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GST on Pharma & FMCG Sectors www.tmslglobal.com

INDEX OVERVIEW OF SECTORS KEY MODELS KEY ISSUES KEY LITIGATION

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OVERVIEW OF SECTORS

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PHARMA SECTOR – INDIA FACTSHEET 3rd

14th

50%

40%

25%

66 mn

In volume of pharmaceutical production

In value of pharmaceutical production

of global demand for various vaccines

of USA’s demand of general drugs

of supply of medicines in the UK

COVID 19 vaccines exported to 95 countries

GOVT EXPENDIURE ON HEALTH

EXPECTED MARKET SIZE

Expenditure (USD bn) 2016 2017

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India- Often referred as the pharmacy of the world!

Market Size (USD bn) 140 120

2018 2019

46

100

2020

80

35 60

120

40 20

41

35

65 42

0 2021

Source: https://www.ibef.org/industry/pharmaceutical-india.aspx

2024 E

2030 E

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PHARMA SECTOR – GLOBAL TRENDS

Biopharmaceutical innovation and research

Robotic surgeries with the help of Artificial intelligence

Precision Medicine – Customized medicines

Genetic or curative therapies

Product life cycle

Research

Development

Factors which contribute to the product life cycle: • Robust R&D facilities and Government support; • Labor intensive countries for production • Patent registration • Consumption centric countries for maximizing sales

Production

Distribution

Sales

PHARMA SECTOR – INDIA’s GROWTH AND CHALLENGES

GROWTH INHIBITORS GROWTH DRIVERS Climate of the country

Not-so robust research and development facilities Brain drain

Political stability Accessibility in terms of connectivity with various countries Innovation in treatments Availability of resources

Regulatory policies and frameworks need to be more structured Lack of economic stimulus of the Government for research and development process Tax policies are not conducive to the sector Long gestation period

Source: https://www.ibef.org/industry/pharmaceutical-india.aspx

6

FMCG SECTOR – INDIA’s FACTSHEET

55%

URBAN SECTOR

31

19

SECTOR SPLIT (%) 50 Household and personal care household and personal care products - such as stationery, cleaning supplies, clothing, etc.

Source: https://www.ibef.org/industry/fmcg.aspx

45%

RURAL SECTOR

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FMCG SECTOR – INDIA’s GROWTH AND CHALLENGES

GROWTH INHIBITORS GROWTH DRIVERS Rise in per capita income Impact of Covid-19 Increased literacy rate

Increased awareness about personal care Role of e-commerce Exposure to global brands

Complex Supply chain and distribution models Regulatory policies and frameworks Emergence of newer brands

Source: https://www.ibef.org/industry/pharmaceutical-india.aspx

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COMMON FEATURES OF PHARMA AND FMCG SECTOR

MULTI-STATE PRESENCE

MRP BASED PRICING

SUPPLY CHAIN MANAGEMENT

MARKETING METHODOLOGY

DIRECT CONSUMPTION BASED

THIN LINE OF CLASSICATION AMONG THE TWO

(from legacy point of view)

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KEY MODELS UNDER GST

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TRADITIONAL BUSINESS MODEL PECULIARITIES OF THE SECTORS:  Long and complicated supply chains  Several value chain participants  Highly reliant on online sales and e-commerce platforms  The traditional supply chain model have been depicted below : Raw Material Supplier

Contract manufacturer

Job worker

MANUFACTURER

C&F Agents

Stockist

Wholesaler

Retailer

Consumer

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PHARMACEUTICAL BUSINESS MODEL PECULIARITIES OF THE SECTORS:  Common activities include third party manufacturing, loan license agreements and job work  P2P model: Marketing companies enter into manufacturing agreements for products which are as per the manufacturer’s expertise. Product is marketed and sold under the trademark of the marketing company.  Under the loan license arrangement, a manufacturer may obtain a license from the licensing authority to manufacture at a facility of another licensee.  This model gives the opportunity to pharmaceutical manufacturer to manufacture drugs more than their in-house capacity

Licensing Authority

License to manufacture specific drugs

Permission to manufacture from another facility

MANUFACTURER 1

Manufactures drugs on behalf of manufacturer

MANUFACTURER 2

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POST-GST BUSINESS MODEL PRE-GST Challenges:  2% non-creditable CST was levied on interstate transactions  This added to the cost and hence supply chain was designed to minimize this cost  Multiple hubs and warehouses were set-up which again added to the operational costs

