Law on new tax demands on pre-GST matters during post GST period, Letter to CBIC

1. LAW ON NEW TAX DEMANDS ON PRE-GST MATTERS DURINGPOSTGSTPERIOD,LETTERTOCBICCHAIRMAN AUTHOR:RAMANATHANGANESAN https://taxguru.in/service-tax/law-tax-demands-pre-gst-matters-post-gst-period.html Lawonnewtaxdemandsonpre-GSTmattersduringpostGSTperiod.–lettertotheChairman-CBIC Sub: Request for issue of guidance circular to service tax [GST] authorities to follow the correct position of Law [includingthe constitutional provisions.] Ref: Show cause notices issued based on section 174 of the CGST Act read with section 73 of the Finance Act 1994.[On pre GST service taxmatters-After 1.7.17] Introductionontheissueofstartingfreshdisputesafter1.7.2017. The service tax department obtained the income tax returns data from CBDT and compared the gross income as perincome tax return and figuresin the ST 3 return. IflesseramountisreportedinST3return,thenshowcausenotices[SCN]wereissuedtomanypersons including small scale business persons, fully exempted service providers like doctors etc. by using section 174 of CGSTAct read with section 73of the finance Act 1994. In many cases, it is unwarranted and unnecessary harassment to the people by the service tax department. This must be avoided by the tax department. In many cases [may be in all cases] the extended period of limitation [5 years]was illegally usedby the departmentcontrary to thedepartmental circulars. People[particularlyexemptedserviceproviders]wantedtoknowaboutthecorrectlegalpositioninsuch circumstances. The basic question arising is whether the authorities have any power to start a new proceedings after arrival of GST law [1.7.17] for the transactions done prior to 1.7.17 [giving show cause for the pre GST mattersduring the post GST period?] Followingisthestudyonsection174ofCGSTAct &wewilltrytogettheanswerforthis legalquestion. The section 174 of the CGST Act can be correctly understood if it is read with the sections 7 and 17 of 101st constitutionalamendment Act.The CGST Actsection 174is not anindependent section. Theanatomyofsection174: Thesection174hastwoparts. Oneissavingtheallthepastactivitiesundertheoldlaw.

2. Thispartdoesnotrequireanyconstitutionalauthorisation. Other one is issuing SCN even after 1.7.17 by using the old Finance Act 1994 machinery provisions. [Without constitutionalauthorisation] Thisisthedisputedpart. Section 174 enables voluntary payment of taxes of the past period [pre GST]. Nobody can be compelled to pay fresh demands made after 1.7.17. The machinery provisions will not work without constitutional power to tax servicesby the central government. Section 174 does not say that notwithstanding anything contained in the constitution of India, new proceedings canbe initiated and fresh demandscan be made. The section 174 says that the remedy may be instituted. [This means that the remedy may be instituted subject to theotherprovisionsinthelaw[THETAXPAYERINSISTSTHATTHECONSTITUTIONOFINDIA SHOULDBE FOLLOWED BY THETAX OFFICER.] FirstLetusunderstandaboutthesuperiorityofconstitutionofIndia. WhytheconstitutionofIndiaisthesupremelegislationinIndia? Answertothequestionisgivenbelow. Ans:TheconstitutionofIndiaisthemotherofallotherlaw. If a provision in any Act is inconsistent with constitution of India then such inconsistent part is invalid in law. TheconstitutionofIndiaisstatedas theholybookofallIndians (byourHonourablePrimeMinisterof India). Amendmenttotheconstitutionrequiresspecialmajorityintheparliament.[2/3memberspresentshouldsupport theamendment with more than½ of the totalmembers support] Whatarethelimitationsonthecentralgovernment’spowers? Answertothequestionisgivenbelow. Ans:Thepowersofthecentralgovernmentarelimitedtotheunionlistinthe7thscheduleoftheconstitutionof India. Aftersatisfyingthespecifiedconditions,powersinconcurrentlistcanbeused.Thescopeofthefunctionsofthe centralgovernment can be givenin a specific Article also. ThescopeoffunctioningoftheCentralgovernmentisclearlydefinedintheUnionlist.Ifthecentralgovernment exceedsits powers than,those excess are ultravires & legally notvalid. Excepttheabove,allothersarenoneofthebusinessofthecentralgovernment. Whatistheauthorisingprovisioninservicetaxlaw? Answertothequestionisgivenbelow.

