Indirect Tax Alert : Circulars and notifications issued to give effect to recommendations made by the GST Council in its 50th meeting

Circulars

Computation of interest on wrong availment and utilisation of IGST credit

Section 50(3) of the Central Goods and Services Tax Act, 2017 (CGST Act) read with Rule 88B of the Central Goods and Services Tax Rules, 2017 (CGST Rules) provides that interest would be leviable on input tax credit (ITC) wrongly availed and utilised, starting from the date of utilisation of such wrongly availed ITC till the date of reversal or payment, as the case may be. Further explanation to Rule 88B of the CGST Rules links the date of the utilisation of ITC to the date when the balance in the Electronic Credit Ledger (ECL) falls below the amount of wrongly availed ITC. In this regard, CBIC has issued the following clarifications:

• Manner of determining the date and extent of utilisation in case of wrong availment of IGST credit:
  • Since IGST, CGST and SGST credits can be utilised for payment of IGST, the total of ITC available in ECL under the heads IGST, CGST and SGST (Total ECL balance) has to be considered for determining the date of utilisation (i.e., whether the balance in ECL has fallen below the amount of wrongly availed IGST credit, and to what extent, the said balance has fallen below the amount of wrongly availed IGST credit so that such incorrectly availed IGST ITC can be considered as utilised) and to compute interest and not only the balance of ITC in IGST.
  • Accordingly, when the Total ECL balance falls below the amount of wrongly availed IGST credit, the same would amount to the utilisation of wrongly availed IGST credit. In such case, the extent of utilisation will be the extent to which the Total ECL balance falls below the amount of wrongly availed IGST credit.
     
• Impact of GST Compensation Cess (Cess) balance in ECL
  • Cess credit can only be utilised for payment of output Cess liability, and the same cannot be utilised for payment of tax or reversal of credits under the heads IGST/ CGST/ SGST.
  • Accordingly, Cess credit available in ECL cannot be taken into account while considering the Total ECL balance for calculating interest liability in respect of incorrect availment and utilisation of IGST, CGST or SGST credit.

[Circular no:192/04/2023-GST dated 17 July 2023]

Clarification in respect of the difference in ITC availed in Form GSTR-3B vis-à-vis ITC reflected in Form GSTR-2A for the period from 1 April 2019 to 31 December 2021

The CBIC, vide Circular no:183/15/2022-GST dated 27 December 2022² (Circular dated 27 December 2022) had clarified the manner in which the difference of ITC availed in Form GSTR-3B vis-à-vis the procurements reflected in Form GSTR-2A would be dealt with during scrutiny/audit/investigation. The aforesaid Circular was valid only in respect of ITC availed during FY 2017-18 and 2018-19.

Regarding subsequent periods, CBIC has clarified that the Circular dated 27 December 2022 may be applied in respect of tax periods from 1 April 2019 to 31 December 2021, subject to certain conditions and restrictions. The gist of clarifications provided by the CBIC is tabulated hereunder:

