After a long wait we have finally voyaged into the Goods and Services Tax regime, and are experiencing many teething problems. Other than filing of GST Returns, issue related to appropriate classification of goods and services and the rates thereon is one of the many burning issues which require immediate action on the part of the government. It may be noted that any inapt classification can result in grave consequences to businesses and their reputation.
Leasing services – The problem
One such service is leasing of cars, aircraft etc. where a conclusive classification and the corresponding rates have not been reached. The rate schedule initially released by the GST Council contained an entry which stipulated that transfer of right to use goods would be taxable as per the rates of the goods being transferred. The industry was apprehensive about the impact on their businesses if such rate of GST as applicable to goods like cars being leased (as high as 50%) was to be followed. It was believed that such high rates would lead to massive costs on industries engaged in leasing of cars as well as to their ultimate recipients. Further, credit on such service is not available which would further escalate the costs.
Subsequently, Notification No. 11/2017-Central Tax (Rate), dated 28th June, 2017 was issued prescribing rate of tax on various services based on a new classification scheme for services under Chapter 99. S. No. 17 of the said Notification covers the following services:
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The industry has been classifying the above services under Heading 9973 which are taxed at the corresponding rates of goods being supplied. Classifying the same under the Heading 9973 implies that service of leasing of motor vehicles would attract GST at the rate of 29% to 50%. However, the above Entry cannot be read in isolation and it is imperative to analyse if there is any other competing entry for such services. S. No. 10 of the said notification also covers a competing entry which was not included in the draft rate schedule. The same has been extracted hereunder:
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On a prima facie reading of the above Entry, it is seen that leasing of car may also fall under Heading 9966, covering rental services of transport vehicles with or without operator and thereby attract 18% of tax (CGST + SGST). Thus, the activity of leasing of motor vehicles may get covered under Heading 9966 of the above notification as ‘rental services of transport vehicles, with or without operator’ as well as under Heading 9973 covering ‘leasing or rental services, with or without operator’.
Absence of classification principles
In the light of above discussed background, resort may be taken to interpretative rules and classification principles. Unfortunately, classification rules are not available in respect of services, leaving the hapless assessee clueless about classification of such services. It can be said that a pandora’s box for classification of services has been opened, when there are two competing entries under the same notification, and there is no classification principle.
It is well established principle that when a general law and a special law dealing with the some aspect as dealt with by the general law, are in question, the rule adopted and applied is one of harmonious construction whereby the general law, to the extent dealt with by the special law, is impliedly repealed. This principle finds its origins in the Latin maxim generalia specialibus non derogant, i.e., general law yields to special law should they operate in the same field on same subject. Accordingly, one may argue that Heading 9966 involves rental services of transport vehicles with or without operator and is a more specific heading as opposed to Heading 9973 which covers a more general category.
Since there are no guiding principles for classification of such services, difference between rates of 18% and 50% may have a long-lasting impact on businesses and their decision-making processes. Similar dispute for leasing of aircraft for non-scheduled purposes exists with the same dispute of 5% (9973) vs. 18% (9966).
In addition, it may be noted that the classification scheme for services appears to have been borrowed from the United Nation’s Central Product Classification though the GST law nowhere mentions any reference to the same. Even otherwise, the persuasive value of the United Nation’s Central Product Classification is yet to be tested in the Indian legal system.
In view of the prevailing quandary, adequate clarity from the legislature will go a long way in adoption of proper principles, and would ensure appropriate classification and finally the rates of GST. [The author is a Senior Associate, Lakshmikumaran & Sridharan, New Delhi]