GST vs Income Tax in Agriculture

 By CA Surekha Ahuja

Why “Tax-Free” Agriculture Is One of India’s Most Audited, Litigated & Penalised Sectors

The Great Agricultural Tax Illusion

Agriculture in India is widely believed to be “outside tax”.
That belief is only half true—and dangerously incomplete.

Under the Income-tax Act, agricultural income enjoys a near-absolute statutory exemption. Under GST, however, agriculture survives only within a narrow, evidence-driven corridor, guarded by supervision tests, end-use verification, system reconciliations, and strict documentation standards.

This asymmetry has quietly turned agriculture into a high-risk audit sector, particularly for rice millers, agri-processors, land lessors, contract farmers, and exporters.

The ICAI Handbook on GST Applicability to the Agricultural Sector (Jan 2026) crystallises what field audits already reveal:

Most GST disputes in agriculture do not arise from evasion.
They arise from applying Income-tax logic to GST law.

This article examines agriculture purely from an agri-audit and enforcement perspective—how defaults arise, how officers frame demands, and how penalties and litigation can be avoided before notices are issued.

The Structural Conflict That Creates Litigation

Dimension	Income Tax Act	GST Law
Nature of relief	Absolute exemption	Conditional exemption
Primary test	Source of income	Activity, supervision, end-use
Evidence required	Minimal	Extensive & continuous
Officer discretion	Limited	High
Penalty exposure	Rare	Automatic & severe

Agri-Audit Insight
What is automatically exempt under Income Tax becomes exempt only if conclusively proven under GST—every year, every month, every transaction.

Rice Milling & Agri Processing - The Largest Silent Default Zone

Rice milling is not agriculture. It is an industrial manufacturing activity.
This position is settled across audits, adjudication, and appellate practice.

• Rice packed above 25 kg → Exempt output

• Rice bran, broken rice, consumer packs → Taxable outputs

• Governing law → Rule 42 / Rule 43 ITC reversal

Ownership of agricultural land, family involvement, or personal supervision has no legal relevance once activity crosses cultivation.

GST registration becomes mandatory on turnover breach, regardless of agricultural lineage.

Where Rice Mills Commonly Fail

• Exempt rice sold alongside taxable by-products

• Common packing material ITC not segregated

• Provisional ITC claimed monthly and never reversed

• GSTR-9 reconciliation delayed or cosmetic

• ITC claimed as expense under Income-tax and retained under GST

How Officers Build the Case

• Wrong availment of common credit

• Suppression of exempt-linked ITC

• Interest under section 50(3) treated as automatic

• Penalty proceedings under sections 73 or 74

Critical Caution
Rice mills rarely lose on tax rate.
They lose on input attribution discipline.

Audit-Safe Architecture

• ERP-level segregation of packing inputs

• Lot-wise input–output mapping

• Monthly Rule-42 workings preserved

• Timely GSTR-9 Table 6B reconciliation

Agriculturist Exemption — Supervision Is the Only Shield

GST exempts only those agriculturists who personally supervise cultivation under section 23(1)(a).

The ICAI aligns with the Supreme Court’s classical test in Raja Benoy Kumar Sahas Roy:

Cultivation through hired labour qualifies only where personal supervision exists.

Enforcement Position

As clarified by the Central Board of Indirect Taxes and Customs, exemption survives only when:

• Produce is self-cultivated

• Supervision by owner or family is demonstrable

• Processing is limited to cleaning, drying, sorting

Registration becomes compulsory where:

• Mechanised harvesting occurs without supervision

• Commercial dryers, hullers, or mills are used

• Trading of third-party produce is undertaken

Audit Red Flags

• Mechanised operations with no supervision evidence

• Contract farming through corporate entities

• Mixing own produce with purchased produce

• Agricultural land records masking commercial activity

Most Common Litigation Fallacy

“The land is agricultural, therefore the activity is exempt.”

Audit Reality
GST evaluates what you did, not what the land is called.

Non-Negotiable Defence

Every agriculturist claiming GST exemption must maintain:

• Labour attendance and wage registers

• Supervision timestamps

• Geo-tagged field photographs

• Crop-cycle activity logs

Absence of this evidence converts exemption into taxable supply with retrospective exposure.

Agricultural Land Leasing - Where Income-Tax Logic Causes Maximum Damage

Under Income Tax, lease rent from agricultural land remains exempt.
Under GST, exemption applies only if the land is actually used for cultivation by the lessee.

The exemption follows end-use, not ownership.

Audit Trigger Indicators

• Warehousing, cold storage, or construction on leased land

• Lessee is trader or processor

• Lease deed silent on agricultural-use restriction

• No cultivation or supervision evidence

Hidden Penalty Exposure

Where commercial use is established and the lessee is unregistered:

• The lessor faces penalty exposure under section 122(1)

• Ignorance or reliance on revenue records offers no defence

Audit-Safe Leasing Architecture

• Crop-specific exclusive use clause

• Right to inspect and terminate on deviation

• Quarterly geo-tagged usage certification

• Revenue and stamp documentation alignment

Agricultural Exports -Refund Rejection Is the New Litigation

Export of agricultural goods is rarely disputed.
Refund claims are.