PRE-GST

POST-GST Resolutions:  GST has led to the unification of warehouses / depots (instead of each state)  This has converted most supply chains in these industries to hub and spoke model  Supply chains are now designed to be more customer centric rather than tax centric

POST GST

HUBS SPOKES

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KEY ISSUES FACED

BY THE INDUSTRY

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KEY ISSUES FACED BY THE INDUSTRY Owing to the voluminous dominance of the pharmaceutical and FMCG sector, they face practical challenges under GST. The quantum of products available or the business processes adopted by them directly affect every consumer in the nation.

Any change or error or incorrect interpretation of law would lead to a rippling impact under GST. While there are multiple challenges that are inherent with these sectors, we have discussed some major challenges under these sectors which are part of our consumers daily transactions. We have covered the following: 1. Classification of goods 2. Discounts and incentives 3. Expiry of goods

4. Input tax credit on process loss 5. Inverted duty structure 6. Anti-profiteering

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1 : CLASSIFICATION OF GOODS

Practical Challenges  Plethora of SKUs are manufactured / traded in these sectors  Basis above classification, GST rate is determined  Exemption conditions are subjective to such HSN classification

Detailed analysis Variation in classification for the same product could arise due to either of the following:  Manner of packaging (unit container or bulk package)  Whether a brand name is affixed  End usage of products (cosmetic or medicament), etc.

Determining the underlying conditions and assigning appropriate HSN for each product is the starting point for charging appropriate GST rate and any exemptions  Various erstwhile litigations are pending due to the above

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1 : CLASSIFICATION OF GOODS

Case Studies 1

2

Alcohol-based hand sanitizers

Odomos Cream

Takeaways Disinfectant Medicament

Repellant Medicament

3

Skin care / acne / face lotion and powders

Cosmetics Medicaments

 Alcohol-based hand sanitizers would fall within ambit of ‘disinfectant’, and not as medicament as therapeutic and prophylactic properties are absent in the same, inspite of product manufactured using ingredients regulated under Drugs and Cosmetics Act  Its curative and preventive value must be substantial, and product must be manufactured to control or cure the disease and should be used by consumers primarily for treatment/cure

 SC refused to entertain Dabur’s SLP assailing Allahabad HC judgment which confirmed AAAR, Uttar Pradesh ruling that ‘Odomos’ merits classification under Heading 3808 as ‘Mosquito repellent’ and not under Heading 3004 as ‘Medicament’

 To determine whether a product / formulation is a “medicament”, it is necessary to consider efficacy in treating or remedying an injury / ailment / illness  Skin ailments such as blackheads, acne, freckles, exfoliation, blemishes, and rash are not per se diseases / illnesses / even injuries  Said products only address the external manifestations and are intended to be applied to the human body for cleansing, beautifying, promoting attractiveness or altering the appearance

1. Wipro Enterprises Private Limited 2. Dabur India Limited vs. The Union of lndia 3. Akansha Hair and Skin Care Herbal Unit Private Limited

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2 : DISCOUNTS & INCENTIVES

Practical Challenges  Schemes & incentives are given to stockists/ wholesalers/ retailers – being recipients

 Pre-sale, post-sale & special discounts have different tax impacts  These include buy one get one free, cash / trade / festive / volume discounts

Detailed analysis The law provides different treatment for price reduction by way of:  Pre-sale discounts: specified on the invoice are considered inclusive in value of supply  Post-sale discounts: only cases where the discount is pre-agreed, linked to specific invoices and ITC is reversed by the recipient, deduction is permitted  Subsidies: subsidies that are directly linked to the price are considered inclusive in value of supply  Free samples: ITC cannot be claimed on goods given as free samples & practical e-way bill challenges  Supplies by recipients: no specific clarity on the treatment of such discounts – case to case basis analysis  Combo packs: determining the nature of composite / mixed supply and its corresponding treatment 18

