Union Budget 2021: Part V – GST and Company Law Related

This is the last part of the Budget series related to Taxation, Company Law and Marco economic analysis. Only a few points are covered here. Any points missed here will be covered in another article in the coming days.

Goods and Service Tax (GST)

Point # 1 GST on supply by Associations to its members

Esteem Park is an apartment complex having 100 flats. The residents (owners of 100 flats) formed an Association, say, M/s Esteem Park Resident Welfare Association to collect maintenance charges towards the salary of the gardener, electrician, plumber, electricity charges for the common area, water charges, diesel for generator, etc.

All the residents contribute money, create a fund and spend on the maintenance of their own apartment complex. Do you think there is an element of business here? Is there a profit motive in the above transactions? I am sure most of you who read this agree that there is no business here, under any stretch of the imagination.

Even the Supreme Court of India vindicated your views. They said in the Calcutta Club case that any transaction between members & the club is in the nature of selling to oneself and hence, under the principle of mutuality, there can’t be any element of Service; so, Service Tax or VAT can’t be levied on such transactions.

Honestly, this is the fact and it is unfair to tax them under GST. However, the Government is in no mood to buy this fact. They wanted to somehow tax the clubs, apartment associations.

Proposed Provision – In order to overcome (nullify) the ruling of the Supreme Court, the Government proposed a retrospective amendment, applicable from 1/7/2017 to the meaning of ‘supply’ as “the activities or transactions, by a person, other than an individual, to its members or constituents or vice versa, for cash, deferred payment, or other valuable consideration

Impact – This means, if any association or club has taken a view under the principle of mutuality and not paid GST, will end up in paying right through July 2017 onwards to date. A big financial burden to the associations. I would say, it is an unfavorable amendment.

Point # 2 GST Input Credit

M/s Metal Works supplies Rs.1,00,000 worth of goods (plus Rs.18,000 GST at 18%) to M/s Iron Rod. Now the buyer (Iron Rod) can claim Rs.18,000 as Input Credit.

Present Position – Once the sale is made by Metal Works, they have to file a GST return and Rs.18,000 GST will reflect in Form 2A /2B of Iron Rod (buyer). Even if such amount is not reflecting in the GST portal, Iron Rod can still avail GST Input Credit based on the valid Invoice received from the supplier.  However, the Government was not comfortable giving credit based on the Invoice, unless the credit is reflecting in the portal, though there was no mention of such rule in the GST Act.

Proposed – A new section 43A in CGST is proposed whereby the taxpayer can avail only the Input Tax Credit pertaining to the Invoices in the GST 2A/2B in the portal.

Impact – The businessmen have to monitor the compliances by the suppliers as well. If the supplier fails to upload GST Return, the buyer won’t get Input Credit. So, Buyers Beware! Keep checking the credits in the portal Vs GST credit as per the purchase bills. In case of any discrepancy, you have to resolve it with the seller to get the legitimate tax credit.

Point # 3 – GST Annual Return

Hitherto Annual Returns were to be certified by Chartered / Cost Accountants. Going forward, the annual returns Form 9 and Form 9C will continue to be there, sans Auditors! The responsibility of submitting the information is completely shifted on to the businessmen.

Proposals under Company Law

Point # 1 – Definition of Small Companies

A private limited company having a paid-up capital of Rs.50 Lakhs or less and a turnover not exceeding Rs. 2 crores is classified under small companies. These companies get certain exemptions from the compliances which private companies, otherwise have to comply.  (Note: Total number of active companies in India is 13 Lakhs of which 10.50 Lakh companies are Small companies)

Proposed The threshold limit of Rs.50 Lakhs capital is increased to Rs.2 Crore and the turnover to Rs.20 Crores.

Point # 2 – One Person Company (OPC)

Only a natural person who is an Indian citizen and Resident Indian (who stayed in India for over 182 days in the previous year) was allowed to incorporate an OPC (Note: Out of 13 Lakh companies, only 34000 are OPC)

Proposed – An NRI can also incorporate OPC. Good for NRIs who want to go solo in India. Maybe the number of OPC registrations will increase in the coming days.

Point # 3 – Ministry of Corporate Affairs (MCA) administration and scrutiny of documents

There are other proposals like launch of data analytics, strengthening NCLT framework, implementation of e-Courts, etc. This will help the Government to collect more penalties and fees!

Another important aspect to be noted, like the way Income Tax scrutiny is being carried out, MCA will also launch random electronic scrutiny of corporate filings. This is a big move. So, the businessmen have to strengthen not only Tax related compliances but also Company related compliances. Any violations will attract penal provisions.

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About B E Kumar Prasad

B E Kumar Prasad
He is a Practicing Chartered Accountant in Bengaluru, India. He has 25+ years of experience in income tax, business setup, and NRI matters. He is also an Insolvency Professional and Registered Valuer (F&SA).Prasad welcomes your comments and questions. Please email him at simplifiedlaws20@gmail.com

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