Sl. No.	Period	Relevant provision – Section 16(2)(aa) of the CGST Act and Rule 36(4) of the CGST Rules	Clarification
1.	1 April 2019 to 8 October 2019	Rule 36(4) of the CGST Rules to allow an additional 20% ITC was inserted only with effect from 9 October 2019, which not was relevant for the prior period.	Guidelines provided in Circular dated 27 December 2022 shall be applicable in toto.
2.	9 October 2019 to 31 December 2019	Rule 36(4) of the CGST Rules (inserted with effect from 9 October 2019) inter alia provided that ITC in respect of invoices/ debit notes which are not reported by the suppliers under Section 37 of the CGST Act (unmatched procurements) shall not exceed 20% of ITC availed on invoices/ debit notes which are reported by the suppliers under Section 37 of the CGST Act (matched procurements).	Guidelines provided by Circular dated 27 December 2022 shall be applicable for verification of the condition under Section 16(2)(c) of the CGST Act (i.e., payment of tax by the supplier to the Government), subject to the condition that the amount of ITC availed on unmatched procurements does not exceed 20% of ITC on matched procurements*.
3.	1 January 2020 to 31 December 2020 (except 1 February 2020 to 31 August 2020)	Rule 36(4) inter alia provided that ITC in respect of unmatched procurements shall not exceed 10% of ITC in respect of matched procurements	Guidelines provided by Circular dated 27 December 2022 shall be applicable for verification of the condition under Section 16(2)(c) of the CGST Act, subject to the condition that the amount of ITC availed on unmatched procurements does not exceed 10% of ITC on matched procurements*.
4.	1 February 2020 to 31 August 2020	First proviso to Rule 36(4) of the CGST Rules provides that the condition provided under Rule 36(4) of the CGST Rules would apply on a cumulative basis from February 2020 to August 2020. Accordingly, ITC in respect of unmatched procurements for the aforesaid period (on a cumulative basis) shall not exceed 10% of ITC in respect of matched procurements.	Guidelines provided by Circular dated 27 December 2022 shall be applicable for verification of the condition under Section 16(2)(c) of the CGST Act, subject to the condition that on a cumulative basis, the amount of ITC availed on unmatched procurements does not exceed 10% of ITC on matched procurements*.
5.	1 January 2021 to 31 December 2021 (except 1 April 2021 to 30 June 2021)	Rule 36(4) inter alia provides that ITC in respect of unmatched procurements shall not exceed 5% of ITC in respect of matched procurements	Guidelines provided by Circular dated 27 December 2022 shall be applicable for verification of the condition under Section 16(2)(c) of the CGST Act, subject to the condition that the amount of ITC availed on unmatched procurements does not exceed 5% of ITC on the matched procurements*.
6.	1 April 2021 to 30 June 2021	Second proviso to Rule 36(4) of the CGST Rules provides that the condition provided under Rule 36(4) of the CGST Rules would apply on a cumulative basis from April 2021 to June 2021. Accordingly, ITC in respect of unmatched procurements for the aforesaid period (on a cumulative basis) shall not exceed 10% of ITC in respect of matched procurements.	Guidelines provided by Circular dated 27 December 2022 shall be applicable for verification of the condition under Section 16(2)(c) of the CGST Act, subject to the condition that on a cumulative basis, the amount of ITC availed on unmatched procurements does not exceed 5% of ITC on the matched procurements*.
7.	1 January 2022 and onwards	Clause (aa) was inserted into Section 16(2) of the CGST Act stipulating a condition that ITC can be availed only in respect of matched procurements. Consequent amendments were also made in Rule 36(4) of the CGST Rules restricting the claim of ITC in respect of unmatched procurements.	No ITC shall be allowed for the period starting from 1 January 2022 and onwards in respect of supply in respect of unmatched procurements.

* The amount of ITC on matched procurements would be as available in the respective tax period and it would not consider any additional ITC of any supply for which the CA certificate is produced as per the process under Circular dated 27 December 2022 and this Circular.

[Circular no:193/05/2023-GST dated 17 July 2023]

Clarification on Tax Collected at Source (TCS) liability in cases involving multiple E-Commerce Operators (ECO) in a single transaction

In the context of Open Network for Digital Commerce (ONDC) or other similar arrangements which involve multiple ECOs in a single transaction of supply of goods or services or both, to determine the ECO liability to comply with TCS under section 52 of CGST Act, the CBIC has clarified the following:

• Scenario I: Where supplier-side ECO himself is not the supplier (of goods or services or both):
  • The parties involved in the present case would be (a) Buyer (b) Buyer-side ECO (c) Supplier-side ECO and (d) Supplier.
  • In such a scenario, it has been clarified that the Supplier-side ECO who finally releases the payment to the actual supplier for a particular supply would be liable to carry out TCS obligations along with corresponding compliances under Section 52 of the CGST Act.
     
• Scenario II: Where supplier-side ECO himself is the supplier (of goods or services or both):
  • The parties involved in the present case would be (a) the Buyer (b) the Buyer-side ECO, and (c) the Supplier who is also an ECO.
  • In such a scenario, it has been clarified that the Buyer-side ECO, who releases the payment to the supplier (who is also ECO) for a particular supply, would be liable to carry out TCS obligations along with corresponding compliances under Section 52 of the CGST Act.

[Circular no:194/06/2023-GST dated 17 July 2023]

Clarification in relation to the replacement of part(s) and repair services supplied during the warranty period

In relation to replacement goods/ services supplied to the customers under warranty provided by the Original Equipment Manufacturers (OEM) or the suppliers, CBIC has clarified the following:

• Scenario I: Replacement of part(s) and/ or repair services are provided by OEM:
  • GST on replacement of part(s) and/ or repair services:
    • The value of the original supply of goods (provided along with warranty) by OEM includes the likely cost of replacement of part(s) and/ or repair services during the warranty period, on which, applicable GST liability would have been already discharged at the time of original supply. Hence, no GST is payable on the replacement of part(s) and/ or repair services to the customer during the warranty period, without separately charging any consideration.
    • Any additional consideration charged by the manufacturer either for the replacement of part(s) and/ or repair services would be subject to applicable GST.
       
