the valuation of such supply shall be higher of:

• • • Actual consideration
    • 1% of the amount of such guarantee offered

This would be done by inserting sub-rule 2 in Rule 28 of the CGST Rules, 2017.

It is further recommended that the valuation of corporate guarantees would be done in the above manner irrespective of the ITC eligibility to the recipient.

In view of the above, the recommended position of taxability of guarantees offered by the related parties is summarized below:

3. Providing amnesty scheme for filing appeal against demand orders issued upto 31.03.2023

• It is recommended to provide an amnesty scheme for filing of appeal against the demand orders issued upto March 31, 2023. The appeals would be allowed to be filed by January 31, 2024
• It is recommended that such appeals would be allowed to be filed upon payment of pre-deposit of 12.5% of the disputed amount and out of this, 2.5% would be required to be deposited through electronic cash ledger

3.1 TAXMANN’s Comments

The GST law provides [5] that the taxpayer is required to file an appeal against the demand orders under section 73 and section 74 of the CGST Act, 2017 within 3 months of the date of communication of the order. Further, the Appellate Authority can extend such time for a further period of 1 month. The appeal is required to be filed upon making a pre-deposit of 10% of the disputed amount. Further, such pre-deposit can be made from both, Electronic Cash Ledger (ECL) as well Electronic Credit Ledger (ECRL).

However, the Council has recommended to provide an amnesty scheme to allow the filing of appeal against all the demand orders passed till March 31, 2023 by January 31, 2024. This would be allowed upon making an additional pre-deposit of 2.5% from ECL. Hence, the appeal would be filed upon making a pre-deposit of 12.5% out of which 2.5% would be required to be paid from ECL.

In respect of the orders passed after March 31, 2023, the aggrieved person may seek relief to file an appeal at the High Court level upon complying with the conditions prescribed for the orders passed before March 31, 2023. A similar view was taken by Madras HC [6] in the case of amnesty schemes for the application of revocation of GST registrations cancelled or suspended.

4. Automatic restoration of provisionally attached property after completion of one year

• It is recommended to amend Rule 159(2) of CGST Rules, 2017 and Form GST DRC-22 to provide that the order for provisional attachment in Form GST DRC-22 shall not be valid after expiry of one year from the date of the said order

4.1 TAXMANN’s Comments

The GST law provides [7] that upon initiation of specified proceedings under the GST law, where the Commissioner is of the opinion that it is necessary to protect the interest of the revenue, he can provisionally attach the property of the person. It provides that the provisional attachment is valid for a period of 1 year from the date of the order. The order of provisional attachment is issued in Form GST DRC-22. The Form specifies that the debit from a bank account should not be allowed without the prior permission of this department.

Hence, even after the expiry of 1 year, attachment remains intact till the time a formal release intimation is sent by the jurisdictional Commissioner.

This has also been clarified as an advisory GST/INV/Provisional Attachment/Advisory/2023-24, dated 02-09-2023, which provides that the Commissioner shall issue communication or an intimation to the concerned authority/bank indicating the release/restoration of the relevant property/account.

To remove the requirement of such communication or intimation, it is recommended to amend Rule 159(2) of CGST Rules, 2017 and Form GST DRC-22 to provide that the order for provisional attachment would not be valid after the expiry of one year from the date of provisional attachment order. The said amendment is intended to remove hardship faced by the taxpayer whose property is provisionally attached and removal of provisional attachment order is not passed by the Commissioner on expiry of one year.

5. Allowing receipt in INR in special Vostro account for export of services

• It is recommended to clarify that export remittances received in the special INR Vostro account would be an eligible mode of receipt of payment to qualify a service as export.

5.1 TAXMANN’s Comments

The GST law provides that [8] receipt of payment in convertible foreign currency is one of the mandatory conditions to qualify the service as an export. However, the receipt of payment in INR is allowed wherever permitted by the Reserve Bank of India.

RBI issued a circular on July 11, 2022 on international trade settlement in INR wherein it allowed the receipt of payment for export in special Vostro accounts of the correspondent bank of the partner country

In line with the above, the GST Council has recommended that payment in INR in special Vostro account would also qualify as an admissible mode of payment, and consequently, the receipt of export proceeds in such account would qualify as export in terms of the payment condition

6. To provide that ECOs would not be liable to pay tax u/s 9(5) for the bus operators organized as companies

• It is recommended that the bus operators who are supplying services through E-Commerce Operator (ECO) and who are organized as a company would not be covered under the scope of Section 9(5), and hence, such companies will be liable to pay tax on their supplies. This would allow such bus operators to utilize the ITC.

