UNEQUAL TREATMENT AND UNFAIR TAXATION
There are cases were an entity is located outside India and through ecommerce mode, they sell certain services in the form of services, where as per the GST law, either they have to have a wholly owned subsidiary in India or a foreign office, which has to obtain a GST Registration no and only after levying applicable rates of GST, the services can be sold through such platform; another mode of recovery is through Reverse Charge Mechanism as contemplated under the provisions of Section 9; however, when the end users / service receipts are unregistered persons, there are certain sellers who escape Tax Incidence of GST, because of ineffective GST implementation by enforcement agencies.
GOAL OF THE PRESET RESEARCH
Goal of present article, is to examine in depth detailed provisions of GST Law applicable in the context of subject matter of present issue, and also various aspects of other applicable laws in India and how can the other market players respond to such practices adopted by certain players in the market for GST evasion through online mode by way of routing their services through foreign entity.
What is GST ?
In India, the Goods and Services Tax (GST) has taken the place of other indirect taxes. After being passed in 2017, the Goods and Services Tax Act has been put into effect. GST is an indirect tax that applies to the entire country, transforming India into a single common market. A single tax is applied to the delivery of both goods and services. It is India’s largest indirect tax reform.
Prior to the introduction of the GST, state VATs, entry taxes, service taxes, and luxury taxes were levied on purchases. The GST has included these taxes. Service tax and entertainment tax were similarly assessed on services. There is currently only one tax, known as GST. Under GST, tax is levied directly at every point of sale.
Applicability & Eligibility Of GST
Learn more about the GST in India’s applicability and eligibility now that you are aware of what it is. A person must pay tax on the supply of goods and services under the GST bill. The obligation to pay these taxes arises after a taxable person exceeds the GST exemption level of Rs. 20 lakh (or 10 lakh). On every supply of goods and services within the state, the person is responsible for paying the CGST and SGST. On every interstate transaction, IGST is due.
People who registered for VAT, service tax, or excise under the pre-GST statute are eligible for GST. Agents of product suppliers and input distributors are eligible to register for GST. In addition, GST registration is essential for those who engage in e-commerce and supply items online.
How is GST Applied ?
The GST is destination-based tax, and it will be levied on the value of goods or services that are consumed within India’s territory. The tax will be collected by the person who is responsible for the final consumption of the good or service. For example, if an item is produced in India and sold to a consumer in another state, the GST will be levied by the state in which the final consumption takes place.
The GST is a multi-stage tax, and it will be levied at every stage of production and distribution of goods and services. The rate of GST at each stage will be based on the value addition that has taken place at that stage.
The GST aims to simplify the taxation system by ensuring a single tax rate across India’s territory, thus making sure that goods and services are not taxed multiple times at different rates even if they cross through multiple states before reaching their destination.
Taxable Person under GST
A ‘taxable person’ under GST, is a person who carries on any business at any place in India and who is registered or required to be registered under the GST Act. Any person who engages in economic activity including trade and commerce is treated as a taxable person.
‘Person’ here includes individuals, HUF, company, firm, LLP, an AOP/ BOI, any corporation or Government company, body corporate incorporated under laws of foreign country, co-operative society, local authority, government, trust, artificial juridical person.
Who is liable to get GST Registration under GST ?
Chapter 6 of the GST Act specifies the requirements for anyone who need to register for GST. The following individuals must mandatedly seek GST registration in accordance with the GST Act:
Aggregate Turnover Criteria
Any supplier of goods and/or services who makes a taxable supply with an aggregate turnover of over Rs.20 lakhs in a financial year should mandatorily obtain GST registration. In special category states, the aggregate turnover criteria are set at Rs.10 lakhs.