  • Requirement to reverse ITC in respect of supplies made without consideration under warranty:
    • ​Since the value of the original supply of goods includes the likely cost of replacement of part(s) and/ or repair services during the warranty period, such repairs/ replacement of part(s) cannot be considered as exempt supply and ITC is not required to be reversed by the OEM.
• Scenario II: Replacement of part(s) and/ or repair services are supplied by a distributor on behalf of OEM:
  • Qua Customer (Replacement of part(s) and/ or repair services):
    • If no consideration is charged for the replacement of part(s)/ repairs by the distributor from the customer, no GST would be payable.
    • However, if any consideration is charged by the distributor from the customer for the replacement of part(s)/ repairs, then applicable GST would be payable on such consideration.
  • Qua OEM (Replacement of part(s)):
    • Where the distributor replaces part(s) either by using its own stock or purchasing it from a third party and charges the OEM for the part(s) replaced:
      • GST would be payable by the distributor on such supplies made to OEM and the distributor would be eligible to claim ITC on the procurements made for the same.
      • OEM would be entitled to avail ITC in respect of such supplies, subject to other conditions of the CGST Act.
• Where the distributor receives the part(s) required to be replaced under warranty from the OEM:
  • GST would not be leviable on part(s) provided by OEM to the distributor for carrying out replacements under warranty.
• OEM would not be required to reverse ITC in respect of such part(s).
   
• Where the distributor replaces part(s) under warranty from the supply already received by him from the manufacturer and the manufacturer issues a credit note in respect of such replacements:
• In respect of credit notes issued by the OEM, subject to provisions of Section 34(2) of the CGST Act, the tax liability may be adjusted by OEM subject to the condition that the distributor has reversed ITC availed against the part(s) so replaced.
  • Qua OEM (Repair services):
    • Where the distributor supplies repair services to the customer under warranty and charges consideration from the OEM for such repairs:
      • GST would be payable on the provision of such service by the distributor to OEM.
      • OEM would be entitled to avail ITC in respect of such supplies, subject to other conditions of the CGST Act.

In addition to the above, the Circular has also clarified the GST implications in respect of ‘Extended warranty’ offered to the customers against consideration as under:

• Where the extended warranty is purchased at the time of original supply, the consideration for extended warranty becomes part of the value of composite supply with the principal supply being the supply of goods on which, applicable GST would be payable.
• Where the extended warranty is purchased at any time after the original supply, it would be treated as a separate contract, and applicable GST would be payable by the service provider (whether OEM or distributor or any third party), depending on the nature of contract i.e., whether the extended warranty is only for goods or services, or composite supply involving goods and services.

[Circular no:195/07/2023-GST dated 17 July 2023]

Clarification on the taxability of shares held by the holding company in its subsidiary

In respect of the activity of holding shares by a holding company in its subsidiary company, CBIC has clarified that –

• The definition of ‘goods’ and ‘services’ does not include ‘securities’ (which include shares). Thus, securities held by the holding company in its subsidiary are neither ‘goods’ nor ‘services’ and the purchase and sale of securities is not a supply of goods or services.
• It cannot be said that a service is being provided by the holding company to its subsidiary company, solely on the basis that there is a SAC entry ‘997171’ which covers ‘services provided by the holding companies i.e., holding securities of (or other equity interests in) companies and enterprises for the purpose of owning a controlling interest’ unless there is a supply of service by the holding company to the subsidiary.
• Thus, the activity of holding shares of a subsidiary company by the holding company per se cannot be treated as a supply of services and hence, would not be leviable to GST.

[Circular no:196/08/2023-GST dated 17 July 2023]

Clarification on refund-related issues

CBIC has provided the following clarifications on various refund-related issues:

