[Analysis] Changes Proposed in GST by the Finance Bill 2024

 Table of Contents

1. Changes in the provisions relating to Input Service Distributor
2. Penalties on Tobacco Manufacturers for Non-Registration of Machines under Special Procedure

Finance Minister Nirmala Sitharaman presented the Interim Budget for 2024-25 in the Parliament on February 01, 2024. The emphasis of the 2024 Interim Budget was on empowering youth and women, developing infrastructure, supporting agriculture, promoting green growth, and enhancing the railway sector.

No significant tax announcements were proposed, with only a few necessary proposals introduced concerning GST. The changes proposed in the Finance Bill 2024 have been discussed below:

1. Changes in the provisions relating to Input Service Distributor

1.1. Background

The GST law¹ contains the provision for the distribution of Input Tax Credit (‘ITC’) in respect of common input services using the Input Service Distributor (‘ISD’) mechanism. This is done for the ease of distribution of ITC where services are procured by the head office or at a single office but are consumed at various offices registered under the same PAN.

• The existing definition²  of ISD provides that it is an office of supplier of goods or services or both that receives a tax invoices issued under Section 31 towards the receipt of input services and issues a prescribed document for the purpose of distributing the ITC to the persons having same PAN as that of the ISD. Thus, to fall within the scope of ISD the two criteria provided below should be satisfied:
  1. It should be an office of the supplier that receives the tax invoices (i.e. invoice issued by the service provider at the ISD GSTN), and
  2. It should issue prescribed documents for distribution of credit (i.e. ISD invoice)

• However, the existing provision of ISD mechanism does not cover the methodology for transfer of credit on those common input services on which tax has been deposited under the reverse charge  Also, from the perusal of the provisions³providing the manner of distribution of common credit using ISD mechanism, it emerges that it is not mandatory to distribute the common credit using the ISD mechanism. Reference may be drawn to the following extracts of the provision:

‘Input service distributor may distribute credit subject to the prescribed conditions’.

Given the above, the industry was following the mixed practice for distribution of common credit either through ISD mechanism or via cross charge mechanism through a tax invoice raised on the respective locations to whom such credit is being distributed. Given the above anomaly, the Council, in its 50th meeting, in respect of the same, recommended to clarify that ISD mechanism is not mandatory for the past periods and also recommended that it should be made mandatory for prospective period. Following this recommendation, a circular⁴ was issued to clarify that ISD is not mandatory for transferring/distributing the ITC for the past period.

1.2. Amendments proposed by the Finance Bill 2024

The Finance Bill 2024 has proposed to amend the definition of ISD and manner of distribution of common credit using ISD mechanism. As per the proposed definition, the condition of issuing the prescribed documents has been removed. Hence, where an office receives input services on behalf of deemed distinct persons, it would be considered as ‘ISD’, and thus it would become liable to comply with the relevant provisions for distribution of common credit.

The impact of the proposed amendment is as under:

• The person who receives common ITC for the deemed distinct persons would be required to obtain mandatory registration as ISD
• For the distribution of ITC of the services liable to RCM, tax is required to be paid by the normal registration in the State of ISD

The said proposed amendment, when made effective, would mandate the distribution of common ITC on services through ISD mechanism only. This would also require parallel amendment in rules to provide for the mechanism of distribution of ITC.

2. Penalties on Tobacco Manufacturers for Non-Registration of Machines under Special Procedure

2.1. Background

To plug the revenue leakage in the tobacco industry, the Government has recently notified⁵ a special procedure for the registered persons engaged in manufacturing of specified goods such as Pan Masala, tobacco and similar goods (list of goods is annexed at the end of this para). The given special procedure is prescribed under Section 148 of the CGST Act with the recommendation of the GST Council⁶.

Manufacturers of tobacco, pan masala, and similar goods are required to adhere to this special procedure, which primarily includes the registration of machines and the submission of special monthly returns. For registration of machines, the details pertaining to existing packing machines, newly installed machines, and removed machines must be furnished in Form GST SRM-I along with the packing capacity of these machines. These details must be certified by a Chartered Engineer in Form GST SRM-III.

The said procedure is set to be implemented with effect from 01-04-2024⁷.

2.2. Amendments proposed by the Finance Bill 2024

The Finance Bill, 2024 has proposed the introduction of new Section 122A within the Penalties Chapter, specifying penalty for any person engaged in the manufacture of specified goods who fail to register the machines in accordance with the special procedure. The proposed provisions prescribe a penalty of Rs. 1 lakh for every machine not registered as per the special procedure. Notably, the said penalty is in addition to any penalty paid or payable under Demand and Recovery provisions or any other sections of the Penalties Chapters. Thus, multiple penalties may be imposed by the proper officer under the GST law for the non-compliance in respect of the special procedure.

In addition to the penalty, machines not registered shall also be liable for seizure and confiscation. However, confiscation can be avoided where the penalty is paid by the manufacturers or if the machine is registered within three days of receiving the penalty order.

The above proposed amendment is in line with the recommendations of the 50^th GST Council meeting recommendations, wherein the council recommended to prescribe a heavy penalty for running any unregistered machine.

Annexure

The Notification provides⁸ that the manufacturers of the following goods would be required to follow the special procedure:

1. Section 2(61) of the CGST Act read with Section 20 of the CGST Act
2. Section 2(61) of the CGST Act
3. Section 20(2) of the CGST Act
4. Circular No. 199/11/2023-GST, Dated 17-07-2023
5. Notification No. 04/2024–Central Tax, Dated 05-01-2024 read with Notification No. 30/2023– Central Tax, Dated 31-07-2023
6. 50th GST Council meeting
7. Notification No. 04/2024–Central Tax, Dated 05-01-2024
8. Notification No. 04/2024–Central Tax, Dated 05-01-2024