Authorities treat agri-export refunds as a systems-matching exercise, not an exemption debate.

Audit Preference in Practice

• LUT route where supervision and exemption are unquestionable

• IGST-paid route where processing exists or ITC exceeds 20 percent

Strategic Insight
Paying IGST often converts a risky exemption dispute into a clean refund verification.

Most Common Refund Rejection Triggers

• GSTR-1 and GSTR-3B mismatch

• Shipping Bill not linked with EGM

• LUT expired mid-year

• ITC claimed on exempt outputs

• Improper merchant export endorsements

Refund Survival Protocol

• ICEGATE pre-validation before GSTR-1

• Continuous LUT monitoring

• Avoid inverted duty claims on exempt supplies

• Invoice–shipping bill–EGM correlation file

How GST Officers Actually Build Agricultural Cases

Area	Officer Focus	Default Risk	Preventive Shield
Cultivation	Supervision proof	Forced registration	Cultivator logbook
Processing	ITC reversal	Interest & penalty	ERP segregation
Land leasing	End-use	18% GST & penalty	Lease controls
Exports	System mismatch	Refund denial	ICEGATE sync

Field Pattern
Cases rarely start with intent.
They start with absence of evidence.

Why Penalties Escalate Rapidly in Agriculture

Once GST exemption collapses:

• Tax becomes retrospective

• Interest is automatic

• Penalty exposure multiplies

• Registration is back-dated

• Refunds and credits get blocked for years

Agri-Audit Reality
Agriculture carries lower tax rates but higher penalty ratios because failures are evidentiary, not interpretational.

The Preventive Architecture Every Agri Client Needs

Non-Negotiable Controls

• Cultivator supervision log

• ERP-based input segregation

• GST-aware lease drafting

• Periodic agri-GST internal audits

• Refund pre-validation checklist

Strategic Advisory Insight
A properly structured voluntary GST registration often:

• reduces net tax cost,

• improves buyer credibility, and

• eliminates retrospective shock demands.

Final Professional Verdict

Agriculture is not outside GST.
It is inside GST—with conditions.

Under GST:

• Supervision creates exemption

• Documentation sustains exemption

• Assumptions destroy exemption

FEMA Remittance Mismatches — Comprehensive Bank-Level Solutions for Inward and Outward Transactions

 BY CA SUREKHA S AHUJA

A Ground-Reality Guide Under RBI Master Directions (FY 2025–26)

Why FEMA Mismatches Are an Expected Feature of Cross-Border Trade

In real-world cross-border commerce, FEMA mismatches are structural, not exceptional.

Indian businesses transacting with Asia-centric jurisdictions (Hong Kong, Singapore, China, UAE, Korea) routinely face mismatches due to:

• advance-based trading models

• multi-party group structures

• delayed logistics and documentation

• foreign exchange fluctuations

• evolving commercial terms

Recognising this, the Reserve Bank of India has consciously empowered Authorised Dealer banks to regularise genuine mismatches through documentation, without invoking penalty or compounding, as long as intent is bona fide.

RBI’s Embedded Framework — Regularise, Document, Close

Across Master Directions governing imports, exports, and reporting:

• Commercial failure is not treated as violation

• Procedural delay is not equated with contravention

• Substance overrides format

• Banks are the first and final resolution authority in most cases

As a result, over 95 percent of FEMA mismatches are resolved at the bank level itself.

Outward Remittance Mismatches — Import Side

Advance Remitted, Supplier Closed, No Import Took Place

Situation
Advance paid against PO; supplier dissolved or unreachable; no Bill of Entry after statutory period.

Bank-Accepted Resolution

• Purchase order and SWIFT proof

• Email follow-ups

• Foreign registry dissolution or strike-off extract

• CA confirmation that no Bill of Entry exists

• Self-declaration of non-receipt

Outcome
No-Import closure issued; write-off permitted (commonly up to USD 100,000) without RBI approval.

Advance Paid, Import Cancelled by Mutual Consent

Situation
Commercial cancellation due to pricing, logistics or regulatory reasons.

Solution

• Cancellation correspondence

• Supplier confirmation

• Refund SWIFT or adjustment agreement

Outcome
Transaction closed as cancelled import; no violation.

Goods Shipped, Bill of Entry Delayed or Lost

Situation
Goods shipped but customs clearance delayed or documents misplaced.

Solution

• Shipping documents

• Overseas warehouse or port confirmation

• Importer affidavit

• Bank extension approval

Outcome
Timeline extended; no penalty.

Partial Import Against Full Remittance

Situation
Only part of goods received; balance not supplied.

