Interim Budget | Changes Proposed under GST in the Finance Bill 2024

Finance Bill 2024 Changes proposed under GST

Finance Bill 2024 Changes proposed under GST

Contents 1.

Distribution of ITC on common input services mandated through ISD

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2.

Non-Registration of machines under special procedure by tobacco manufacturers will result in heavy penalty

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Finance Bill 2024: Changes proposed under GST

On February 01, 2024, the Finance Minister Nirmala Sitharaman unveiled the Interim Budget for the fiscal year 2024-25 in Parliament. The budget prioritized empowering the youth and women, advancing infrastructure development, supporting agriculture, fostering green growth, and strengthening the railway sector.

No significant tax announcements were proposed, only a few necessary proposals are introduced concerning GST. The changes proposed in the Finance Bill 2024 have been discussed below:

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Finance Bill 2024: Changes proposed under GST

1.

Distribution of ITC on common input services mandated through ISD The GST law1 contains the provision for the distribution of Input Tax Credit (‘ITC’) concerning common input services using the Input Service Distributor (‘ISD’) mechanism. This mechanism facilitates the seamless distribution of ITC where services are procured by the head office or at a single office but are consumed at various offices registered under the same PAN. The existing definition2 of ISD provides that it is an office of supplier of goods or services or both that receives a tax invoices issued under Section 31 towards the receipt of input services and issues a prescribed document for the purpose of distributing the ITC to the persons having same PAN as that of the ISD. Thus, to fall within the scope of ISD the two essential criteria need to be met: •

It should be an office of the supplier that receives the tax invoices (i.e. invoice issued by the service provider at the ISD GSTN), and

•

It should issue prescribed documents for distribution of credit (i.e. ISD invoice)

However, the existing provision of ISD mechanism does not cover the methodology for transfer of credit on those common input services on which tax has been deposited under the reverse charge mechanism. Also, from the perusal of the provisions3 providing the manner of distribution of common credit using ISD mechanism, it becomes evident that it is not mandatory to distribute the common credit using the ISD mechanism.

Given the above, the industry was following the mixed practice for distribution of common credit either through ISD mechanism or via cross charge mechanism through a tax invoice raised on the respective locations to whom such credit is being distributed. Given the above anomaly, the Council, during its 50th meeting, in respect of the same, recommended to clarify that ISD mechanism is not mandatory for the past periods and also recommended that it should be made mandatory for the prospective period. In alignment with this recommendation, a circular4 was issued to clarify that ISD is not mandatory for transferring/distributing the ITC for the past period.

Amendments proposed by the Finance Bill 2024 The Finance Bill 2024 has proposed to amend the definition of ISD and the procedure of distributing common credit using ISD mechanism. The proposed definition eliminates the requirement of issuing prescribed documents. Consequently, where an office receives input services on behalf of deemed distinct persons, it would be considered as ‘ISD’, and thus it would become liable to comply with the relevant provisions for distribution of common credit.

The impact of the proposed amendment is as under: •

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The person who receives common ITC for the deemed distinct persons would be required to obtain mandatory registration as ISD

Section 2(61) of the CGST Act read with Section 20 of the CGST Act Section 2(61) of the CGST Act Section 20(2) of the CGST Act Circular No. 199/11/2023-GST, Dated 17-07-2023

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Finance Bill 2024: Changes proposed under GST

•

For the distribution of ITC of the services liable to RCM, tax is required to be paid by the normal registration in the State of ISD

The said proposed amendment, when made effective, would mandate the distribution of common ITC on services through ISD mechanism only. Concurrently, there would be a need for corresponding amendments in the rules to establish the framework for providing the manner of distribution of ITC.

2. Non-Registration of machines under special procedure by tobacco manufacturers will result in heavy penalty The Finance Bill, 2024 has proposed the introduction of new Section 122A within the Penalties Chapter, specifying penalty for persons engaged in the manufacture of specified goods who fail to register the machines in accordance with the special procedure.

Notably, the Government has recently notified5 a special procedure for the registered persons engaged in manufacturing of specified goods such as Pan Masala, tobacco and similar goods, which will be effective from 01-04-2024. Under the said procedure, manufacturers of tobacco, pan masala, and similar goods are required to adhere to this special procedure, which primarily includes the registration of machines and the submission of special monthly returns.

This special procedure is prescribed under section 148 of the CGST Act based on the recommendations by the GST Council in its 50th meeting. The Council also recommended to prescribe a heavy penalty for running any unregistered machine.

Section 122A prescribes a penalty of Rs. 1 lakh for each machine not registered as per the special procedure. It’s noteworthy that this penalty is in addition to any penalty paid or payable under Demand and Recovery provisions or any other sections of the Penalties Chapters. Consequently, non-compliance with the special procedure may lead to the imposition of multiple penalties by the proper officer under the GST law.

In addition to the penalty, machines not registered shall also be liable for seizure and confiscation. However, confiscation can be avoided if the penalty is promptly paid by the manufacturers or if the machine is registered within three days of receiving the penalty order.

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Notification No. 04/2024–Central Tax, Dated 05-01-2024 read with Notification No. 30/2023–Central Tax, Dated 31-07-2023

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