Taxmann's Analysis | 55th GST Council Meeting – Detailed Analysis of 30+ Recommendations [Dec. 2024]

55th

GST Council Meeting Detailed Analysis of [30+] Recommendations

December 2024 Tax Dispute and Settlement Measures

Trade Facilitation

GST Exemptions

Clarifications on Ongoing Issues

Compliance Facilitation

New Procedures, Mechanism and Technology Adoption

Rate Rationalization

Other Measures

55th

GST Council Meeting Detailed Analysis of [30+] Recommendations

December 2024 Tax Dispute and Settlement Measures

Trade Facilitation

GST Exemptions

Clarifications on Ongoing Issues

Compliance Facilitation

New Procedures, Mechanism and Technology Adoption

Rate Rationalization

Other Measures

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CONTENTS A. Tax Dispute and Settlement Measures

7

1.

Recommendation to Amend ‘Plant or Machinery’ Under Section 17(5)(d) of the CGST Act with ‘Plant & Machinery’

8

2.

Reduction in the Amount of Pre-deposit for Filing of Penalty Appeals in Respect of Section 129 of CGST Act Matters

9

B. Trade Facilitation

11

3.

Taxability of Sponsorship Services Provided by Body Corporate Under Forward Charge Mechanism

12

4.

Recommendation to Omit the Definition of Declared Tariff and Amend the Definition of Specified Premises

13

5.

Transaction of Vouchers Neither to Be Treated as Supply of Goods Nor as Supply of Services

15

6

Exclusion of Composition Taxpayers From RCM on Renting of Commercial Property Under GST

17

7.

No Proportional Reversal of ITC by Electronic Commerce Operator (ECO) for Supplies Made Under Section 9(5) of CGST Act

18

8.

Recommendation to Exempt Supply of Pepper (Fresh Green or Dried) and Raisins Supplied by Agriculturists

19

9.

Recommendation to Amend the Definition of ‘Pre-Packaged and Labelled’

20

10.

Recommendation to Include Supply of Goods Warehoused in SEZ or FTWZ to Any Person Before Clearance for Exports or to DTA, to Schedule III of CGST Act, 2017

21

C. Clarifications on Ongoing Issues

20

11.

Clarification on RBI-Regulated Payment Aggregators Being Eligible for Exemption Under GST

23

12.

No GST on the ‘Penal Charges’ Levied and Collected by Banks and NBFCs

24

13.

Recommendation to Clarify Availability of ITC on Goods Delivered by Supplier on Ex-Works Basis

25

14.

Recommendation to Clarify Applicability of Late Fee for Delay in Filing Form GSTR-9C

26

D. New Procedures, Mechanism and Technology Adoption

27

15.

Recommendation to Include Inter-State RCM Transactions for the Purposes of Input Service Distributor (‘ISD’) Mechanism

28

16.

Amendment in CGST Act and CGST Rule in Respect of Functionality of Invoice Management System

29

17.

Recommendation to Amend Definition of Local Authority and Insert an Explanation Regarding Definitions of Local Fund and Municipal Fund

30

18.

Recommendation to Insert New Rule 16A for Grant of Temporary Identification Number to Persons Not Liable to Be Registered Otherwise

31

19.

Amendment in Rule 19(1) of CGST Rules for Modifying the Field ‘Category of Registered Person’ in Form CMP-02

32

E. GST Exemptions

33

20.

GST Exemption on Gene Therapy

34

21.

Exemption on Components Including Systems, Sub-Systems, Equipment Used in Assembly or Manufacture of LR SAM System

34

22.

Exemption of IGST on Imports of All Equipment and Consumable Samples by Inspection Team of IAEA

35

F. Compliance Facilitation

36

23.

Insertion of New Provision for Track and Trace Mechanism Uniform

37

24.

Clarification for Recording Name of the State of the Unregistered Recipient and Place of Supply for Supply of Online Services

37

G. Rate Rationalization

39

25.

Clarification on GST Rate on Ready-to-Eat Popcorn

40

26.

Reduction in GST Rate on Fortified Rice Kernel (FRK) to 5% and Classifiable Under HS 1904

41

27.

Reduction in the Rate of Compensation Cess to 0.1% on Supplies to Merchant Exporters

42

28.

Recommendation to Extend GST at 5% on Food Inputs for Preparations Intended for Free Distribution Under Government Programs

42

29.

Recommendation to Exempt Contributions by General Insurance Companies to Motor Vehicle Accident Fund From GST

43

30.

Recommendation to Increase GST Rate to 18% on Sale of All Old and Used Vehicles, Including Electric Vehicles (EVs)

44

31.

Recommendation to Clarify That Autoclaved Aerated Concrete (ACC) Blocks Containing More Than 50% Fly Ash Content Will Fall Under HS 6815 and Attract 12% GST

45

32.

Recommendation to Clarify That the Explanation Regarding Ground Clearance Is Applicable With Effect From 26-07-2023

46

H. Other Measures

48

33.

49

Decisions Deferred for Future Deliberation

I. Concluding Remarks

50

Introduction The GST Council’s recent proposals in the meeting dated 21-12-2024 reflect a mix of compliance adjustments and business-friendly reforms. The retrospective amendment to restrict input tax credit on construction expenses, nullifying the Supreme Court’s Safari Retreats ruling, is a critical change for the construction sector. Removal of reverse charge on sponsorship services and reduced cess for merchant exporters, will reduce cost of doing business. On the trade facilitation front, key measures include clarity on voucher taxation, exemption for small transaction fees by payment aggregators, simplified registration for small businesses. On the other side, with Input Matching System (IMS) provisions finding place in the GST legislation, which could influence compliance dynamics significantly, the businesses also need to carefully examine the impact of the same. Retrospective amendment in law to bring the tax treatment of SEZ/FTWZ warehousing transactions in line with the provisions already applicable to transactions in customs bonded warehouses, ensures consistency and clarity in GST provisions. Overall, these steps aim to streamline GST while addressing industryspecific challenges.

6

55th GST Council Meeting

A. Tax Dispute and Settlement Measures

55th GST Council Meeting

7

1.

Recommendation to Amend ‘Plant or Machinery’ Under Section 17(5)(d) of the CGST Act with ‘Plant & Machinery’

To align provisions of Section 17(5)(d) of the CGST Act, 2017 (‘CGST Act’) with the intent of the said section, the Council has recommended to amend Section 17(5)(d) of CGST Act, to replace the phrase ‘plant or machinery’ with ‘plant and machinery’, retrospectively, with effect from 01-07-2017, so that the said phrase may be interpreted as per the explanation given at the end of Section 17 of the CGST Act.

Taxmann’s Comments The GST Council has recommended to amend Section 17(5)(d) of the CGST Act, to replace the phrase ‘plant or machinery’ with ‘plant and machinery’, retrospectively, with effect from 01-07-2017 (i.e. since inception of GST), so that the said phrase may be interpreted as per the Explanation at the end of Section 17 of CGST Act. As per the GST Council, this was a drafting error & such amendment is necessary to align the provisions of Section 17(5)(d) of the CGST Act with the intent of the legislature.

This topic has been highly debated due to its significant impact on the availability of input tax credit (‘ITC’), which was previously deemed ineligible, particularly for industries like construction and real estate.

It is to be noted that this amendment has been proposed to nullify the impact of decision as held in Safari Retreats.1 The issue in Safari matter was whether the phrase ‘plant or machinery’ in Section 17(5)(d) can be given the same meaning as, the explanation appended at the end of Section 17(5) which defines the term ‘plant and machinery’.

After much deliberation, it was held by Hon’ble Supreme Court that ‘plant or machinery’ cannot be given the same meaning as provided for ‘plant and machinery’. Also, it was observed that, ITC can be availed on goods and services used for construction of immovable property subject to its use, which is to be decided on a case-by-case basis by applying a functionality test, considering the unique business requirements and the role that immovable property plays in the said business.

1

Chief Commissioner of Central Goods and Service Tax vs. Safari Retreats (P.) Ltd. [2024] 167 taxmann.com 73 (SC)

8

55th GST Council Meeting

Now the Council has recommended to replace the phrase ‘plant or machinery’ with ‘plant and machinery’, retrospectively, with effect from 01-07-2017, which reinforces the departments view and upholding the understanding that ITC should not be available on exceptions carved out by the explanation appended at the end of Section 17(5) which defines the term ‘plant and machinery’.

The companies that availed ITC based on the Safari Retreats ruling will need to reassess their ITC claims, once the recommended amendment is implemented.

2.

Reduction in the Amount of Pre-deposit for Filing of Penalty Appeals in Respect of Section 129 of CGST Act Matters

•

Recommendation to amend proviso to Section 107(6) of CGST Act, providing for payment of pre-deposit at 10% instead of 25% for filing appeals before Appellate Authority in cases involving only demand of penalty without involving the demand of tax.

•

Further, recommended to insert a proviso to Section 112(8) of CGST Act, providing for payment of pre-deposit at 10% for filing appeals before Appellate Tribunal in cases involving only demand of penalty without involving the demand of tax.