2 : DISCOUNTS & INCENTIVES Legal Clarification MARCH 2019

JUNE 2019

Circular No. 105/24/2019-GST dated 28 June 2019

Circular No. 92/11/2019-GST dated 7 March 2019 The circular explained the schemes and tax treatment in four categories: Free samples – Not a ‘supply’; exception is Schedule I supply. ITC restriction Buy one get one free – supply of two items for the cost of one Discounts – Pre-agreed/ on-invoice discounts Secondary discounts – For post supply discounts, financial credit notes can be issued; no change in taxable value

Treatment of post sales or secondary discounts: If post supply discount is given with the condition that the dealer shall undertake specific activities  separate transaction with consideration If post supply discount is given with the condition that the dealer shall offer special discount to customers to augment sales  to be treated as consideration

OCTOBER 2019

Circular No. 112/31/2019-GST dated 03 October 2019 Representations were made expressing apprehensions on the implications of the said Circular To ensure uniformity in the implementation of the provisions, the circular was withdrawn

Circulars not binding on assessees!

Therefore, the taxability of post sales discount is still a grey area that needs further comprehension.

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2 : DISCOUNTS & INCENTIVES

Case Studies

1

2

3

Distributor sells goods at discounted prices which is subsequently reimbursed by manufacturer

Quantity discount by way of extra cigarettes

Amount paid to authorized dealers towards ‘rate difference’ and ‘special discount’ outside the agreement purview

Takeaways Consideration

Discount

Individual supply of free goods Two goods at the price of one

Consideration

Discount

 Such reimbursed discounts are said to be a consideration paid by the manufacturer on behalf of the customers and thus are liable to be included in the taxable value  The appellant has no control on quantum of scheme discount to be offered since it is on supplier’s instruction  The amounts paid to dealer towards ‘rate difference’ and ‘special discount’, post activity of supply does not comply with sec 15(3)(b)(i) and hence not a discount  Quantity discount given by way of extra quantity of cigarettes in addition to normal quantity against same consideration, will not be an individual supply of free goods but a case of two or more individual supplies where a single price is being charged for the entire supply  It can at best be treated as supplying two goods for the price of one  The agreements have no pre-fixed criteria, basis, or rationale for arriving at quantum of such discounts as compared to cash discount, price equalization etc.  The mention of bare word ‘discount’ in the agreement without any parameters / criteria would not fulfil requirement of Section 15(3)(b)(i)  Such abnormal discounts without any criteria or basis cannot be considered fair and at an arm’s length business transaction

1. Santhosh Distributors 2. Golden Tobacco Limited 3. Ultratech Cement Limited

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3 : EXPIRED OR NEAR EXPIRY PRODUCTS

Practical Challenges  All products in the sector are perishable in nature  Typically, products close to expiry are returned by the wholesaler/ retailer/ stockist to the manufacturer  Treatment of return of products post stipulated time is unclear

Detailed analysis Time limit in case for issuing credit notes has been prescribed under law, within which tax adjustment can be taken. However, in case of expired drugs, this time limit lapses.

In case of return of goods post the stipulated time allowed under law – GST credit notes with tax adjustment is not permissible  Double jeopardy: when goods are written off / destroyed by manufacturers – ITC on such products are to be reversed and no tax adjustment is available  Ambiguity on the reversal of ITC amount being limited to goods returned / destroyed or the inputs used in manufacture of such goods  Supply chain in such sectors is complex and widespread. It is cumbersome to track the flow of goods & documentation in the channel 21

3 : EXPIRED OR NEAR EXPIRY PRODUCTS Legal Clarification Based on the circular no. 72/46/2018-GST dated 26 October 2018 issued, two scenarios can be envisaged. For which the treatment is discussed as follows:

1

Return of expired goods by issuing credit notes

Within time-limit Issue Credit Note | Goods returned under delivery challan | Tax liability can be adjusted by manufacturer | Recipient has reversed ITC Outside time-limit Can issue commercial Credit Note | Goods returned under delivery challan Return by registered person Issue invoice with GST | Original value of supply on invoice | Recipient eligible for ITC

2

Return of expired goods to be treated as fresh supply

Return by composition supplier Issue Bill of Supply and pay tax applicable to composition dealers | No ITC available

In case the manufacturer or supplier destroys the returned goods, ITC attributable to manufactured goods needs to be reversed

