Indirect Tax Updates February 2025

GST Implications on Sub-Contracted Goods Transportation: Classification as Vehicle Rental Service

Background:

The taxpayer entered into an arrangement with a principal Goods Transport Agency (GTA) for the transportation of goods. The taxpayer, however, did not issue consignment notes but merely provided trucks for the transportation of goods.

Issue:

Whether the transportation service provided by the taxpayer as a sub-contractor to the principal GTA is exempt from GST under Sl. No. 18 of Notification No. 12/2017-Central Tax (Rate).

Ruling:

• As per Notification No. 11/2017-Central Tax (Rate), a GTA is defined as a person who provides service in relation to the transport of goods by road and issues a consignment note.

• In the instant case, the principal GTA had the contractual agreement with the consignor and assumed responsibility for transportation, including issuing consignment notes. The Applicant merely provided trucks on a rental basis, without issuing consignment notes, and thus did not qualify as a GTA.
• Since the Applicant’s activity falls outside the ambit of a GTA, the exemption under Sl. No. 18 of Notification No. 12/2017-Central Tax (Rate) is not applicable. Instead, the service is classifiable under “renting of transport vehicles,” which is a taxable supply under GST. Consequently, GST is leviable on the said supply as per the applicable rate.

Provisional Attachment of Bank Account under GST: Necessity of Tangible Material

Background :
The Taxpayer’s bank account was provisionally attached by the tax authorities under Section 83 of the CGST Act, 2017. The attachment was based on allegations that the Taxpayer had availed ineligible Input Tax Credit (ITC) under Section 17(5)(d) of the CGST Act. However, no specific material was brought on record to justify the necessity of such an attachment.

Issue :
Whether the tax authorities can provisionally attach the Taxpayer’s bank account without placing tangible material on record to establish that the Taxpayer is likely to defeat the demand.

Ruling:

• The power to provisionally attach property, including bank accounts, under Section 83 of the CGST Act is draconian in nature and must be exercised strictly in accordance with the statutory conditions. As per the Supreme Court’s ruling in Radha Krishan Industries Vs. State of Himachal Pradesh [2021 (48) GSTL 113 (SC)], tax authorities must form an opinion based on tangible material that the taxpayer is likely to defeat the demand before invoking this provision.
• In the present case, the attachment order was issued on the grounds that:

• The Taxpayer availed ITC on procurements allegedly ineligible under Section 17(5)(d) of the CGST Act.
• The GST Council recommended an amendment to Section 17(5)(d) by replacing “plant or machinery” with “plant and machinery.”
• However, the tax authorities failed to bring on record any material indicating that the Taxpayer intended to defeat the demand, if any. The Impugned Order neither mentioned such material nor provided any justification for the attachment.

• The Bombay High Court observed that the absence of tangible material rendered the attachment order a colourable exercise of power. Accordingly, the Writ Petition was allowed, and the tax authorities were directed to unfreeze the Taxpayer’s bank account.

Technical Committee Updates on Sales Tax and Service Tax Matters

The Technical Committee on SST Implementation convened on 24 October 2024 to discuss various concerns related to Sales and Service Tax (SST). Following these discussions, the Royal Malaysian Customs Department (RMCD) addressed technical queries raised by professional bodies. The responses have been documented in Lampiran 3 of Mesyuarat Jawatankuasa Teknikal Isu Pelaksanaan Cukai Jualan dan Cukai Perkhidmatan Bil. 2/2024. (Note: The minutes of this meeting are still pending finalization and will be confirmed in the upcoming session.)

One of the significant matters discussed is outlined below:

Sales Tax Implications for Companies Shifting from LMW to Sales Tax-Registered Manufacturer

A question was raised regarding whether a company transitioning from a Licensed Manufacturing Warehouse (LMW) to a sales tax-registered manufacturer would qualify for sales tax exemption on goods acquired under its LMW license (i.e., goods initially purchased without sales tax).

RMCD’s Clarification:

• The Sales Tax Act does not provide an automatic exemption in cases where a company transitions from LMW status to a registered manufacturer under the sales tax regime.
• The regulatory frameworks governing LMWs and sales tax-registered manufacturers are separate, and there is no direct provision allowing for tax relief under such circumstances.
• However, companies seeking exemption may submit an application to the Ministry of Finance (MoF), which has the discretionary authority to grant sales tax exemptions on a case-by-case basis under the Sales Tax Act.

Service Tax Treatment on Maintenance and Repair Services in Common Areas

A discussion was held regarding the applicability of service tax on maintenance services provided in common areas to tenants under a lease agreement. Reference was made to Example 5A of the RMCD Guide on Management Services (dated 4 August 2021), where RMCD had previously clarified that maintenance management services in common areas were not subject to service tax. However, if such services were provided by the lessor within the leased premises, they would attract service tax. Given that repair and maintenance services were introduced as a taxable category under service tax laws effective 26 February 2024, the key question was whether maintenance or repair services carried out in common areas would now be subject to service tax.

RMCD’s Clarification:

• Example 5A in the RMCD Guide was based on the principle that rental charges collected from tenants include maintenance fees for common areas, provided this is explicitly stated in the tenancy agreement.
• In such cases, maintenance charges are considered incidental to rental income, which itself is not a taxable service under the service tax framework.
• Consequently, even after the introduction of repair and maintenance as a taxable service category, maintenance or repair services for common areas remain not subject to service tax, provided they are included as part of rental charges under the lease agreement.

Service Tax Treatment on ‘Free Delivery’ Services

A clarification was sought regarding the taxability of “free delivery” services, as referenced in FAQ No. 8 of RMCD’s Logistics Services Guide. The FAQ describes a scenario where an online platform offers free delivery as part of a promotion when a customer’s purchase exceeds a certain threshold. The guide acknowledges that delivery services are taxable; however, it also states that the service tax on free delivery should be zero-rated. This interpretation appears to be a concession by RMCD, raising concerns about its alignment with the Service Tax Act, as taxable services—whether provided for free or otherwise—are generally subject to tax at their open market value. An amendment to clarify this position was suggested.

RMCD’s Clarification:

• Under the Service Tax Act 2018, service tax is applicable on the provision of taxable services, and the value for taxation is determined based on the provisions of Section 9.
• When a taxable service is provided free of charge, the tax is generally calculated based on its open market value, provided it is offered in the ordinary course of business to a non-related party.
• In reference to FAQ No. 8 of the Logistics Services Guide, RMCD explained that the service tax on free delivery is treated as ‘zero’ because the service is made available to all customers as part of standard business operations, rather than being an exclusive or discretionary benefit.