Taxmann’s Comments Under the GST law, the first appeal is filed against an order passed by the Adjudicating Authority before the Appellate Authority. If the aggrieved party is not satisfied with the order of Appellate Authority, a second appeal can be filed before the Appellate Tribunal.

However, the taxpayer is required to mandatorily deposit certain amount as predeposit before the Appellate Authority and Appellate Tribunal as a condition for admission of appeal. Notably, for all matters (other than matters relating to Section 129) no pre-deposit is required for filing appeals for penalty amount since the amount of pre-deposit is tagged to the amount of tax in dispute. However, proviso to Section 107 (6) of the CGST Act specifies that penalty of 25% to be pre-deposited for filing appeal against the order of Section 129.

Now, the Council has recommended to revise the pre-deposit amount in respect of such matters, to reduce the financial burden and working capital requirement for taxpayers who want to file an appeal. The revised limits recommended by the GST Council are summarised below:

55th GST Council Meeting

9

Sr. No.

Appeal to be Filed Before

Existing Provisions

Recommendations

1.

Appellate Authority

25% of the amount of penalty

10% of the amount penalty

2.

Appellate Tribunal

No specific provision for cases involving penalties In such case general provision of pre-deposit will apply

10% of the amount of penalty

This is a welcome step demonstrating the Government’s intent to reduce financial burden on the taxpayers.

10

55th GST Council Meeting

B. Trade Facilitation

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3.

Taxability of Sponsorship Services Provided

by Body Corporate Under Forward Charge Mechanism

It is recommended to bring the supply of sponsorship services by the body corporates under forward charge mechanism.

Taxmann’s Comments Under GST, sponsorship services provided by any person to a body corporate or partnership firm (including Limited Liability partnership) located in the taxable territory is liable to GST on reverse charge basis2 (‘RCM’) i.e. body corporate or partnership firm including LLP receiving sponsorship services are liable to pay GST under RCM. The RCM was introduced to simplify tax compliance for smaller or unregistered entities. However, there may be instances where the sponsorship services are supplied by body corporates and the recipient is required to pay tax under RCM. To streamline this process, the GST council has recommended to bring the levy of GST on supply of sponsorship services by a body corporate under the forward charge mechanism (‘FCM’).

It is important to note that services provided by any person other than body corporate such as individuals, unincorporated entities, firms will continue to be taxed under RCM. The recommendation to bring sponsorship services by a body corporate under FCM will entail the following benefits: •

Improve cash flows for the recipients as credits under RCM can be claimed only after making GST payment in cash which is no longer required post this amendment.

•

The move to bring sponsorship services under the FCM ensures that suppliers can retain the full ITC without needing to reverse a proportionate ITC under Section 17(2) and Section 17(3) of the CGST Act. This is because these services will no longer be classified as exempt supplies.

•

The businesses at times face challenge to determine whether a particular supply will qualify to be sponsorship service. The challenge to whether such supplies will be liable to GST under FCM or RCM will also get resolved thereby bringing greater certainty to the person liable to pay tax thereon.

While this recommendation is a welcome move to simplify taxation, the Council may consider making similar recommendations for other services currently liable to RCM such as the services of a recovery agent specifically when rendered by a body corporate.

2

12

Sl. No. 4 of Notification No. 13/2017 – Central Tax (Rate), Dated 28-06-2017 55th GST Council Meeting

4.

Recommendation to Omit the Definition of Declared Tariff and Amend the Definition of Specified Premises

•

It is recommended to omit the definition of declared tariff and suitably amend the definition of specified premises (from the services rate and exemption notifications) to link it with actual value of supply of any unit of accommodation provided by the hotel.

•

Further, recommended to make the rate of GST applicable on restaurant services in such hotels, for a given financial year, dependent upon the ‘value of supply’ of units of accommodation made in the preceding financial year, i.e. 18% with ITC if the ‘value of supply’ exceeded Rs. 7,500 for any unit of accommodation in the preceding financial year, and 5% without ITC otherwise. Further, to give an option to pay tax on restaurant service in hotels at the rate of 18% with ITC, if the hotel so chooses, by giving a declaration to that effect on or before the beginning of the financial year or on obtaining registration.

•

The above changes are to be made effective from 01-04-2025 to avoid any transition difficulties.

Taxmann’s Comments Under GST, the term ‘declared tariff3’ includes charges for all amenities provided in the unit of accommodation (given on rent for stay) like furniture, air-conditioner, refrigerators or any other amenities, but without excluding any discount offered on the published charges for such unit.

Similarly, ‘specified premises4’ means premises providing ‘hotel accommodation’ services having declared tariff of any unit of accommodation above Rs. 7,500/- per unit per day or equivalent.

These definitions were established to determine the levy of GST on hotel accommodation. However, the requirement to pay GST based on the declared tariff, even when discounts are provided or the actual value of the room is lower, has placed a significant burden on the hotel industry. Additionally, ambiguity regarding whether the declared tariff should refer to the price listed at the hotel or a different price advertised on websites has further complicated the taxability of these services.

The concept of ‘declared tariff’ has its roots in the erstwhile ‘luxury tax,’ a tax system previously introduced and regulated by individual states to levy taxes on highend accommodation and services. This concept was subsequently incorporated into the service tax framework and later transitioned into the GST regime. Over time, as business practices and consumer behaviour evolved, particularly with the 3 4

Notification No. 12/2017 – Central Tax (Rate), Dated 28-06-2017 Notification No. 11/2017 – Central Tax (Rate), Dated 28-06-2017

55th GST Council Meeting

13

rise of digital and e-commerce platforms, the notion of ‘declared tariff’ became a frequent point of contention due to its ambiguous definition and inconsistent interpretations.

Recognizing these challenges, the GST Council has taken a progressive step to rationalize the tax structure on unit accommodations by shifting the focus from the ‘declared tariff’ to the actual value of supply. This change aims to bring greater clarity and alignment with contemporary business models, addressing longstanding disputes and ensuring a fairer taxation system.

To further benefit the hotel industry, it is recommended to make the rate of GST applicable on restaurant services in such hotels, for a given financial year, dependent upon the ‘value of supply’ of units of accommodation made in the preceding financial year, as outlined below: Sr. No.

Criteria

GST Rate

ITC

Additional Option

1.

If the value of supply for any unit of accommodation exceeded ₹7,500 in the preceding financial year

18%

Allowed

-

2.

If the value of supply for any unit of accommodation did not exceed ₹7,500 in the preceding financial year

18% (With ITC)/ 5% (without ITC)

-

Hotel can opt any option by submitting a declaration before the start of the financial year or upon registration.

To allow for a smooth transition and avoid any operational difficulties, the GST Council has recommended that these changes to become effective from 01-042025.

These proposed amendments aim to simplify compliance, reduce the tax burden on the hotel industry, and resolve longstanding ambiguities related to the valuation of supply and the applicability of GST. While the above recommendations are welcome, more ground may be covered by the Council to further simplify the taxation in hospitality industry such as:

14

•

The issue of whether allied offerings by hotels (such as breakfast, gym/spa access, kids lounge etc. offered as a package) will be liable to GST as composite supply needs to be clarified.

•

Also the option to pay GST at the rate of 18% with ITC entitlement may be extended to all restaurants and not only to the restaurants in a hotel.

55th GST Council Meeting

5.

Transaction of Vouchers Neither to Be Treated as Supply of Goods Nor as Supply of Services

•

Recommended to omit Section 12(4) and Section 13(4) from CGST Act and Rule 32(6) from CGST Rules to resolve ambiguities in the tax treatment of vouchers.

•

Further, recommended to issue clarification on the following issues: (a)

Transactions in vouchers shall be treated neither as a supply of goods nor as a supply of services.

(b)

Distribution of vouchers on principal-to-principal basis shall not be subject to GST. However, where vouchers are distributed on principal-to-agent basis, the commission/fee or any other amount charged by the agent for such distribution is taxable under GST.

(c)

Additional services such as advertisement, co-branding, marketing and promotion, customization and technology support, customer support etc. related to vouchers would be leviable to GST on the amount paid for these services.

(d)

Unredeemed vouchers (breakage) would not be considered as supply under GST and no GST is payable on income booked in the accounts in respect of breakage.

Taxmann’s Comments Under GST law, voucher means5 an instrument where there is an obligation to accept it as consideration or part consideration for a supply of goods or services or both and where the goods or services or both to be supplied or the identity of their potential suppliers are either indicated on the instrument itself or in related documentation, including the terms and conditions of use of such instrument.

In case of supply of vouchers by a supplier, the time of supply shall6 be – (a)

the date of issue of voucher, if the supply is identifiable at that point; or

(b)

the date of redemption of voucher, in all other cases.

Further, rule 32(6) deals with the determination of value of supply of voucher.

The taxability of vouchers has been a longstanding point of contention since the inception of the GST law with conflicting perspectives from various Advance rulings and courts causing confusion amongst stakeholders.