6.1 TAXMANN’s Comments

The GST law provides that where bus transportation services are provided through ECOs, GST on the same is liable to be paid by the ECO [9]. This was done to prevent the small bus operators from the requirement of obtaining GST registration and consequent compliances. However, this provision is causing loss of ITC to larger bus operators operating through ECOs.

Now, it has been recommended that the bus operators organized as companies would be excluded from the preview of Section 9(5) of the CGST Act, 2017 (‘CGST Act’). Hence, ECO would not be liable to pay tax in relation to such bus operators but the bus operators would themselves be doing so.

This would strike a balance, as, on one hand, the small operators would be saved from the compliance burden, on the other hand, the bus operator companies would be able to avail the benefit of ITC.

Notably, ‘Omni-bus’ was included under the scope of Section 9(5) of the CGST Act [10] w.e.f. November 18, 2021 and its meaning has been borrowed from Section 2(29) of the Motor Vehicles Act, 1988 which defines it as any motor vehicle constructed or adapted to carry more than six persons excluding the driver.

7. No GST on ENA used for manufacture of alcoholic liquor for human consumption

• It is recommended to keep Extra Neutral Alcohol (ENA) used for the manufacture of alcoholic liquor for human consumption outside the GST net
• It is also mentioned that ENA for industrial use will continue to attract GST at 18%.

7.1 TAXMANN’s Comments

Levy of GST on Extra Neutral Alcohol (ENA)/Rectified Spirit supplied for manufacture of alcoholic liquor for human consumption is a subject matter of dispute as there was a difference of opinion regarding the Constitutional power to tax such goods between the Centre and the States. Some states were of the view that sale of ENA for manufacture of alcoholic liquor for human consumption will continue to be liable to State VAT. Whereas, the Centre is of the view that it should be subject to GST.

The GST Council in 20th Council meeting held on 05-07-2017, agreed to seek a legal opinion of the Learned Attorney General of India. The Attorney General of India gave an opinion that ENA contains 95% alcohol by volume and is therefore not fit for human consumption, hence, GST is applicable to the same.

Given the above, various states (including the State of Uttar Pradesh) included a specific entry under their respective VAT schedule to levy VAT on sale of ENA.

Subsequently, the Allahabad [11] HC held the relevant entry for ENA under UP VAT laws as ultra vires stating that states do not have the power to levy VAT on sale of ENA.

In order to put to rest this long standing litigation, the GST council has recommended that ENA for manufacture of alcoholic liquor for human consumption be kept outside the GST net and ENA supplied for industrial use should continue to attract GST at 18%.

It is also recommended that a separate tariff HSN code has been created at 8 digit level in the Customs Tariff Act to cover rectified spirit for industrial use.

8. Providing clarification on PoS in respect of specified categories of services

• It is recommended to clarify the PoS in respect of the following services:
  • Supply of goods transportation services, including by mail or courier in case supplier or recipient is outside India
  • Supply of advertising services
  • Supply of co-location services
• Currently, Section 12 and 13 of the IGST Act, does not provide any specific provision to determine the Place of Supply (‘PoS’) in respect of aforesaid services. Therefore, it is recommended to provide clarification on PoS provisions for these services. One would need to wait for the clarifications to understand its implications.

8.1 TAXMANN’s Comments

As a background, the Hon’ble SC in the case of Mohit Minerals [12] has held that in case of CIF contracts, the buyer of the goods would be considered as the recipient of the transportation services. This conclusion was reached upon by a combined reading of Section 13(9) of the IGST Act and the definition of the recipient under the GST law.

Pursuant to the said decision, the provision of Section 13(9) of the IGST Act has been deleted w.e.f. 01-10-2023 leading to the ambiguity regarding determination of PoS in case of transportation of goods.

The Council, in its 49th Council meeting, clarified that the intention behind the amendment to section 13(9) of the CGST Act was to deem the place of supply of such services to be the location of the recipient. In order to avoid any ambiguity, the council has not proposed to issue a suitable clarification in this regard.

Likewise, for advertisement and co-location services, there remains an ambiguity whether the PoS be determined on the basis of location of immovable property or under the default rule under Section 12 or Section 13 as the case may be. The council has recommended to issue a suitable clarification to avoid any possible litigation.