3. Article268A and entrynumber92c(Taxonservices)intheunionlistinthe7thscheduleoftheconstitutionofIndia. These two points authorised the central government to impose tax on services in the past [pre 101stCAA position]. “To tax service” is the high level decision by the parliament. It is the superior decision of the parliamentin the superior legislation. Whatisthemachineryprovisionintheservicetaxlaw? Answertothe questionis givenbelow. TheFinanceAct1994partV-speaksabout“Howtotaxservices”,whentotaxetcinrelationtothelevyand collectionof service tax. Thisisthemachineryprovisioninthesubordinatelegislation. Thisistheconsequentialdecisionbasedontheprincipledecisionofauthorisingtolevytaxonservices. The101stconstitutionalamendmentActisthefoundationfortheGSTlaw. Section7and17ofthe101stconstitutionalamendmentActOMITTEDArticle268A&Entrynumber92c. Theabovesaidarticle268Aandentrynumber92cwasnotrepealed&fullyOMITTED. The CGST Act Section 174 saves the machinery provision. But the Authorising provision in the constitution of India[Totaxservicesbythecentralgovernmentinamonopolistic,standalone&intheoldtaxstructure]wasnot saved or not repealed but simply omitted. Consequently, the machinery provision without authorising provision cannotenablethecentralgovernmenttocontinuetoenjoythepowertotaxservicesaspertheold,abandonedtax structure. Theterms“OMITTED”and“repealed”givestwodifferentmeaningsasperthedecisionoftheHonourable apexcourt. Pleaseseeannexure-1 TheOMITTEDpartoflawcannothaveanyforceafteritsdeletion.(Evenduringthepastperiodduringwhich itwasin force).Itis fullstop andnotpartial stop.This isasper theHonourableSupreme Courtdecision. Demandingtaxonserviceafterdeletingentry92candarticle268Aisanunauthorizedactofthecentral governmentandconsequently, anunauthorized actof officerof thecentralgovernment also. The already determined taxes by the orders passed by the department authorities are dues of government. They are concluded matters. Initiating a new proceedings & raising fresh demands after 101st constitutional amendment Act is unlawful, unreasonable, & un-constitutional. Under this situation, erroneously demanding servicetaxonexemptedservicesisagreatgrievancetothepublic.ItdamagestheGoodwillofthegovernment. TheconstitutionofIndiastoppedtherightofthecentralgovernmenttotaxservicesinamonopolisticmanner. Thisfullstopprovisionisinsection7and17ofthe101stconstitutionalamendmentAct.Theconstitution

4. prohibited the standalone Act for taxing services. The central government’s possession of power to tax service is thepre-conditionforthefreshdemandingofservicetaxafter1.7.17.Thestandalonepowertotaxservicesis noneof thebusiness of thecentral government after101stconstitutional amendmentAct. ThepositionPriorto1.7.17: Article 268A + Entry No. 92c in union list + Finance Act 1994 part V = A constitutionally valid law to tax services. ThepositionAfter1.7.17: No article 268A + No Entry No92c in union list [only Finance Act 1994 saved provisions] = A constitutionally voidlaw to tax standalone services only. The constitution of India started giving or has granted new joint power for the central government and state governments to tax goods and services. A consolidated Act for taxing goods and services is the only option availableintheconstitutionofIndiawithoutmonopolisticpowerforthecentralgovernment.[Exceptin exceptionalcircumstances] The parliament did not grant any power to tax goods orservices in a standalone manner in Article 246A(1). The schemeofthenewpowerisdifferentfromtheoldpower.Thisprospectivenewpowerisgrantedbythesection2 of the 101st constitutional amendment Act. The very basic purpose of the 101st constitutional amendment Act is standalone Acts for taxing goods or services must end. Accordingly, the constitutional power to tax goods and services cannot be used to support the section 174(2) (d) & (e) of the CGST Act to make fresh demands. Article 246A(1)enables the GST lawprospectively and notretrospectively. TheArticle246Acannotoccupytheplaceofthe268A&entryno92conthefollowingreasons. 268A provided the Monopoly right to tax services (old law) for the central government. Article 246A provides a sharedright totax services(new law).Scheme &objective ofthe oldand new lawsare different. Constitution of India is supreme law. All other Acts of parliament are subordinate laws. The constitution law prevail over other laws. The tax payer relies on constitution law that the central government’s power to tax servicesinastandalonemanner isprohibited.Thismustprevail overtheCGSTActsection 174(2)(d)&(e). Further, if two views in the law are available, then the beneficial view to the assesse must be followed as per the SupremeCourt Ruling in vegetable productcase law. On the top of everything the central government has announced in press information bureau on 22.7.17 that the pasttransactions are not to be checked. Conclusion: Whether the section 174 is really an enabler for making fresh demands on pre GST matters during post GST Period? [In spite of the section 7 & 17 of the 101stconstitutional Amendment Act and in spite of central governmentannouncementin PIBon 22.7.17(past transactionsare notto bechecked underGST)] Ans: Section 174 must be read with section 7 & 17 of the constitutional Amendment Act. In such situation, anyonecan understand thatCGST Section 174 savesall past activities.

