Key Clarifications from the 53rd GST Council Meeting Circulars

The 53rd Goods and Services Tax (GST) Council Meeting released various circulars under the CGST Act to resolve significant issues impacting businesses. These circulars, dated June 26, 2024, address critical areas like the time of supply, input tax credit eligibility, place of supply, and how certain transactions are taxed. This summary outlines the key points from these important GST updates.

Clarifications on Time of Supply for Continuous Services

Spectrum and Natural Resources Allocation

For services involving the allocation of spectrum or natural resources, such as those provided by the Department of Telecommunications (DoT) or the government to telecom operators, the time of supply depends on the payment schedule. If the full payment is made initially, GST becomes due or is paid at the earliest of these events. For installment-based deferred payments, GST is payable when the payment is due or made, whichever occurs first. (Source)

Road Construction and Maintenance under HAM Model

In Hybrid Annuity Mode (HAM) projects for National Highways, concessionaires receive a portion of the bid project cost during construction, with the remainder paid through annuities over time. The time of supply is determined as follows: If an invoice is issued by or on the contract's specified date or event completion date, the time of supply is the invoice date or payment receipt date, whichever is earlier. If the invoice is issued after these dates, the time of supply is the service provision date or payment receipt date, whichever is earlier. Any interest integrated into the installment or annuity payment is also subject to taxation. (Source)

Input Tax Credit (ITC) Availability Clarified

Ducts and Manholes for Optical Fiber Cables

Input Tax Credit (ITC) is permissible for ducts and manholes utilized within Optical Fiber Cable (OFC) networks. These items are not blocked under Section 17(5)(c) or (d) of the CGST Act. They fall within the definition of "plant and machinery" as per the Explanation to Section 17, given they are not land, buildings, civil structures, telecommunication towers, or pipelines outside factory premises. (Source)

Insurance Companies for Motor Vehicle Repairs

Insurance companies can claim ITC on motor vehicle repair costs when settling claims via the reimbursement method. Section 17(5) of the CGST Act does not restrict the credit for GST paid on these repair services, as they are part of the outward supply of insurance services for the vehicles. For ITC claims on amounts exceeding the approved repair claim: if the garage bills the insurance company and the insured separately, ITC is only available to the insurance company for the approved, reimbursed claim. If a single invoice for the full amount is issued to the insurance company, ITC is still limited to the approved claim cost. If the repair invoice is not in the insurance company's name, ITC cannot be claimed due to unmet conditions under Section 16(a) and (aa) of the CGST Act. (Source)

Life Insurance Policy Premiums with Investment Component

The investment or saving portion of premiums for taxable life insurance policies, which is excluded from the taxable value under CGST Rule 32(4), cannot be linked to a non-taxable or exempt supply. Consequently, there is no requirement to reverse input tax credit under CGST Rule 42 or 43, in conjunction with Section 17(1) and (2). (Source)

Replenishment of Goods for Warranty Claims

Manufacturers are not required to pay GST or reverse ITC when supplying goods or parts to distributors who use their own stock for warranty replacements on the manufacturer's behalf. If an extended warranty is supplied by an OEM or third party (not the original dealer), it is considered a separate taxable service. When the original supplier provides the extended warranty at the time of goods supply, it forms a composite supply of goods and services subject to GST. However, if a different entity provides the extended warranty, it is separately liable for GST. Similarly, if an extended warranty is provided after the initial supply of goods, it is also a separately taxable service. (Source)

Time Limit for ITC on RCM Supplies from Unregistered Persons

For supplies subject to the Reverse Charge Mechanism (RCM) from unregistered individuals, where the recipient is mandated to issue an invoice under Section 31(3)(f) of the CGST Act, the financial year in which this invoice is issued dictates the time limit for claiming input tax credit under Section 16(4). If the recipient delays issuing the invoice beyond the time of supply and subsequently pays tax, interest will be applicable for the delay. Furthermore, such delayed invoice issuance by the recipient may also lead to penal action under Section 122 of the CGST Act. (Source)

Establishing Monetary Thresholds for Appeals

Monetary limits have been set for filing appeals at different appellate forums:

These monetary limits are based on the disputed amounts, including tax, interest, penalties, incorrect refunds, or late fees, unless a GST law provision is deemed unconstitutional. These represent the maximum values below which Central Tax officers will not initiate appeals, applications, or Special Leave Petitions. (Source)

Place of Supply Clarifications

Goods Supplied to Unregistered Persons with Different Billing/Delivery Addresses

For supplies of goods to unregistered individuals, especially in e-commerce, where the billing address differs from the delivery address, the place of supply is determined by the address recorded on the invoice. If the recipient's address is not on the invoice, the supplier's location is considered the place of supply. To establish the correct place of supply, suppliers can list the delivery address as the recipient's address on the invoice when these two addresses are distinct. (Source)

Custodial Services by Banks to Foreign Portfolio Investors

Banks offer custodial services to Foreign Portfolio Investors (FPIs), primarily involving the management of securities accounts. These services are associated with opening and managing bank accounts, facilitating activities like lending, deposits, safe deposit lockers, and money transfers. However, banking companies typically do not provide financial leasing, merchant banking, securities portfolio management, or custodial and depository services to an account holder in the general sense. Therefore, the custodial services provided to FPIs should not be categorized as services to 'account holders.' Consequently, Section 13(8)(a) of the IGST Act does not apply. Instead, the default provision of Section 13(2) applies, designating the recipient's location as the place of supply. (Source)

Taxability Clarifications for Specific Supplies

GST on Loan-Related Charges

GST is not applicable to loans extended by foreign affiliates to their Indian counterparts, or by one related party to another, when no processing or loan granting fees are involved, and the consideration is purely in the form of interest or discount. However, if any processing fees or similar charges are levied, GST will then be applicable. (Source)

GST on ESOP/ESPP/RSU Transactions

GST is imposed on any additional fees, markups, or commissions charged by a foreign holding company to its domestic subsidiary for providing Employee Stock Option Plans (ESOP), Employee Stock Purchase Plans (ESPP), or Restricted Stock Units (RSU) to the subsidiary's employees. The domestic subsidiary must pay this GST under a reverse charge mechanism for importing these services. Conversely, no GST is levied when a foreign holding company issues ESOP/ESPP/RSU to a domestic subsidiary's employees, and the subsidiary merely reimburses the cost without any additional charges. (Source)

GST on Salvage Value from Insurance Claims

GST is generally not applied to the salvage or wreck value subtracted from an insurance claim for a damaged motor vehicle, as the salvage typically remains the property of the insured individual. However, if an insurance claim is settled for the full amount without deducting the salvage value (as per contractual terms), the salvage then becomes the property of the insurance company. In such instances, GST will apply to the subsequent supply of that salvage to a buyer. (Source)

Other Important Clarifications

Valuing Services Between Related Foreign and Domestic Entities

When a foreign affiliate supplies services to its related domestic entity, and the domestic entity is eligible for full Input Tax Credit (ITC), the value stated in the invoice can be considered the open market value, according to the second proviso to CGST Rule 28(1). If no invoice is issued, the value is taken as nil and can also be deemed the open market value. (Source)

Input Tax Credit Reversal for Discounts via Credit Notes

To confirm that recipients have completed the necessary proportionate reversal of Input Tax Credit (ITC) for credit notes issued by suppliers (for discounts under Section 15(3)(b)(ii) of the CGST Act), suppliers may request a CA/CMA certificate from their recipients. This measure will remain in effect until the Goods and Services Tax (GST) portal develops a dedicated system functionality for this purpose. (Source)