Introduction:
The 55th GST Council Meeting, held in Jaisalmer, Rajasthan under the chairpersonship of Union Finance Minister Smt. Nirmala Sitharaman, has introduced several significant changes to the GST framework. The meeting, attended by key stakeholders including the Union Minister of State for Finance, Chief Ministers of multiple states, and senior finance ministry officials, resulted in comprehensive recommendations aimed at streamlining the GST system and providing relief to taxpayers.
KEY RATE CHANGES AND EXEMPTIONS:
The Council has recommended several crucial rate modifications and exemptions that will impact various sectors of the economy. A significant change involves the reduction of the GST rate on the Fortified Rice Kernel (FRK), classifiable under heading 1904, to 5%. This modification aims to make fortified rice more accessible and promote nutritional security.
In a landmark decision benefiting the healthcare sector, the Council has recommended complete GST exemption on gene therapy. This exemption is particularly significant as it will help reduce the cost of advanced medical treatments and make life-saving therapies more accessible to patients suffering from serious genetic conditions.
The Council has also addressed the insurance sector by recommending GST exemption on contributions made by general insurance companies from third-party motor vehicle premiums for the Motor Vehicle Accident Fund. This fund, constituted under section 164B of the Motor Vehicles Act, 1988, provides compensation and cashless treatment to road accident victims, including hit-and-run cases.
In a clarificatory move regarding banking services, the Council has specified that no GST is payable on 'penal charges' levied and collected by banks and NBFCs from borrowers for non-compliance with loan terms. This clarification brings certainty to the banking sector's operations and eliminates potential disputes regarding the taxability of such charges.
A significant simplification has been introduced regarding vouchers, with the Council recommending that no GST be applicable on voucher transactions as they are neither supply of goods nor supply of services. The Council is also working on simplifying the provisions related to vouchers to reduce compliance burden and enhance ease of doing business.
The automobile sector sees changes with an increase in GST rate from 12% to 18% on the sale of all old and used vehicles, including EVs, other than those specified at 18%. This applies to old and used petrol vehicles of engine capacity 1200cc or more and length of 4000mm or more, diesel vehicles of engine capacity 1500cc or more and length of 4000mm, and SUVs. Importantly, GST is applicable only on the margin of the supplier, calculated as the difference between purchase price and selling price (considering depreciation if claimed).
For the construction sector, the Council has clarified that Autoclaved Aerated Concrete (ACC) blocks containing more than 50% fly ash content will fall under HS 6815 and attract 12% GST. This clarification provides certainty to the construction industry regarding the applicable GST rate.
In the agricultural sector, the Council has clarified that pepper (whether fresh green or dried) and raisins supplied by agriculturists are not liable to GST. This clarification benefits farmers and helps maintain the tax-free status of agricultural produce.
The Council has also addressed the food processing sector by clarifying GST rates for popcorn. Ready-to-eat popcorn mixed with salt and spices, classifiable under HS 2106 90 99, attracts 5% GST if supplied without pre-packaging and labeling, and 12% if supplied as pre-packaged and labeled. However, when popcorn is mixed with sugar (e.g., caramel popcorn), changing its character to sugar confectionery, it becomes classifiable under HS 1704 90 90 and attracts 18% GST.
TRADE FACILITATION MEASURES:
SCHEDULE III AMENDMENT:
The GST Council has introduced a pivotal amendment to Schedule III of the CGST Act, 2017, marking a significant development for businesses operating in Special Economic Zones (SEZ) and Free Trade Warehousing Zones (FTWZ). The amendment involves the insertion of clause (aa) in paragraph 8 of Schedule III, effective retrospectively from July 1, 2017.
Key Features of the Amendment:
Treatment of goods warehoused in SEZ/FTWZ before clearance
Neither supply of goods nor services
Retrospective effect from July 1, 2017
Alignment with Customs bonded warehouse provisions
Coverage of both export and domestic clearances
Under this amendment, the supply of goods warehoused in a Special Economic Zone or Free Trade Warehousing Zone to any person before their clearance for exports or to the Domestic Tariff Area shall be treated neither as supply of goods nor as supply of services. This comprehensive change brings much-needed clarity to the tax treatment of warehoused goods in these special zones.