Special Category States under GST
Currently, special category states include Assam, Nagaland, Jammu & Kashmir, Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Uttarakhand, Tripura, Himachal Pradesh, and Sikkim. The list of special category states in India is decided by the National Development Council, which is made up of the Prime Minister, Union Ministers, Chief Ministers, and members of the Planning Commission. The decision to grant special status to a State is also based on factors like the state’s hilly and challenging terrain, low population density and/or significant tribal population, strategic location along borders with neighboring countries, infrastructure and economic backwardness, and unviable state finances.
Mandatory GST Registration Criteria
Some taxable persons who do not qualify for GST registration under the aggregate turnover criteria should mandatorily obtain GST registration if they satisfy any of the following criteria:
Person making any inter-state taxable supply
Inter-state supply is supplying goods or services from one state to another. Hence, any taxable person who is involved in supplying goods or services to persons outside of the State should mandatorily obtain GST registration.
Casual taxable persons making taxable supply
A casual taxable person refers to a person who occasionally undertakes supply of goods and/or services and has no fixed place of business. An example of a casual taxable person would be a fireworks shops setup during Diwali festival time, selling fireworks temporarily.
Non-resident taxable persons making taxable supply
A non-resident taxable person refers to any person who occasionally supplies goods or services to recipients in India with no fixed place of business or residence in India. Regardless of the threshold for aggregate turnover, All non-resident taxable persons engaged in the supply of goods and services should mandatorily obtain GST registration.
Person Required to deduct tax under GST
According to Section 51 of the GST Act, the Government may mandate a department or establishment of the Central Government or State Government or local authority or Governmental agencies or a category of persons to deduct tax at the rate of 1% from the payment made or credited to the supplier, where the total value under a contract, exceeds Rs.2.5 lakhs. Such persons should mandatorily obtain GST registration and thus referred to as “deductor”.
Persons who make taxable supply of goods or services on behalf of other persons
Agents, brokers, dealers, and others who make taxable supplies of goods or services on behalf of other persons are among those who are required to register for GST.
Input Service Distributor
Input Service Distributor means a supplier of goods or services which receives tax invoices for the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, State tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services.
Electronic Commerce Operator
Electronic commerce refers to the supply of goods or service, including digital products over a digital or electronic network. An electronic commerce operator refers to any person who owns, operates or manages digital or electronic facility or platform for electronic commerce. All electronic commerce operators should mandatorily obtain GST registration, irrespective of turnover.
Persons supplying online information and database access or retrieval services (OIDAR)
Any person supplying online information and database access or retrieval services from a place outside India to a person in India should mandatorily obtain GST registration. Online information and database access or retrieval refers to giving any person access to data and information in electric form across a computer network, whether it be retrievable or not.
Persons who supply goods or services through electronic commerce operators
Persons who supply goods or services through electronic commerce operators may require to collect tax for acting on behalf of the supplier for providing supplies. During these circumstances, the concerned person acting on behalf should mandatorily obtain GST registration.
Under GST, the Government can specify liable categories for taxation. If any services provided by the electronic commerce operator falls under the categories, the operator shall pay the amount as mentioned by the government.
Persons Having Service Tax or VAT or Central Excise Registration
Everyone who had a service tax, VAT, or central excise licence under the previous law on the day before the designated day must register under GST. Therefore, GST migration is applicable to all taxpayers who have an active registration.
Transferee or Successor of a Business
Any person represents as a transferee or a successor of a business, carried on by a person registered under GST shall register under GST with effect from the date of such transfer or succession.
Supply by the Foreign Company in India
Do foreign companies require Indian GST Registration ?
Yes, any foreign company that supplies goods and/or services to recipients in India, but operates without a fixed place of business or residence in India should mandatorily obtain GST registration.
In the CGST Act, a “non-resident taxable person” has been defined any person who occasionally undertakes transactions involving the supply of goods or services or both, whether as principal or agent or in any other capacity, but who has no fixed place of business or residence in India. And Section 24 of the CGST Act, has mandated that non-resident taxable persons making taxable supply mandatorily obtain GST registration.