• Refund of accumulated ITC under Section 54(3) of the CGST Act for the tax period starting from 1 January 2022 and onwards:
  • As per Circular no:135/05/2020-GST dated 31 March 2020, the refund of accumulated ITC is restricted to the amount of ITC on matched procurements (i.e., procurements which are appearing in Form GSTR-2A).
  • Pursuant to the insertion of Section 16(2)(aa) of the CGST Act and the consequent amendment to Rule 36(4) of the CGST Rules (effective 1 January 2022), the availment of ITC has been linked to Form GSTR-2B (earlier, it was linked to Form GSTR-2A).
  • Pursuant to the above amendments, the restriction on availing the refund of accumulated ITC for a tax period would be on the basis of Form GSTR-2B instead of Form GSTR-2A. This amendment would apply for refund claims for the tax period of January 2022 and onwards
  • However, in cases where the refund claim has already been disposed of by the Tax Authorities before the issuance of this Circular, the same shall not be reopened because of the aforesaid clarification.
• Amendment in the Undertaking appended to Form RFD-01
  • As a consequence of the omission of section 42 of the CGST Act, various consequential changes have been made in the undertaking to be given for refund in form RFD-01 and annexures for claiming a refund as per Circular No.:125/44/2019-GST dated 18 November 2019.
  • The requirement of uploading a copy of Form GSTR-2A for the relevant period stands removed/ deleted.
  • The requirement of uploading ‘Self-certified copies of invoices entered in Annexure-B whose details are not found in GSTR-2A of the relevant period’ stands removed/ deleted.
• Calculation of ‘Adjusted Total Turnover’ under Rule 89(4) of the CGST Rules
  • Explanation to Rule 89(4) of the CGST Rules has been introduced with effect from 5 July 2022, which provides the method of calculation of the value of goods exported out of India. It is clarified that the same value, which is considered as the value of goods exported from India has to be considered for computing adjusted total turnover, in the formula to compute a refund of ITC by exporter of goods. This clarification is in line with the clarification provided in Circular no:147/03/2021-GST dated 12 March 2021 on a similar calculation-related issue.
• Admissibility of refund after complying with the provisions of Rule 96A(1) of the CGST Rules belatedly:
  • It is clarified that where the goods could not be exported or payment for export of services could not be received, in specified time limits, the exporters can still claim a refund of unutilised ITC pertaining to exports, if otherwise eligible. Further, in such cases, the IGST paid on exports (as a consequence of the export of goods beyond the stipulated timeline or realisation of payment for export of services beyond stipulated time) under rule 96A of CGST Rules, will also be refunded. However, the interest paid for delay in payment of such tax on exports under rule 96A would not be refunded.
  • It is further clarified that ideally, the application for claiming the aforesaid refunds may be made under the category ‘Excess payment of tax’. However, till the time the refund application cannot be filed under the said category (due to the non-availability of the facility on the GST portal), the exporter may file a refund application under the category ‘Any Other’ on the GST portal.

[Circular no:197/09/2023-GST dated 17 July 2023]

Clarification on E-invoicing requirements on supplies made to specified persons

• Government Departments or establishments/ Government agencies/ local authorities/ Public Sector Undertakings (specified persons) are required to deduct tax at source (TDS) under Section 51 of the CGST Act. Such specified persons are liable to obtain compulsory registration under Section 24(vi) of the CGST Act, in some cases, solely for discharging TDS obligations.
• It has been clarified that
  • Such specified persons are to be treated as registered persons under Section 2(94) of the CGST Act.
  • Accordingly, a registered supplier whose turnover exceeds the prescribed threshold for generation of e-invoice is required to issue e-invoices for the supplies made to such specified persons under Rule 48(4) of the CGST Rules.

[Circular no:198/10/2023-GST dated 17 July 2023]

Clarification on taxability of services provided inter se between distinct persons

The various issues relating to the taxability of services supplied by the Head Office (HO) situated in a State to its Branch Offices (BOs) situated in other States are clarified as under:

• Scenario I: Common input services procured from third-party which are attributable to both HO and BOs or exclusively to one or more BOs:
  • In such cases, the HO shall have the following options:
    • Option I: Input Service Distributor (ISD) mechanism
      • Under this option, the HO can distribute such ITC to the HO and BOs to which such ITC relate, by following the ISD mechanism, after registering itself as an ISD.
      • ITC in respect of common input services procured from third-party can be distributed by the HO only to these BOs to whom such input services are attributable or have actually been provided to them.
      • It has also been clarified that under the present provisions of GST law, the ISD mechanism is not mandatory and the HO can issue invoices to the concerned BOs (referred below).
    • Option II: Issue tax invoice
      • HO can issue tax invoices to the concerned BOs in respect of common input services procured from a third party by HO but attributable to the said BOs. Such tax invoices can be issued only for services actually provided to the concerned BOs.
      • The BOs can avail ITC on the same subject to the provisions of sections 16 and 17 of the CGST Act.
         