Earlier, the Karnataka High Court, in the case of Premier Sale Promotion Private Limited7, held that vouchers, being pre-paid payment instrument (‘PPI’s’), are 5 6 7

Section 2(118) of the CGST Act Section 12(4) of the CGST Act and Section 13(4) of the CGST Act Premier Sales Promotion (P.) Ltd. v. Union of India [2023] 147 taxmann.com 85 (Karnataka)

55th GST Council Meeting

15

neither goods nor services, and hence, outside the levy of GST. This High Court decision has provided further clarity by holding that gift vouchers, being actionable claims, are deemed neither as supply of goods nor as supply of services.

This view was followed8 by the Karnataka AAAR in the case of Myntra Designs (P.) Ltd., wherein it was held that voucher are neither goods nor services, hence, the question of eligibility of input tax credit does not arise. The Tamil Nadu AAAR in the case of Kalyan Jewellers India Ltd. held9 that PPI are neither goods nor services. A voucher is a means for advance payment of consideration for future supply of goods or services. However, it was held that the time of supply of the gift vouchers/gift cards by the applicant to the customers shall be the date of issue of such vouchers and the applicable rate of tax is that applicable to that of the goods.

Whereas, under the erstwhile service tax regime it was clarified10 that voucher does not create a ‘beneficial interest’ in a moveable property but only entitles a person to enjoy a particular service for a single or specified number of times. Thus vouchers entitling a person to enjoy service for example a health club and recharge vouchers are not actionable claims.

In order to resolve the ambiguity and minimize the litigations, the GST Council has recommended to omit Section 12(4) and Section 13(4) from CGST Act and Rule 32(6) from CGST Rules, considering transactions in vouchers shall be treated as neither supply of goods nor supply of services.

Further, GST council has recommended to issue clarification on the following issues: •

Distribution of vouchers on principal-to-principal basis shall not be subject to GST. However, where vouchers are distributed on principal-to-agent basis, the commission/fee or any other amount charged by the agent for such distribution continues to be taxable under GST.

•

Additional services such as advertisement, co-branding, marketing and promotion, customization and technology support, customer support etc. related to vouchers will be leviable to GST on the amount paid for these services.

•

Unredeemed vouchers (breakage) would not be considered as supply under GST and no GST is payable on income booked in the accounts in respect of breakage

This amendment in law is expected to bring relief to the industry by resolving the ambiguity that has emerged under GST regime.

8 9 10

16

Myntra Designs (P.) Ltd., In re [2023] 148 taxmann.com 186 (AAAR-KARNATAKA) Kalyan Jewellers India Ltd., In re [2021] 127 taxmann.com 37 (AAAR - Tamil Nadu) Service Tax Education Guide 2012, Dated 20-06-2012

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Exclusion of Composition Taxpayers From RCM on Renting of Commercial Property Under GST •

Recommendation to exclude taxpayers registered under composition levy scheme from entry Sr. No. 5AB introduced vide Notification No. 09/2024- Central Tax (Rate), Dated 08-10-2024 vide which renting of any commercial/ immovable property (other than residential dwelling) by unregistered person to registered person was brought to tax under RCM.

•

Further, recommended to regularize the period from the date when the Notification No. 09/2024- Central Tax (Rate), Dated 08-10-2024, became effective i.e. from 10-10-2024 till the date of issuance of the proposed notification on ‘as is where is’ basis.

Taxmann’s Comments Based on the recommendation of 54th GST Council meeting vide Notification No. 09/2024- Central Tax (Rate), Dated 08-10-2024, effective from 10-10-2024, the services by way of renting any immovable property other than residential dwelling are liable to GST under RCM when provided by any unregistered person to a registered person. It includes renting of commercial property.

However, prior to 10-10-2024, the service provider was liable to pay GST on rentals under the FCM. This change was made to bring ease in compliances for the unregistered service provider and prevent revenue leakage. However, its unintended impact on small taxpayers, particularly composition dealers, warranted reconsideration.

Under the GST law, the Composition Scheme was designed to simplify compliance for small taxpayers by allowing them to pay tax at a concessional rate while restricting ITC eligibility. However, with the introduction of RCM on renting of commercial property, composition dealers were required to pay tax where landlord is unregistered. This created a tax burden for composition dealers who could not offset the GST paid, thereby increasing their costs.

In order to provide the relief to composition dealers, the GST Council has recommended to exclude them from RCM11 on renting of any commercial/ immovable property (other than residential dwelling) by unregistered person to registered person.

The GST Council further recommended to regularize the period from the date when the above mentioned notification has become effective i.e. from 10-10-2024 till the date of issuance of the proposed notification on ‘as is where is’ basis.

11

Sr. No. 5AB of Notification No. 09/2024 - Central Tax (Rate), Dated 08-10-2024

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This recommendation ensures cost reduction and compliance ease for taxpayers registered under the composition scheme. These steps are expected to support the government’s objective of fostering a simplified tax environment for small businesses and addressing the unique challenges faced by composition taxpayers.

7.

•

No Proportional Reversal of ITC by Electronic Commerce Operator (ECO) for Supplies Made Under Section 9(5) of CGST Act Recommendation to clarify that no proportional reversal of ITC under Section 17 (1) or Section 17 (2) of CGST Act is required to be made by the ECO in respect of supplies for which they are required to pay tax under section 9(5) of CGST Act.

Taxmann’s Comments Under GST law, a registered person can claim the ITC on inward supply of goods or services or both used in the course or furtherance of its business. The claim of ITC is subject to a few conditions and restrictions. Further, there are few scenarios where proportionate reversal of ITC is required. These scenarios are as under: (a)

Where goods or services are used partly for purpose of business and partly for other purposes12, and

(b)

Where goods or services are used partly for effecting taxable supplies (including zero-rated supplies) and partly for exempt supplies13.

Additionally, in specified cases, the GST law has empowered14 the Government to notify certain categories of ‘services’ on which GST is to be paid by the ECO instead of the actual supplier of the services, if such services are supplied through it.

Under Section 9(5) of the CGST Act, many services are subject to a 5% tax rate without the benefit of ITC. In practice, the department has been categorising these services as ‘exempt,’ even when the tax liability shifts to ECO’s on the pretext these operators are not the actual providers of the services but have been made liable to discharge the tax on behalf of the original suppliers. This approach has led to a broader classification of such services as ‘exempt’ in the hands of ECOs, raising interpretational and compliance challenges in the taxation framework.

The CBIC had previously clarified15 that ECO shall not be required to reverse ITC on account of restaurant services on which it pays GST in terms of Section 9(5). Further, it was clarified that ECOs provide their own services as an electronic platform and an 12 13 14 15

18

Section 17(1) of the CGST Act Section 17(2) of the CGST Act Section 9(5) of the CGST Act and Section 5(5) of the IGST Act Sl No. 6 of Circular No. 167/23/2021 – GST, Dated 17-12-2021

55th GST Council Meeting

intermediary for which it would acquire inputs/input services on which ECOs avail ITC. ECOs operate as electronic platforms or intermediaries and avail ITC on inputs and input services acquired for their own services, such as charging commission or fees. This ITC is utilized for payment of GST on services provided by the ECO on its own account (e.g., to a restaurant). The liability of ECOs to pay tax on restaurant services does not alter their eligibility to claim ITC. To resolve the issue conclusively, the GST Council has recommended to issue a comprehensive clarification covering all notified services. This clarification is likely to provide that ECOs will not be required to proportionately reverse ITC against the concessional GST paid for such notified services.

8.

Recommendation to Exempt Supply of Pepper (Fresh Green or Dried) and Raisins Supplied by Agriculturists

GST Council has recommended that pepper whether fresh green or dried pepper and raisins, when supplied by an agriculturist, will be exempt from the levy of GST

Taxmann’s Comments The GST Council has provided clarity regarding the taxation of pepper (fresh green or dried) and raisins. It has been recommended to clarify that when these products are supplied directly by an agriculturist, they will be exempt from the levy of GST. This exemption is in line with the broader policy objective of supporting the agricultural sector by reducing tax-related complexities for farmers.

Now, the agriculturists selling these products directly to buyers, including end consumers or businesses, will not have to bear the burden of GST. It aims to safeguard the income of farmers and promote ease of doing business for the agricultural sector.

However, this exemption will be limited to supplies made directly by agriculturists.

If these products are sold by merchants, traders, or intermediaries who are not classified as agriculturists, GST will apply as per the applicable rates.

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9.

Recommendation to Amend the Definition of ‘Pre-Packaged and Labelled’

It is recommended to amend the definition of ‘pre-packaged and labelled’ to cover all commodities that are intended for retail sale and containing not more than 25 kg or 25 litre, which are ‘pre-packed’ as defined under the Legal Metrology Act, or a label affixed thereto.