Also, the Ministry of Finance notified wide circular no. 161/17/2021-GST titled: Clarification relating to export of services-condition (v) of section 2(6) of the IGST Act 2017–reg, clearly stated that
- Explanation 1 of the Section 8 of the IGST Act provides for the conditions wherein establishments of a person would be treated as establishments of distinct persons, which is reproduced as under:
Explanation 1.––For the purposes of this Act, where a person has,––
- an establishment in India and any other establishment outside India;
- an establishment in a State or Union territory and any other establishment outside that State or Union territory; or
- an establishment in a State or Union territory and any other establishment being a business vertical registered within that State or Union territory, then such establishments shall be treated as establishments of distinct persons.
As per the above Explanation, an establishment of a person in India and another establishment of the said person outside India are considered as establishments of Distinct Persons.
- Reference is also invited to Explanation 2 of Section 8 of IGST Act, which is reproduced below:
Explanation 2.–A person carrying on a business through a branch or an agency or a representational office in any territory shall be treated as having an establishment in that territory.
- Reference is also invited to the definition of “person” as provided under CGST Act 2017, made applicable to IGST Act vide section 2(24) of IGST Act 2017. “Person” has been defined under sub-section (84) of the section 2 of the CGST Act 2017, as under:
(84) “person” includes—
(a) an individual;
(b) a Hindu Undivided Family;
(c) a company;
(d) a firm;
(e) a Limited Liability Partnership;
(f) an association of persons or a body of individuals, whether incorporated or not, in India or outside India;
(g) any corporation established by or under any Central Act, State Act or Provincial Act or a Government company as defined in clause (45) of section 2 of the Companies Act, 2013;
(h) any body corporate incorporated by or under the laws of a country outside India;
(i) a co-operative society registered under any law relating to co-operative societies;
(j) a local authority;
(k) Central Government or a State Government;
(l) society as defined under the Societies Registration Act, 1860;
(m) trust; and
(n) every artificial juridical person, not falling within any of the above;
- The definitions of company and foreign company have been provided under section 2 of Companies Act 2013, as under:
(20) “company” means a company incorporated under this Act or under any previous company law;
(42) “foreign company” means any company or body corporate incorporated outside India which—
- has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
- conducts any business activity in India in any other manner.
Analysis of the Issue :
- A person to another establishment of the same person, considered as establishments of Distinct person as per Explanation 1 of Section 8 of IGST Act.
Also if any any supply of services by an establishment of a foreign company in India to any other establishment of the said foreign company outside India will not be covered under definition of export of services.
- In view of the above, it can be stated that supply of services made by a branch or an agency or representational office of a foreign company, not incorporated in India, to any establishment of the said foreign company outside India, shall be treated as supply between establishments of distinct persons and shall not be considered as export of services” in view of condition (v) of sub-section (6) of section 2 of IGST Act.
- As per section 2(84) of the CGST Act, 2017 and Section 2 of the companies act, 2013, it is observed that a company incorporated in India and a foreign company incorporated outside India, are separate “person” under the provisions of CGST Act and accordingly, are separate legal entities. Thus, a subsidiary/ sister concern/ group concern of any foreign company which is incorporated in India, then the said company incorporated in India will be considered as a separate “person” under the provisions of CGST Act and accordingly, would be considered as a separate legal entity than the foreign company.
- As a result, the threshold limit for the registration under GST will be applicable to this separate person or Distinct person.
Penalty provision regarding GST Registration
Penalty for not registering under GST Act or in case of compulsory registration penalty can be imposed for not applying for registration: As per section 122 of the CGST Act, a person/supplier exceeds the threshold limit for GST registration and becomes taxable or is legally bound to get registered, and if a person has failed to obtain the registration the penalty is equivalent to: penalty for nonregistration under GST shall be INR 10,000/- (ten thousand rupees) or ten percent (10%) of the tax due from such person/supplier, whichever is higher.