5. Section 7 and 17 of CAA overrides the section 174 while starting fresh disputes [fresh Show Cause Notice] underservice tax law[section 73 of thefinance Act 1994] after30.6.17. The parliament ordered to STOP complicated old tax structure by way of omitting the old, monopolistic “power totax services” by theunion government in theconstitution of India. The parliament further ordered to START new, simplified tax structure as enabled in Article 246A. Under this article it is not possible to tax services alone under separate Act and separate charging section; then, goods alone under the separate Act and separate charging section. There should be a common charging section to tax goods and services. Such a common charging section alone gives power to tax by union & state governments. Hence, the officers of the union government must STOP the new demands after 1.7.17 under the old tax structure by using section 174 CGST Act. They cannot override the constitution of India and the intentions of the parliament to STOP the old tax structure. Accordingly, the CGST Act section 174 powers are given to handle the pending proceedings. This is the harmonious, reasonable & only possible interpretation of law. After 1.7.17, a court may order for the remand of case to the adjudicating authority and that adjudicating authority may have to “re do” his job. In such circumstances section 174 powers can be used. Old proceedings is not affected by new law is the intentionofsection174.Thereisnowordinginthesection174forempoweringtheauthoritiestocommencenew proceedingsafter 1.7.17 in spiteof Constitutional constraints. Theabandonedprovisions(article268Aandentrynumber92cthatisdeletedprovisions)disabledfreshdemands after101st constitutional amendment Act. The new provision Article 246A does not give retrospective power to raise fresh demands under the old & monopolistictax structure. Eitherthisway(retrospectiveeffectin246A) Or that way (Repeal of old 268A & entry 92c way) the central government did not retain the power to Tax servicesinastandalone&monopolisticmannerintheoldtaxstructure.Theauthoritytotaxonserviceshas goneconstitutionally. The standalone tax on services is not the function of the central government after 30.6.17. Hence on 22.7.17 the centralgovernmentin PIBhas announcedthat thepasttransactions arenot tobe checkedunderGST. Under these circumstances, there is no way to raise fresh demands in service tax after constitutional amendment Act. Unfortunately, based on the erroneous understanding of the law, some GST Department officials issue show cause notices and orders using inappropriate section 174 of the CGST Act contrary to the intentions of the law andin the unconstitutional manner. The intention of parliament is to remove the power of Central government to Tax services in a standalone manner. Consequently, Article 268A and Entry number 92c were omitted without savings. The intention of parliament is that the central government should not use the power to Tax services retrospectively. Therefore the Article246A does notgive the retrospectivepower to the centralgovernment. The ultimate intention of the parliament is that the central government should not have the power to Tax services prior to 1.7.17 so as to prevent the fresh demands after 1.7.17 in a standalone manner based on old tax structure. Contrary to the intention of parliament the central government cannot use the power to tax services in any other manneralsobycircumventingthelaw.Theintentionofparliamentandcentralgovernmentwasexpresslymade

6. in the announcement in the press information bureau, of Government of India on 22.7.17. The Government believes in voluntary compliance. The tax payer asks the officer to show which part of constitution of India empowered the central government to tax services in standalone manner after omission of article 268A and entry No92C in the union list. The old tax structure [Finance Act 1994 – service tax part] is like an unusable, torned, fade shirt. The new tax structure is like a new shirt. The parliament wants that the central government must wear thenewshirtonly.Theofficersofthecentralgovernmentcannotoverrideparliamentandgovernment announcementin PIB on 22.7.17. The sabka Vishwas legacy dispute resolution scheme was introduced with a view to dispute reduction and to close old disputes. [The Sabka Vishwas Scheme, 2019 is a scheme proposed in the Union Budget, 2019, and introducedto resolveall disputesrelating tothe erstwhileService Taxand CentralExcise Acts] Contrarytothisgoodintentionofthegovernment,CBICisontheunwarrantednewdisputecreationmodeon thematters relating to pre GST period. New proceedings were initiated contrary to Law and facts by the mere comparison of direct tax returns with indirect tax returns after normal limitation period. It is not the comparison of comparable. Both returns were designedfordifferentpurposes.Themeaningofdifferenttermsinindirecttaxlawanddirecttaxlawdiffer.Both werenot designed for the comparisonpurpose. The direct tax return and indirect tax returns both are in the hands of the finance ministry. In such situation, it is not possible for the finance ministry to accuse the income tax payer as he suppressed facts and thereby invoking theextended period of limitation. The comparison of direct tax returns with indirect tax returns – to create a dispute on pre GST matters is and ill thoughtandpoorlyconceived(apartfromcontrarytolawandcontrarytothepolicyofthegovernment).A person who wants to suppress the facts from the finance ministry would not give the same facts to the finance ministryin his income tax return. Thefollowingphraseappearinginsection1742d “Maybecome due” & Thefollowingphraseappearinginsection1742eofCGSTAct “…and any such investigation, inquiry, verification (including scrutiny and audit), assessment proceedings, adjudication and other legal proceedings or recovery of arrears or remedy may be instituted, continued or enforced, and any such tax, surcharge, penalty, fine, interest, forfeiture or punishment may be levied or imposed asif these Acts had notbeen so amended or repealed”… causes a mistaken notion that these phrases are enabling provisions to start a fresh proceedings in service tax matterson pre-GST matters in thepost GST period. The constitutionality of these two phrases is disputed by the tax payers. The enabling the future operation is not enabled in the constitution. These provisions may be used without Let down of the constitutional provisions in 101stconstitutional amendment Actsection 7 and17 in aharmonized manner.. These provisions maybe of use for doing re assessment as per the direction of any court to “re do” the adjudicationon the proceedings originallystarted prior to 1.7.17.