Solution

• Bill of Entry for received goods

• Supplier debit note / balance write-off confirmation

• Reconciliation statement

Outcome
Partial closure permitted.

Remittance Amount Does Not Match Invoice

Situation
Excess or short remittance due to forex movement, tolerance clause or renegotiation.

Solution

• Reconciliation statement

• Supplier confirmation

• Revised PO or credit/debit note

Outcome
Variance accepted; excess may be parked in EEFC.

Wrong Purpose Code Used

Situation
Incorrect FEMA purpose code selected during remittance.

Solution

• Invoice and agreement

• Self-declaration

• Online correction request

Outcome
Purpose code corrected; no fee, no penalty.

Import Through Third-Party Supplier

Situation
Remittance made to one entity; goods supplied by another.

Solution

• Tri-party agreement

• Commercial explanation

• Invoices and shipping documents

Outcome
Accepted if substance is clear.

Inward Remittance Mismatches — Export and Service Receipts

Invoice Raised on Indian Entity, Payment from Foreign Group Company

Situation
Holding or affiliate remits payment.

Solution

• Invoice copy

• SWIFT proof

• Group structure

• Consent email

• KYC of remitter

• CA genuineness certificate

Outcome
Credit allowed; FIRC issued.

Export Advance Received, Shipment Did Not Occur

Situation
Commercial cancellation or force majeure.

Solution

• Refund through banking channel, or

• Adjustment against future invoice with buyer NOC

Outcome
No utilisation certificate required if refunded.

Export Invoice Raised, Partial Payment Received

Situation
Balance delayed due to buyer constraints.

Solution

• Proof of substantial receipt

• Buyer correspondence

• Extension request

Outcome
FIRC issued for received amount; balance tracked.

Export Proceeds Realised Beyond Prescribed Period

Situation
Delayed realisation beyond normal timeline.

Solution

• Buyer justification

• Extension approval

• Evidence of recovery efforts

Outcome
Regularised without violation.

Currency Mismatch Between Invoice and Receipt

Situation
Invoice in one currency, receipt in another.

Solution

• Forex conversion working

• Bank rate confirmation

• Gain/loss declaration

Outcome
Accepted and adjusted.

Third-Party Receipt Through Overseas Agent

Situation
Payment routed via commission agent.

Solution

• Exporter authorisation

• Agency agreement

• Back-to-back invoices

Outcome
Purpose code aligned to commission receipt.

Over-Realisation or Short-Realisation of Export Proceeds

Situation
Received more or less than invoice.

Solution

• Reconciliation

• Buyer confirmation

• Adjustment against future invoices

Outcome
Regularised.

Intra-Group and Complex Structures

Intra-Group Settlement Without Matching Invoice

Situation
Group treasury or netting arrangement.

Solution

• Inter-company agreement

• Board resolution

• Fund flow explanation

• Consolidated KYC

Outcome
Treated as permitted trade/service flow.

EEFC Credits Without Immediate Underlying Invoice

Situation
Advance pooling or timing mismatch.

Solution

• Future invoice mapping

• Declaration of intended utilisation

Outcome
Accepted if adjusted within permitted period.

Income-Tax Overlay - Why FEMA Regularisation Protects 

Even after FEMA closure:

• Section 195 exposure may still be examined

• Form 15CA / 15CB consistency matters

However, a FEMA-regularised transaction is rarely treated as sham under income-tax proceedings, provided documentation is aligned.

How Banks Expect Submissions — The Universal Template

Banks expect:

• Clear narration

• Chronology of events

• Evidence of bona fide intent

• Concise document pack

• CA confirmation where values are high

Escalation to RBI FED is exceptional, not routine.

The Professional Reality

FEMA mismatches are not failures.
They are commercial explanations waiting to be documented.

When handled correctly:

• no Section 13 penalty

• no compounding

• no long-term compliance stain

When ignored, they become retrospective liabilities.

Closing Statement

In FEMA, truth plus documentation is compliance.

Banks are empowered to regularise — professionals are expected to explain.

That intersection is where real compliance exists.

Companies Compliance Facilitation Scheme, 2026

By CA Surekha Ahuja 

The Definitive Professional Guidance Note for Companies, Directors and Compliance Advisors

(Issued vide General Circular No. 01/2026 dated 24 February 2026 by the Ministry of Corporate Affairs)

Executive Context — Why CCFS-2026 Is a Regulatory Turning Point

The Companies Compliance Facilitation Scheme, 2026 (CCFS-2026) is not a routine amnesty or a cosmetic fee-reduction exercise. It is a targeted regulatory reset designed to correct chronic annual-filing failures that have distorted MCA-21 records since 2018 and constrained the formal economy.

The scheme serves four clear regulatory objectives:

• Restoration of data integrity on MCA-21
• Re-enabling MSMEs and private companies for banking, tenders and investments
• Segregation of curable governance lapses from enforcement-worthy violations
• Preparation for post-scheme mass enforcement, adjudication and strike-off

The compliance window is strict and non-extendable:

15 April 2026 to 15 July 2026

After this date, the regulatory posture shifts decisively from facilitation to enforcement.