9. Allowing refund route on supplies made to SEZ with payment of tax

• It is recommended to provide that supplies can be made to SEZ units or developers for authorised operations (except the specified products such as pan masala, tobacco etc.) with payment of tax and supplier can claim refund of the tax so paid.

9.1 TAXMANN’s Comments

Zero-rated supplies under the GST law can be made either with payment of tax or without payment of tax under the cover of Letter of Undertaking (‘LuT’).

However, based on the recommendations of 50th GST Council meeting, the refund route for specified tobacco and related products was intended to be restricted and it will be granted only if such supplies are made under bond/LuT.

To bring this into effect, w.e.f. October 01, 2023, refund for all goods and services has been allowed only in the cases where the zero-rated supplies are made under LuT [13].

Further, the government notified [14] that refund would be allowed on export with payment of tax on all goods and services except a few specified tobacco and related products. However, there was no clarity on zero rated supplies made to SEZ unit or developer.

Now, the council has recommended that refund would be allowed to the persons effecting supplies to SEZ unit or SEZ developers for authorised operations with payment of tax except on the specified tobacco products. However, it is relevant to note that such amendment should be made effective retrospectively from October 01, 2023, to avoid any litigation in claim of refund for the taxes paid from October, 01 2023 till the date such notification comes into effect.

10. Conditional exemption to foreign flag foreign going vessels converted to coastal run

• It is recommended that the foreign flag foreign going vessels if converted to coastal run would be eligible for conditional exemption from payment of IGST subject to the condition that they re-convert into foreign going vessels within 6 months

10.1 TAXMANN’s Comments

Currently, foreign flag foreign going vessels shifting from international voyages to domestic coastal operations are subject to a 5% IGST on the value of the vessel. The meaning of foreign going vessels has been defined in Section 2(21) of the Customs Act, 1962 as follows:

‘Foreign-going vessel or aircraft’ means any vessel or aircraft for the time being engaged in the carriage of goods or passengers between any port or airport in India and any port or airport outside India, whether touching any intermediate port or airport in India or not, and includes—

– any naval vessel of a foreign Government taking part in any naval exercises
– any vessel engaged in fishing or any other operations outside the territorial waters of India
– any vessel or aircraft proceeding to a place outside India for any purpose whatsoever

The GST Council has recommended an exemption to such foreign flag foreign-going vessels from IGST. However, the exemption is conditional in nature and is allowed if the vessel is reconverted into a foreign going vessel within a time frame of 6 months.

11. Exemption provided to certain specified services supplied to Government Authorities

• It is recommended to exempt the services of water supply, public health, sanitation conservancy, solid waste management, and slum improvement and upgradation supplied to Governmental Authorities.

11.1 TAXMANN’s Comments

The GST law provides an exemption [15] to pure and composite services where they are provided to ‘Central/State/UT government’ and ‘local authorities’ in relation to any function entrusted to Panchayat/ Municipality under Article 243G and 243W of the Constitution of India. The GST Council has recommended to retain the existing exemption entries with no change.

Notably, till 31-12-2021, the above exemption also included the supply of such pure/composite services provided to a ‘Governmental authority’ or a ‘Government Entity’. With effect from 01-01-2022, the exemption to the services supplied to the ‘Governmental authority’ or a ‘Government Entity’ was withdrawn [16].

Now, the GST Council has recommended to extend the above exemption to the services supplied to the Governmental Authority in relation to:

• Water supply
• Public health
• Sanitation conservancy
• Solid waste management
• Slum improvement and upgradation

It may be noted that the term ‘Governmental Authority’ is defined [17] as an authority or a board or any other body,—

(a) Set up by an Act of Parliament or a State Legislature; or
(b) Established by any Government,

with 90% or more participation by way of equity or control, to carry out any function entrusted to a Municipality under article 243W of the Constitution or to a Panchayat under article 243G of the Constitution.

12. To clarify that DMFT is to be treated as a Governmental Authority for the purpose of GST exemption

• It is recommended that the District Mineral Foundation Trust (DMFT) set up by State Government in mineral mining areas are Governmental Authorities and thus eligible for same exemptions under GST as available to any other Governmental Authority

12.1 TAXMANN’s Comments

For obtaining license of mining, the recipient is required to obtain permission from the State Government and is required to pay consideration to the State Government, NMET, and DMFT. Notably, the payments towards DMFT are paid to GoAP (Mining & Geology Department) through online payment on their website.