In case the manufacturer or supplier destroys the returned goods, ITC in respect of such returned goods needs to be reversed

Return by unregistered person Issue commercial invoice | No tax | No ITC 

Compliance to be checked under the Drugs and Cosmetics Act, 1940 which prohibits to issue an invoice and sell expired goods in India

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4 : ITC ON PROCESS LOSS Practical Challenges 

Both sector are heavily process driven with quality control regulations



When quality standards are not met, the goods are destroyed / discarded



Such activity may amount to large quantum of loss which is considered normal in the industry

Detailed analysis

Case Studies 

GST law restricts the claim of ITC on goods that are destroyed, scrapped, written off etc.  Industry may have to reverse the input tax credit which is in relation to manufactured items which are lost as a part of normal loss  Reversal of such ITC is significant requiring more cash flow in the process and impacting final pricing for consumers

Impact on ITC on loss of inputs that are quantifiable and involve external factors in manufacturing process ITC can be claimed

ITC to be reversed

ARS Steels and Alloy International Private Limited vs. State Tax Officer

Takeaways  

The HC noted that Section 17(5)(h) of the CGST Act, 2017 does not occasion reversal of ITC in case of normal manufacturing losses.

The situations set out in the said section indicates loss of inputs that are quantifiable and involve external factors and hence is different than normal loss. This case might be a ray of hope of the industry, but undeniably is not yet the law of land

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5 : INVERTED DUTY STRUCTURE

Practical Challenges 

Majority of products are charged at a lower output rate of tax owing to the consumer goods



Where as, inputs used are at 18% GST (being higher)



There is massive accumulation of ITC with little recourse through inverted duty structure

Takeaways  

Detailed analysis  Typically. crucial APIs for pharmaceutical sector are imported having 18% GST  Most input services for both sectors are charged at 18%  Owing to the consumption nature, most products are chargeable to output rate of Nil/5%/12%  The inverted duty structure situation creates recurring accumulation of ITC  Delayed refund cause blockage of working capital  Inverted duty structure is limited to only inputs used in the process (not services / capital goods)

Case Studies



Inverted duty refund is available

Inputs only

Inputs, Input Services and Capital goods

Multiple representations have made by the industry in this regard (including erstwhile regime) Recently, the Supreme Court in the case of The Union of lndia vs. VKC Footsteps India Private Limited settled the dust on the issue by holding that refund of unutilized input tax credit only in respect of input goods shall be allowed in cases of inverted duty structure.

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6 : ANTI-PROFITEERING

Practical Challenges 

Changes in rates, provisions and conditions is recurring under GST law



Keeping a track of such changes in provisions – which may be beneficial to the consumers can be tedious



There is no methodology prescribed for the same

Detailed analysis  Law requires the suppliers to pass on benefit to the consumers by way of commensurate reduction in prices in case of reduction in rate of tax or seamless flow of ITC  The regulating authority has not prescribed any methodology or procedure to compute the commensurate reduction to be done  Ambiguity with respect to calculation to be done at SKU level / company level /product level  Period for which the comparison needs to be made is not specified

Case Studies 

Anti-profiteering is only a transition provision, not required in daily GST routine YES



NO

Does accounting practice impact anti-profiteering YES

NO

Takeaways   

Notices continue to be issued for anti-profiteering. Litigation for the same becomes challenging due to lack of defined process of calculation The SC has directed Delhi HC to club various petitions and decide them together in the interest of time. About 50 petitions have been clubbed and are in the process of being heard at Delhi HC The tenure of National Anti-profiteering Authority has been extended by another one year i.e., till 30 November 2022.

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KEY LITIGATION

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PHARMA LITIGATION Sanofi India Limited (Maharashtra AAAR) FACTS

LEGAL PROVISIONS

 The appellant was engaged in business of sale of pharmaceutical  As per Section 16(1) of the said Act - "Every registered person shall, goods and services. subject to such conditions and restrictions as may be prescribed and, in  They initiated various marketing and distribution expenses in regular the manner, specified in section 49, be entitled to take credit of input course of business to promote their brand and enhance its sales. One tax charged on any supply of goods or services or both to him which such schemes was to reward dealers for goods sold by them by giving are used or intended to be used in the course or furtherance of his them watches, foreign trips etc. Vide another scheme they distributed business and the said amount shall be credited to the electronic credit products like pens, notepad, key chains etc. as brand reminders to the ledger of such person". distributors and dealers.  Section 17(5)(h) states that "input tax credit shall not be available in  They applied for an advance ruling on the question of whether the respect of the following, namely: goods lost, stolen, destroyed, written GST paid on expenses incurred towards the Scheme or goods given as off or disposed of by way of gift or free samples." brand reminders is available as ITC.  The Advance Ruling Authority ruled that ITC is not available in such cases.  Aggrieved, the appellant appealed before the AAAR.