Taxmann’s Comments Under the GST law, the applicable tax rates for certain commodities vary based on whether they are pre-packaged and labelled. The term ‘pre-packaged and labelled’ is defined16 as ‘pre-packaged commodity’ under clause (l) of Section 2 of the Legal Metrology Act, 2009. According to this definition, a ‘pre-packaged commodity’ is one that is pre-packed in a manner where the package or a securely affixed label must carry specific declarations as required under the provisions of the Legal Metrology Act, and the rules made thereunder.

However, as per Rule 3(a) of the Legal Metrology (Packaged Commodities) Rules, 2011, the definition of ‘pre-packaged commodity’ only includes packages containing quantities of up to 25 kilograms or 25 litres, subject to other exclusions specified in the Act and its rules. This has created ambiguities under the GST law, as the definition does not explicitly address larger quantities or clarify its scope for GST purposes.

To address these concerns, the CBIC issued detailed FAQs17, clarifying that the term ‘pre-packaged commodity’ under GST only applies to packages containing quantities of up to 25 kilograms or 25 litres. However, the FAQs did not fully resolve the ambiguities, leaving room for multiple interpretations, thereby leading to confusion.

To eliminate this uncertainty, the GST Council has now recommended to amend the definition of ‘pre-packaged and labelled’. The proposed amendment will explicitly state that the term covers all commodities intended for retail sale and containing not more than 25 kilograms or 25 litres, provided they are ‘pre-packed’ as defined under the Legal Metrology Act, or bear a label with the required declarations under the Act and its rules.

The amended definition now aligns with the provisions of the Legal Metrology Act, ensuring consistency in the classification of goods. This alignment facilitates a more streamlined and rational approach to determine what constitutes ‘pre-packaged and labelled’ goods for the purposes of GST.

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Notification No. 1/2017-Central Tax (Rate), Dated 28-6-2017 FAQs on GST applicability on ‘pre-packaged and labelled’ goods, Dated 18-07-2022

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10. Recommendation to Include Supply of Goods Warehoused in SEZ or FTWZ to Any Person Before Clearance for Exports or to DTA, to Schedule III of CGST Act, 2017 Recommendation to insert clause (aa) in paragraph 8 of Schedule III of the CGST Act, 2017 w.e.f. 01.07.2017, to explicitly provide that supply of goods warehoused in a Special Economic Zone (SEZ) or Free Trade Warehousing Zone (FTWZ) to any person before clearance of such goods for exports or to the Domestic Tariff Area, shall be treated neither as supply of goods nor as supply of services.

Taxmann’s Comments Supply of Goods warehoused in a Special Economic Zone (SEZ) or Free Trade Warehousing Zone (FTWZ), to any person, before clearance of such goods for exports or before clearance of such goods to the Domestic Tariff Area (DTA), shall be treated neither as supply of goods nor as supply of services.

It is to be noted that this entry in Schedule III is to be made retrospectively effective from 01-07-2017. (i.e. since inception of GST) providing relief for past transactions.

This brings transactions relating to supply of goods warehoused in SEZ/FTWZ at par with the existing provision in GST for transactions related to Customs bonded warehouse.

The insertion of clause (aa) is a welcome change, offering legal certainty and easing the operational burden for businesses operating in SEZs and FTWZs. It aligns with the broader policy objective of promoting exports and economic activity in these zones without any tax complications.

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C. Clarifications on Ongoing Issues

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11.

Clarification on RBI-Regulated Payment Aggregators Being Eligible for Exemption Under GST

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It is recommended to issue a clarification that RBI regulated payment aggregators are eligible for exemption under Sl. No. 34 of Notification No. 12/2017- Central Tax (Rate), Dated 28-06-2017, as they fall within ambit of acquiring bank.

•

Further, recommended to clarify that the said exemption does not cover payment gateway and other fintech services which do not involve settlement of funds.

Taxmann’s Comments To promote cashless payments, the government has exempted18 services by an acquiring bank to any person in relation to settlement of an amount upto Rs. 2,000/- in a single transaction transacted through credit card, debit card, charge card or other payment card service. For this purpose ‘acquiring bank’ is defined as any banking company, financial institution including non-banking financial company or any other person, who makes the payment to any person who accepts such card.

There has been ambiguity regarding whether payment aggregator qualifies as acquiring bank and thereby eligible for exemption under the said exemption.

In accordance with the RBI guidelines19, a clear distinction has been drawn between payment aggregators and payment gateways. The ‘payment aggregators’ manage the receipt, pooling, and transfer of funds, while ‘payment gateways’ only provide infrastructural support for payment processing without handling money. These guidelines from RBI confirm that payment aggregators meet the criteria for settlement functions and qualify as acquiring bank.

In this respect, the GST Council has now recommended that a suitable clarification will be issued to provide that payment aggregators falls within the ambit of acquiring bank and settlement of an amount upto Rs. 2000/- is exempt from GST. Further, recommended that clarification would be issued to provide that this exemption excludes the payment gateway and other fintech services which do not involve settlement of funds.

Notably, this recommendation aligns with the judgment of Delhi High Court20 , which provided that payment aggregators not only integrate the payment system but also handles the funds of the customers, thereby falls within the purview of ‘payment system’ under the Payment and Settlement Systems Act, 2007.

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Sl No. 34 of Notification No. 12/2017 - Central Tax (Rate), Dated 28-06-2017 Guidelines on Regulation of Payment Aggregators and Payment Gateways, Dated 17-03-2020 Lotus Pay Solutions (P.) Ltd. v. Union of India [2022] 142 taxmann.com 371 (Delhi)

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12.

No GST on the ‘Penal Charges’ Levied and Collected by Banks and NBFCs

It is recommended to clarify that no GST is payable on the ‘penal charges’ levied and collected by banks and NBFCs from borrowers for non-compliance with loan terms.

Taxmann’s Comments Financial institutions including NBFCs, in their ordinary course of business, extend loans to customers by charging interest as consideration. Additionally, these institutions may impose penal interest for non-compliance with material terms of the loan agreement, such as delays in repayment of instalments. Penal interest is an additional charge imposed over and above the agreed interest rate.

Services related to the extension of loans and advances, where the consideration is in the form of interest or discount, are exempt21 from GST. The notification defines ‘interest’ as any amount payable in respect of borrowed money or debt incurred, including deposits and similar obligations, but excludes service fees or other charges related to the borrowed money or unused credit facilities.

By this definition, the penal interest levied by the bank including NBFC, qualifies as ‘interest’ under the exemption notification and is, therefore, exempt from GST. The same is also clarified22 by the CBIC. However, service fees, charges, or any other amounts levied in relation to loans or advances do not qualify as ‘interest’ and are subject to GST. The RBI issued instructions23 providing that the penalties for non-compliance with material terms of a loan contract should be treated as penal charges rather than penal interest. This change distinguishes penal charges from the concept of penal interest.

However, the aforesaid notification24 explicitly excludes fees or charges related to the extension of loans or advances from the definition of ‘interest,’ making them taxable. This has led to uncertainty regarding whether GST should apply to penal charges levied by banks and NBFCs. Circular No. 178/10/2022-GST, Dated 03-08-2022 was issued to address ambiguities surrounding the applicability of GST on liquidated damages (LD), compensation, and penalties arising from breach of contracts or legal provisions. For GST to be levied, an activity must qualify as a ‘supply’ and involve a ‘consideration’. The circular clarifies that performance is the cornerstone of any contractual agreement, and LD clauses are incorporated as deterrents against non-performance, delays, or unsatisfactory execution of contracts. Contracts are inherently intended for fulfilment, not breach, and the acceptance of LD by the aggrieved party does not imply an agreement to permit non-compliance or breach.

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Notification No. 12/2017-Central Tax (Rate), Dated 28-06-2017 Circular No. 102/21/2019-GST, Dated 28-06-2019 RBI Instruction No. DoR.MCS.REC.28/01.01.001/2023-24, Dated 18-08-2023 Notification No. 12/2017-Central Tax (Rate), Dated 28-06-2017 55th GST Council Meeting

Penal charges in contracts are designed to discourage deviations from contractual obligations rather than to provide a remedy or compensation for the breach. For instance, in the context of NBFCs and banks, penal clauses ensure borrowers adhere to their repayment commitments and other terms, without intending to create a separate taxable supply between the lender and the borrower. Thus, such charges cannot be construed as consideration for tolerating breaches. The clarification proposed by the Government reiterates this position, aligning it with earlier circulars and legal interpretations.

While this clarification is much welcome, clarifications on similar lines is required for charges of penal nature levied in other industries such as charges for delay in payment of telecommunication services, electricity bills, credit card bills etc.

13.

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Recommendation to Clarify Availability of ITC on Goods Delivered by Supplier on Ex-Works Basis The GST Council has recommended to clarify that in an Ex-works contract, where goods are delivered by the supplier to the recipient or a transporter at the supplier’s place of business, and the property in goods transfers to the recipient at that point, the goods are considered to be ‘received’ by the recipient under Section 16(2)(b) of CGST Act and the recipient may claim ITC on such goods, subject to the conditions outlined in Sections 16 and 17 of the CGST Act.

