Goods and Services Tax
- The Government of India vide Circular No. - 178/10/2022 –
GST dated 3rd August, 2022 clarified the applicability of GST on
payments, which are typically penal in nature and arise out of a
breach of contract or otherwise. Since the time GST was introduced
in India, there was always a controversy around taxability of these
charges such as liquidated damages, notice pay recovery, penalty,
cancellation charges, forfeiture of earnest money, penalty for
violation of law, late payment surcharge etc. It has been clarified
in the circular that payments such as liquidated damages in a
contract, notice pay recovery or cheque bouncing charges, penalty
by the statutory authorities in violation of the law, forfeiture
earnest money deposit by buyer of immovable property etc. do not
constitute consideration for a supply and hence are not subject to
levy of GST.
On the other hand, the circular also explains about those situations which are envisaged under the entry 5(e) and thus would be subject to levy of GST. In terms of the circular, the taxable events would include situations such as non-compete agreements, penal charges for cancellation of bookings of a taxable service like travel or events where penalty is levied for last minute cancellation charges or amounts forfeited due to no show etc.
- Supply of service by way of ‘Renting of a Residential
unit' was exempt from levy of GST until now. However,
effective from 18.07.2022 vide a new entry at Serial No. 5AA
Notification No. 13/2017- Central Tax (Rate) dated 28.06.2017,
the Government on the recommendations of the GST council has
decided to bring the services of renting of residential dwellings,
when rented to a registered business person. This would effectively
make all company lease arrangements taxable under GST, whether
taken by the registered businesses for their employees on long term
or short term. The levy has been introduced under the reverse
charge mechanism. Hence, the registered recipient person will pay
the GST to the Government.
Eligibility of the input credit of such GST paid under reverse charge would need to be analysed in terms of the applicable input credit restrictions. Besides, implications under income tax laws would also need to be analysed to understand whether going forward the companies should continue providing company lease vis a vis providing HR allowance to its employees and the related tax implications.
- The Government of India has rescinded Notification No. 45/2017- Central Tax (Rate) dated 14.11.2017 which provided concessional GST rate of 2.5% on scientific and technical equipment supplied to public funded research institutions. The withdrawal is effective from 18.07.2022 vide Notification No. 11/2022-Central Tax (Rate) dated 13.07.2022.
- The Supreme Court, in the matter of C.C.E. & ST Vs Northern
Operating Systems Pvt. Ltd.[2022-VIL-31-SC-ST], while following the
concept of ‘Substance over Form' held that the
arrangement of secondment of employees by overseas group companies
to Indian affiliates, where the seconded employees remained on the
payrolls of the overseas companies and worked under supervision and
operational control of Indian affiliate, was nothing but was an
arrangement to ‘supply of manpower service' under the
provisions of Section 65(105) (k) under the Finance Act, 1994 (the
erstwhile service tax law) and would be subject to levy of service
The decision has a direct bearing on the tax positions adopted by companies on similar arrangements under the GST regime.
- The Government of India vide letter dated 01.08.2022 has
permitted the manufacturers or packers or importers of pre-packaged
commodities to declare the revised retail sale price (MRP) on the
unsold stock manufactured /packed/ imported prior to revision of
GST, after inclusion of the applicable/ increased amount of tax or
after reducing the reduced amount of tax due to GST, if any, in
addition to the existing retail sale price (MRP) up to 31st January
2023 or till such date the stock is exhausted, whichever is
It further clarified that the difference between MRP and revised MRP should be in excess of increase in Tax. Also, the original MRP must be displayed along with the revised price.
- Section 194R of the Income Tax Act, 1961 which came into effect
from 01.07.2022 mandates every person who provides any benefit or a
perquisite to a ‘resident' of India to pay TDS of 10%
of the total amount of the benefit or perquisite in case the value
or aggregate of value of the benefit or perquisite exceeds Rs.
20,000. The Section does not extend to individuals and Hindu
undivided families (‘HUF'), provided their total sales,
gross turnover or receipts from (a) business do not exceed Rs.
1,00,00,000; or (b) profession does not exceed Rs. 50,00,000, in
the financial year immediately preceding the one in which the
benefit or perquisite is given.
Pursuant to its powers under Section 194R (2) of the Income Tax Act, 1961, the Central Board of Direct Taxes issued detailed guidelines for the removal of difficulties in implementation of Section 194R, vide Circular No. 12 of 2022 dated 16.06.2022 (F. No. 370142/27/2022-TPL).
Broadly the guidelines provides that:
- The benefit or perk may either be in cash or in kind. This is on inference from the first proviso to sub-section (1) of Section 194 which evidences the intent of the legislature to tax all transactions which have the effect of being benefits or perks.
- Regardless of whether the benefit or perk is in the form of a capital asset, tax must be deducted.
- Except in cases where a seller provides free items during sale from its stock in trade to a buyer and a few similar cases, there is no relaxation in the application of the provision especially with free samples including medicine samples given to medical practitioners.
- Expenditures relating to conferences with the main objective to educate customers or dealers are not considered as benefits or perks. However, other expenses that are incurred for leisure, for family members of those attending, and overstay, would be subject to tax.
- Social Media influencers who retain products provided by the manufacturing company, after using it for the purpose of rendering services, will be taxed under Section 194R.
- The valuation of the benefit or perk will be on fair market value basis, with GST being excluded during such valuation.
- If a service provider's miscellaneous expenses like travel, stay etc., are invoiced and met in the name of the person receiving the service, it will not be taxed under this provision, otherwise, the levy will apply.
The guidelines have dealt with situations like sales discounts, free samples of medicines, gifts, cash, sponsoring a delegate for a seminar, travel and stay arrangements etc., to clarify what would be constitute a benefit or perquisite.
- The Delhi High Court in the case of Director of Income Tax Vs.
Microsoft Regional Sales Corporation [ ITA 664/2011] dismissed the
revenue appeal on the point that the sale of software licenses by
the foreign supplier to the Indian customers/distributors is not a
royalty and accordingly no withholding of tax is required on
payments made by end users/distributors.
The Court while dismissing the revenue appeal relied on the Supreme Court (SC) decision in Engineering Analysis Centre of Excellence Private Limited Vs. Commissioner of Income Tax and Anr. [2021 SCConline SC 159] wherein the SC observed that the amount paid by the Indian resident to non-resident computer software manufacturers as consideration for the resale/use of the computer software through EULAs / distribution agreements does not give rise to any income taxable in India as it is not royalty for the use of copyright in the computer software. Accordingly, TDS is not required to be deducted under section 195 of the Income Tax Act
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