• Scenario II: Internally generated services supplied by HO to BOs for which, full ITC is available to the concerned BOs
  • As per Section 15 of the CGST Act read with Rule 28(a) of the CGST Rules, the value of the supply of goods or services between distinct persons shall be the ‘Open Market Value of such supply’ (OMV). Further, as per the second proviso to Rule 28 of the CGST Rules, where the recipient is eligible to full ITC, the value declared in the invoice shall be deemed to be the OMV.
  • Considering this, in respect of services supplied by HO to BOs, the value declared in the invoice by HO (irrespective of inclusion or otherwise, of a particular component of cost like employee cost, etc. in the invoice value) shall be deemed to be the OMV.
  • If HO has not issued a tax invoice for any service rendered to BO, the value of such services may be deemed to be declared as Nil by HO to BO and may be deemed to be the OMV.
• Scenario III: Internally generated services supplied by HO to BOs for which, full ITC is not available to the concerned BOs
  • In respect of internally generated services provided by HO to BOs, the cost of salary of employees of the HO involved in providing such services is not mandatorily required to be included in computing the taxable value of supply of such services even in a case where full ITC is not available to the concerned BOs.

[Circular no:199/11/2023-GST dated 17 July 2023]

Notifications

Extension of due dates for filing GST returns for Taxpayers in Manipur State and for availing the benefit of amnesty schemes

The CBIC has issued notifications to extend the due dates for filing returns for Taxpayers in Manipur State and for availing benefit of various amnesty schemes, which is tabulated below:

Sl. No.	Reliefs	Returns	Period	Earlier due date	Revised due date
1.	Extension of due dates for filing GST Returns by Taxpayers having principal place of business in Manipur3	Form GSTR–1, Form GSTR-3B and Form GSTR-7	April 2023 to June 2023. Quarter ending 30 June 2023.	Due dates for April and May 2023 - 30 June 2023 Due dates for June 2023 – 10 July (Form GSTR-7), 11 July 2023 (Form GSTR-1) and 20 July 2023 (Form GSTR-3B) Due dates for or quarter ending 30 June 2023 – 13 July 2023 (Form GSTR-1) and 24 July 2023 (Form GSTR-3B)	31 July 2023 (Due date has been extended and such extension would also apply to June 2023 and the Quarter ending 30 June 2023 returns)
2.	Late fees for delayed filing of returns as under: Nil – If tax payable is Nil. INR 500 - In other case4	Form GSTR – 4	Quarters starting from July 2017 to March 2019 FY 2019-20, FY2020-21 and FY2021-22	30 June 2023	31 August 2023
3.	Extension of due date for filing application for revocation of cancellation of registration due to non-filing of returns in cases where it is not filed within 30 days from the date of cancellation of registration4	Form GST REG–21	Where the registration is cancelled on or before 31 December 2022	30 June 2023	31 August 2023
4.	Deemed withdrawal of assessment orders issued under Section 62(1) of the GST Act in cases where the returns are not furnished within 30 days from the date of issuance of assessment order4	Returns under Sections 39 and 45 of the CGST Act	Assessment order issued on or before 28 February 2023	30 June 2023	31 August 2023
5.	Late fees for delayed filing of Annual Return and Reconciliation Statement – capped at INR 20,0004	Form GSTR–9/ 9C	FY 2017-18 to 2021-22	30 June 2023	31 August 2023
6.	Late fees for delayed filing of Final return – capped at INR 5004	Form GSTR–10	Any period	30 June 2023	31 August 2023

[Notification no: 18,19,20,21,22,23,24,25 & 26/2023 – Central Tax dated 17 July 2023]

BDO India Comments

The aforesaid Circulars and Notifications have been issued pursuant to the recommendations of the GST Council in the 50^th GST Council meeting held on 11 July 2023. It should be noted that all the recommendations of the GST Council are not yet given effect/ clarified and some more Circulars/ Notifications may be issued in the coming days.

For one of the most debated issues for the industry, i.e., cross charge, the clarification that the inclusion of salary cost is not mandatory to determine the amount of cross charge is a welcome move, which is coming after a few advance rulings holding otherwise. However, some guiding principles on what constitutes internally generated services, needing cross charge would have made this clarification comprehensive as this issue remains unclear even now. The industry may need to revisit the positions taken on the basis of this clarification.

The clarification on the non-applicability of GST on holding securities of a subsidiary company by a holding company is timely since recently this issue has been raised by tax authorities in different jurisdictions and this clarification would reduce litigation. The further extension of the process to obtain a CA certificate to fulfil the conditions under section 16(2)(c) and various refund-related clarifications would also help the industry and so will a detailed clarification on warranty covering various transactions involved in warranty. However, by and large, the circulars have clarified the issues in depth and these clarifications would provide the industry with certainty on these contentious issues.