[Opinion] Analysis of Proposed Amendment in Section 17(3) of CGST Act, 2017

Authored by Muskaan Biyani | CA

It is well known that Goods and Service Tax played a vital role in making generous and endless contributions to the exchequer’s revenue basket. However, till date it seems that the number of disputes and discussions has not come to any proper conclusion. It has been half a decade since the implementation of one of the biggest greenfield tax reforms in India yet various practical difficulties are faced by trade and industry at large. Although several issues are already addressed and resolved by Government yet there are many issues that need expeditious resolution. This corresponding sharp rise in litigations and legal proceedings further adds fuel to fire and bothers the assessees. To put an end to all these issues, recently in the Finance Bill 2023, hon’ble Finance Minister announced substantial legislative changes in the Goods and Service Tax Law. Amendments have been made in provisions regarding availment of input tax credit, GST refunds, registration etc. Some of these proposed amendments are in favour of assessee while some are detrimental to the smooth functioning of business. The present article seeks to decode and discuss the changes proposed in Section 17(3) of CGST Act, 2017.

Section 17(3) of CGST Act, 2017 is amended vide clause 130 of Finance Bill, 2023 and paragraph 8(a) of Schedule III of CGST Act, 2017 is provided as an exception to the exclusions mentioned in the explanation to said section. This hereby denotes that paragraph 8(a) of Schedule III of CGST Act, 2017 has been included in the definition of “value of exempt supply”. The paragraph 7 and 8(a) of Schedule III of CGST Act, 2017 is as follows:

“Activities or transactions which shall be treated neither as a supply of goods nor a supply of services:

6. …

7. Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India.

8. (a) Supply of warehoused goods to any person before clearance for home consumption;”

Further, the relevant extract of the amended provision of Section 17(3) of CGST Act, 2017 is reproduced below:

(a) in sub-section (3), in the Explanation, for the words and figure “except those specified in paragraph 5 of the said Schedule”, the following shall be substituted, namely:––
“except,––

(i) the value of activities or transactions specified in paragraph 5 of the said Schedule; and

(ii) the value of such activities or transactions as may be prescribed in respect of clause (a) of paragraph 8 of the said Schedule“;

The proposed amendment is made to include the paragraph 8(a) in the value of exempt supply as per Section 17(3) of CGST Act, 2017. This indicates that now the input tax credit in respect of these supplies shall be liable to be reversed in accordance with provisions of Rule 42 of CGST Rules, 2017. Consequently, this will further increase the miseries and hardships of taxpayers exponentially.

Amidst all these sufferings, the unresolved and debatable question haunting the minds of taxpayers is whether the proposed amendment will have retrospective applicability or prospective applicability. It is worth mentioning over here that there had been various judicial precedents wherein it is delivered that amendments made by way of insertion of explanation is merely clarificatory in nature and hence should be constructed as having retrospective effect. Reliance in this respect can be placed on decision of Hon’ble Supreme Court in the case of Commissioner v. Prakash Saree Processing [2017 (345) E.L.T. A178 (S.C.)], Apex Court in CIT v. Vatika Township (P.) Ltd. [2014] 49 taxmann.com 249/227 Taxman 121 (SC) and Channan Singh v. Smt. Jai Kaur AIR 1970 SC 349, Bombay High Court in the case of Mahindra and Mahindra Ltd. v. C.C.E. [2011] 22 STR 151 etc. Having said that the coin has two sides, there are contrary settled judicial rulings on the other side of the coin wherein it is delivered that insertion of explanations can have prospective applicability as well. To illustrate, Bombay High Court in the case of Godrej Industries Ltd. v. Commissioner of C. Ex. [2014] 51 taxmann.com 320/489 GST 616] held that amendment made by way of insertion of new explanation clarifying the existing statue should be given effect prospectively and not retrospectively.

