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GST is payable by the Supplier on Subsidy Received from Central Government through Escrow Account

Recently Karnataka AAR in the case of M/s M / s. Hitze Boilers Private Limited has held that Subsidy Received through Escrow Account by the Supplier is not excludible from the value of supply i.e. GST needs to be discharged on the Gross Value inclusive of subsidy amount also. (copy of Order is attached in the end of the Article).

Areas Covered in the Article

Brief Facts of the Case

The applicant has stated that they intend to manufacture and supply plant and machineries to Chinnapuri Silks (Recipient) whose estimated cost is Rs.23,19,100/- (excluding GST) and cost is based on the quotation. The recipient of machinery is eligible for 90% subsidy grants from Central Government and State Government. The total amount of subsidy is Rs.20,87,280/- (being 90% of the costs of the Plant and Machinery). The amount of subsidy will be deposited in an Escrow account opened with Canara Bank where the recipient is the account holder and from this account the funds will be transferred to the supplier of Machinery, M/s. Hitze Boilers Private Limited (the Supplier).

Arguments in the Favour of the Taxpayer

The Commissioner of Central Tax, Bengaluru North West GST Commissionerate has also submitted arguments that GST is payable on the net value (10%) not on the subsidy amount.

Legal Provisions used

Consideration as defined in Section-2(31):

"Consideration-(a) any payment made or to be made, whether in money or otherwise, in respect of in response to, or for the inducement of the supply of goods or services or both whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

Section 15(2) regarding Value of Supply

The value of supply shall include-


(e) subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments.

On perusal of the said definition, it is clear the consideration shall not include any subsidy given by the Central Government or a State Government. Thus the subsidy amount paid by the government is not to be treated as consideration for the purpose of CGST Act, 2017. The intention of the legislature is to exempt subsidy from GST.

In the instant case, In order to ensure that the payment of subsidy reaches the particular suppliers, the Government prescribes the opening of an ESCROW account in a nationalized bank through a letter of credit (LC) and monitor the mode of payment in stages. Here the beneficiary has to first deposit 10% of the amount payable and the Government deposit remaining 90% as subsidy to the ESCROW account opened for the said purpose. The 90% of the amount deposited by the Government in the name of Subsidy cannot be used for any other purpose and even the beneficiary cannot utilize for any other purpose except for the intended purpose. This condition is prescribed only to ensure that the subsidy reaches the supplier only.

The beneficiary cannot take 90% of the amount as expenditure incurred in their books of account, instead can only take 10% paid by them as expenditure. It is not a case where the beneficiary incur the full 100% of the cost of the machinery and subsequently government pay or reimburse the 90% of the cost to the beneficiary instead the 90% of the cost is incurred by the government directly.

Just because an ESCROW account is opened and the subsidy amount is deposited and payment is monitored, it cannot be construed that the subsidy is not received from the government.

Accordingly, it was submitted that GST is payable on the net value (i.e. 10%) only.

3 Discussion & Decision by Authority

Authority has emphasised that for for determining the value of taxable supply, sub-sections(1) and (2) of Section15 are to be read in-conjunction. As per sub-section 15(1), taxable value shall be the transaction value when the supplier and recipient are not related and price is the sole consideration for supply. Sub-section15(2) expands the scope of value of supply so as to include such values mentioned in the clauses(a) to (e) of the sub-sec

Thus,Section15(2) e) seeks to expand the value of supply so as to include subsidies which are directly linked to the price with a condition that subsidies provided by Central Government and State Governments are to be excluded. We find that the phrase providing for exclusion of subsidies by Central Government and State Governments will apply only when two conditions are satisfied viz.,

(i)when such subsidies are to be added to the transaction value and

(ii)when such subsidies are directly linked to the price or affects the price of supply.

In the instant case, it is observed that the contract for supply of machinery is between the Applicant and the recipient i.e. M/s Chinnapuri silks; the applicant supplier raises the invoice for the full contract price and even if the recipient is not provided subsidy,the contract price is still recoverable from the recipient. Subsidies provided by State Government or Central Government in the escrow account are not separately recoverable by the Applicant, but are part of the price payable by the recipient. Thus, there does not arise a situation where the subsidies are to be added separately to the transaction value or value of supply payable by the recipient. Also, for the same reason we find that the subsidy is not affecting the price of supply. Only the subsidies provided by Central Government and State Governments which are directly linked to the price and affects the price of supply are not a part of value of supply. Hence the exclusion provided in Section15(2)(e) is not applicable in the instant case and the subsidies provided by Central Government and State Governments can not be excluded in determining the value of supply.

Accordingly, it was held that Subsidy received is not excludible from the value of Supply.

Our Opinion

In our opinion, as mentioned in the Brief Facts, subsidy is not directly provided by the Supplier but through Escrow account that is also in the name of Recipient, Subsidy amount is not excludible from the Value of Supply.

Eligibility of ITC on 10% or 100% of Value

Now question arise whether Recipient will be eligible for ITC on 10% of value as the amount being paid by him or on the 100% of value inclusive of subsidy amount.

Here, one provision needs to be discussed i.e. regarding payment to Supplier by the Registered Person in 180 days for eligibility of ITC.

As discussed above, subsidy amount is received by the Recipient not the supplier. So, payment to Supplier has been made by the Registered Person (10% by from self source, 90% from the funds provided by the Government in his Escrow Account).

Though, on the principal of equity, he should be eligible for ITC for 10% only equivalent to the amount he actually borne. However, as far as our understanding of Law, there is no provision to restrict the ITC to the recipient.

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Copy of the Order

Download PDF • 4.41MB

Disclaimer: We have taken due care to the best of our knowledge while explaining the provisions surrounding the issue purely for informational/academic purpose. It should not be considered as professional advice or consultancy to be relied upon. While due care has been taken by Fab Gyan in preparing this article, certain mistakes and omissions may creep in. The Fab Gyan or its Author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.

Disclaimer: We did interpretation of Respected Authority Decision for purely academic purpose. In case, there is any mistake in understanding of the order, we are apologised to the Authority.

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