NITYA Insight | Legislative changes introduced by the Finance (No. 1) Bill, 2024

The Hon’ble Finance Minister today presented the Interim Budget 2024. Being the Interim Budget, taxation front was kept largely untouched.

Vide this update, we wish to apprise you with changes introduced by the Finance Bill, 2024 (‘Finance Bill’) on the Indirect Tax front and changes / clarifications in GST law which are still pending for introduction.

  1. Revamping ISD mechanism

The 50th GST Council Meeting proposed to put an end to controversy on manner of distribution of common expenses by Cross-charge or Input Service Distribution (‘ISD’) mechanism. It was proposed to make ISD mandatory prospectively and past transactions were regularized through issuance of Circular No. 199/11/2023-GST dated July 17, 2023 (‘Circular No. 199’). Further, in the 52nd GST Council Meeting, legislative changes were proposed in Section 2(61) & Section 20 of the CGST Act and Rule 39 of the CGST Rules.

The following amendments have now been proposed vide the Finance Bill:

  • Definition of ISD under Section 2(61) will be amended to include an office of supplier who receives tax invoices including reverse charge invoices for or on behalf of distinct persons and distributes Input Tax Credit (‘ITC’) in respect of such invoices.

  • Section 20 will be substituted to provide for mandatory ISD registration and distribution of ITC on tax invoices (including invoices on which tax is paid under reverse charge by distinct person). Notably, taxpayers need to seek normal registration for paying reverse charge GST in same State as of ISD.

  • Government will make necessary changes in Rule 39 to provide manner, time, restriction and conditions for ITC distribution.

NITYA Comments: A closer scrutiny of proposed Section 20 indicates that ISD is only made mandatory for services received ‘for or on behalf of distinct persons’. Thus, taxpayers need to follow ISD only for services exclusively attributable to its distinct person(s). Consequently, other common services like audit etc. which are procured by ISD for business as a whole, ISD will not apply. For such services, taxpayers can continue to adopt cross-charge mechanism. 

Although the intent of the GST Council and Circular No. 199 has always been to make ISD mechanism mandatory for all services (whether exclusively attributable to distinct persons or not), wordings of proposed provision does not reflect such intention and the same will attract dispute in future. The Government may also correct such anomaly while final passage of the Finance Bill. 

  1. Levy of penalty for failure to register certain machines as per special procedure

The 50th GST Council Meeting introduced a special procedure for suppliers of tobacco and pan masala products providing for registration of machines and filing of returns for implementation of capacity based taxation. The capacity based taxation scheme was introduced vide Notification No.04/2024 – Central Tax dated January 5, 2024.

The Finance Bill has introduced Section 122A levying penalty of Rs. 1,00,000 for each machine which is not registered. Additionally, such machine will also be liable for seizure and confiscation. There will be no confiscation if penalty has been paid and registration has been obtained.

  1. Changes / clarifications still pending for introduction

Following changes / clarifications which were proposed in earlier GST Council Meetings are still pending for introduction:

Issue Discussion Status NITYA Comments
ENA used for manufacture of alcoholic liquor for human consumption
The 52nd GST Council Meeting recommended to keep ENA used for manufacture of alcoholic liquor for human consumption out of GST.

Law committee to make suitable amendments

Taxability of ENA used for manufacture of potable liquor was long-pending issue with the Council. In the case of Jain Distillery Private Limited v. State of Uttar Pradesh, 2021-VIL-714-ALH, the High Court held that ENA will attract GST. Further, whilst the State of Uttar Pradesh is contesting this issue before the Supreme Court, Revenue is demanding GST on such ENA. Hence, the Revenue is taking contrary stands. These amendments will ensure no levy of GST on ENA. It is pertinent to see whether these changes will be prospective or retrospective. Even after these changes, the States will be empowered to levy VAT on ENA only once necessary amendments are made in the Constitution of India

Explanation 1 and 2 to Section 140
The CGST (Amendment) Act, 2018
Explanation 1 and 2 defined ‘eligible duties’ and ‘eligible duties and taxes’, respectively for various sub-sections to Section 140 except for sub-section (1). This amendment to Explanation 1 and 2 proposed for extending meanings to sub-section (1) as well.

Department released Circular No. 87/06/2019-GST dated January 2, 2019 to clarify that amendments to Explanation 1 and 2 will not be notified as this will lead to an absurdity in law by barring Service Tax credit as well. Further, the Circular clarified that desired purpose of barring credit of Cesses has been achieved by insertion of Explanation 3.

Refer to our detailed analysis of this issue in NITYA Outlook | Issue 15 | Eligibility of transitional credit of various cesses.

Treatment of secondary post-sales discount
  • Discussion on issue whether post sales discount given qualify as separate supply or added in consideration of supply of dealer.

 

  • Levying tax on discounts will increase price which defeats promotional aspect of benefit given.

Referred back to Law Committee

Whole issue required holistic examination. Draft Circular was also referred to Law Committee.

This issue of dealer discounts and incentives continues to be contentious and is expected to witness substantial litigation under the GST regime. In our view, discounts should be taxable only when given for performing some additional activity (sales drive, exhibition etc.).

Reward/Incentive scheme for B2C Invoice
  • Eligibility for B2C transactions where payment done through digital mode (Cards or UPI).

 

  • Scheme proposed to be administered by NPCI.

 

  • Prize winner to be decided through random selection.

 

  • Reward sharing between consumer and supplier in ratio 3:1.

Deferred for detailed examination

This scheme will improve GST collections but will increase invoice compliance for B2C transactions.

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