In mid-November 2021 the government decided to tax transactions supplied through an e-commerce operator which were earlier not liable to tax, i.e. Non-AC passenger transport services (bus & auto) and certain restaurant service suppliers.  Similar services when availed directly without routing the transaction through e-commerce operators would remain untaxed. Whether this decision is sound? Or is it just a stop gap measure to earn revenue until the Judiciary steps in, which practically may take a few years. We aim to bring out the issues and some clarity with respect to the recent changes in law which will come into effect from 1^st January 2022.

GST tax position w.e.f 1^st January 2022:

Notification 16/2021-CT(R) dated 18.11.2021, effective from 1^st January 2022:

Amending original notification 12/2017-CT(R) dated 28.06.2017 w.r.t services exemptions:

• Sl no 15(b) & (c) – Passenger transportation services through non-airconditioned carriages would not be exempt when such services are provided through an e-commerce operator which is notified under Section 9(5).
• Sl no 17(e) – Passenger transport services through metered cabs or auto-rickshaws (including e-rickshaws) would not be exempt when such services are provided through an e-commerce operator which is notified under Section 9(5).

Notification 17/2021-CT(R) dated 18.11.2021, effective from 1^st January 2022:

Amending original notification 17/2017-CT(R) dated 28.06.2017 w.r.t e-commerce operator liability under Section 9(5):

• Extends liability of passenger transport services to include omnibus and any other motor vehicle. (Cab, taxi and motor cycle were already included). [Various definitions under Motor Vehicle Act 1988 linked although section 2A not linked]
• Adds restaurant services, other than services supplied by restaurants also providing accommodation services above Rs. 7,500/unit/day.

Section 2(45) of CGST Act – defines e-commerce operator (hereinafter referred to as ECO) any person who owns, operates or manages digital or electronic facility or platform for electronic commerce.

Section 9(5) of CGST Act (similar section 5(5) of IGST Act) – The Government may, on the recommendations of the Council, by notification, specify categories of services the tax on intra-State supplies of which shall be paid by the electronic commerce operator if such services are supplied through it, and all the provisions of this Act shall apply to such electronic commerce operator as if he is the supplier liable for paying the tax in relation to the supply of such services.

Notification No. 65/2017-CT, dated 15-11-2017 – exempted persons making supplies of services, through an ECO and having an aggregate turnover, to be computed on all India basis, not exceeding an amount of twenty lakh rupees in a financial year.

Issues due to change in law:

The intention of the government is very clear – as the collecting taxes is becoming an issue, all transactions conducted over ECO w.r.t passenger transport and restaurant services are being taxed. 

The notion that ECO facility is used pre-dominantly by the financially stable/well-earning/rich class of persons may have been true about 3/5 years ago, but not anymore. With the majority of the population in India owning a smartphone, the advent of social media/technology, internet access in the entirety of India, growth in purchasing power – the facility to access these services through ECO is available to all.

Considering the present way of life, corona virus impact where people are requested not to gather or move around unless absolutely required – these ECO’s are a boon.

This change in the law creates undue burden on those businessmen who do not need to be registered under GST as their services were either exempted or below the threshold limit to register under GST. Although there is no change in their outward supplies, due to the fact it is supplied through an ECO, the services are being taxed. This reduces their opportunity to remain competitive in the market and has a direct adverse impact on their business.

Implication of the aforementioned amendments are summarised below (illustrations):

Note: Expected tax rate – 5% without ITC in both passenger transport and restaurant services.

Clarification against common queries:

1. Whether a taxpayer being a supplier and an ECO is liable person?
   • The wordings of Section 9(5) indicate that the section would be applicable when there are two separate persons, i.e. an actual supplier and an e-commerce operator. In the event where the supplier himself has a digital platform through which his supplies are made, he would be liable as the supplier and not as an e-commerce operator under s9(5).
   • Example – ABC Limited runs a bus passenger transport service (AC & non-AC). They own & operate their own digital platform where anyone can book tickets and make payments. Such persons would not be liable under section 9(5), rather would be liable as a supplier. Therefore, non-AC would be exempt & AC taxable.
2. Whether autos are covered under ‘Motor Vehicle’ definition in GST? What about e-rickshaws?
   • There is an ambiguity under section 2(28) of Motor Vehicles Act 1988, which does not include ‘a vehicle having less than four wheels fitted with engine capacity of not exceeding 25 cc’. Whether this can be construed that if a vehicle have 3 or lesser wheels or any vehicle have less than 25cc or is powered by electric battery is not covered under the definition of motor vehicle?
   • The exclusion is specific to what is written, i.e. if a vehicle is having less than 4 wheels and is with engine capacity less than 25 cc, then such a vehicle will not be covered. Otherwise all other types of motor vehicles are covered. This can be understood by a conjoint reading of other definitions in the Motor Vehicles Act 1988.
   • Section 2A introduced in 2015 in MVA 1988, includes e-cart & e-rickshaws.
3. Whether electric two-wheeler & electric buses and are covered under ‘Motor Vehicle’ definition
   • Two-wheelers are covered under the ‘motor cycle’ definition – 2(27) of MVA 1988.
   • Buses are covered under ‘omnibus’ definition – 2(29) of MVA 1988.
   • Both 4.1 & 4.2 are construed to be motor vehicles. Electric vehicles of all nature will get covered in the ‘motor vehicle’ definition – 2(28) of MVA 1988.
4. Whether discounts or payment benefits through ECO can be considered as supply by ECO (Ex: Zomato pro used during restaurant dine-in)
   • No, only when the restaurant services (including takeaway/food delivery as per notification Circular 164/2021-GST dated 6th October 2021) are provided through the ECO then the liability is cast upon the ECO.
   • The usage of such features during dine-in would tantamount to a discount and the GST would be leviable on the actual supplier, i.e. the restaurant himself. 
5. Whether a restaurant/canteen/mess/food joint having takeaway/food delivery option will be considered as restaurant services or supply of goods?
   • This could be disputed on the grounds of what elements can be considered as a restaurant service and what elements must constitute a supply of goods. Although, in sl. 7(i) of notification 11/2017-CT(R) the wordings used indicate that takeaway/food delivery also can be construed as a service – “……provided by a restaurant, eating joint including mess, canteen, whether for consumption on or away from the premises where such food or any other article for human consumption or drink is supplied……”
6. Whether a cloud kitchen is covered in the restaurant services definition?
   • Assuming that a cloud kitchen does not have any seating area for customers, and no service element whatsoever, i.e. it facilitates takeaway/delivery only, it may not fit into the definition of a ‘restaurant, eating joint, mess, canteen’ and therefore, may not be classified as a service and may require to charge GST as a supply of goods.
   • This creates a practical impossibility for such suppliers and clarification from the government is required.

Way forward/Representation:

Persons who are unregistered due to present exemptions and providing passenger transport services & restaurant service must raise their voice. If possible, the same can be enabled through associations/industry to the appropriate offices/persons. (indicative list given below):

• Hon’ble Union Minister of Finance, Ministry of Finance
• Hon’ble Secretary, GST Council
• Hon’ble Minister for Commerce and Industry, Government of India
• Hon’ble Minister for Finance, Government of Karnataka (State-wise)
• Chairman, Empowered Committee of State Finance Ministers, Government of India
• Chairman, CBIC
• Hon’ble Prime Minister’s office (optional)

Grounds for representations

• Necessity product: To prove that non-AC passenger transportation services are necessary services and that was the reason for covering such services under exemption from erstwhile regime till date. Similarly, for restaurant services considering the change in way of life, where nuclear families are increasing, lack of cooking skills, COVID risks and need to social distance oneself makes food delivery services also a basic necessity and not one of luxury/sin.  
• Nature of services: Nature of services are not altered only by provision of such services via ECOs. Any additional service provided by ECOs was always taxed separately. What is being taxed is the convenience brought about through availability of mobiles, internet and technology. Is this being seen as part of a luxurious lifestyle and not a basic necessity? The law must change with times, although, here it has changed unfavorably.
• Service cost imbalance: Those services where, tax is levied w.e.f 1.1.22 only due to the fact that it is supplied through an ECO otherwise remains exempt increases the cost of such services on par with other similar services in the marketplace. The smaller entities/unregistered persons will lose business and will be forced to enroll under an e-commerce operator to survive.
• Constitutional violation: As this notification affects a certain class of businessmen only, one may dispute that the notifications are in violation of Article 19 (Right to Business) and Article 14 (Right to Equality) of the Constitution of India.
• Public interest/Government’s private interest: Considering the various issues raised above, one must question whether the amendment has been carried keeping in mind the public interest or just to boost the revenue of the State & Centre and to ease the collection of taxes for the Govt? If the GST law amendments cause more harm than good, would it not be prudent to rectify the changes in law?

Conclusion

Can the government have different taxation mechanisms for the same underlying transaction? Does the availability of internet and e-commerce operators actually display a luxurious lifestyle? Whether the supply food delivery & passenger transport service through an e-commerce operator change the very nature of the underlying services? If the answer to these questions is ‘No’, then can we say that the recent circulars and notifications are incorrect and must be made void ab-initio? Can they be struck down on the basis of equality and in the public interest? We will have to wait and watch.

Representations by taxpayers, trade/associations and industry will help bring out these issues and ensure remedy is provided at the earliest. Sadly, the way the law is changing, it seems the Government does not trust the taxpayers and vice versa. This will only increase in time!

Suggestions or feedback can be sent to madhukar@hiregange.com or akshay@hiregange.com

Acknowledgement – This article was published in KSCAA journal

By CA Madhukar N Hiregange

& CA Akshay M Hiregange