Legal Nature of the Scheme — Precise Boundaries

CCFS-2026 is an administrative relaxation, not a legislative amendment.

What the Scheme Achieves

• 90 percent waiver of additional fees for specified filings
• One-time regularisation of multi-year annual defaults
• Limited immunity from penalty and prosecution for select sections
• Discounted pathways for dormant status or voluntary strike-off

What the Scheme Does Not Do

• It does not override the Companies Act, 2013
• It does not nullify adjudication orders already passed
• It does not cover all forms or all defaults
• It does not sanitise fraudulent or substantive violations

This distinction is critical for responsible professional advice.

Forms Covered Under CCFS-2026

(Only current, operative forms)

The scheme is form-specific, not default-specific.

Compliance Area	Current Form	Section
Annual Return	MGT-7 / MGT-7A	92
Financial Statements	AOC-4 / AOC-4 XBRL / AOC-4 CFS	137
Auditor Appointment	ADT-1	139
Foreign Company Filings	FC-3 / FC-4	381
Dormant Status	MSC-1	455
Voluntary Strike-off	STK-2	248

Key Characteristics
• Any prior year eligible
• No cap on period of delay
• Applicable to resident companies

Fee Structure — The Economic Core of CCFS-2026

Additional Fee Relief

• 90 percent waiver of additional fees
• Only 10 percent of applicable additional fee payable
• Normal filing fees remain unchanged

Practical Impact

For companies with 3–5 years of pending AOC-4 and MGT-7 filings, savings typically range between:

₹1 lakh to ₹5 lakh per company

For MSMEs, this often determines whether compliance revival is viable at all.

Penalty and Prosecution Immunity — Exact Legal Position

Sections 92 and 137

Where MGT-7 / MGT-7A and AOC-4 are filed:
• Before an adjudication order, or
• Within 30 days of notice

→ No penalty proceedings shall be initiated

Other Covered Forms (ADT-1, FC-3, FC-4)

• Immunity applies only where no prosecution or adjudication has commenced
• Existing orders remain enforceable

CCFS-2026 is not a compounding or settlement scheme.

Absolute Exclusions — Areas Where No Relief Exists

Charge-Related Forms (Completely Outside the Scheme)

• CHG-1
• CHG-4
• CHG-9

Charge filings affect creditor rights and operate under strict statutory timelines.

➡ Full fees payable
➡ No waiver or immunity
➡ Errors continue to impair balance-sheet credibility

Other Excluded Filings

• DIR-3 KYC
• DPT-3
• MGT-14
• INC-22 / INC-22A
• Companies with final STK-7 notice
• Amalgamated or dissolved entities
• Vanishing companies
• Companies already declared dormant

Cost Records and Cost Audit Defaults 

CCFS-2026 does not grant direct immunity for defaults relating to:

• Cost records maintenance
• Cost auditor appointment
• Cost audit reporting

These arise under Section 148 and are governed by separate adjudication mechanisms.

Critical Practical Insight

Where AOC-4 filings for the relevant years are pending and are regularised under CCFS-2026:

• Continuing default arguments weaken
• Bona fide corrective intent is demonstrable
• Penalty exposure during adjudication is often materially reduced

The scheme therefore functions as risk mitigation, not absolution, in cost-related matters.

Dormant Status vs Strike-Off — Strategic Deployment

Dormant Status (MSC-1)

Appropriate where:
• Licences, IP or brand value exist
• Revival remains a commercial possibility

Benefit:
• 50 percent of normal fee
• Minimal annual compliance thereafter

Voluntary Strike-off (STK-2)

Appropriate where:
• No assets or liabilities exist
• No future business intent remains

Benefit:
• 25 percent of normal fee
• Permanent compliance closure

A wrong choice here can permanently foreclose future options.

Professional Execution Framework — Best Practice

Step 1 — Compliance Diagnosis

• Review MCA Master Data
• Identify missing AOC-4, MGT-7, ADT-1 years
• Check adjudication and STK status

Step 2 — Document Readiness

• Finalise financial statements
• Regularise auditor position
• Ensure DIN KYC and DSC validity
• Reconcile banking and loan balances

Step 3 — Filing Sequence (Non-Negotiable)

1. AOC-4 / AOC-4 CFS

2. MGT-7 / MGT-7A

3. ADT-1

4. MSC-1 or STK-2, where applicable

Step 4 — Evidence Preservation

• SRNs
• Challans
• Acknowledgements

These are critical for future immunity and defence.

Post-15 July 2026 — The Enforcement Reality

Companies ignoring CCFS-2026 should realistically expect:

• Heightened ROC scrutiny
• STK-7 public strike-off actions
• Prosecutions under Sections 92 and 137
• Director disqualification drives
• Banking, tender and due-diligence failures
• Costly compounding proceedings

There is no credible signal of another broad amnesty.

