RNM: Indirect Tax Alert July 2024
GST Calendar –Compliances for the month of July’2024
| Nature of Compliances | Due Date |
| GSTR-7 (Tax Deducted at Source ‘TDS’) | August 10,2024 |
| GSTR-8 (Tax Collected at Source ‘TCS’) | August 10,2024 |
| GSTR-1 | August 11,2024 |
| IFF- Invoice furnishing facility (Availing QRMP) | August 13,2024 |
| GSTR-6 Input Service Distributor | August 13,2024 |
| GSTR-2B (Auto Generated Statement) | August 14,2024 |
| GSTR-3B | August 20,2024 |
| GSTR-5 (Non-Resident Taxable Person) | August 20,2024 |
| GSTR-5A (OIDAR Service Provider) | August 20,2024 |
| PMT-06 (who have opted for QRMP scheme) | August 25,2024 |
SC Upholds Legislative Power of States to Impose Taxes on Mineral Rights
This Tax Alert highlights a recent Supreme Court (SC) decision regarding the allocation of legislative authority between the Union and States concerning the taxation of mineral rights.
A nine-judge bench of the SC, with a majority of 8:1, determined that:
- Parliament cannot impose taxes on mineral rights under Entry 54 of List I of the Constitution of India.
- State legislatures have the authority to levy taxes on mineral-bearing land under Entry 49 of List II and may use the mineral produce or royalty as a basis for taxation.
- Royalty is a payment made by the lessee to the lessor of a mining lease for the use of mineral rights and to compensate for the loss in the value of minerals experienced by the owner.
- Parliament cannot use its residuary powers to tax mineral rights when the matter is explicitly listed under Entry 50 of the State List.
- The Central Government’s prescription of royalty rates under Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) does not constitute a “compulsory exaction by a public authority for public purposes.”
- While the MMDR Act regulates the exercise of proprietary rights in minerals in the broader public interest, the lease agreement is ultimately between the State Government (or a private entity) and the lessee.
- A payment made under a contract to the State Government for acquiring exclusive privileges and rights related to a specific activity cannot be considered an “impost” or “tax” under Article 366(28) of the Constitution of India.
Clarification on Taxability of Corporate Guarantee
In October 2023, the Council proposed several clarifications and amendments regarding the taxability of inter-company corporate guarantees. Many issues remained unresolved, which have now been addressed in this circular. This alert analyzes the circular and provides our views on its legal implications.
Issue No. 1: Does sub-rule (2) of Rule 28 of the CGST Rules apply to corporate guarantees issued before October 26, 2023? Is GST applicable to intra-group corporate guarantees issued before this date at “1% of the guarantee amount”?
Clarification: The service of providing a corporate guarantee (CG) was taxable before the introduction of Rule 28(2) on October 26, 2023. Rule 28(2) specifies the valuation method, not its taxability. For CGs issued before October 26, 2023, valuation should follow the old rules. For guarantees issued or renewed on or after October 26, 2023, valuation should adhere to Rule 28(2).
Issue No. 2: How is the value of the CG service determined if only part of the loan is disbursed, or none at all? Can the recipient claim full Input Tax Credit (ITC) before the entire loan is disbursed?
Clarification: The provision of a CG service is independent of loan disbursement. The value of the CG service is based on the guaranteed amount, not the disbursed amount. The recipient can claim ITC, provided all other conditions specified in the Act and Rules are met.
Issue No. 3: Does GST apply if an existing loan is taken over, and there is only an assignment of an already issued CG?
Clarification: When a corporate entity provides a CG, it is the service supplier, and the related entity is the recipient. If another entity takes over a loan, GST does not apply unless a new CG is issued or an existing one is renewed.
Issue No. 4: When multiple entities or co-guarantors provide a CG, how is GST calculated for each co-guarantor?
Clarification: For multiple related entities providing CGs, the value of the service is determined by the total consideration paid or payable to the co-guarantors. If this total exceeds 1% of the guaranteed amount, GST is calculated on the actual consideration paid by each co-guarantor. If the total is less than 1%, GST is payable proportionately by each co-guarantor on 1% of the guaranteed amount.
Issue No. 5: Should GST on an intra-group CG be paid by the recipient under reverse charge, considering the recipient may not have an actual invoice or payment to claim ITC from the domestic guarantor?
Opinion: GST should be paid under the forward charge mechanism for domestic corporate entities issuing intra-group guarantees. The service supplier must issue an invoice under Section 31 of the CGST Act, 2017, in accordance with relevant rules.
Issue No. 6: Should the tax liability on a CG, calculated at 1% of the guaranteed amount, be discharged one-time, yearly, or monthly? How should this be handled for fixed-term guarantees?
Opinion: Rule 28(2) has been retrospectively amended from October 26, 2023. The value of providing a CG service is 1% of the guaranteed amount per annum or the actual consideration, whichever is greater. For a specified number of years, the value is 1% per year multiplied by the number of years or the actual consideration, whichever is greater. For CGs issued for less than a year, the value may be prorated.
Issue No. 7: Does the benefit of the second proviso to Rule 28(1), which deems the invoice value as the open market value when full ITC is available to the recipient, apply to cases under sub-rule (2)?
Opinion: A proviso has been added to Rule 28(2) retroactively from October 26, 2023, allowing the invoice value to be considered the value of the supplied service when full ITC is available to the recipient.
Issue No. 8: Does the valuation under Rule 28(2) apply to the export of CG services between related parties?
Opinion: The amendment to Rule 28(2) specifies that it does not apply when the recipient of CG services is located outside India. Therefore, it does not apply to the export of CG services.
Conclusion
The recent circular [Circular No. 225/18/2024 GST dated 11th July 2024] provides much-needed clarifications on the taxability of corporate guarantees, addressing several unresolved issues from previous amendments. While the circular attempts to clarify the application and valuation of GST on corporate guarantees, some interpretations, particularly regarding the valuation mechanism and its retrospective application, remain contentious.
RNM’s analysis suggests that while some clarifications align with existing legal principles and provide practical solutions, others may lack legal authority and could be subject to judicial scrutiny. Corporates must carefully assess these guidelines and consider their implications, particularly for guarantees issued before October 26, 2023, and the valuation methods prescribed.
Staying abreast of these developments and seeking professional advice will be crucial for compliance and strategic planning in managing inter-company corporate guarantees under the GST regime.
Notification on Place of Supply for Deliveries to Unregistered Persons
Issue at Hand The place of supply according to the newly added Section 10(1)(ca) of the IGST Act, particularly when goods are supplied to an unregistered person and the billing address is different from the delivery address, especially through e-commerce platforms.
Clarification Provided
Example:
Ms. B (an unregistered person) in State M orders a laptop from an e-commerce platform to be delivered to an address in State N. Ms. B provides a billing address in State M when placing the order. The question arises: what is the place of supply for this laptop—State M (billing address) or State N (delivery address)?
Clarification:
For goods supplied to an unregistered person:
When the delivery address is different from the billing address on the invoice, b. The place of supply is the delivery address recorded on the invoice—in this case, State N.
Furthermore, in situations where the billing and delivery addresses differ, the supplier should record the delivery address as the recipient’s address on the invoice to determine the place of supply for the goods.