Penalty for late application registration under GST
Though there is no special provision for penalty for late gst registration by a taxable person/supplier, if the GST authorities catch any taxable person/supplier applying late for GST registration, the penalty will be levied on such person/supplier: The higher of INR 10,000/- or the total amount of tax evaded by the taxable person/supplier.
What happens if a business is not registered for GST on time?
If GST not registered on time:
- Detention of goods and vehicles.
- Confiscation of goods and vehicles.
- The person/supplier cannot claim the input tax credit.
- The person/supplier cannot transfer the input tax credit.
- The penalty of INR 10,000/- or total tax invaded whichever is higher.
Market Impact if any person is not having GST Registration?
If a person does not fall outside the threshold limit of the GST Registration provision or tries to evade tax by not registering himself, then it will affect the market stability of the same industry as the price of the product might fall down just due to non-payment of GST.
Ex. : A is a registered person under GST and B is an unregistered person therefore, A will charge higher prices which will include GST whereas, B will be able to sell goods at lower prices as he is not liable to pay GST.
Hence, it will harm the fair trade policy of the market and create a monopoly by few players.
Violation of Other Laws
- Section 4 of the Competition Act, 2002
Abuse of dominant position.—
(1) No enterprise shall abuse its dominant position.
(2) There shall be an abuse of dominant position under sub-section (1), if an enterprise,—
(a) directly or indirectly, imposes unfair or discriminatory—
(i) condition in purchase or sale of goods or services; or
(ii) price in purchase or sale (including predatory price) of goods or service; or Explanation.—For the purposes of this clause, the unfair or discriminatory condition in purchase or sale of goods or services referred to in sub-clause (i) and unfair or discriminatory price in purchase or sale of goods (including predatory price) or service referred to in sub-clause (ii) shall not include such discriminatory conditions or prices which may be adopted to meet the competition; or
(b) limits or restricts—
(i) production of goods or provision of services or market therefor; or
(ii) technical or scientific development relating to goods or services to the prejudice of consumers; or
(c) indulges in practice or practices resulting in denial of market access; or
(d) makes conclusion of contracts subject to acceptance by other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts; or
(e) uses its dominant position in one relevant market to enter into, or protect, other relevant market. Explanation .—For the purposes of this section, the expression—
(a) “dominant position” means a position of strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to—
(i) operate independently of competitive forces prevailing in the relevant market; or
(ii) affect its competitors or consumers or the relevant market in its favor;
(b) “predatory price” means the sale of goods or provision of services, at a price which is below the cost, as may be determined by regulations, of production of the goods or provision of services, with a view to reduce competition or eliminate the competitors.
- Section 420 of the IPC
Cheating and dishonestly inducing delivery of property.—Whoever cheats and thereby dishonestly induces the person deceived to deliver any property to any person, or to make, alter or destroy the whole or any part of a valuable security, or anything which is signed or sealed, and which is capable of being converted into a valuable security, shall be punished with imprisonment of either description for a term which may extend to seven years, and shall also be liable to fine.