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PHARMA LITIGATION Sanofi India Limited (Maharashtra AAAR) HELD

OPEN QUESTIONS

 The AAAR recorded divergent views of members on ITC eligibility to  Due to divergent opinion of the members, no conclusion was Appellant. reached on the matter.  The CGST member opined that ITC is available of GST paid on  Giving gifts and promotional items to dealers is common. Other expenses incurred towards promotional schemes as well as brand rulings have also been issued on similar matter. However, no reminders observing that promotional scheme “is designed with the consistency has been achieved. Some of these rulings are: sole purpose of the furtherance of their business and is thus purely  Kanhaiya reality Private Limited – The WBAAAR in this case held driven by the commercial intentions” and fulfill conditions stipulated that the applicant was recovering nominal amount for for input and input services under section 2 (59) and section 2 (60). promotional items given to dealers, hence, it is not free of cost.

It was also noted that watch given to the wholesaler is not a gift as ITC would be available in this case. However, the valuation would the watch is given under the contractual obligation under the have to be done in terms of Sec. 15. scheme. It is the consideration for achieving a particular sales target  Page Industries Limited – The Kar. AAAR also noted that GST paid and hence, input tax credit on purchase of the said watch should be on the procurement of promotional items supplied to the available to Sanofi. distributors free of charge will not be eligible for ITC since the said  The SGST member noted that “these goods are inputs but supply is a non-taxable supply. distributed as free gifts. Therefore, ITC is not available as per section 17 (5) (h)”.  Considering divergent views of Members, the AAAR in conclusion elucidates that “as per Section 101 (3) of the CGST Act, it shall be deemed that no advance ruling can be issued in respect of the question under appeal.

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PHARMA LITIGATION Abbott Healthcare Private Limited (Kerala AAR) FACTS

LEGAL PROVISIONS

 As a part of its business, the applicant places medical instruments free  Section 2(31) of the CGST Act, 2017 defines consideration as follows: of cost at unrelated hospital premises/ laboratories.

“Consideration in relation to the supply of goods or services or both  The applicant has an agreement with these hospitals/ laboratories to includes– (a) any payment made or to be made, whether in money or procure minimal quantity of reagents, disposables and calibrators otherwise, in respect of, in response to, or for the inducement of, the from the applicant’s distributors on which applicable GST is charged. supply of goods or services or both, whether by the recipient or by  The applicant contends that placement of instruments is without any other person but shall not include any subsidy given by the Central consideration; no amount is charged for deficit as well.

Government or a State Government; (b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of,  The sequence of the events is that the Company applied for an AAR the supply of goods or services or both, whether by the recipient or by which held both supplies to be composite supplies. The same was any other person but shall not include any subsidy given by the Central upheld by Kerala AAAR. The Kerala HC quashed the rulings on grounds Government or a State Government”. that it is without jurisdiction and remanded the matter back to AAR!

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PHARMA LITIGATION Abbott Healthcare Private Limited (Kerala AAR) HELD

OPEN QUESTIONS

 Any supply to qualify as ‘supply’ under the GST law should have the following key elements viz. there should be supply of goods and/or services, it should be in the course or furtherance of business and supply should be made for a consideration.  In the instant case, the said supply can be said to be a supply of goods. Moreover, the supply can be made during or furtherance of business. However, largely the discussion in the said AAR revolved around the consideration aspect. The AAR held that agreement to purchase a minimum quantum of reagents, calibrators, and disposables is a consideration for provision of medical instruments and hence it is not a free of cost supply.

