GST: ITC for packing materials consumed in packing of Exempted/Nil rated/Zero rated & Non GST supplies

GST: Input Tax Credit (ITC) for packing materials consumed in packing of Exempted/Nil rated/Zero rated & Non GST supplies; 

Under the GST Acts, the goods and services are classified into Exempted, Nil rated, Zero Rated and Non-GST supplies.

Exempted supply denotes, supplies taxable under the GST Acts but are specifically exempted from GST by notifications issued U/s. 11 of the CGST/SGST Acts, for which Input Tax Credit (ITC) is not available. Fresh fruits, Fresh milk, Curd, Bread, etc are examples for the goods coming under the exempted supplies.

Nil rated supplies means the supplies for which the tax rate under the GST Act is notified as ‘0’. Examples are Grains, Salt, Jaggery, etc

Zero-Rated supplies as defined in Section 16 of the Integrated Goods & Services Tax Act, 2017 means any supplies made by a registered dealer (both goods or services) as an export or supply to a Special Economic Zone (SEZ) or to SEZ Developers. This supply attracts a GST of 0%. For such supplies, ITC can be claimed and entire value chain of the supply is exempt from tax.

Non-GST supplies constitute the supplies which don’t come under the scope of the GST as per Section 9 of the CGST/SGST Acts. However, these supplies can attract taxes other than the GST as per the jurisdiction of the state or the country. We can find, Alcohol for human consumption, Petroleum crude, motor spirit (petrol), high speed diesel (HSD), natural gas and aviation turbine fuel and electricity in this basket.

Apart from these four items, another category of supplies is also there under the GST law attracting no tax, come under the Schedule lll of the CGST/SGST Acts. These supplies, if not had been included in Schedule III, would have been considered as supply and would be subjected to levy of GST. Needless to say, these supplies are also not qualified for ITC. This category represents six supplies including Services by an employee to the employer, Services of funeral, burial, crematorium or mortuary including transportation of the deceased, Sale of land and building (subject to conditions) and Services by any Court or Tribunal. Predominantly, these supplies represent supply of services.

To make the situation more complex, there are definitions for “Exempt supply” in section 2(47) and for “Non-taxable supply” in section 2(78) of the CGST/SGST Acts.

In this Article, this author attempts to find out a reasoned answer to the question whether input tax credit (ITC) is eligible in respect of the packing materials procured by a tax person registered under the GST Acts from another registered dealer, when he consumes it for the packing of exempted/nil rated/zero rated/Non-GST goods in the course of supply. The answer is neither a simple yes or no.

Statutory Provisions

To have a clear understanding about the topic, let us first see the texts of the statutory provisions relevant thereto and as such the same are extracted below for a ready reference;

• Section 2(30) of the CGST/SGST Acts: — “Composite Supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;
• Section 2(74) of the CGST/SGST Acts: — “Mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.
• Section 8 of the CGST/SGST Acts: — Tax liability on composite and mixed supplies. The tax liability on a composite or a mixed supply shall be determined in the following manner, namely: –

(a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply.

(b) a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.

• Section 16(1) of CGST/SGST Acts: – Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in Section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
• Section 17(2) of CGST/SGST Acts: – Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.
• Section 41 of CGST/SGST Acts: – Claim of input tax credit and provisional acceptance thereof: –

(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to take the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited on a provisional basis to his electronic credit ledger.

(2) The credit referred to in sub-section (1) shall be utilized only for payment of self-assessed output tax as per the return referred to in the said sub-section.

Analysis

Now the moot question for answer is whether a dealer having GST registration who bought packing materials from a registered supplier (taxable inward supply), after suffering GST is eligible for input tax credit thereon when he is suppling non-taxable goods after consuming the said packing materials for packing the goods for supply. Here, the dealer is either selling fresh fruits, fresh milk, curd, bread (Exempted supply) or selling grains, salt, jaggery (Nil rates supply) or Indian Made Foreign Liquor (IMFL), petrol, High Speed Diesel (HSD), natural gas etc (Non –GST supply) or suppling any goods to a SEZ/SEZ developer (zero rated supply). In fact, there is no clear or unambiguous statutory provision to deny ITC for the purchases of packing materials under such circumstances, even though it lacks any logic in claiming ITC thereon under the GST scenario. However, a conjoint reading of various provisions relevant herein would force us to reach at a conclusion that no ITC can be claimed in the present scenario except for certain fragile exemptions. A one-by one analysis of the relevant provisions is made hereunder; [ for ease of understanding an example of supply of Indian Made Foreign Liquor (IMFL) in packaged form is taken here]