- Section 36A of MRTP Act, 1969 (Repealed by Competition Act, 2002)
36A. Definition of unfair trade practice.—In this Part, unless the context otherwise requires, “unfair trade practice” means a trade practice which, for the purpose of promoting the sale, use or supply of any good or for the provision of any services, 1[adopts any unfair method or unfair or deceptive practice including any of the following practices], namely:—
(1) the practice of making any statement, whether orally or in writing or by visible representation which,—
(i) falsely represents that the goods are of a particular standard, quality, 2[quantity,] grade, composition, style or mode;
(ii) falsely represents that the services are of a particular standard, quality or grade;
(iii) falsely represents any re-built, second-hand, renovated, re-conditioned or old goods as new goods;
(iv) represents that the goods or services have sponsorship, approval, performance, characteristics, accessories, uses or benefits which such goods or services do not have;
(v) represents that the seller or the supplier has a sponsorship or approval or affiliation which such seller or supplier does not have;
(vi) makes a false or misleading representation concerning the need for, or the usefulness of, any goods or services;
(vii) gives to the public any warranty or guarantee of the performance, efficacy or length of life of a product or of any goods that is not based on an adequate or proper test thereof: Provided that where a defence is raised to the effect that such warranty or guarantee is based on adequate or proper test, the burden of proof of such defence shall lie on the person raising such defence;
(viii) makes to the public a representation in a form that purports to be—
(i) a warranty or guarantee of a product or of any goods or services; or
(ii) a promise to replace, maintain or repair an article or any part thereof or to repeat or continue a service until it has achieved a specified result, if such purported warranty or guarantee or promise is materially misleading or if there is no reasonable prospect that such warranty, guarantee or promise will be carried out;
(ix) materially misleads the public concerning the price at which a product or like products or goods or services, have been, or are, ordinarily sold or provided, and, for this purpose, a representation as to price shall be deemed to refer to the price at which the product or goods or services has or have been sold by sellers or provided by suppliers generally in the relevant market unless it is clearly specified to be the price at which the product has been sold or services have been provided by the person by whom or on whose behalf the representation is made;
(x) gives false or misleading facts disparaging the goods, services or trade of another person. Explanation.—For the purposes of clause (1), a statement that is—
(a) expressed on an article offered or displayed for sale, or on its wrapper or container, or
(b) expressed on anything attached to, inserted in, or accompanying, an article offered or displayed for sale, or on anything on which the article is mounted for display or sale, or
(c) contained in or on anything that is sold, sent, delivered, transmitted or in any other manner whatsoever made available to a member of the public, shall be deemed to be a statement made to the public by, and only by the person who had caused the statement to be so expressed, made or contained;
(2) permits the publication of any advertisement whether in any newspaper or otherwise, for the sale or supply at a bargain price, of goods or services that are not intended to be offered for sale or supply at the bargain price, or for a period that is, and in quantities that are, reasonable, having regard to the nature of the market in which the business is carried on, the nature and size of business and the nature of the advertisement. Explanation.—For the purpose of clause (2), “bargain price” means—
(a) a price that is stated in any advertisement to be a bargain price, by reference to an ordinary price or otherwise, or
(b) a price that a person who reads, hears, or sees the advertisement, would reasonably understand to be a bargain price having regard to the prices at which the product advertised or like products are ordinarily sold;
(a) the offering of gifts, prizes or other items with the intention of not providing them as offered or creating the impression that something is being given or offered free of charge when it is fully or partly covered by the amount charged in the transaction as a whole,
(b) the conduct of any contest, lottery, game of chance or skill, for the purpose of promoting, directly or indirectly, the sale, use or supply of any product or any business interest;
(4) permits the sale or supply of goods intended to be used, or are of a kind likely to be used, by consumers, knowing or having reason to believe that the goods do not comply with the standards prescribed by competent authority relating to performance, composition, contents, design, constructions, finishing or packaging as are necessary to prevent or reduce the rise of injury to the person using the goods;
(5) permits the hoarding or destruction of goods, or refuses to sell the goods or to make them available for sale, or to provide any service, if such hoarding or destruction or refusal raises or tends to raise or is intended to raise, the cost of those or other similar goods or services.
- As per the Competition Act, 2002 all the case/ proceedings pertaining to Section 36A of the MRTP Act, 1969 shall be transferred to the different Authorities as mentioned in Section 66 of the Competition Act, 2002 titled Repeal and Savings.
Note: Although the MRTP Act is repealed by Competition Act, all the provisions of this Act are still applicable and hold validity in India under Competition Act.
GST plays a very vital role in the spectrum of taxation policy of India as it not only motivates systematic taxation but also regulates the fair trade practices in the market. Not paying GST will not only violate the laws pertaining to GST or taxation, but will also violate other laws framed under IPC, Competition Act, 2002 and the principles of Fair Trade Practices under MRTP Act,1969 which was repealed by Competition Act, 2002.
Advocate Dhruvil kanabar