Primary Benefits for Businesses:
Elimination of double taxation scenarios
Reduced compliance burden
Enhanced operational efficiency
Simplified record-keeping requirements
Resolution of past transaction ambiguities
The significance of this amendment lies in its alignment with existing provisions for transactions in Customs bonded warehouses. Prior to this change, there was potential ambiguity in the treatment of such transactions, leading to complications in tax compliance and possible instances of double taxation. By explicitly providing for these transactions in Schedule III, the Council has created a uniform framework for handling warehoused goods across different types of warehouses.
This measure is particularly beneficial for businesses engaged in international trade through SEZs and FTWZs. It eliminates the complexity in determining the tax treatment of intermediate transactions before final clearance of goods, whether for export or domestic consumption. The retrospective application from July 1, 2017, ensures that past transactions also benefit from this clarification, potentially resolving ongoing disputes and litigation.
From a broader perspective, this amendment aligns with the government's objective of promoting ease of doing business and facilitating international trade. By removing ambiguities in the tax treatment of warehoused goods, it makes Indian SEZs and FTWZs more attractive for international business operations and strengthens India's position as a global trading hub.
The Council has taken a comprehensive approach to address long-standing concerns regarding the taxability of vouchers under GST. The recommendations include:
1. Removal of sections 12(4) and 13(4) from CGST Act, 2017, and rule 32(6) from CGST Rules, 2017, to resolve ambiguities in voucher treatment.
2. Clarification that voucher transactions shall be treated neither as supply of goods nor services, with this treatment being applicable both retrospectively and prospectively.
3. Distribution of vouchers on principal-to-principal basis will not attract GST. However, when vouchers are distributed on principal-to-agent basis, the commission or fee charged by the agent for distribution will be taxable.
4. Additional services related to vouchers, such as advertisement, co-branding, marketing, promotion, customization, and technology support, will be subject to GST on the amount paid for these services.
5. Unredeemed vouchers (breakage) will not be considered as supply under GST, and no GST will be payable on income booked in accounts for breakage.
The Council has also addressed the payment aggregator sector by clarifying that RBI-regulated Payment Aggregators are eligible for exemption under entry at Sl. No. 34 of notification No. 12/2017-CT(R) dated June 28, 2017. This exemption applies as they fall within the definition of 'acquiring bank'. However, the Council specifically noted that this exemption does not extend to payment gateway and other fintech services that do not involve settlement of funds.
To further facilitate international trade and research, the Council has recommended IGST exemption for imports of all equipment and consumable samples by Inspection Teams of the International Atomic Energy Agency (IAEA), subject to specified conditions.
For merchant exporters, the Council has recommended reducing the rate of Compensation Cess to 0.1% on supplies, aligning it with the GST rate on such supplies. This measure aims to promote exports and enhance the competitiveness of Indian merchants in international markets.
The Council has also extended the concessional 5% GST rate on food inputs used in food preparations under HSN 19 or 21 that are supplied for food preparations intended for free distribution to economically weaker sections under government programs, subject to existing conditions.
These trade facilitation measures demonstrate the Council's commitment to reducing compliance burden, promoting ease of doing business, and supporting various sectors of the economy while maintaining the integrity of the GST system.
COMPLIANCE AND PROCEDURAL CHANGES:
The GST Council has introduced substantial compliance and procedural modifications to enhance the efficiency of the GST system and reduce taxpayer burden. One of the most significant changes relates to the Invoice Management System (IMS) and associated procedures.
The Council has recommended comprehensive amendments to the CGST Act, 2017 and CGST Rules, 2017 regarding the functionality of the Invoice Management System. These changes include amending section 38 of CGST Act and rule 60 of CGST Rules to provide a legal framework for generating FORM GSTR-2B based on taxpayer actions in the IMS. Under this system, invoices can be accepted, rejected, marked as pending, or left with no action (resulting in deemed acceptance).