• Firstly, sub –section (30) of section 2 of the CGST/SGST Acts defines composite supply ‘as a supply made by a taxable person to a recipient consisting of two or more taxable suppliesof goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply’. A plain reading of the section reveals that it has no direct application to the present situation since to constitute a ‘composite supply’ there should be two or more taxable supplies but in the present scenario, in case of supply of IMFL, there is only one taxable supply (arguably for packing material). The second one is a non-taxable supply (IMFL) but out of purview of the CGST/SGST Acts. Therefore, obviously supply of IMFL along with taxable packing material is not a composite supply. Here, it is worth to note that the term “taxable supply” means a “supply of goods or services or both which is leviable to tax under this Act” as per sub section (108) of section 2 of the CGST/SGST Acts.
• Secondly, according to sub-section (74) of section 2 of the CGST/SGST Acts, “Mixed supply” means ‘two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply’.Again, we cannot find any face to face application for this section to the present situation since to constitute a mixed supply there should be two or more individual supplies of goods or services whereas in the present scenario, in case of supply of IMFL, one cannot say there are two individual supplies. In fact, supply of a commodity in a packed form is in essence a composite supply but at the same time does not qualify for the definition of “Composite supply” as found in the CGST/SGST Acts. Furthermore, section 8 (b) says the rate of tax applicable for a mixed supply is the highest rate applicable to any of the goods in such supply. In our example packing material attracts tax @12 % under GST but IMFL is exempt. Moreover, as a whole the subject supply is exempt.
• Thus, for the supply of IMFL in packaged form (as in case of other similar supplies), the nature of supply is not well defined under the CGST/SGST Acts.
• Thirdly, Section 16(1) of CGST/SGST Acts, says that ‘every registered person is entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person’. This is subject to the conditions described U/s. 49. Thus according to this section one could claim and avail ITC on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business. In the instant case the supply of packing materials to him are undisputedly used in the course or furtherance of his business. As such the packing materials procured for packing of IMFL and for subsequent supply would qualify for input tax credit. Moreover, none of the conditions listed in Section 49 would come against the claim of ITC in the present case.
• Fourthly, Section 17(2) of CGST/SGST Acts, stipulates that, ‘where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies’. Accordingly, in the instant case there is no reason to deny the fact that the same constitutes two different supplies –ie – supply of packing material and supply of IMFL. In fact, there is no statutory provision available to term the instant supply as a composite supply as discussed earlier. As such the supplier of IMFL in our example is eligible for ITC for the supply of packing materials, embedded in the instant supply.
• Fifthly, Section 41 (1) of CGST/SGST Acts, prescribes that ‘every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to take the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited on a provisional basis to his electronic credit ledger. That apart, as per Section 41 (2) of the said Acts the credit referred to in sub-section (1) shall be utilized only for payment of self-assessed output tax as per the return referred to in the said sub-section. This section, to a certain extent, will become a road block in the way of availing ITC by our dealer supplying IMFL. If he has no self-assessed output tax as per the return, he is not able to utilize the ITC in respect of the packing materials. However, if he has any self-assessed output tax as per the return (on account of some other supply) he will be eligible for claiming ITC on packing materials as well.
• Discussions in the para above possibly raise another doubt that, under the given circumstances whether the supplier is eligible for refund of the unutilized input tax credit? As per the proviso below to sub section (3) of section 54 of the CGST/SGST Acts, refund of unutilized input tax credit is available for zero rated supplies made without payment of tax. With regard to the “nil rated or fully exempt supplies” such a refund is not permissible, as per the clause (ii) of the above proviso. Here also there is no specific provision to deny refund for non –GST goods (as they wouldn’t come under the category of “nil rated or fully exempt supplies”), but the situation lacks clarity. According to this author, the supplier of IMFL (non-GST supply) is eligible for refund of the ITC on the inward supply of packing materials consumed.

Advance ruling in VNR Seeds Pvt. Ltd case

The Authority for Advance Ruling (AAR), Chhattisgarh, in an identical case, has ruled vide Order No. STC/AAR/01/2018 dated:06.06.2018 that the applicant therein is not entitled to ITC on the packing material used for packaging seeds, while making such exempted supply of seeds to their own branches and to other purchasers. Therein, the applicant, namely VNR Seeds (P) Ltd, Raipur has submitted that they were involved in the business of supplying seeds in packaged form using such packaging materials. Seeds are exempted from GST whereas packing materials and other consumables are taxable. It is discernible from the above ruling that the AAR has reached at this conclusion based on the finding that “Thus, this supply of the applicant falls under the category of composite supply, as stipulated under the provisions” [Para 5(1) of the ruling]. However, the finding of the AAR on the above lines is not found in terms with the definition of “Composite supply” as defined in Section 2(30) of the CGST/SGST Acts which means that the entire discussion held in the said ruling was on a wrong footing or the least not based on an elaborate discussion on the subject matter. Thus, it seems the ruling of the AAR Chhattisgarh should not be a final word with regard to the claim and eligibility of packing materials for ITC, when consumed for the supply of exempted/nil rated/zero rated/non –GST goods.

Conclusion

• The CGST/SGST Acts do not have any clear answer to the question whether a supplier of exempted/nil rated/zero rated/Non-GST goods sold in packaged form is eligible for ITC in respect of the packing materials procured by him from a registered dealer?
• The supply of exempted/nil rated/zero rated/Non-GST goods sold in packaged form is neither a ‘composite supply’ nor a ‘mixed supply’ as defined in the CGST/SGST Acts.
• As per Section 41 (2) of the said Acts the ITC shall be utilized only for payment of self-assessed output tax as per the return. So much so, if he has no self-assessed output tax as per the return, he is not able to utilize the ITC in respect of the packing materials. However, if he has any self-assessed output tax as per the return (on account of some other supply) he will be eligible for claiming ITC on packing materials.
• As per the proviso below to sub section 54(3) of the Acts, refund of unutilized input tax credit is available for zero rated supplies made without payment of tax. With regard to the “nil rated or fully exempt supplies” such a refund is not permissible. There is no specific provision to deny refund for non –GST goods and therefore the supplier of non-GST goods is eligible for refund of the ITC on the inward supply of packing materials consumed.
• The advance ruling issued in Order No. STC/AAR/01/2018 dated:06.06.2018 to VNR Seeds (P) Ltd, Raipur is bad in law as it was issued without elaborating on the core issues involved and also issued after misinterpreting the statutory provisions.