Final Professional Conclusion

CCFS-2026 is surgical, time-bound and unforgiving of inaction.
It rewards timely correction of annual governance failures, not structural non-compliance.

Those who act:
• Save substantial cost
• Restore MCA credibility
• Reopen commercial and financial channels

Those who do not:
• Face irreversible enforcement
• Lose exit flexibility
• Carry permanent compliance risk

This is a compliance reset window — not a forgiveness charter.

GST on School Transportation Charges

 Recipient Test, Conditional Exemption Breakdown, ITC Prohibition, Audit Triggers & Penalty Exposure

By CA Surekha Ahuja

Introduction — Why School Transport Is a High-Risk GST Area

GST on school transportation is not a grey area anymore — it is a structuring-sensitive compliance issue where minor commercial deviations routinely convert into tax demands, ITC reversals, and penalty proceedings.

Most disputes do not arise from ignorance of exemption, but from:

• incorrect identification of the recipient,

• casual payment flows,

• legacy practices continued without GST re-validation, and

• wrong ITC claims on exempt activity.

The GST law does not protect intent, convenience, or educational purpose.
It protects only statutory alignment.

This note distils the exact legal tests, departmental trigger points, and defensible structuring models that survive scrutiny.

Statutory Framework - The Exemption Is Conditional, Not Automatic

1 Governing Notification

Notification No. 12/2017 – Central Tax (Rate), Entry 66

• 66(a) Services by an educational institution to students, faculty, staff

• 66(b) Services to an educational institution by way of transportation of students, faculty, staff

 Entry 66(b) is a conditional exemption.
All conditions must be satisfied simultaneously and in substance.

Failure of even one condition results in total denial of exemption.

Core Legal Test — Recipient Under the CGST Act

1 Statutory Definition

Section 2(93), CGST Act

“Recipient” means the person liable to pay the consideration and to whom the invoice is issued.

Section 2(93)(c) applies only where consideration is not ascertainable — a scenario absent in school transport contracts.

2 Non-Negotiable Legal Principle

Concept	Legal Status
Beneficiary	Irrelevant
Facilitator	Irrelevant
Controller / Regulator	Irrelevant
Safety Mandate	Irrelevant

Only two facts matter:

1. Who pays the transporter

2. On whom the invoice is raised

Everything else is legally inconsequential.

Interpretation of Entry 66(b) — Strict Construction Applies

Exemption notifications are interpreted strictissimi juris.

Accordingly:

• If the school does not pay the transporter, or

• If the invoice is not issued to the school,

     the exemption fails in toto, regardless of:

• student benefit,

• administrative routing,

• parental convenience,

• or historical practice.

There is no doctrine of substantial compliance under GST exemptions.

Recipient Outcome Matrix — Taxability Crystallises Irrevocably

Commercial Arrangement	GST Result
School pays; invoice on school	Exempt u/Entry 66(b)
Parents pay transporter directly	Taxable passenger transport
School reimburses parents	Taxable (recipient already fixed)
Transport fee bundled in school fees	Exempt
Students direct / staff via school	Split supply

 Recipient identity crystallises at the time of supply and payment.
Post-facto accounting adjustments cannot cure taxability.

Input Tax Credit — Absolute Prohibition Zone

1 Statutory Bar

Section 17(2), CGST Act

Where outward supply is exempt, no ITC is admissible.

Blocked credits include:

• fuel,

• maintenance,

• insurance,

• spares,

• vehicle lease costs.

Once blocked, ITC cannot be revived, even if the structure changes later.

2 Practical Enforcement Reality

Wrong ITC on exempt school transport is routinely treated as:

• wilful misstatement, and

• suppression of facts,

triggering Section 74 with full penalty exposure.

Most penalty orders are sustained on ITC misuse — not exemption disputes.

Judicial Position — No Doctrinal Conflict

Appellate authorities consistently hold:

• payment + invoice determine recipient,

• facilitation theories are untenable,

• benefit-based arguments have no statutory footing.

Perceived conflicts in rulings are fact-driven, not principle-based.

Departmental Audit Trigger Points (High-Risk Indicators)

GST authorities typically flag cases where:

• parents pay transporters directly,

• invoices are raised on parents but routed through school,

• transport fee collected separately without school payment,

• ITC claimed on fuel or repairs,

• multiple transport vendors with inconsistent invoicing,

• legacy arrangements continued post-GST without review,

• transport income shown as “recovery” instead of consideration.

Any two or more triggers together usually escalate the case.

Penalty Exposure — Realistic Risk Assessment

Provision	When Invoked
Section 73	Disclosure / interpretation disputes
Section 74	Wrong ITC, misstatement
Section 122	Procedural contraventions
Section 125	Residual penalty

Voluntary reversal and payment before SCN materially weaken penalty sustainability.