Taxmann’s Comments The GST council has recommended to clarify on the issue of availability of ITC in relation to ex-works contracts.

In general context, ex-works contract is an arrangement between buyer and seller, by requiring the seller to make the goods available to the buyer at either the seller’s premises or another named place. Once the buyer (himself or through his transporter) collects the goods, he assumes all the risks & responsibilities in relation to the goods from that point onwards.

There was ambiguity regarding the eligibility of ITC where the goods were delivered to a place of business, other than the recipient’s place of business, especially in case of ex-works contracts.

In this regard, the GST Council has recommended to clarify that in an ex-works contract where a supplier delivers goods to a recipient or his transporter, at his own place of business & the property in goods transfers to the recipient at that point, then:

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•

The goods are to be considered as ‘received’ by the recipient, in accordance with Section 16(2)(b) of CGST Act, and

•

The recipient will be eligible to claim ITC on such goods thereon, subject to the other conditions being fulfilled in Sections 16 and 17 of the CGST Act.

14. Recommendation to Clarify Applicability of Late Fee for Delay in Filing Form GSTR-9C •

Recommendation to clarify through a circular that the late fee under Section 47(2) of the CGST Act is leviable for the delay in filing the complete annual return under Section 44 of the CGST Act, which includes both Form GSTR-9 (Annual Return) and Form GSTR-9C (Reconciliation Statement), where applicable.

•

For the annual returns pertaining to the period 2017-18 to 2022-23, it is also recommended, to issue notification under Section 128 of CGST Act, for waiver of the amount of late fee for delayed filing of Form GSTR-9C, which is in excess of the amount of late fee payable till the date of filing of Form GSTR-9 for the said financial years, provided the said Form GSTR-9C is filed on or before 31-03-2025.

Taxmann’s Comments The GST Council has recommended to clarify that late fee is leviable for delay in filing of complete annual return, which includes both Form GSTR-9 (Annual Return) and Form GSTR-9C (Reconciliation Statement).

This recommendation addresses ambiguity over whether the late fee applies only to delays in filing Form GSTR-9 or to both Form GSTR-9 and Form GSTR-9C, where both are applicable. Therefore, it is to be noted that late fee is applicable on both forms i.e. Form GSTR-9 & Form GSTR-9C. Also, it has been recommended, to issue a notification, for the waiver of amount of late fee, exclusively for delayed filing of Form GSTR-9C. It is to be noted that such waiver is to be granted for delayed filing of Form GSTR9C, only on amount of late fee, which is in excess of late fee payable till date of filing of Form GSTR-9. In simple terms, relief is granted for the delay in filing Form GSTR9C beyond the late filing date of Form GSTR-9.

Additionally, such waiver is to be granted exclusively for the annual returns pertaining to the period 2017-18 to 2022-23 and where Form GSTR-9C is filed latest by 31-03-2025.

This recommendation specifically provides relief for delayed filing of Form GSTR-9C for the period 2017-18 to 2022-23 and the late fees which is in excess of the amount of late fee payable till the date of filing of Form GSTR-9 for the said financial years shall be waived if the said Form GSTR-9C is filed on or before 31-03-2025.

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D. New Procedures, Mechanism and Technology Adoption

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15.

Recommendation to Include Inter-State RCM Transactions for the Purposes of Input Service Distributor (‘ISD’) Mechanism

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It is recommended to amend Section 2(61) and Section 20(1) of the CGST Act to explicitly include inter-state RCM transactions under the ISD mechanism by including reference to supplies subject to tax under Section 5(3) and 5(4) of IGST Act in the said provisions.

•

Further recommended to amend Section 20(2) of CGST Act and Rule 39(1A) of the CGST Rules. These amendments are to be made effective from 01-04-2025.

Taxmann’s Comments Under GST, a supplier of goods and services may receive a single invoice at common office(s) for the procurement of services that are used by its other units. Since these services are common to multiple units, the common office(s) cannot claim ITC of the entire GST amount. To address this, the common office is required to register as an ISD under GST and distribute the ITC to the relevant units by issuing invoices in compliance with the GST legislation.

Notably, with effect from 01-04-202525, the ISD registration is made mandatory for common offices receiving common ITC for deemed distinct persons. The Finance Act, 2024, has substituted the definition of ISD under Section 2(6) and Section 20 of the CGST Act to include the distribution of common ITC in respect of the invoices of intra-state RCM services.

To further extend the benefit of availment of common ITC on inter-state RCM transaction under ISD mechanism, the GST Council has recommended to amend Section 2(61) and Section 20(1) of the CGST Act by including reference to supplies subject to tax under section 5(3) and 5(4) of IGST Act in the said provisions. And, further recommended to amend Section 20(2) of CGST Act and Rule 39(1A) of the CGST Rules. These amendments are to be made effective from 01-04-2025.

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Section 20(1) of the CGST Act read with Section 2(61) of the CGST Act

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16. Amendment in CGST Act and CGST Rule in Respect of Functionality of Invoice Management System •

Recommended to amend Section 38 of CGST Act and Rule 60 of CGST Rules to provide a legal framework in respect of generation of Form GSTR-2B based on the action taken by the taxpayers on the Invoice Management System (‘IMS’).

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Recommended to amend Section 34(2) of CGST Act to specifically provide for requirement of reversal of ITC as is attributable to a credit note, by the recipient, to enable the reduction of output tax liability of the supplier

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Recommended to insert a new Rule 67B in CGST Rules, to prescribe the manner in which the output tax liability of the supplier shall be adjusted against the credit note issued by him.

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Recommended to amend Section 39(1) of CGST Act and Rule 61 of CGST Rules to provide that Form GSTR-3B of a tax period shall be allowed to be filed only after Form GSTR-2B of the said tax period is made available on the portal

Taxmann’s Comments The Government has introduced a new IMS functionality on the GST portal in its Advisory, Dated 03-09-2024, to enable taxpayers to efficiently verify the correctness of invoices or amendments with their supplier. Notably, in the 54th Council meeting, it was clarified that IMS will be an optional facility for the taxpayers to reduce errors in claiming ITC and improve reconciliation.

Under the IMS, once the supplier saves an invoice in Form GSTR-1, IFF or Form GSTR-1A, it will be reflected on the recipient’s IMS dashboard. The recipient can then accept, reject or mark the invoice pending for the future action. Notably, the recipients are permitted to change their action already taken until the filing of Form GSTR-3B for the respective month. This facility is available to the taxpayer on the GST portal from 14-10-2024 onwards.

The introduction of the IMS marks a significant step toward improving the accuracy of ITC claims and enhancing the reconciliation process under GST. However, it’s optional nature and the lack of complete alignment with existing legal provisions created challenges for both taxpayers and the overall compliance framework. To address these issues, the GST Council has recommended aligning the functionality of IMS with the GST law through amendments and new provisions.

The GST Council has recommended to amend Section 38 of CGST Act, which provides provisions relating to communication of details of inward supplies and ITC and Rule 60 of CGST Rules which provides provisions relating to form and manner of ascertaining details of inward supplies. These amendment aims to provide a legal framework in respect of generation of Form GSTR-2B based on the action taken by the taxpayers on the IMS. 55th GST Council Meeting

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Section 34(2) of CGST Act require suppliers to declare credit notes in their returns and the recipient to reverse the attributable ITC. However, the IMS dashboard mandates the recipient to either accept or reject a credit note and recipient cannot keep action pending on such credit note. To specifically provide for requirement of reversal of ITC with respect to a credit note, by the recipient, to enable the reduction of output tax liability of the supplier, the GST Council has recommended to amend Section 34(2). Also, recommended to insert a new Rule 67B in CGST Rules to prescribe the manner in which the output tax liability of the supplier shall be adjusted against the credit note issued by him.

Further, every registered taxpayer is required to furnish Form GSTR-3B for every calendar month or part thereof in accordance of Section 39 of CGST Act. However, the GST law does not link the filing of Form GSTR-3B to the availability of Form GSTR-2B. In this respect, the GST Council has recommended to amend Section 39(1) and Rule 61 to provide that Form GSTR-3B of a tax period shall be allowed to be filed only after Form GSTR-2B of the said tax period is made available on the portal.

These amendments are likely to streamline the GST compliance framework, enhance the functionality of IMS, and ensure greater alignment of taxpayers’ actions with legislative provisions. The recommendations reflect a step toward reducing reconciliation errors, simplifying ITC claims, and improving overall GST compliance efficiency.

However the impact of the amended provisions and IMS on businesses once the same become mandatory will need to be seen.

17.

Recommendation to Amend Definition of Local Authority and Insert an Explanation Regarding Definitions of Local Fund and Municipal Fund

Recommendation to amend clause (c) of Section 2(69) of CGST Act and to insert an explanation under the same to provide for definitions of the terms ‘Local Fund’ and ‘Municipal Fund’ used in the said clause.

Taxmann’s Comments The term ‘local authority’ is defined under Section 2(69) of the CGST Act and includes a Municipal Committee, a Zilla Parishad, a District Board, and any other authority legally entitled to or entrusted by the Central or State Government with the control or management of a municipal or local fund.

