European Union’s Court of Justice has recently (on 11th May, 2017) held that transfer of tangible property to the State Treasury in settlement of arrears of taxes constituting State Budget revenues is a transaction that is not subject to VAT. The judgement though deals with transfer of immovable property, and such transactions have been kept out of the GST system in India, proposed to be effective from 1st of July, 2017, nevertheless, the issues raised in this judgement are worth discussion. These issues may be relevant in case of recovery of GST dues by the department by way of attachment of plant and machinery.
The EU Court’s Judgement
The question before the Court of Justice was whether it was possible to consider transfer of right to dispose of tangible property (land in the present case), as owner, made in settlement of tax debt, to be a ‘supply of goods for consideration’ within the meaning of the EU VAT Directive [Articles 2(1)(a) and 14(1) of the EU law].
The Minister in Individual Tax Ruling was of the view that since upon transfer of ownership of immovable property, the municipality acquired all the rights of an owner, such transfer of ownership in settlement of tax arrears constituted supply of goods for consideration. However, the referring court (the court which referred the issue to the Court of Justice) was of the view that since tax is not a pecuniary performance which may be obtained in exchange for another performance, its principal feature being unilaterality, the transaction would not be liable to VAT.
Article 2(1) of the VAT Directive provides,
“the following transactions shall be subject to VAT,
(a) The supply of goods for consideration within the territory of a Member State by a taxable person acting as such; ……….”
According to Article 14(1),
“‘Supply of goods’ shall mean the transfer of the right to dispose of tangible property as owner.”
The Court of Justice in this regard was of the view that though there existed a legal relationship between the supplier of the immovable property in the case, and the beneficiary of that property – the relationship linking the creditor and its debtor, the obligation of the taxpayer, as a debtor, to make payment to the tax authorities, as creditor, is unilateral in nature. It was held that this is because payment of tax by the taxpayer results only in the statutory discharge of tax debt, even if it is done by means of provision of immovable property.
Accordingly it was held that the transaction of providing a property in lieu of payment, the purpose of which is to discharge a tax debt, cannot be considered to be a transaction effected for a consideration, as there is no legal relationship entailing reciprocal performance.
The Court also observed that the compulsory charge of tax, whether it relates to sum of money or to tangible property, does not result in any performance on the part of the public authority or any corresponding performance on the part of the taxable person.
Further, the Court rejected the plea of coverage under Article 16 of the VAT Directive, which while talking of application of business assets for private use, also covers ‘disposal free of charge’ for the purpose of coverage under ‘supply for consideration’. The plea was rejected observing that such provision was only to attain the objective of ensuring equal treatment between a taxable person who applies goods for own use and the final consumer who acquires goods of same type, on the other hand. Reliance in this regard was placed by the Court on a 2014 judgement in the case of BCK Leasing IFN wherein it was held that impossibility of actually recovering the goods earlier provided under the financial leasing contract, does not fall within any of the situations as in Article 16, for liability under VAT.
From the EU case law, it is clear that such transfer would not amount to ‘supply under consideration’ for the purpose of VAT. In the Indian context, transfer of business assets is dealt at two places in the CGST law, other than Section 85 of the said Act (which talks of transfer of business). It finds mention in Schedule I (dealing with activities which are to be treated as ‘supply’ even if made without consideration), and in Schedule II which specifically deals with transfer of business assets, with or without consideration. It is not clear whether these provisions could be relied by the department in future to claim tax on the plant and machinery attached by them under recovery proceedings (refer Section 79 of the CGST Act), terming such transfer as ‘supply’ for the purpose of GST liability. It is another matter that it may amount to double blow to the assessee who would be already under pressure to clear earlier dues.
Broadly, it may be argued that above mentioned clauses of Schedule I and II are to take care of disposal of business assets to the third party (another entity), in order to have a level playing field for those procuring and selling those assets from/in the market, and that these provisions would not cover disposal or transfer in favour of the tax department. EU case law discussed above is quite relevant in this context.
Further, it may be noted that Entry 6 in Schedule III, excludes ‘actionable claims’ from the scope of ‘supply of goods’. ‘Actionable claim’ is defined under the CGST Act as having the same meaning as assigned to it in Section 3 of the Transfer of Property Act, 1882, and according to the latter provisions, ‘actionable claim’ means a claim to any debt. Whether, considering the fact that the tax would be the first charge on property of taxable person (Refer Section 82), issue of taxability of transfer of assets to the Revenue department, in lieu of tax liability – taxpayer being the debtor, would be covered under ‘actionable claims’?
It may also be noted that the charging section (Section 9 of the CGST Act) does not talk about ‘consideration’. The charge is on provision of ‘supply’, and it is only in Section 7 (which non-exhaustively defines ‘supply’), the term ‘consideration’ is used. It is another matter that certain supplies even if provided without consideration are part of the Indian as well as the EU law.
It took a long time for the EU law to evolve to the present state, with the Court of Justice only on 11th of May, holding that such supply would not be liable to VAT. In India we are at present just a few days short of implementing the biggest reform in indirect taxes in the history of independent India, and hence it is naturally desirable that we step into the future with more clarity and precision. Clarity is anticipated more because we have knowledge of issues that had cropped-up in other countries and the solutions that tax department or the Courts of those countries have provided to the tax payers.