GST Implications of The Jammu and Kashmir (Reorganisation) Act, 2019

The Jammu and Kashmir (Reorganisation) Act, 2019 (‘J&K Reorganisation Act’) will divide the State of J&K into two Union Territories (‘UT) viz. UT of J&K (with legislature) and UT of Ladakh (without legislature) from the appointed date i.e. October 31, 2019.

This act of Parliament will have significant implications under the Goods and Services Tax (‘GST’) laws. In particular, the following issues become prominent:

• The nature of GST to be charged viz. IGST, CGST & SGST and UTGST; and
• The fate of accumulated Input Tax Credit (‘ITC’) of SGST lying on the appointed date.

In this update, we have attempted to highlight the aforesaid issues and their implications in detail:

Nature of GST to be charged for intra-state supplies viz. CGST & SGST or UTGST

• Section 95 of the J&K Reorganisation Act provides that specified Central laws and laws applicable in the State of J&K, will apply to both the UTs in the manner specified in the Fifth Schedule.
• Table 4 to the Fifth Schedule provides that the Jammu and Kashmir Goods and Services Tax Act, 2017 (‘J&K GST Act’) shall remain applicable to both the UTs. This implies that SGST shall continue to apply even after the appointed date.
• At the same juncture, it is notable that as UT of J&K falls under the definition of ‘State’ under the GST laws, SGST shall apply. However, UT of Ladakh falls under the definition of ‘Union Territory’ given under the UTGST Act, hence, UTGST should apply in respect of supplies made within that UT.
• Thus, a contradiction exists between the UTGST Act and J&K Reorganisation Act regarding the nature of GST to be charged in the UT of Ladakh SGST or UTGST.
• Section 96 of the J&K Reorganisation Act provides that the Central Government, may by order, make necessary modifications or adaptions in the laws existing on the appointed date. Therefore, the Central Government needs to make necessary changes in the UTGST Act or J&KGST Act to clarify the above.

Nature of GST to be charged for supply between UT of J&K and UT of Ladakh

• Another important issue to be addressed is whether supplies made between UT of J&K and UT of Ladakh, will continue to attract CGST & SGST or will it attract IGST.
• Section 7(3) of the Integrated Goods and Services Tax Act, 2017 (‘IGST Act’) treats supply between a State and a UT as an inter-state supply. Hence, IGST will be payable in such cases.

Fate of accumulated ITC of SGST lying on the appointed date

• Another issue that will arise is the fate of accumulated ITC of SGST lying with the taxpayers in the UT of Ladakh on the appointed date.
• The Government needs to bring transitional provisions for smooth utilization of such credit in UT of Ladakh towards future liabilities of UTGST. Taxpayers must attempt to utilize SGST to the maximum extent to avoid any contingency in this regard.

NITYA Comments:

The Government needs to promptly come up with transitional provisions (much before the appointed date) to ensure smooth transition. Further, the taxpayers should gear up and undertake changes in their IT system to operationalize these changes.