The definition of local authority uses the terms ‘municipal funds’ or ‘local funds’ as a key criteria for qualifying as a local authority. However, these terms are not explicitly

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defined under the CGST Act. The absence of definition of these terms have created interpretational challenges in determining whether funds managed by authorities like Zilla Parishads or District Boards qualify as municipal or local funds.

The Supreme Court in case of R.C. Jain & Ors, has held26 that it is not appropriate to borrow definitions of terms like ‘local fund’ or ‘municipal fund’ from other statutes, such as the General Clauses Act or state-specific treasury rules. The Court emphasized that the meaning of terms used in one law cannot be automatically imported into another.

In the case of Newtown Kolkata Development Authority the West Bengal AAR27 has inconsistently referenced external statutes like the West Bengal Treasury Rules, which was not in line with the principles propounded by the Supreme Court of India.

To address these issues, the GST Council has recommended to amend clause (c) of Section 2(69) of the CGST Act, by inserting an explanation to explicitly define the terms ‘local fund’ and ‘municipal fund within the GST framework.

This recommendation is likely to bring clarity in interpretation, and resolve inconsistent view adopted under state advance rulings.

18. Recommendation to Insert New Rule 16A for Grant of Temporary Identification Number to Persons Not Liable to Be Registered Otherwise •

Recommendation to insert new Rule 16A in CGST Rules to provide for a separate provision for generation of Temporary Identification Number for persons who are not liable to be registered under CGST Act but are required to make any payment as per Rule 87(4) of CGST Rules.

•

To amend Rule 87 (4) of CGST Rules incorporating a reference to the new Rule and consequential modification in Form GST REG-12.

Taxmann’s Comments The GST Council has recommended to insert a new Rule 16A to the CGST Rules.

This new rule will establish a separate provision for the generation of a Temporary Identification Number (TIN).

This TIN will specifically cater to individuals or entities who are required to make payments under GST but are not liable to obtain GST registration.

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Union Of India & Ors vs R. C. Jain & Ors [1981 AIR 951} [2020] 115 taxmann.com 126 (AAR-WEST BENGAL)

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In addition to Rule 16A, it is also recommended that Rule 87(A) is to be amended to incorporate references to the new rule, ensuring alignment within the regulatory framework. Furthermore, consequential modifications will be made to form GST REG-12 to support the implementation of this change.

The primary objective of this recommendation is to simplify compliance for unregistered individuals or entities, who may be required to make payments under GST under different circumstances, that otherwise do not warrant registration.

For instance, this amendment aims to simplify the tax payment process for unregistered persons during the inspection and detention of trucks at check posts. It facilitates the prompt release of detained trucks. Additionally, it provides the option to file appeals online through the common portal, streamlining the resolution process and reducing delays. Also, if an unregistered person seeks an advance ruling, they would be required to pay the applicable fees. The proposed amendment will enable unregistered persons to make such payments seamlessly, without going through the challenges of registration & return filing.

19.

Amendment in Rule 19(1) of CGST Rules for Modifying the Field ‘Category of Registered Person’ in Form CMP-02

It is recommended to amend of Rule 19(1) of CGST Rules to include reference to Form GST CMP-02 in the said rule to allow the taxpayers to modify their ‘category of registered person’ in Table 5 of Form GST CMP-02 through Form GST REG-14.

Taxmann’s Comments Under the GST law, a person registered under the normal scheme can opt for the composition scheme by filing an intimation in Form GST CMP-02 before the start of the financial year in which they wish to opt for the scheme.

While filing Form GST CMP-02, the registered person is required to select the category of registered person. Rule 19 of the CGST Rules allows for modification to any particulars furnished in registration application and such modification can be made through Form GST REG-14.

However, the provisions under Rule 19 does not allow for modification to the ‘category of registered person’ specified in Table 5 of Form GST CMP-02 using Form GST REG-14.

To address this limitation, the GST Council has recommended to amend Rule 19(1) of the CGST Rules, to include a reference to Form GST CMP-02. This amendment will allow taxpayers to modify the ‘category of registered person‘ in Table 5 of Form GST CMP-02 through Form GST REG-14, thereby simplifying compliance and providing greater flexibility for taxpayers.

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E. GST Exemptions

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20. GST Exemption on Gene Therapy It is recommended to provide GST exemption on gene therapy.

Taxmann’s Comments Gene therapy, a critical advanced medical technique used to treat, prevent, or even cure life-threatening diseases, is currently taxed at 12% under GST. This therapy aims to fix a faulty gene or replace it with a healthy gene to try to cure disease or make the body better able to fight diseases. It shows significant potential in treating wide range of diseases, such as cancer, cystic fibrosis, heart disease, diabetes, hemophilia and AIDS. To reduce the financial burden on patients, the GST Council, following the proposal

by Tamil Nadu Finance Minister, has recommended to exempt gene therapy from the levy of GST.

21.

Exemption on Components Including Systems, Sub-Systems, Equipment Used in Assembly or Manufacture of LR SAM System

It has been recommended to extend IGST exemption to import of systems, sub-systems, equipment, parts, sub-parts, tools, test equipment, software meant for assembly/ manufacture of LR SAM system under Notification No. 19/2019-Customs, Dated 06-07-2019.

Taxmann’s Comments Previously, an exemption was provided from customs duty and IGST on the import of the long range surface to the air missile system (LR SAM). However, this exemption has been further extended28 for a period of 5 years. However, the said exemption does not apply to systems, sub-systems, equipment, parts, sub-parts, tools, test equipment, or software used in the assembly or manufacture of the LR SAM system.

To support the ‘Make in India’ initiative, the GST Council has now recommended IGST exemption on systems, sub-systems, equipment, parts, sub-parts, tools, test equipment, and software when used for the assembly or manufacture of the LR SAM system. This exemption is likely to bolster indigenous defense production and contribute to the government’s self-reliance objectives in the defense sector.

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Notification No. 26/2024 - Customs, Dated 27-6-2024

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22. Exemption of IGST on Imports of All Equipment and Consumable Samples by Inspection Team of IAEA Recommended to exempt the IGST on imports of all equipment and consumable samples by inspection team of the international atomic energy agency (‘IAEA’) subject to specified conditions.

Taxmann’s Comments The IAEA plays a critical role in ensuring that nuclear activities are conducted for peaceful purposes and are not diverted for weapons development. By implementing nuclear safeguards such as monitoring, inspections, and data analysis, the IAEA enforces the Comprehensive Safeguards Agreements (CSA) under the NonProliferation Treaty (NPT), ensures that nuclear activities remain peaceful and are not diverted for weapons-related purposes.

Previously, a similar exemption29 from IGST and customs duty was granted to the inspection team of the organization for the prohibition of chemical weapons (OPCW). This exemption supports the verification of adherence to the Chemical Weapons Convention, which bans the use of chemical weapons and mandates their destruction.

To ensure that nuclear activities remain peaceful and are not diverted for weaponsrelated purposes, the GST Council has now recommended an IGST exemption for all equipment and consumable samples imported by the IAEA Inspection Team for monitoring and verifying nuclear activities.

This exemption is a significant step toward facilitating the IAEA’s operations in India thereby reducing the tax burden on essential imports, which will facilitate in promoting international collaboration in nuclear research and development and supports global commitments to ensure that nuclear activities remain peaceful and non-diverted.

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Notification No. 121/2003 - Customs, Dated 01-08-2003 as amended by Notification No. 43/2017-Customs, Dated 3006-2017

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F. Compliance Facilitation

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23. Insertion of New Provision for Track and Trace Mechanism Uniform •

Recommendation to insert an enabling provision in CGST Act through Section 148A so as to empower the Government to enforce the Track and Trace Mechanism for specified evasion prone commodities.

•

The system shall be based on a Unique Identification Marking which shall be affixed on the said goods or the packages thereof. This will provide a legal framework for developing such a system and will help in implementation of mechanism for tracing specified commodities throughout the supply chain.

Taxmann’s Comments Under the GST law, many commodities face a high risk of tax evasion, leading to revenue losses due to under reported sales, fictitious input tax credit claims, the sale of counterfeit goods, etc.

To address this, the GST Council has recommended adding a new provision to the CGST Act for a ‘Track and Trace Mechanism’. The system will involve placing a unique identification mark on certain goods or their packaging, enabling complete tracking throughout the supply chain, from production to sale.

This mechanism aims to reduce tax avoidance by tracking the entire supply chain, making it easier to identify inconsistencies in manufacturing, shipping, or sales.

It will help reduce revenue losses caused by underreported sales and fraudulent ITC claims. By deterring illegal activities like the trade in counterfeit goods, the mechanism promotes fair competition and provides authorities with the necessary data to conduct focused audits and investigations.

