Rise of the Drones - Potential Issues under the GST Law?
Rise of the Drones - Potential Issues under the GST Law?
The UAS Rules were introduced to regulate the sale and operation of unmanned aerial systems in India
In the recent past, "unmanned aerial systems" commonly, referred to as "drones" have been in the news . On the one hand, drone importers, manufacturers are on their toes to ensure the compliance under the newly introduced Unmanned Aircraft System Rules, 2021 ('UAS Rules') effective from 12 March, 2021, while the logistics/delivery companies/electronic commerce operators were testing or awaiting approvals for delivering their supplies using drones under the specific exemption order(s) from the Ministry of Civil Aviation.
UAS Rules-To whom do they apply?
The UAS Rules, have been enacted under the Aircraft Act, 1934. The UAS Rules were introduced to regulate the sale and operation of unmanned aerial systems in India. UAS Rules bring in a set of obligations and compliances that every manufacturer, trader, operator and owner of an unmanned aircraft should comply with. Prior to the said UAS Rules, the Civil Aviation Requirements for Operation of Civil Remotely Piloted Aircraft System (RPAS) provided for the regulation of civil remotely piloted aircraft systems, which are remotely piloted from a remote pilot station. The UAS Rules applies to the following,
(a) Unmanned Aircraft System (UAS) registered in India, wherever they may be; or
(b) a person owning or possessing or engaged in exporting, importing, manufacturing, trading, leasing, operating, transferring or maintaining an Unmanned Aircraft System in India; or
(c) all Unmanned Aircraft System for the time being in or over India.
The terms 'drone' and 'unmanned aircraft' has been defined under Rule 2(x), Rule 2 (zw) of the UAS Rules. Drone has been defined to mean an unmanned aircraft. An 'unmanned aircraft' has been defined to mean an aircraft, which is intended to operate with no pilot on board.
The said Rules are exhaustive and provide the compliances for all kinds of stakeholders to whom they are made applicable. While the stakeholders are grappling with the compliances under the UAS Rules, the emerging issues which are bound to arise under the GST Law in the future are outlined below.
Issues under GST Law
GST on Lease of UAS
- Various persons can trade/operate the UAS, the individuals/companies can also obtain the same on lease basis. Where the UAS is leased by the owner for a consideration, the said activity, would qualify as a supply of service and the rate of tax payable by the lessor shall be on the rate applicable to goods .
- Where the owner/operator/manufacture operate different models (such as, hire-purchase, transfer of title where there is part payment of consideration etc.) in respect of UAS, the implications are required to be ascertained accordingly.
Maintenance and Repair of UAS
- Another emerging issue is what would be the rate applicable on the activity of repair/maintenance of the UAS carried out in India?
- Government had prescribed a reduced rate of GST of 5% for maintenance and repair of aircrafts and the residuary rate for maintenance and repair services is 18% .
- It needs to be examined whether drones can also be termed as an 'aircraft' and if the maintenance service providers of drones can pay GST at the rate of 5% for the purpose of Rate Notification. However, it may not be the intention of the legislature to cover "drones" as an "aircraft" and hence, the reduced rate of tax is not applicable.
- In the event, the registered person located in India obtains the services of repair from an MRO located outside India, there may also be an issue of double taxation i.e., payment of GST on reverse charge and payment of customs duty at the applicable rate.
Requirement to generate e-way bill
- Drones are the next gen mode of conveyance for transporting goods. Usage of drones for emergency delivery of medicines, delivery by E-commerce operators (ECOs), delivery of small tools/moulds/ finished products between job worker- manufacturer would become a regular mode of delivery of goods in the near future.
- Rule 138 of the CGST Rules provides that every registered person who causes movement of goods is required to generate the e-way bill based on the value of the consignment and subject to other conditions under the Rules for such movement of goods. The CGST Rules remain silent with respect to transport of goods by way of drones/ unmanned aircrafts.
- It needs to be examined whether the delivery of goods by drones can be termed as transport by air. In such a case, the E-way Bill requirements applicable for transport of goods by air would apply. Since, drone is an unmanned aircraft, the question as to who is the person in-charge of the conveyance, also would arise.
Classification of Drones
- While we were all aware that, the import of Unmanned Aircraft System (UAS)/Unmanned Aerial Vehicle (UAVs)/Remotely Piloted Aircraft (RPAs)/drones is 'Restricted', and it requires prior clearance of the Directorate General of Civil Aviation (DGCA) and an import license. This is explicitly provided now in the UAS Rules. The question which remains is what would be the classification/HSN code of drones/UAS.
- The owners/operators/manufacturers/traders should remember that the drone which is an unmanned aircraft for the purpose of UAS Rules, need not necessarily be an unmanned aircraft for the purposes of GST Law. The classification determines the rate of the tax to be paid and hence a decisive factor for the persons dealing in the supply of drones.
- UAS Rules classifies the UAS based on their sizes and these drones/UAS can be used for various purposes including but not limited to aerial photography, aerial mapping, inspection, agriculture, security, surveillance, town and country planning, aerial delivery, etc,. Based on their usage and specifications, classification of a drone under the GST Law and the Customs Law, has to be determined.
- For instance, a drone/unmanned aircraft with an integrated camera (quadrocopter) may merit classification under the following competing headings,
• CTH 8525 as Closed-circuit television (CCTV), transmission apparatus for radio-broadcasting or television, whether or not incorporating reception apparatus or sound recording or reproducing apparatus; television cameras digital cameras and video camera recorders other than two-way radio (Walkie talkie) used by defence, police and paramilitary forces etc.
• CTH 8802 as Other aircraft (for example, helicopters, aeroplanes), other than those for personal use or as aircrafts used for personal use.
• CTH 9305 as Electronic Toys like tricycles, scooters, pedal cars etc. (including parts and accessories thereof).
The reading of the entries gives rise to the following questions,
• Whether drones can be classified as digital cameras?
• Whether drones qualify as other aircrafts similar to helicopter ?
• Whether usage of drones for non-commercial purpose, qualify as aircrafts for personal use?
As on date, the Customs Tariff, does not provide for a definition of unmanned aircraft. The proposed HSN 2022 with effect from 1 January, 2022 apart from inserting specific Tariff Items for unmanned aircraft, has inserted the following Note under Chapter 88.,
"For the purposes of this Chapter, the expression "unmanned aircraft" means any aircraft, other than those of heading 88.01, designed to be flown without a pilot on board. They may be designed to carry a payload or equipped with permanently integrated digital cameras or other equipment which would enable them to perform utilitarian functions during their flight. The expression "unmanned aircraft", however, does not cover flying toys, designed solely for amusement purposes (heading 95.03)."
The said note seems to address the issues of classification surrounding drones to an extent.
To keep their drones flying, and ensure the transactions are tax efficient from the perspective of GST Law, the stakeholders venturing into this space should undertake a detailed examination of the business models, implications on the repair services sought to be availed for drones and also classification of the said drones. Insofar as the rate of tax on repair services is concerned, it is urged that the CBIC issue a clarification.