 Contrary ruling in the case of M/s Randox Laboratories India Private Limited with similar facts  Valuation of the supply i.e., placement of medical instruments to levy GST?  No charge for deficit  Time of supply to issue debit note lapsed?  If deficit charged  Liquidated damages?

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PHARMA LITIGATION Sterling Biotech Ltd. (Gujarat AAR) FACTS

HELD

 The applicant is engaged in manufacturing of bulk drugs which are  The AAR noted that the definition of drugs is not available in GST Act. consumed in manufacture of life saving drugs and medicaments for Hence, referring Drugs and Cosmetics Act, 1940, drug means ‘All treatment of cancer, etc. medicines for internal or external use of human beings or animals and  The applicant approached the AAR to question whether they can all substances intended to be used for or in the diagnosis, treatment, classify their products under SN 180 of NN 1/2017 – CT (Rate) which mitigation or prevention of any disease or disorder in human beings, covers drugs or medicines. The said entry covers ‘Drugs or medicines or animals, …..’ including their salts and eaters and diagnostic test kit, specified in List  As per the definition of bulk drugs in DRUGS (PRICES CONTROL) ORDER, I appended to this Schedule’.

1979, bulk drug” means any substance including pharmaceutical,  Whether their bulk drugs can get covered under the said entry to levy chemical, …..accepted under the Drugs and Cosmetics Act, i940 (23 of GST @ 5% instead of 18% which they are currently charging by 1940), which is used as such or as an ingredient in any formulations. classifying their drugs under the general entry.  Therefore, bulk drugs are raw materials, ingredients and APIs. It is used for making a medicine. It cannot be directly administered in a human.  Entry no. 180 of NN 1/2017 – CT (Rate) would have included applicant’s drugs if the Government intended to extend the benefit of concessional rate to the bulk drugs/raw material. However, the intent is to provide concessional rate to drugs that are administered in humans.  The AAR ruled in negative to say that concessional rate of GST is not applicable to the given products.

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PHARMA LITIGATION M/s Ambara (Karnataka AAR) FACTS

LEGAL PROVISIONS

 The applicant is engaged in engaged in the business of providing  Composite supply means it is a supply made by a taxable person to a health care services and run a Hospital in the name of CURA Hospital. recipient consisting of two or more supplies of goods or services or The applicant provides the services relating to Health Care Services both or any combination thereof, which are naturally bundled and which are diagnostic and treatment services. supplied in conjunction with each other in the ordinary course of  The applicant has posed the following questions: business, one of which is a principal supply. Further, the expression  Whether input tax credit is required to be restricted on medicines "principal supply" means the supply of goods or services which supplied to patients admitted in hospital? constitutes the predominant element of a composite supply and to  Whether input tax credit is required to be restricted on medicines which any other supply forming part of that composite supply is supplied to patients not admitted in hospital? ancillary.  Whether input tax credit is required to be restricted on medicines  Section 17(2) of the Act, reads as "where the goods or services or both supplied to other than inpatients and outpatients? are used by the registered person partly for effecting taxable supplies  Whether input tax is required to be restricted on supply of food including zero-rated supplies under this Act or under the Integrated and beverages to the patients admitted in hospital?

Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies".

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PHARMA LITIGATION M/s Ambara (Karnataka AAR) HELD

OPEN QUESTIONS

 The AAR held the following:  The AAR held supply of food and beverages as a composite supply  In case of medicines given to in-patients (admitted in the but not medicines. It was held that medicines are not consumables hospital), are a part of treatment services and supply of medicines used in providing health care service and hence not a separate is not a separate supply. Thus, medicines become a part of exempt supply. The distinction between consumables and separate supply is service as health care service is exempt. No ITC available in such very thin line and open to interpretation. cases  In case of medicines given to out-patients, the medicines are a part of treatment services and supply of medicines is not a separate supply. Thus, medicines become a part of exempt service as health care service is exempt. No ITC available in such cases  Sale of medicine at pharmacy – liable to GST, ITC available  Patients are not allowed to have outside food. Hence, supply of food becomes naturally bundled with health care service and hence exempt. No ITC available.