A crucial modification has been made to the credit note mechanism through the amendment of section 34(2) of CGST Act, 2017. This change specifically requires recipients to reverse input tax credit attributable to a credit note, enabling suppliers to reduce their output tax liability. To complement this, a new rule 67B will be inserted in CGST Rules, 2017, prescribing how suppliers' output tax liability should be adjusted against issued credit notes.
The Council has also introduced a sequential filing requirement by amending section 39(1) of CGST Act and rule 61 of CGST Rules. This mandates that FORM GSTR-3B for a tax period can only be filed after FORM GSTR-2B for that period is available on the portal, ensuring proper reconciliation and accuracy in GST returns.
For streamlining registrations, the Council has approved the insertion of new rule 16A in CGST Rules, 2017. This provision allows tax officers to generate temporary identification numbers for persons not liable for GST registration but required to make payments under rule 87(4). Corresponding amendments to Rule 87(4) and modifications to FORM GST REG-12 will be made to support this change.
The composition levy scheme sees procedural improvements with amendments to sub-rule (1) of rule 19 of CGST Rules, 2017. This change allows taxpayers to modify their "category of registered person" in Table 5 of FORM GST CMP-02 through FORM GST REG-14, providing greater flexibility to composition scheme taxpayers.
A significant development for tracking tax evasion is the insertion of Section 148A in CGST Act, 2017. This enables the government to implement a Track and Trace Mechanism for specified evasion-prone commodities using Unique Identification Marking on goods or packages. This system will provide a legal framework for tracing commodities throughout the supply chain, enhancing tax compliance and reducing evasion.
For online service providers, including online money gaming and OIDAR services, the Council has clarified that suppliers must mandatorily record the state name of unregistered recipients on tax invoices. This state name will be deemed the recipient's address for section 12(2)(b) of IGST Act read with rule 46(f) of CGST Rules.
LEGAL AMENDMENTS AND CLARIFICATIONS:
The GST Council has introduced several significant legal amendments and clarifications to address various interpretational issues and streamline the GST framework. These changes demonstrate a comprehensive approach to resolving long-standing ambiguities and strengthening the legal framework.
A notable amendment concerns section 17(5)(d) of CGST Act, 2017, which aims to align with the provision's original intent. The Council has recommended replacing the phrase "plant or machinery" with "plant and machinery" retrospectively from July 1, 2017. This change ensures interpretation aligns with the Explanation provided at the end of section 17, effectively addressing issues arising from the Safari Retreats case.
The Council has made substantial changes to the appeal process through amendments to sections 107 and 112 of CGST Act, 2017. The pre-deposit requirement for filing appeals has been modified when orders involve only penalty amounts. The amendment to section 107(6) reduces the pre-deposit from 25% to 10% for appeals before the Appellate Authority in cases involving only penalty demands without tax implications. Similarly, a new proviso to section 112(8) introduces a 10% pre-deposit requirement for appeals before the Appellate Tribunal in penalty-only cases.
To provide clarity on institutional definitions, the Council has recommended amending section 2(69) of CGST Act, 2017. This amendment includes inserting an Explanation to define 'Local Fund' and 'Municipal Fund' under clause (c), addressing ambiguities in dealing with local authorities.
Significant changes have been proposed for the Input Services Distributor (ISD) mechanism. The Council recommends amending sections 2(61) and 20(1) of CGST Act to explicitly include inter-state RCM transactions under the ISD mechanism by referencing supplies subject to tax under sections 5(3) and 5(4) of IGST Act. Consequential amendments to section 20(2) of CGST Act and rule 39(1A) of CGST Rules will follow, with these changes becoming effective from April 1, 2025.
The definition of 'pre-packaged and labelled' has been amended to cover all commodities intended for retail sale containing not more than 25 kg or 25 litre, which are either 'pre-packed' as defined under the Legal Metrology Act or require declaration-bearing labels under the Act's provisions.
ADMINISTRATIVE MEASURES:
The GST Council has approved several administrative measures to enhance the operational efficiency of the GST system and address various stakeholder concerns. These measures reflect a balanced approach to improving tax administration while facilitating compliance.