24. Clarification for Recording Name of the State of the Unregistered Recipient and Place of Supply for Supply of Online Services It is recommended to clarify that, in the case of the supply of ‘online services’ such as online money gaming, OIDAR services, etc., to unregistered recipients, the supplier is required to mandatorily record the name of the state of the unregistered recipient on the tax invoice. The name of the recipient’s state shall be deemed to be the address on record of the recipient for the purpose of determining place of supply of service under Section 12(2)(b) of the IGST Act read with proviso to Rule 46(f) of the CGST Rules.

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Taxmann’s Comments The proviso to Rule 46(f) of CGST Rules, requires that in cases involving supply of online services involving online money gaming, supply of taxable services by or through an ECO or by a supplier of OIDAR services to a unregistered recipient, the tax invoice issued by the supplier shall contain the name of the state of the recipient. The same shall be deemed30 to be the address on record of the recipient.

Section 12 of IGST Act provides place of supply of services where location of supplier and recipient is in India. The place of supply of services rendered to a person other than the registered person would depend on whether the address of the recipient exists in the record of the supplier or not. In such cases, the place of supply would be determined in the following manner31: •

Where the address of such recipient is available on the record of the supplier - Place of supply shall be the ‘location of the recipient’.

•

On the other hand, where such address is not available on the records of the supplier - Place of supply shall be the ‘location of the supplier’.

However, there was ambiguity regarding the place of supply for online services provided to unregistered recipient, particularly whether the state mentioned on the tax invoice should be the place of supply or whether the supplier’s location should be the place of supply.

In order to resolve this, the GST Council has now recommended that clarification would be issued to provide that the state name recorded by the supplier in the tax invoice will be deemed as address of recipient address on record for determining the place of supply of online services under Section 12(2) of the IGST Act read with Rule 46(f) of CGST Rules.

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Central Goods and Services Tax (Second Amendment) Rules, 2023, w.e.f. 4-8-2023.

Section 12(2)(b) of the IGST Act

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G. Rate Rationalization

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25. Clarification on GST Rate on Ready-to-Eat Popcorn •

It is recommend to clarify the applicable GST rate on ready to eat popcorns which is mixed with salt and spices and which is mixed with sugar thereby changing its character to sugar confectionery. The recommendation specifies the following: (a)

Ready to eat popcorns (Other than pre-packed and labelled) – 5% GST rate and classifiable under HS code 21069099

(b)

Ready to eat popcorns (Pre-packed and labelled) – 12% GST rate and classifiable under HS 21069099

(c)

Sugar coated ready to eat popcorn (eg. Caramel popcorn) – 18% GST rate classifiable under HS 17049090

•

Additionally, it is recommended to regularize the tax payment for past periods on ‘as is where is’ basis.

•

It has been clarified by the GST Council that there is no new imposition of any tax in this regard and is merely a clarification as certain field units were demanding different tax rates on the same. Therefore, it is a clarification being recommended by the GST Council to settle the disputes arising out of interpretation.

Taxmann’s Comments There was no specific GST rate for popcorns which led to ambiguity for the classification and their applicable rate. This lack of clarity led to varying demands by certain field formations demanding different tax rates on ready to eat popcorns.

The Uttar Pradesh AAR in the case of Shyam Sundar Sharma held32 that ‘Ready to Eat’ popcorn is classifiable under HSN 1904 and subject to GST at 18 per cent. This view was followed33 by Telangana AAR in the case of Agro Tech Foods Ltd. These rulings have led to inconsistent classifications, with taxpayers adopting varying interpretations.

The Finance Minister highlighted that many states are currently treating salted ready to eat popcorns as namkeen. Currently, savory snacks like namkeens are taxed at 12%, while confectionery items, including sweet snacks, are charged at 18%.

To remove the ambiguity, the Council has recommended to clarify the GST rates of ready to eat popcorn mixed with salt and spices at 5% other than pre-packed and labelled and 12% for pre-packed and labelled.

32 33

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Shyam Sundar Sharma, In re [2021] 124 taxmann.com 609 (AAR- UTTAR PRADESH) Agro Tech Foods Ltd., In re, [2022] 140 taxmann.com 553 (AAR- TELANGANA)

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Food items having added sugar are placed under a separate tax bracket. In line with this, it is recommended when popcorn is mixed with sugar thereby changing its character to sugar confectionary (eg caramel popcorn), it would be classifiable under HS 1704 9090 and attract 18% GST. This clarification aims to address disputes, eliminate ambiguity around tax liability on different types of popcorn products, and reduce potential litigation. It also ensures uniformity in GST treatment across states and field formations, promoting compliance and reducing taxpayer uncertainty.

26. Reduction in GST Rate on Fortified Rice Kernel (FRK) to 5% and Classifiable Under HS 1904 Recommended to reduce the GST rate on Fortified Rice Kernel (FRK), classifiable under heading 1904, to 5%.

Taxmann’s Comments Fortified rice is similar to regular rice but contains more nutrients. The rice kernels are either coated or shaped to resemble rice, and are enriched with a mix of vitamins and minerals.

Following the recommendation of the 45th GST Council meeting, the GST rate on fortified rice kernel (‘FRK’), classified under 1904, was reduced34 from 18% to 5% w.e.f.

01-10-2021 for use in the integrated child development services (‘ICDS’) or similar scheme approved by central government or any state government. However, FRK not used in any government-approved scheme continued to be taxed at 18%.

To further enhance nutrition and health outcomes, the GST Council has now recommended reducing the GST rate on FRK classified under 1904 from 18% to 5%, ensuring broader accessibility and affordability of fortified rice.

34

Notification No. 11/2021 - Central Tax (Rate), Dated 30-9-2021

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27. Reduction in the Rate of Compensation Cess to 0.1% on Supplies to Merchant Exporters It is recommended to reduce the rate of compensation cess to 0.1% on supplies to merchant exporters at par with GST rate on such supplies.

Taxmann’s Comments The term ‘merchant exporter’ is not defined under the GST law. However, the Foreign Trade Policy defines35 it as a person engaged in trading activities and exporting or intending to export goods.

To encourage exports, the government has provided a concessional36 GST rate of 0.10% (0.05% CGST and SGST each for intra-state supplies) on taxable goods supplied by a registered supplier to a registered merchant exporter. This benefit is subject to specific conditions, and the GST paid by the merchant exporter can be claimed as ITC. Now, to further reduce costs for exporters and make Indian goods more competitive globally, the GST Council has recommended to reduce the compensation cess to 0.10% on supplies to merchant exporters, aligning it with the GST rate for such supplies.

This reduction will lower procurement costs for merchant exporters, enabling them to offer competitive pricing in international markets. Also, the reduction in the rate of compensation cess it will address the challenges often faced by merchant exporters related to tax refunds and compliance and will improve their operational efficiency.

By minimizing tax burdens, the move is expected to make Indian exports more attractive globally, thereby contributing to the growth of the country’s export sector.

28. Recommendation to Extend GST at 5% on Food Inputs for Preparations Intended for Free Distribution Under Government Programs Recommendation to extend the concessional 5% GST rate on food inputs of food preparations under HSN 19 or 21 that are supplied for food preparations intended for free distribution to economically weaker sections under a government program subject to the existing conditions.

35 36

Para 9.33 of Foreign Trade Policy 2015-2020 Notification No. 40/2017 - Central Tax (Rate), Dated 23-10-2017 and Notification No 41/2017 - Integrated Tax (Rate), Dated 23-10-2017

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Taxmann’s Comments At present, the government has provided the benefit of concessional GST rate37 at 5% on food preparations packaged in unit containers and intended for free distribution to economically weaker sections under government-approved programs. This is subject to the condition that the supplier provides a certificate from a government officer not below the rank of Deputy Secretary confirming that the goods were distributed for free to economically weaker sections of society under a government-approved program. The certificate must be submitted within five months of the goods being supplied, or within an extended period allowed by the relevant tax authority.

However, the food inputs used in the preparation of food intended for free distribution are taxed at the standard GST rates.

To further enhance the benefit of free food distribution to economically weaker sections of society, the government has now recommended extending the 5% concessional GST rate to food inputs as well, provided they are supplied for the purpose of food preparation intended for free distribution under government program subject to the existing conditions provided in the notification as mentioned above.

This will reduce the cost of food distribution programs and amplify the social welfare impact of government initiatives targeting the economically weaker sections of society.

29. Recommendation to Exempt Contributions by General Insurance Companies to Motor Vehicle Accident Fund From GST Recommendation to exempt GST on the contributions made by General Insurance Companies from the third-party motor vehicle premiums collected by them to the Motor Vehicle Accident Fund, constituted under Section 164B of the Motor Vehicles Act, 1988.

This fund is constituted for providing compensation/ cashless treatment to the victims of road accidents including hit and run cases.

Taxmann’s Comments The GST Council has recommended to exempt the GST on contributions made

by General Insurance companies, from the third-party motor vehicle premiums collected by them, to Motor Vehicle Accident Fund, constituted under Section 164B of the Motor Vehicles Act, 1988.

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Notification No. 39/2017 - Central Tax (Rate), Dated 18-10-2017

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This fund is constituted for providing compensation/cashless treatment to the victims of road accidents including those involved in hit and run cases.