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FMCG LITIGATION The Union of lndia vs. VKC Footsteps India Private Limited (SC) FACTS

LEGAL PROVISIONS

 The assessee is engaged in the manufacture and supply of footwear which attracts GST at the rate of 5%; while it procures input goods and input services such and avails ITC on the GST paid thereon. Most of the input goods and input services attract tax at the rate of 12% or 18%;  Despite utilization of credit for payment of GST on outward supply, there is an accumulation of unutilized ITC for which refund was applied u/s 54(3). The refund with respect to input services and capital goods was rejected basis the formula given u/r 89(5). Division Bench of Gujarat HC held that Rule 89(5) is ultra vires Sec. 54(3), thereby allowing the petition.  On the other hand, a division bench of the Madras High Court in the case of Tvl. Transtonnelstroy Afcons Joint Venture Vs Others upheld the classification contained in Rule 89(5) and restricted the refund of input tax credit only on the input goods.  Due to Contrary judgments, the matter reached SC.

 Section 54(3)(ii) allows refund for unutilized input tax credit in cases where credit is accumulated on account of tax rate on inputs being higher than output supplies.  Explanation to rule 89(5) states that for the purposes of this sub-rule, the expressions – (a) ―Net ITC shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both”.  It must be noted that Rule 89(5) was amended vide NN 21/2018 - CT dated 18 April 2018 which prescribed a revised formula retrospectively w.e.f. 1 Jul 2017*.  As per Section 2(59), input hereby defined as “Input” means any goods other than the capital goods used or intended to be used by a supplier in the course or furtherance of business.

Note*

Before Amendment

Post Amendment

In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula -

In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula:-

Maximum Refund Amount = {(Turnover of inverted rated supply of goods) x Net ITC ÷ Adjusted Total Turnover} - tax payable on such inverted rated supply of goods

Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) x Net ITC ÷ Adjusted Total Turnover} - tax payable on such inverted rated supply of goods and services.

Explanation.- For the purposes of this sub rule, the expressions “Net ITC” and “Adjusted Total turnover” shall have the same meanings as assigned to them in sub-rule (4)."

Explanation:- For the purposes of this sub-rule, the expressions –(a) Net ITC shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both; and

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FMCG LITIGATION : 1 The Union of lndia vs. VKC Footsteps India Private Limited (SC) HELD

OPEN QUESTIONS

• Under Section 54(3)(ii) the legislature has used the word “inputs”  The SC acknowledged the inconsistencies in the formula and noted which, as defined in the act, means only input goods. Therefore, there the below: is no disharmony between Rule 89(5) and Section 54(3). If the legislature had any intention of giving the credit of tax paid on input ‘Accordingly, we shall refrain from replacing the wisdom of the goods and input services, the legislature would not have restricted legislature or its delegate with our own in such a case. However, the scope of refund in inverted duty structure to only “inputs”. given the anomalies pointed out by the assessees, we strongly urge • An inequitable and discriminatory provision in tax legislation does not the GST Council to reconsider the formula and take a policy decision make it discriminatory per se. The court observed that input goods regarding the same.’ and input services constitute two different classes and therefore, the argument that equals are being treated unequally does not hold water.

• Therefore, the SC affirmed the decision of Madras HC and disapproved the ruling of Gujrat HC.

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NEW FOCUS

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NEW FOCUS : PLI SCHEME PLI scheme is a plan which has been announced by the Government of India to boost the manufacturing in the country and support the Atmanirbhar Bharat initiative. The scheme has identified 13 sectors (including Pharmaceuticals) which shall qualify under the scheme and make India globally competitive by giving these sectors a stimulus.

13 SECTORS

The scheme has been categorised based on Global Manufacturing Revenue (GMR) of pharmaceutical goods in FY 2019-20. Basis the GMR of an organisation the quantum of incentives is decided. The following expenditure shall be considered for eligible investment in the sector: 1.

2.

3.

4.

5.

New plant, machinery, equipment, and associated utilities.

Research and Development (R&D) Transfer of Technology (ToT) agreements Product registration Factory building & associated infrastructure (limited to 20% of plant & machinery)

3 CATEGORIES

15000 CRORES

The scheme intends to offer a total of INR 15,000 crore in incentives to the selected applicants for the identified pharmaceutical products.

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BRING ABOUT A TAX REVOLUTION AT YOUR ORGANIZATION tmsl tmslglobal tmslglobal

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