In respect of the same, there existed confusion as to whether the amount paid to the DMFT would constitute consideration or not and whether DMFT constitute Governmental authority or not. If DMFT is considered as Governmental Authority, the tax would be required to be paid on RCM.

Andhra Pradesh AAR held [18] that contributions to NMET and DMFT by the applicant qualify as consideration towards the supply of mining service by the Government of Andhra Pradesh and they being includible in the value of supply are chargeable to GST under RCM in the hands of the applicant.

The Council has recommended to clarify that the DMFT would be treated as a Governmental Authority, consequently, it would be eligible for the exemptions under GST as available to the Governmental Authorities. This would bring to an end, litigation on the issue.

13. Rate changes in goods

13.1 5% GST on millet flour in powder form

• It is recommended to provide a NIL rate of GST on food preparation of millet flour in powder form falling under HSN 1901 when sold in loose form or pre-packed but non-labelled form
• It is recommended that 5% GST rate to apply when sold in pre-packaged and labelled form

13.1.1 TAXMANN’s Comments

The GST Council has recommended a ‘Nil’ rate of GST on ‘Food preparation of millet flour in powder form containing at least 70% millet by weight’ and falling under HSN 1901 where sold in other than pre-packaged and labelled form. This would apply with effect from the date of notification.

Further, it is recommended that 5% GST rate to be applicable when sold in pre-packaged and labelled form. This recommendation would lead to a significant reduction in tax from the existing GST rate of 18% on millet-based food preparations.

This recommendation aligns with India’s dedicated efforts to promote millets, especially in the year 2023, which has been declared as the ‘International Year of Millets’ and India is actively engaged in initiatives to popularize millets as a healthy dietary choice.

13.2 GST rate on molasses reduced from 28% to 5%

• It is recommended to reduce the GST rate on molasses from 28% to 5%

13.2.1 TAXMANN’s Comments

The GST rate on molasses is recommended to be reduced to 5% from the current rate of 28%. The rate reduction will increase liquidity with sugar mills as the reduced tax burden will leave more financial resources at their disposal and would enable faster clearance of cane dues to the sugarcane farmers.

Additionally, molasses is a crucial ingredient in the production of cattle feed and its GST rate reduction will also lead to a reduction in the cost of manufacturing of the cattle feed.

13.3 5% GST on imitation zari thread/ yarn made of metallised polyester film/ plastic film

• It is recommended to clarify that imitation zari thread or yarn made out of metallised polyester film/ plastic film would fall under the HSN 5605 and taxable at 5% GST
• Also, no refund to be allowed on polyester film (metallised)/ plastic film on account of inversion

13.3.1 TAXMANN’s Comments

Based on the recommendation of 50th GST Council meeting, the GST rate on zari thread or yarn, known by various trade names, was reduced [19] from 12% to 5% by inserting a new serial number under HSN 56050020.

In this context, it is recommended to clarify that zari thread made from metallised film or plastic film will also fall under the same HSN classification and will be taxed at a reduced rate of 5%.

It has also been recommended to grant no refund for polyester film (metallised) or plastic film on account of inversion.

14. 5% GST on job work in relation to converting barley to malt

• It is recommended to clarify that 5% GST to apply on job work arrangements for processing of barely into malt

14.1 TAXMANN’s Comments

The GST council has proposed to clarify that 5% GST to apply in case of job work arrangements for processing of barley into malt. This clarification will help to resolve the ongoing litigation for the industry relating to applicable GST rate of 5% or 18%.

15. Taxing all supplies by Indian Railways under Forward Charge Mechanism (‘FCM’)

• It is recommended that all goods and services supplied by the Indian railways are to be taxed at FCM. This would result in utilisation of ITC by railways leading to cost reduction

15.1 TAXMANN’s Comments

The GST Council has recommended that all goods and services supplied by the Indian Railways are to be taxed at a Forward Charge Mechanism so as to enable them to avail the ITC. This would lead to cost reduction for the Indian railways

16. ISD mechanism for distribution of common ITC on third-party invoices is to be made mandatory prospectively

• It is recommended to make necessary changes in the GST law to make the ISD mechanism mandatory for third-party invoices in respect of input services procured by Head Office (HO) but attributable to both HO and Branch Office (BO) or exclusively to one or more BOs. This would apply prospectively

16.1 TAXMANN’s Comments

There existed an uncertainty in the industry as to whether ISD [20] mechanism is mandatory for the transfer of common credit on third-party invoices or the same can be done by raising a tax invoice to location/locations where the services are consumed (popularly known as cross charge mechanism).