Proceeding further in the same pipeline, it is important to bring attention to the fact that paragraphs 7, 8(a) and 8(b) of Schedule III were inserted from 01.02.2019. Subsequently, this created a huge room for disputes as regards to the applicability of GST on these transactions as specified under Schedule III of CGST Act, 2017 from 01.07.2017 to 01.02.2019. Therefore, to put an end to all the unnecessary litigations, one more amendment was proposed in Clause 142 of Finance Bill, 2023 wherein paragraphs 7 and 8 of Schedule III of CGST Act, 2017 were made effective retrospectively with effect from 01.07.2017. This strongly showcases the intent of legislation of making explanation to Section 17(3) of CGST Act, 2017 effective retrospectively. Further, it is also stated that no refund shall be granted in case tax is already collected and paid on such transaction which is totally draconian and against the authority of law. The moot question is if supplies as specified under Schedule III of CGST Act, 2017 are treated as neither supply of goods not supply of service and hence, no Goods and Service Tax is to be charged and collected on the same, how Government can deny the refund of tax already paid on those transactions?.

Having a bird eye view on the above proposed amendment, there are various school of thoughts having opinions that the amendment made by way of insertion of explanation to Section 17(3) of CGST Act, 2017 is totally null and void. This is because of the fact if the definition of “value of exempt supply” as defined in the main provision i.e. Section 17(3) nowhere talks about paragraph 8(a) of Schedule III of CGST Act, 2017, then, how can explanation talk about it and widen the scope of main provisions? On the contrary, various viewpoints are expressed in favour of the motion and argued that the definition of “value of exempt supply” as per Section 17(3) of CGST Act, 2017 is an inclusive definition and hence, prescribes just an illustrative list of supplies and transactions to be treated as exempt supply for the purpose of reversal of input tax credit as per provisions of Rule 42 of CGST Rules, 2017. This hereby denotes that explanation is not expanding the scope of already expanded main provision. It is only making addition in the illustrative list prescribed by statue under section 17(3). Therefore, the arguments that the explanation carries a null and void character does not hold good and is not tenable.

In alignment with the above, it is important to throw light on the fact that the amendment is proposed to overturn the tables and nullify the effect of decisions of High Courts. Reliance in this respect can be placed on decisions delivered by Kerala High Court in case of CIAL Duty Free & Retail Services Ltd. v. Union of India [2020] 119 taxmann.com 388/[2021] 83 GST 585/2020 (42) GSTL 481 and Bombay High Court in case of Sandeep Patil v. UOI [2019] 110 taxmann.com 155/(31) GSTL 398wherein it is delivered that supply of warehoused goods before clearance would not restrict the supplier of Input tax credit to claim 100% of input tax credit on corresponding procurement even if no goods and service tax is paid on such supplies.

Further adding fuel to fire is the failure on the part of Government to announce the long overdue constitution of Goods and service Tax Appellate Tribunal, which represents the second stage of appeal in Goods and Service Tax Judiciary. It is well known that the Constitution of Goods and Service Tax Tribunal would provide an aid and remedy in eliminating challenges being faced by taxpayers. However, they are left with no other choice but to approach Higher Judicial forums and file appeals against the decisions of Appellate Authorities. The matter does not rest here only. The situation worsened further when even the Goods and Service Tax Council in its 48th Council Meeting held on 17.12.2022 failed to undertake this issue on account of shortage of time. The matter is getting lingered on time and again. It is important to note here that the pain and pressure being suffered by the taxpayers nowadays due to sequential amendments and litigations in Goods and Service Tax even after 6 years down the line is not hidden from everyone. The need of the hour is that the Government should come up with an idea of acknowledging and resolving these disputed issues as stated above otherwise it will pave a way to never-ending litigations in the future to come.

It is hoped that the government will examine the above ambiguities and make suitable amendments/issue clarifications before the proposed amendment in the provision of section 17(3) is enacted by the government by way of passing of Finance Act, 2023.