Betting on the value for GST and Input Tax Credit on normal loss
With the Covid wave showing signs of ebbing, it is time to look at some of the important judicial rulings in the field of Goods and Services Tax rendered when the wave was at its peak. In this article, two decisions are taken up for discussion.
Let us first focus on the decision of the Karnataka High Court in the case of Bangalore Turf Club versus Union of India delivered in June 2021. At first sight, this decision may look like having application only in the realm of the betting industry. However, the decision lays down certain profound principles that go beyond the industry.
Bangalore Turf Club (“the Club”) is carrying on the business of a race club, more specifically horse racing and facilitates betting by the punters. They do not undertake betting by themselves. The punter places the bet either with a totalisator run by the Club or a book-maker licensed by the Club. If a horse backed by a punter wins, the winning punter surrenders the receipt and collects the prize money. The losing punter’s money is used to pay the prize money to the winning punter. The club collects commission in the process. Under the service tax regime, the Club was discharging service tax on the commission amount. The point in dispute is Rule 31A (3) of the CGST Rule which mentions the taxable value of the service to be the face value of the bet or the amount paid into the totalisator. The Club was required to remit Goods and Services Tax on the face value of the bet which was a radical departure from the tax base of commission amount under the service tax.
The High Court ruled that the valuation method is given in Rule 31A(3) as ultra vires the CGST Act, 2017, and the Club was liable to pay Goods and Services tax only on the amount of commission received. While doing so, it has laid down the following principles:-
- The components of tax are a taxable event, a taxable person, rate of tax, and measure of tax which are intertwined with nexus being the soul of these components. A taxable event is an event that triggers the tax. The taxable event under Goods and Services tax supplies and in the present case it is totalisator service. A taxable person is one who is obliged to pay tax. The rate of tax is the rate at which tax is determined and the measure of tax is the value to which the rate is applied for computing a particular tax liability which in the instant case is the commission. The valuation rules necessarily need to uphold the nexus among these components. Here the valuation rule was contemplating to tax not only the commission being considered for the service but also the amount that gets distributed to the winner of the bet.
- The Club holds the money for a brief period in a fiduciary capacity for distribution to the winner of the prize money. This is not part of the consideration received for the service as the Club is only facilitating betting and not supplying bets and therefore cannot be considered as value for the purpose of levying Goods and Services tax.
The above principles having been accorded legal sanction in the sphere of Goods and Services taxation through the above decision and hence can be applied by taxpayers in other instances as well.
The second decision discussed in the article was delivered by the Madras High Court in June 2021 in the case of ARS Steel and Alloy International Pvt Ltd Vs Sales tax officer. This issue involved relates to the claim of GST input tax credit and more specifically section 17(5) (h) which reads as under
“Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following:- (h) goods lost, stolen, destroyed or written off or disposed by way of gift or free samples;”
The taxpayer was engaged in the manufacture of MS Billets and Ingots. MS scrap is an input in the manufacture of MS Billets which becomes an input for the manufacture of TMT/CTD bars. The manufacturing process inherently entails the loss of a small portion of the inputs. The tax authorities invoked the above section and demanded a reversal of input tax credit availed on the portion of the loss. The Madras High Court concluded the above section covers only instances where loss is quantifiable and involves external factors or compulsions. A loss that is occasioned by consumption in the process of manufacture is one that is inherent to the process of manufacture itself. Hence invoking the above section is misconceived. The Court also placed reliance on a ruling under the erstwhile Central Excise law to buttress its interpretation.
The above ruling is a very important judgment and provides the guiding principles for interpretation of section 17(5)(h) of the Central Goods and Services Tax Act, 2017. It provides much-needed certainty and relief for the manufacturing industry where raw materials are subject to normal process loss.