7. Inthecaseofrepugnancy,theharmoniousconstructionmustbefollowed.Inthecaseofrepugnancy,theharmoniousconstructionmustbefollowed. Section 7 and 17 of the 101st constitutional amendment Act read with the Honourable Supreme Court Ruling is infavor of the tax payer.[Given in annexure] TheArticle246Aisnothavingretrospective.Thisisalsoinfavorofthetaxpayer. Thegovernmentannouncementon22.7.17inpressinformationbureauisalsoinfavorofthetaxpayer. The government policy which is the basis for sabka Vishwas 2019 (believing in voluntary compliance) is also in favorof the tax payer. Though CGST Act section 174 is in favor of the department, it must be used in exceptional and essential situationsonly so asto give effectto the constitutionalprovisions as said above. ThedifferencebetweentheoldtaxregimeandtheGSTregime[from1.7.17]canbeexplainedasfollowswithan example. The taxes paid after dispute cannot be shifted to service recipients [due to long time gap] and even if shifted the recipients cannot take ITC as there is no enabling provisions in the transition law. The taxes paid for the old regime cannot be used as ITC in the GST regime. In general, if service provider pays tax, then the service recipientshouldbeabletogetinputtaxcredit.Thisisthebasicinindirecttaxvalueaddedtaxsystem.Hence, theconstitution ofIndia disabled freshdisputes on preGST mattersin post GSTperiod. Example: A tax payer provided exempted services [non-taxable as per the notification 25/2012] and submitted income tax return. He is not liable to submit the ST 3 Return and hence, he did not submit it. In such situation, the adjudicating officer by mentioning some invalid reasons, contrary to law and contrary to facts demanded service tax merely based on sales amount in the income tax return. This is very unfortunate. The commissioner [appeals] does not have the judicial responsibility to protect the tax payer rights as per the law in many occasions. There is nosucheffectivelawtofixresponsibility.Hence,theappealcommissionersconfirmtheorderofthe adjudicatingauthority in a mechanical manner. Now,thistaxpayermustbeartheentiretaxburden.Hecannot: Shiftthetaxburdentotheservicerecipient. HecannotgettheInputTaxCredit[ITC]and HecannotgiveITCasthereisnoenablingprovisionanditisnotpracticallypossiblealso. This would be contrary to the principles of the Indirect tax. This amounts to economically killing that person. Therefore,thenewtaxstructure[GSTregime]doesnothavetheconstitutionalauthoritytostartanewservice taxdisputeafter30.6.17onthepreGSTmatters.This30.6.17isthecut-offpoint;beyondthispointnew disputeson old tax regime matterscannot be initiated. RequesttotheCBIC: WerequesttheCBICtoissuesuitableinstructionscirculartoAdjudicatingauthoritiesinthefollowingmanner.

8. Disputemanagementguidelines–ServicetaxdemandsraisedonPre-GSTmattersduringpostGST.Disputemanagementguidelines–ServicetaxdemandsraisedonPre-GSTmattersduringpostGST. Disputes or demands raised based on comparison of income tax records and ST3 service tax returns – (Demands raisedunder section 174of CGST Actread with section73 of thefinance act 1994)- In this type of cases, service tax exemption [As per Notification 25/2012] may be allowed on self-declaration basisat any stageof proceedings (includingAppeal before thecommissioner). Inthistypeofcases,intheassessee’sappealbeforeCESTATorinHighcourt,thedepartmentsideneednot raise objection against allowing of the assessee’s appeal. The CBIC welcome the voluntary payment of taxes; however pressing the service tax demands made after 1.7.17 would not be appropriate in view of the omission of article 268A and entry number 92c of the union list without savings. (The constitutional amendment was made withview to stop theold tax structure andstart the GST taxstructure). I have submitted the above views and the requested in public interest & the department can avoid actions which will“only yield disputes” and notrevenue. The views expressed herein are personal views. It is necessary to take professional advice before taking any decision.