AUGUST 18, 2018

By Prof. PR Chandrasekharan

ONE of the most widely used (or misused?) provisions in the GST law is that relating to Advance Ruling. This supposedly trade- friendly measure is proving to be a nightmare for the taxpayers as well as the tax administration. All over the world, advance ruling powers are given to independent bodies consisting of experienced and erudite judicial and technical members so that there is no bias and the taxpayers get a fair and correct ruling in accordance with the law. The Customs and Central Excise laws as well as the Income Tax law in India also provide for an independent body for advance ruling headed by a retired Supreme Court Judge. However, the Indian GST law makes a departure from this norm and the power of advance ruling is conferred on departmental officers (that too, at relatively junior levels) notorious for their highly revenue biased and jaundiced views. These officers generally lack proper understanding of the GST law, which is complicated and lacking in clarity (owing to poor drafting). No wonder then that, there is confusion and chaos in the interpretation of law leading to avoidable litigations.

When a new tax regime is introduced, it is natural that there will be many doubts in the minds of both the taxpayer and the tax collector. That is why, at the initial stages of implementation of the new tax regime, the task of interpretation of law should be assigned to senior officers within the department as well as legal experts on the subject matter so that a climate of confidence as well as competence is created. However, the policy makers involved in GST legislation have failed miserably in this regard by ignoring the best international practices in advance ruling mechanism.

Let us consider one example - a ruling given by the AAR in Karnataka relating to interpretation of employer-employee relationship. All over the world, the services rendered by an employee to the employer is not considered as a 'supply of service' at all and the same is the position under the Indian GST law as well. This treatment is unconditional and is not connected with or related to how the employer utilises such services rendered, whether for profit or otherwise. A question arose before the Karnataka AAR recently in Columbia Asia Hospitals Pvt. Ltd. case - 2018-TIOL-113-AAR-GST as to whether the services of accounting/administrative/IT related services rendered by the employees in the Corporate Office of the appellant firm is leviable to GST (on proportionate basis) when such services are utilised partially in the branch offices of the appellant firm located in other States. The AAR ruled that since the branch offices are distinct persons from the Corporate office and the transaction between the Corporate office and its branches are deemed as "supplies" as per Schedule I (entry 2) the services rendered by the Corporate office employees are liable to GST to the extent these have been used in the branch offices. There cannot be anything more perverse than this interpretation of law adopted by the AAR.

Let us see how far this interpretation can stand legal scrutiny? Schedule I (of the CGST Act 2017) refers to "Activities to be treated as supply even if made without consideration". Services rendered by employees are for a consideration by way of emoluments/wages; hence falls outside Schedule I. Such activities are covered by Schedule III which concerns "Activities or transactions which shall be treated neither as a supply of goods nor a supply of services", specifically under entry 1 - "Services by an employee to the employer in the course of or in relation to his employment".

Both the Schedules refer to section 7 of the said Act. As per Sec.7,-

(1) For the purposes of this Act, the expression "supply" includes -

(a) all forms of supply of goods or services or both .....................

(b) import of services .................

(c) the activities specified in Schedule I ........

(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.

(2) Notwithstanding anything contained in sub-section (1),-

(a) activities or transactions specified in Schedule III; or

(b) ...............

shall be treated neither as supply of goods nor as a supply of services.

A harmonious reading of the legal provisions coupled with the non-obstante clause used in sub-section (2) of sec. 7 make it abundantly clear that, whatever be the circumstances, services rendered by an employee to the employer in the course of his employment cannot be considered as a supply at all. If that be so, how can it be made liable to GST? The reasoning adopted by the AAR in this case is perverse, to say the least.

This kind of mistake happens due to ignorance of the principles of statutory interpretation by officers who have neither the experience nor the expertise in dealing with such matters and who tend to "play safe" due to revenue considerations. There are several such decisions by various AARs which portends bad for the tax administration resulting in unnecessary and avoidable litigations. Ease of doing business in India should not remain merely a slogan and has to be put into practice by the tax administration. Sooner we get rid of such ill-thought out provisions in GST law and entrust the task of advance ruling to an authority (consisting of judicial and technical members) which is independent of the revenue department, the better it will be for the taxpayers and the tax administration!