Question28 : 1. a)  Clause 2 to Schedule I of the CGST Act provides that 'supply of goods or services or both between related persons or between distinct persons as specified in Section 25, when made in the course of furtherance of business', amounts to supply, notwithstanding the fact that it is made or agreed to be made without consideration.  

b) However, Rule 32(7) of CGST Rules provides that the value of taxable services provided by such class of service providers as may be notified by the Government, on the recommendations of the Council, as referred to in paragraph 2 of Schedule I of the said Act between distinct persons as referred to in Section 25 of CGST Act, where input tax credit is available, shall be deemed to be NIL.  

c)(i)     Further Rule 32 (7) of CGST Rules 2017 stipulates that the value of taxable service where 'Input Tax Credit is available to the recipient, the value shall be deemed to be NIL'.          

Please  clarify that if an entity is eligible for Input Tax Credit, the subsequent reversal of such Common Input Tax Credit proportionately because of certain exempted activities (such as supply of free samples, High Sea Sales, goods destroyed, Insurance claim due to fire etc. taking place from that entity)  will not have any effect on the condition of full input credit is available .

 (ii) It appears the above is equally be applicable for the second Proviso of Rule 28 of CGST Rules 2017 '1. a)  Clause 2 to Schedule I of the CGST Act provides that 'supply of goods or services or both between related persons or between distinct persons as specified in Section 25, when made in the course of furtherance of business', amounts to supply, notwithstanding the fact that it is made or agreed to be made without consideration.  

b) However, Rule 32(7) of CGST Rules provides that the value of taxable services provided by such class of service providers as may be notified by the Government, on the recommendations of the Council, as referred to in paragraph 2 of Schedule I of the said Act between distinct persons as referred to in Section 25 of CGST Act, where input tax credit is available, shall be deemed to be NIL.  

        Since the Government has not issued any Notification, the provisions of above Sections/Rules should be kept in abeyance till such Notifications are issued. 

c)(i)     Further Rule 32 (7) of CGST Rules 2017 stipulates that the value of taxable service where 'Input Tax Credit is available to the recipient, the value shall be deemed to be NIL'.          

The Government needs to clarify that if an entity is eligible for Input Tax Credit, the subsequent reversal of such Common Input Tax Credit proportionately because of certain exempted activities (such as supply of free samples, High Sea Sales, goods destroyed, Insurance claim due to fire etc. taking place from that entity)  will not have any effect.

 (ii) It appears the above is equally be applicable for the second Proviso of Rule 28 of CGST Rules 2017 and can value of service for any amount.   

However, since the words 'full Input Tax Credit' has been used in the said Proviso, whereas in Rule 32(7) of CGST Rules 2017 it is only for the 'Input Tax Credit available '. Does it make any difference'

However, since the words 'full Input Tax Credit' has been used in the said Proviso, whereas in Rule 32(7) of CGST Rules 2017 it is only mentioned the 'Input Tax Credit available'. Does it make any difference'

Answer: Let us talk about the logic behind the law it is to avoid the litigation relating to valuation if the case is revenue neutral. I am paying tax and my sister unit is getting credit  then the payment and credit exercise can be avoided. But take a example when I am running a restaurant and sending food to some vertical which is factory and can't  claim ITC in this case  my non payment or short payment will effect the collection of exchequer.  

The effect is same  further suppose if I am providing design and development service to my vertical and fifty percent of the product manufactured by it are exempt if i am not paying tax they are not taking credit. but the full amount of tax half of which was other wise went to revenue is saved and some example given by you are having same effect.  

The notification under Rule 32(7) is yet to be issued and all these point may be considered by the Government at the time of issue.

There can be one more situation where ITC can't be fully used like in case of textile if the receiving unit can't use credit then also nonpayment of tax by supplier will not have revenue neutral effect.  

 Let us wait for the notification and discuss these point after it.

Any way it will require lot of technical and impact  analysis  because there many people those who will start taking benefit of loop holes. (Reply dt. 12/12/2017)