Registration, Rate & RCM — Settled Positions

• Transporter registration required if turnover > ₹20 lakh (including exempt supplies)

• Taxable transport rates:

  • 5% without ITC, or

  • 12% with ITC

• No reverse charge applicable to schools for exempt transport

Only Structuring Model That Survives Audit

✔ Transporter invoices only the school
✔ School pays from its own bank account
✔ Transport charges recovered from parents by school
✔ Transport component disclosed transparently
✔ No ITC claimed on transport inputs

Any deviation materially increases tax and penalty exposure.

Full Caution Points — What Schools Must Not Do

❌ Allow parents to contract directly with transporter
❌ Route payments “for convenience”
❌ Claim ITC on exempt transport expenses
❌ Treat transport as mere reimbursement
❌ Change structure mid-year without tax reset
❌ Assume educational purpose grants immunity

Final Legal Takeaway

GST on school transport is not equity-driven.
It is recipient-driven, payment-driven, and documentation-driven.

Under GST, compliance succeeds on statutory precision — not benevolence of purpose.

GST on Used Motor Vehicles: Margin Scheme, ITC on Repairs, Negative Margins and a Complete Compliance Playbook

By CA Surekha Ahuja 

Kerala AAR in Goexotic Plus91 Motors (P.) Ltd. – The Definitive Law Explained

Executive Summary

The Kerala Authority for Advance Rulings in Goexotic Plus91 Motors (P.) Ltd. (AAR No. KER/42/2025 dated 11 December 2025; reported at 182 taxmann.com 676) has conclusively settled one of the most litigated issues in the used motor vehicle trade under GST.

The ruling authoritatively holds that a dealer paying GST under the margin scheme in terms of Rule 32(5) of the CGST Rules is entitled to full Input Tax Credit on repairs, refurbishment, spare parts, common overheads and capital goods, with only one restriction — no ITC can be claimed on the purchase of the used motor vehicle itself.

Further, negative margins are statutorily ignored, resulting in nil GST liability without triggering ITC reversal, provided the dealer remains compliant with the core statutory conditions.

This ruling is legally sound, textually faithful to the statute, and strategically transformative for organised used-car dealers.

Why a Special Margin Scheme for Used Motor Vehicles Exists

Used motor vehicles have already suffered indirect taxes at the time of their first supply. Taxing the entire resale value would result in double taxation without incremental value addition. To correct this distortion, Rule 32(5) of the CGST Rules introduces a special valuation mechanism whereby GST is levied only on the margin, that is:

Selling price minus purchase price

This concessional valuation is a legislative bargain. In exchange for paying tax only on value addition, the dealer agrees not to avail ITC on the purchase of the used vehicle.

Notification No. 8/2018–Central Tax (Rate) operationalises this scheme by prescribing the applicable rates and explicitly addressing the treatment of negative margins.

Statutory Architecture: How the Provisions Interlock

A correct understanding emerges only when the provisions are read together:

Section 9 establishes levy of GST on taxable supplies. Section 15 governs valuation, subject to prescribed rules. Rule 32(5) provides a special valuation rule for second-hand goods, including used motor vehicles. Notification 8/2018 prescribes the rate and conditions, including treatment of negative margins. Sections 16 and 17 govern eligibility and restrictions on Input Tax Credit.

Crucially, Rule 32(5) restricts ITC only in respect of the purchase of such goods. It does not expand the restriction to any other inward supplies.

In fiscal law, restrictions must be express and narrowly construed. This principle has been repeatedly affirmed by the Supreme Court, including in Dilip Kumar and Company v. Commissioner of Customs.

The Core Issue Before the Kerala AAR

The applicant was engaged in the business of buying and selling used motor vehicles. Before resale, the vehicles underwent:

Minor repairs and refurbishments Replacement of spare parts Denting, painting and mechanical corrections

The applicant also incurred common business expenses such as showroom rent, advertising, professional fees, telephone expenses and purchased capital goods like workshop tools and computers.

The legal question was precise:

Whether Notification 8/2018 or Rule 32(5) bars ITC not only on vehicle purchases but also on repairs, spares, refurbishment services, overheads and capital goods.

Kerala AAR’s Ruling: Clean, Narrow and Statutorily Faithful

The AAR answered the question decisively in favour of the taxpayer.

1. Scope of ITC Restriction Is Limited

The Authority examined Paragraph 2 of Notification 8/2018 and held that the denial of ITC is strictly confined to the inward supply of used motor vehicles meant for resale.

There is no legislative language extending this denial to:

Spare parts Repair or refurbishment services Common business inputs Capital goods

2. Repairs and Refurbishment Are in Furtherance of Business

The AAR recognised that minor refurbishment enhances the marketability of vehicles without altering their essential character. Such activities are integral to the business of trading in used vehicles and squarely fall within the phrase “in the course or furtherance of business” under Section 16.

3. Section 17(5) Does Not Apply

The blocking provision for motor vehicles under Section 17(5) applies to vehicles used as capital assets for transportation. It does not apply to motor vehicles held as trading stock.