The Council has approved recommendations from the committee of officers regarding IGST settlement issues raised by States. The committee has been directed to conclude the desired changes by March 2025, demonstrating a commitment to resolving interstate tax distribution concerns. This development is particularly significant as it affects the fiscal health of states and ensures proper revenue allocation.
In a significant move toward operationalizing the GST Appellate Tribunal (GSTAT), the Council has taken note of proposed procedural rules for its internal functioning. These rules will be notified after examination by the Law Committee, marking a crucial step in establishing an effective dispute resolution mechanism. The operationalization of GSTAT will provide taxpayers with a dedicated forum for GST-related disputes, potentially reducing the burden on High Courts.
Addressing state-specific concerns, the Council has responded to Andhra Pradesh's request by recommending the constitution of a Group of Ministers. This group will examine legal and structural issues and recommend a uniform policy for levy imposition during natural disasters or calamities in states. This measure recognizes the need for standardized approaches to emergency situations while maintaining fiscal flexibility.
The Council has also extended the timeline for the Group of Ministers working on GST compensation restructuring until June 30, 2025. This extension ensures thorough examination of compensation-related issues and their impact on state finances.
A significant matter brought before the Council concerned charges collected by municipalities for granting Floor Space Index (FSI), including additional FSI, and their GST implications under reverse charge basis. However, the Council deferred this matter for further examination at the Central Government's request, noting that these amounts relate to municipal or local authorities and require careful consideration of their tax treatment.
The Council has also addressed issues related to unregistered recipients of online services. Suppliers are now mandatorily required to record the state name of unregistered recipients on tax invoices, which will be deemed the recipient's address for place of supply purposes. This change particularly affects online gaming, OIDAR services, and similar digital services.
DETAILED ANALYSIS AND IMPACT:
The recommendations from the 55th GST Council meeting represent a comprehensive overhaul of various aspects of the GST system, with far-reaching implications for businesses and taxpayers across sectors.
Impact on Food and Agriculture Sector:
The reduction in GST rate on Fortified Rice Kernel (FRK) to 5% is expected to have significant implications for food security and nutrition programs. This change will reduce the tax burden on fortification processes, potentially making fortified rice more affordable and accessible. The clarification regarding GST exemption for agriculturist-supplied pepper and raisins provides certainty to farmers and agricultural traders, eliminating potential disputes over tax liability.
Healthcare and Medical Sector:
The complete GST exemption on gene therapy represents a progressive step toward making advanced medical treatments more accessible. This exemption is likely to reduce the overall cost of gene therapy treatments, benefiting patients with genetic disorders and rare diseases. The decision reflects the government's commitment to supporting advanced medical treatments while keeping healthcare costs manageable.
Insurance and Banking Sector:
The exemption of GST on contributions to the Motor Vehicle Accident Fund marks a significant development for the insurance sector. This change should help streamline the compensation process for accident victims while reducing the tax burden on insurance companies. The clarification regarding non-applicability of GST on penal charges by banks and NBFCs provides much-needed clarity in the banking sector, potentially reducing litigation and compliance costs.
Digital Economy and E-commerce:
The framework for online services, particularly regarding recording state names for unregistered recipients, introduces new compliance requirements for digital service providers. This change affects various sectors including online gaming, streaming services, and digital content providers. The clarification regarding Payment Aggregators' exemption status while excluding payment gateways demonstrates a nuanced approach to fintech services taxation.
Automobile Sector:
The increase in GST rate to 18% for used vehicle sales, while maintaining the margin scheme, represents a significant change for the used car market. This modification affects dealers and consumers in the secondary automobile market, though the impact is moderated by applying GST only on the dealer margin rather than the full vehicle value.
Construction and Real Estate:
The clarification regarding ACC blocks containing fly ash provides certainty to the construction industry. The 12% GST rate under HS 6815 offers clarity for manufacturers and builders, potentially promoting the use of environmentally friendly construction materials.
Trade and Commerce:
The modifications to voucher taxation and distribution represent a major simplification in this area. The clear distinction between principal-to-principal and principal-to-agent transactions provides a practical framework for businesses dealing with vouchers, while the treatment of additional services ensures appropriate taxation of value-added services.
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