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Conflicting rulings at state level fuel call for setting up centralised AAR

Topics GST | GST Act | GST Council

The recent ruling by the Karnataka-based authority for advance rulings (AAR) on GST on director's income, which runs contrary to the decision by other courts, has made it all the more necessary to have a centralised AAR.

Back in December 2018, the GST Council had approved setting up of a centralised AAR that would decide on cases in which there are divergent orders at the state level.

The next month, the union Cabinet had given nod to the proposal. 

The setting up of a centralised AAAR would require amendments to the GST Acts. The centralised authority as an appellate body will only take up cases in which the AARs of two states have passed divergent orders.

However, the body is yet to be set up by the Central Board of Indirect Taxes and Customs (CBIC).

Last month, the Karnataka AAR had ruled that the executive director of a company will not be liable to pay GST, but the income of non-executive directors will suffer the tax through the reverse charge mechanism (RCM). 

The order stirred a controversy as other state AARs had held that all directors are liable to pay GST.

The authority delivered this ruling after a petitioner with multiple income sources sought to know which heads attract GST, and which don't.

The AAR's ruling is based on the fact that an executive director is an employee of the company and his work doesn't fall under the definition of supply under the CGST Act. On the other hand, a non-executive director is not an employee and, therefore, his inputs are essentially services under the CGST Act and taxable under RCM.

Normally, a person or entity providing services pays the tax to the exchequer, and recovers it from the receiver of the service. But under RCM, the receiver of the service pays the tax by deducting it from the service provider's compensation.

However, in a case related to Clay Craft, the Rajasthan AAR had ruled that the services rendered by the director to the company, for which consideration is paid to the firm under any head, are liable to GST under RCM. The situation would remain the same even when the director is also a part-time director in another company. The AAR did not distinguish between executive director and non-executive director as was done by its Karnataka counterpart.

In a case relating to ALCON Consulting Engineerrs (India), the Karnataka AAR in 2017 had also ruled that the consideration paid to the director in the form of remuneration is in relation to services provided by the director to the Company. So, the Company is required to pay GST under RCM on remuneration paid to the director, it had held.

Harpreet Singh, partner at KPMG, said, "While the whole scheme of advance ruling has been looked upon as a useful mechanism for achieving tax certainty, a slew of conflicting rulings is defeating this very purpose and adding to taxpayer’s woes.” 

Earlier as well, there have been conflicting rulings by AARs. 

For instance, there was an issue of taxability of setting up of solar power plants. Under the GST regime, renewable energy devices and parts that go into the manufacture of solar power generating systems and PV cells, whether or not assembled in modules or made up into panels, enjoy a lower rate of five per cent GST.  

The issue here was whether setting up solar power generating systems would qualify as 'composite supply' and be subject to GST at five per cent, (supply of solar power generating system being the principal supply) or whether it would be treated as 'works contract' and suffer a GST of 18 per cent.

While there were several contradictory advance rulings on the matter, the issue was put to rest through a GST Council decision in December 2018. It amended the law to provide that if renewable energy devices were supplied along with other goods and taxable services, then 70 per cent of the gross consideration would be deemed as ‘value of supply of goods’, attracting GST at the rate of five per cent and the remaining 30 per cent would be ‘value of services’, attracting 18 per cent GST.

However, there is still some confusion in the industry, as divergent views have been taken on the rate for solar projects on composite orders, where taxpayers are trying to artificially split the contract into two -- one for goods and other for services -- in order to avoid the 70:30 valuation rule.

Then, there was the issue of liquidated damages. The term liquidated damages is not defined in GST law.

Where compensation is liable to be paid on the termination of a contract or on breach of any clauses thereof, and which is specifically agreed at the time of signing the contract, the said compensation would fall within the meaning of "liquidated damages".  

As regards the taxability of liquidated damages, multiple divergent rulings have been issued wherein some state authorities have held that such damages can be construed as "consideration" paid for "toleration of an act" in terms of clause 5(e) of Schedule II to the CGST Act (i.e. deemed service) and would attract GST. 

On the other hand, some have held that damages are in the nature of compensation for loss suffered hence cannot be equated with consideration for any supply as positive act of doing something in return and as such would not attract GST. 

Liquidation damages assume importance in the current era of Covid-19 where agreements face termination.  
Singh said,""One nation, one saw, one CBIC, yet some contrary decisions by Advance Ruling Authorities, act as a classic paradox to the principles of GST, and hence there is an urgent need for a centralized authority." 

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