Accordingly, ITC on tools, equipment and services used for refurbishing trading stock remains fully admissible.

4. Nil or Negative Margin Supplies Are Taxable Supplies

The Authority clarified that when margin is zero or negative, the supply does not become exempt. It remains a taxable supply with nil taxable value. Therefore, Rules 42 and 43 have no application, and no reversal of common ITC is required.

Treatment of Negative Margin: Statutory Finality

Notification 8/2018 expressly provides that where the margin is negative, it shall be ignored.

The legal consequences are:

No GST payable on that transaction No set-off or carry forward of negative margins Each vehicle treated as an independent supply

Importantly, ignoring negative margin does not convert the supply into an exempt supply under Section 2(47). Absence of exemption notification is fatal to any such argument.

This position aligns with multiple AAR rulings across States and reflects uniform statutory interpretation.

Margin Computation: What Must and Must Not Be Included

Margin computation under Rule 32(5) is rigid and mechanical.

Only the following are relevant:

Selling price Purchase price

The following must never be adjusted against margin:

Repair or refurbishment costs Spare parts Overheads Depreciation or notional adjustments

Valuation and ITC operate in separate statutory compartments. Mixing them is the most common cause of audit disputes.

ITC Eligibility Matrix

Used vehicle purchase – ITC not eligible Spare parts and repairs – ITC eligible Refurbishment services – ITC eligible Rent, advertisement, professional fees – ITC eligible Capital goods such as tools and computers – ITC eligible Negative margin supplies – no ITC reversal

Audit-Proof Compliance Checklist

To remain litigation-safe, dealers should ensure:

No ITC is claimed on used vehicle purchases Vehicle-wise margin working papers are maintained Repair costs are never deducted from margin ITC on repairs and overheads is booked separately Invoices clearly reflect business use Negative margins are ignored and not netted Standard operating procedures document refurbishment activity

Paras 7.4 to 7.10 of the Kerala AAR order should be specifically cited in replies to audit objections.

Strategic Tax Planning Insight

For organised dealers, the margin scheme combined with unrestricted ITC on operational inputs creates a structurally efficient GST model.

The scheme is especially beneficial where gross margins are moderate, operational costs are significant and refurbishment activity is routine.

With the post-2025 expansion of the used vehicle and electric vehicle ecosystem, this ruling provides a decisive compliance advantage to disciplined players.

Final Takeaway

The law is now clear and internally consistent:

The margin scheme restricts ITC only on the purchase of used motor vehicles. It does not, and cannot, block ITC on repairs, refurbishment, spares, overheads or capital goods. Negative margins result in nil GST without triggering reversal.

The Kerala AAR ruling in Goexotic Plus91 Motors stands on strong statutory footing and offers a robust defence framework for dealers nationwide.

For the used motor vehicle trade, this is not merely a ruling — it is a compliance blueprint.

Budget 2026 MAT Overhaul: Accumulated Credit, Carry-Forward, Transition Strategy, and Corporate Impact

 By CA Surekha Ahuja

The Union Budget 2026 introduces a major structural reform of the Minimum Alternate Tax (MAT) regime, fundamentally changing its purpose, usage, and strategic implications for domestic and foreign companies.

The key focus is how accumulated MAT credit is now restricted, the 25% usage cap upon transition, and carry-forward limitations, which require careful planning before moving from the old regime to the new tax regime. The amendments also close the historical “hidden path” that allowed companies to indefinitely defer cash outflow through MAT credits.

MAT – Pre-Budget Overview

Prior to Budget 2026:

• Applicability: Domestic companies under old regime; prescribed foreign companies.

• Rate: 15% (domestic/foreign), 9% for IFSC units (subject to conditions), plus surcharge & cess.

• MAT Credit: Excess MAT paid over normal tax could be carried forward for 15 years and set off against normal tax exceeding MAT.

• Strategic Use: Companies could remain under the old regime to accumulate MAT credit, deferring cash outflows—a major “hidden path” for corporate tax planning.

Observation: MAT acted as a timing-difference levy, allowing deferred monetization of taxes while optimizing cash flow.

Budget 2026 – Key Amendments

Feature	Amendment	Implication
MAT as Final Tax	MAT under old regime from FY 2026–27 is final	No new MAT credit; eliminates deferred recovery
MAT Rate	15% → 14%	Partial relief on cash outflow, especially for foreign companies
Accumulated MAT Credit – Domestic Companies	Can be used only upon transition to the new regime; usage capped at 25% of current year tax liability	Forces strategic planning on when and how much credit to utilize
Carry-Forward Limitation	Carry-forward is allowed for up to 15 years, but only for the portion of MAT credit actually utilized in the transition year	Remaining unused MAT credit beyond 25% cap cannot be carried forward
Foreign Companies	Full accumulated MAT credit till 31 Mar 2026 can be used without cap; carry-forward up to 15 years	Transition timing less critical; easier credit monetization
Scope	Corporate assessees only; AMT for non-corporates unchanged	Non-corporates outside the reform

Clarification: For domestic companies, carry-forward does not apply to the full accumulated MAT credit, but only to the fraction actually used during the year of transition to the new regime. Any portion exceeding the 25% cap cannot be carried forward and is effectively lost.