Based on the recommendation of 50th GST Council meeting, it was clarified [21] by CBIC that transfer of ITC on third-party invoices through ISD mechanism is optional in nature as of now. It further recommended that it is to be made mandatory with a prospective effect.

Now, to give effect to the same, it is proposed in this council meeting to make necessary amendments in Section 2(61) and Section 20 of CGST Act, 2017 as well as Rule 39 of CGST Rules, 2017.

The industry would now need to prepare itself for the ISD mechanism as the GST council has recommended to make this procedure mandatory by making necessary changes in GST Law. This amendment, once made, would require system changes and involve additional compliance for the taxpayers.

17. Changes in age limit of appointment of President & Member of the GSTAT

• Recommended that an advocate with 10 years of substantial experience in litigation under indirect tax laws in the Appellate Tribunal, Central Excise and Service Tax Tribunal, State VAT Tribunals, High Court or Supreme Court to be eligible for the appointment as judicial member
• It is recommended that the minimum age for eligibility for appointment as President and Member to be prescribed 50 years
• It is recommended that the tenure of the President and Members to be increased to a maximum age of 70 years and 67 years respectively

17.1 TAXMANN’s Comments

The GST Law [22] is proposed to be amended to provide that an Advocate can be appointed as a Judicial Member of the GST Appellate Tribunal if he/she is an advocate for atleast 10 years and possesses substantial experience in litigation under Indirect Tax Laws in either of the forums mentioned below:

• Appellate Tribunal
• Central Excise and Service Tax Tribunal
• State VAT Tribunals, by whatever name called
• High Court or Supreme Court

Further, it is also proposed to provide that for eligibility for appointment as President and Member of the GST Appellate Tribunal, there will be a minimum age requirement of 50 years.

Furthermore, it is proposed to raise the maximum age limit for the President of the GST Appellate Tribunal from 67 years [23] to 70 years. After the proposed amendment, the President may hold office until earlier of the date when he attains the age of 70 years or until his term of four years comes to an end.

Similarly, the maximum age limit for the Member of the GST Appellate Tribunal is also proposed to be increased from 65 years [24] to 67 years. After the proposed amendment, the Member may hold office until the earlier of the date when he attains the age of 67 years or until his term of four years comes to an end.

This has been recommended to align the provisions of the CGST Act, 2017 with the provisions of the Tribunal Reforms Act, 2021.

[1] Edelweiss Financial Services Ltd. [2023] 149 taxmann.com 76 (SC)

[2] Entry no. 2 of Schedule I of the CGST Act

[3] Explanation to Section 15 of the CGST Act

[4] Section 7 of the CGST Act

[5] Section 107 of CGST Act

[6] Active Pest Control v. Deputy Commissioner, Commercial Taxes Department [2023] 154 taxmann.com 2 (Madras)

[7] Section 83 of CGST Act read with  Rule 159 of CGST Rules

[8] Section 2(6) of the IGST Act

[9] Section 9(5) of the CGST Act

[10] Notification No. 17/2021-Central Tax (Rate) dated 18-11-2021

[11] Jain Distillery v State of UP [2021] 131 taxmann.com 112 (Allahabad)

[12] Union of India v. MohitMinerals (P.) Ltd [2022] 138 taxmann.com 331

[13] Section 16(3) of the IGST Act

[14] Notification No. 01/2023-Integrated Tax dated 31-07-2023 effective from 01.10.2023

[15] Sl. No. 3 and 3A of Notification No. 12/2017-Central Tax (Rate) dated 28-06-2017

[16] Notification No. 16/2021-Central Tax (Rate) dated 18-11-2021

[17] Note 2(zf) of Notification No. 12/2017-Central Tax (Rate) dated 28-06-2017

[18] Andru Anantha Padma Koti Satyavathi [2021] 131 taxmann.com 335 (AAR – ANDHRA PRADESH)

[19] Notification No. 09/2023– Central Tax (Rate) dated 26-07-2023

[20] Section 20 of the CGST Act read with Rule 39 of the CGST Rules

[21] Circular No. 199/11/2023-Central Tax, dated 17-07-2023

[22] Section 110(1)(b) of the CGST Act

[23] Section 110(9) of the CGST Act

[24] Section 110(10) of the CGST Act