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Goods & Service Tax – An Expressway To Litigations

Dinesh Kumar, Partner
Indirect Tax

11 July 2022

The roll-out of the Goods & Services Tax (GST) is considered as a watershed moment in the Indian indirect tax history. The GST model embodies uniformity on fundamental issues such as chargeability, definition of a taxable event, tax rate and classification. For the first time, tax administrations at the Centre and States have an identical value for assessments under respective statutes. It is perceived that one return entering the streams of the Central and the State tax authorities, fewer exemptions, reduced tax slabs, etc. can significantly reduce disputes which in India typically centre around taxability, tax rate, classification, exemption, tax credits, etc.

As one takes a retrospect of the GST journey thus far, the reaction is mixed, especially in the realm of litigations. It is understandable to see spikes in litigations in the initial phase of reformative law due to early apprehensions, but the future is not free of concerns if the five-year experience is any indication.

A certain level of tax disputes is normal for any taxation system based on the rule of law. Excessive tax litigation results in a delayed collection of tax revenue, litigation costs and uncertainty. Many factors influence the high level of disputes - aggressive tax assessments, complex or unclear tax laws, cultural attitudes of taxpayers disputing administrative orders, delay, or lack of capacity in dispute resolution delivery and revenue bias of adjudication/appellate ladder.

Conscious of the malady, the ‘First Discussion Paper on GST’ by the Empowered Committee of State Finance Ministers in November 2009 emphasised the need for a strong dispute resolution mechanism. They had clarified that, as a part of the exercise on drafting the GST legislation, rules and procedures for the administration of CGST and SGST, specific provisions would also be made for the issues of dispute resolution and appropriate advance ruling mechanism. However, GST has sprung many disputes over the last 5 years.
The Advance ruling mechanism for containing disputes did not live up to the expectations and taxpayers perceive revenue bias and rulings of the authorities as testimony to this. The formation of a central authority for disposal of appeals against the appellate advance ruling authority is still-born, compelling taxpayers to knock on the doors of jurisdictional high courts which lack bandwidth. The formation of the GST Tribunal is pending due to legal/technical issues, leaving little room for early redressal of disputes.

Litigation continues to galore as assessments and audits are yet to pick up the pace. A recent Supreme Court ruling raised questions on the GST architecture by holding that the GST Council’s recommendation has persuasive value and is not binding on the legislature. The Apex court in another important judgment disallowed refund of input service credit in inverted tax situations (where output tax is lower than input tax leading to tax credit accumulation) accepting the Union government's view, requiring the GST Council to intervene and recommend a change of law (refer minutes of 47th GST Council meeting). In another important judgment, implications of which will stretch to the GST law, the Apex Court held that employee secondment contracts, where salary is reimbursed to an overseas group company, would be liable to Service Tax to overturn earlier positions. 

Another dispute causing serious concern is the GST authority’s view that GST is leviable on the allocation of cost by the head/registered office to its branches/depots, treating it as a supply of service by such head/regional office to branches. This view, a departure from the practices of the past and no conclusive clarification forthcoming from authorities, is pursued in High Court. 

Disputes about the taxability of recovery of notice-pay/employee subsidised canteen, liquidated damages/breach of contract, denial of unmatched input tax credit claims, refund on exports and inverted tax situations, taxation of online gaming/cryptocurrencies, etc. continue to hog the limelight. The optimism of a less litigation GST framework may soon evaporate if immediate attention is not given.

As Adam Smith said, "Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice - all the rest being brought about by the natural course of things."

Source : Business World