Government Intent

1. Simplification:

   • Eliminates dual computation (book profits vs taxable income), reducing compliance and litigation risks.

2. Encouraging Migration to New Regime:

   • By restricting MAT credit utilization, companies are incentivized to transition from the old regime.

3. Fiscal Certainty:

   • Limits deferred tax liabilities and improves predictability of government receipts.

4. Closing Loopholes:

   • Companies could previously remain in the old regime indefinitely, accumulating MAT credits while leveraging exemptions.

   • Budget 2026 closes this pathway, ensuring MAT functions as a final, predictable tax.

Impact – Domestic Companies

1. Transition Timing:

   • Early transition (FY 2025–26): MAT credit cannot be used; accumulated credit may be lost.

   • Transition in FY 2026–27: Only 25% of current year’s tax liability can be offset; unused credit beyond 25% is lost.

2. Cash Outflow vs Total Tax Liability:

   • Pre-Budget: MAT credit could minimize cash outflows.

   • Post-Budget: MAT is final, and only partial credit reduces cash outflow, increasing net cash requirement.

3. Carry-Forward Limitation:

   • Carry-forward allowed only for the portion of MAT credit actually used in the transition year.

   • Example: If a company has ₹10 Cr MAT credit and can use only ₹2.5 Cr in transition year (25% cap), carry-forward is allowed for ₹2.5 Cr only. The remaining ₹7.5 Cr cannot be carried forward.

4. Sectoral Considerations:

   • SEZ, IFSC, and other incentivized units often hold high MAT credits; transition planning is critical to avoid substantial cash outflow shocks.

Impact – Foreign Companies

• Full MAT credit utilization allowed; carry-forward up to 15 years.

• Reduced MAT rate (14%) lowers immediate cash outflow.

• Timing of transition is less critical, but credit computation must be precise.

Key Factors for Transition Decision

Factor	Consideration
Accumulated MAT Credit	High credit → delay transition to maximize 25% utilization
Current Year Tax Liability	Model cash outflow vs partial credit offset
Cash Flow Impact	Higher immediate outflow if majority of credit is blocked by cap
Business Model / Sector	SEZ, IFSC units disproportionately impacted
Compliance & Governance	Board approval required; maintain audit trail of calculations
Policy Alignment	Leverage reduced MAT rate and new regime benefits

Illustrative Scenarios

Company	MAT Credit Accumulated	Transition Year	Credit Utilized (25% cap)	Carry Forward	Cash Outflow	Observation
Domestic SEZ	₹10 Cr	FY 2026–27	₹2.5 Cr	15 years for ₹2.5 Cr	₹7.5 Cr unrecoverable	Partial credit utilization; high cash outflow
Domestic Non-SEZ	₹1 Cr	FY 2026–27	₹0.25 Cr	15 years for ₹0.25 Cr	₹0.75 Cr unrecoverable	Low impact; early transition feasible
Domestic – Early Transition FY 2025–26	₹5 Cr	FY 2025–26	0	0	₹5 Cr unrecoverable	Premature transition → forfeited credit
Foreign Company	₹5 Cr	FY 2026–27	100%	15 years	Cash outflow reduced by 14% MAT rate	Full credit set-off allowed; timing less critical

Decision Insight:

• Companies with high accumulated MAT credit should delay transition to maximize partial utilization and carry-forward.

• Companies with low MAT credit can transition early to simplify compliance.

Caution Points

1. MAT Credit Forfeiture Risk: Early transition before FY 2026–27 may result in loss of accumulated credit.

2. 25% Utilization Cap: Only a fraction of credit can be applied in transition year; plan multi-year cash flow.

3. Sectoral Impact: SEZ/IFSC units may face large cash outflows; careful planning required.

4. Governance & Documentation: Maintain audit trail, board approvals, and MAT credit calculations.

5. Policy Monitoring: Follow CBDT FAQs and circulars for precise computation rules.

Conclusion

Budget 2026 transforms MAT into a final levy, fundamentally changing corporate tax strategy:

• Domestic companies: Must strategically plan transition year, partial credit utilization (25% cap), and cash outflows.

• Foreign companies: Full credit utilization remains; reduced MAT rate offers relief.

• Carry-forward now applies only to the portion of credit actually used in transition year—unused accumulated credit beyond 25% is lost.

Key Takeaway: MAT is no longer a deferred tax lever. The timing of regime transition, cash outflow modeling, and partial credit utilization strategy now determine the net corporate tax outcome. Companies must adopt a scenario-driven, analytical approach to optimize tax planning under the new framework.