Previously, GST at the rate of 18% was levied on these contributions made by General Insurance Companies to Motor Vehicle Accident Fund.

It is important to note that this recommendation specifically pertains to third-party motor vehicle insurance premiums collected by general insurance companies and does not apply to any other types of insurance premiums.

The GST Council’s decision to exempt GST on contributions made by General Insurance Companies to the Third Party Motor Vehicle Accident Fund reflects a significant relief measure aimed at reducing the financial burden on policy holders.

By doing so, the Council acknowledges the critical purpose of this fund in ensuring timely compensation and cashless treatment for road accident victims, including those in hit-and-run cases, aligning with the broader goal of public welfare and social responsibility.

30. Recommendation to Increase GST Rate to 18% on Sale of All Old and Used Vehicles, Including Electric Vehicles (EVs) •

Recommendation to increase the GST rate from 12% to 18 % on sale of all old and used vehicles, including EV’s, other than those specified at 18% which includes sale of old and used petrol vehicles of engine capacity of 1200 cc or more & of length of 4000 mm or more or diesel vehicles of engine capacity of 1500 cc or more & of length of 4000 mm and SUVs.

•

GST Council has noted that GST is applicable only on the value that represents margin of the supplier, that is, the difference between the purchase price and selling price (depreciated value if depreciation is claimed) and not on the value of the vehicle.

•

GST Council has further noted that this recommendation is not applicable in case of unregistered persons.

Taxmann’s Comments The GST Council has recommended to increase the GST rate from 12% to 18%, on sale of all old & used vehicles, including EV’s. This recommendation has been introduced to bring the rate at par with sale of old and used petrol vehicles (of engine capacity of 1200 cc or more & of length of 4000 mm or more) and diesel vehicles (of engine capacity of 1500 cc or more & of length of 4000 mm) and SUVs, which were already liable to GST at 18%.

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As per Rule 32(5) of the CGST Rules, GST on such transaction is applicable only on the difference between the purchase price & selling price & not on the entire sale value of that vehicle.

Additionally, if depreciation is also claimed by such supplier, then such depreciation will also be available as deduction and the margin at which GST is to be levied, is to be arrived at after deducting such depreciation amount. However, if the differential amount is negative, then the same shall be ignored.

It is important to note that this recommendation does not apply to unregistered persons.

It is also to be noted that previously, EVs were taxed38 at 5%, while old and used petrol vehicles (excluding those with an engine capacity of 1200 cc or more and length of 4000 mm or more) and diesel vehicles (excluding those with an engine capacity of 1500 cc or more and length of 4000 mm) were taxed39 at 12%. Larger petrol and diesel vehicles, as well as SUVs, were already subject to 18% GST rate.

This Recommendation increases the GST rate on all old and used vehicles, including EVs, to 18%. This move aims to bring uniformity in taxation across different categories of vehicles. However, an increased GST burden on second hand car sales may adversely impact the industry.

31.

Recommendation to Clarify That Autoclaved Aerated Concrete (ACC) Blocks Containing More Than 50% Fly Ash Content Will Fall Under HS 6815 and Attract 12% GST

Recommendation to clarify that Autoclaved Aerated Concrete (ACC) blocks containing more than 50% fly ash content will fall under HS 6815 and attract 12% GST.

Taxmann’s Comments The GST Council, has recommended to clarify that AAC blocks containing more than 50% fly ash content will fall under HSN 6815 and liable to GST at 12%.

This clarification specifically addresses AAC blocks with more than 50% fly ash content, which was prone to classification dispute. The ambiguity arose because AAC blocks with over 50% fly ash content aligned with two classifications.

38

Sl. No. 242A of Schedule I of Notification No. 01/2017 – Central Tax (Rate), Dated 28-06-2017 read with Notification No. 12/2019 – Central Tax (Rate), Dated 31-07-2019 39 Notification No. 01/2017 – Central Tax (Rate), Dated 28-06-2017 read with Notification No.8/2018 – Central Tax (Rate), Dated 25-01-2018

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While they are structurally and functionally AAC blocks (classifiable under HSN 6810), a significant portion of their material composition (more than 50%) is made of fly ash (classifiable under HSN 6815), leading to confusion about their classification.

To address this issue, the GST Council has recommended to clarify that AAC blocks containing more than 50% fly ash should be classified under HSN 6815 and taxed at the GST rate of 12%.

By providing a concessional GST rate for AAC blocks with more than 50% fly ash, the GST Council aims to incentivize the production and adoption of environmentally sustainable materials, making them more affordable and accessible.

32. Recommendation to Clarify That the Explanation Regarding Ground Clearance Is Applicable With Effect From 26-07-2023 Recommendation to clarify that the Explanation in Sl. No. 52B of Notification No. 1/2017 Compensation Cess (Rate), Dated 28-06-2017 regarding ground clearance will apply with effect from 26-07-2023.

Taxmann’s Comments It is to be noted that, Entry 52B of Notification40 dated 28-06-2017, specified a 22% compensation cess for motor vehicles popularly known as SUVs with an engine capacity exceeding 1500cc. The notification outlined conditions regarding length exceeding 4000 mm and ground clearance of 170 mm or above, but the said notification did not clarify whether ground clearance should be measured in the laden or unladen condition. Also, the notification did not clarify whether any one or all of the conditions would be required to be satisfied.

Subsequently, Tata Motors Ltd. approached the Maharashtra AAAR which ruled41 that ground clearance should be measured in the laden condition. It also confirmed that all conditions must be satisfied for the compensation cess to apply and not just one.

Later, the 50th GST Council meeting, recommended to amend the above stated entry 52B to include all utility vehicles by whatever name called provided they meet the parameters of length exceeding 4000 mm, engine capacity exceeding 1500 cc and having ground clearance of 170 mm & above. It was also recommended to clarify by way of inserting an explanation that ‘Ground Clearance’ means ground clearance in Un-laden condition. This explanation was brought through a notification42 dated 23-07-2023.

40 Sl. No. 52B of Notification No. 1/2017-Compensation Cess (Rate), Dated 28-6-2017 41 Tata Motors Ltd., In re vs. [2022] 138 taxmann.com 90 (AAAR-Maharashtra) 42 Notification No. 3/2023-Compensation Cess (Rate) , Dated 26-07-2023

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However, in pursuance of Section 11(3) of the CGST Act, it was still unclear as to the date from which such explanation would apply.

Now, the 55th GST Council meeting has recommended to further clarify on the above stated entry 52B, that the explanation regarding ground clearance is to be made applicable from 26th July 2023, which is the date of Notification that brought the same explanation, as recommended by 50th GST Council meeting.

This clarification effectively resolves the ambiguity regarding applicability of compensation cess on the basis of ground clearance and ensures that it would help vehicle manufacturers with their GST compliance.

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H. Other Measures

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33. Decisions Deferred for Future Deliberation •

Natural disaster or Calamity Cess – On the request of State of Andhra Pradesh the Council recommended that Group of Ministers (‘GOM’) be constituted to examine the legal and structural issues, and recommend a uniform policy on imposition of levy in case of a natural disaster/calamity in the State.

•

Compensation Cess – The Council also decided to extend the time frame for the Group of Ministers on the restructuring of the GST Compensation till 30 June, 2025.

•

Floor Space Index – The GST Council discussed the issue of whether charges collected by municipalities for granting Floor Space Index (FSI), including additional FSI, should be subject to GST under the reverse charge mechanism. The matter was deferred for further examination at the request of the Central Government, citing that these charges pertain to municipalities or local authorities.

•

IGST Settlement – The GST Council approved the recommendations of the committee of officers regarding measures to address various issues raised by the States pertaining to IGST settlement. The Council directed the committee to finalize the proposed changes by March 2025.

•

GST Appellate Tribunal (GSTAT) – The GST Council reviewed the proposed procedural rules for the internal functioning of the GSTAT. These rules will be notified after examination by the Law Committee, facilitating the operationalization of the GSTAT.

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I. Concluding Remarks

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The 55th GST Council meeting was eagerly awaited by the industry, which sought resolutions to long-pending issues and critical clarifications. Although the Council did not meet all expectations, it introduced several impactful measures aimed at tax rate rationalization and facilitating trade.

Noteworthy changes include steps to streamline compliance and bring greater clarity to specific aspects of the GST framework.

However, despite these positive strides, several pressing issues remain unresolved. Key decisions, such as the potential extension of the GST compensation cess, inclusion of Aviation Turbine Fuel (ATF) under GST, taxability of health and life insurance policies, and GST treatment of delivery services provided by food delivery apps, have been deferred. The GST Council has emphasized that these matters require further in-depth analysis and deliberation before reaching definitive conclusions.

While the measures announced provide immediate relief and address certain concerns, the postponement of these critical decisions highlights the need for ongoing engagement and a comprehensive approach. Resolving these outstanding issues is essential to adapting the GST framework to evolving industry dynamics and ensuring a fair, balanced, and efficient taxation regime.

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