In a week, the nation will be celebrating the second anniversary of landmark tax reform, the Goods and Services Tax Act. It is only befitting to remark that neither the sense of excitement nor the clamour surrounding GST has seen any diminution. Its accomplishments on the pedestal of its avowed objectives have been dissected and analysed across various dimensions. From an ease-of-doing business perspective or revenue-buoyancy concerns of states, which was perhaps a significant constitution amendment barrier, the pace of legislative and administrative actions has been unprecedented. Irrespective of the perception of its success and political barbs, GST has undoubtedly changed the tax policy outlook of India, and it’s still work-in-progress.
It is commendable the manner with which the central and state governments have
- refrained from knee-jerk reaction based tax-policies,
- appreciated concerns of trade and industry to rationalising the provisions,
- addressed critical aspects timely, amicably and with stakeholder-engagement.
India has come a long way since the 2016 Constitutional Amendment to usher GST.
In various quarters, it is perceived that GST has fallen short of success on a core parameter for judging tax reform, i.e. reduced litigation.
In the analysis, the authors have dispassionately and analytically appraised trends in litigation to assess the correctness of such perception and what lies beneath the surface of media headlines.
Roughly, in excess of 400 GST advance rulings and an equal number of orders of other judicial forums have been rendered in the first two years. A theme-based analysis spread across the geography of the country, various forums and issue-based statistics reveal the criticality and classification of GST disputes issue and can judge the success of the GST reform.
GSTN Hurdles
Firstly, most disputes which have plagued the judicial system are on account of GSTN-related woes. These have been due to lack of familiarisation, the inability to register through the online portal, difficulty in transitioning credits under the erstwhile law, timely access to the platform, system related glitches, etc. accounts for most writ petitions in the jurisdictional High Courts. Some concerns were genuine, to which the tax administration’s tacit acceptance translated into the appointment of ‘nodal officers’, a concept conceived upon directions of the Bombay High Court. The administration frequently extended the deadline for transition credit, and even the rules were tweaked to permit revision of returns in some instances.
Despite administrative actions, friction-points have arisen and as a result, fresh writ petitions continue to be filed. One can nonetheless classify such disputes more like teething challenges of a new law and at best temporal. With additional capacity augmentation drive and progressive familiarisation, the administration is intensively engaged to resolve pain-points for compliant businesses. More importantly, it is beginning to dawn upon businesses that compliance deadlines cannot be taken casually, and procrastination shall invite the wrath of the administration.
The seriousness which the businesses have attached to the annual returns and audits reveal that the timely compliance should soon become the order of the day rendering such issues moot in near future.
Seizure Of Goods Under Transportation
Another prominent area of dispute relates to ‘detention and seizure’ of goods under transportation. A review of orders passed by various High Courts, prominent among which are the Allahabad and Kerala High Courts, reveal two trends.
First, aggressive patrolling by anti-evasion squads, has led to unearthing of nefarious activities, and transportation of non-tax paid goods. In such cases, courts have merely impressed upon officers to follow the due process of law, without granting relief. The second category of disputes relates to interception because of inadequate documentation or failure to follow procedures. For these, both businesses and the tax administration are at fault in view of the latter’s failure to provide the last-mile guidance to field officials and the former for its failure to observe modalities, particularly e-way bills. The tax administration, albeit not without a nudge from the courts, has risen to its role accelerating issuance of series of circulars and instructions as well as sensitising officials on the exercise of discretionary powers.
Businesses are, however, yet to absorb the importance of adequate disclosures.
Inadequate knowledge, failure to cope with the new system, inefficient business processes, etc., are no longer viewed as genuine reasons for evoking empathetic judicial considerations. It’s time businesses gear up to changed realities and discontinue engagement with non-compliant intermediaries, thereby facilitating migration of the unorganised sector into GST.
Tax Adventurism
The third category of disputes are nothing short of tax adventurism. They can broadly be classified under three segments:
- Challenge to the vires or legality of provisions under GST laws,
- Challenge to administration’s power to enforce pre-GST laws and undertake, audits and investigations thereunder, and
- Questioning tax-policy decisions, such as tax incidence on braille goods, female hygiene products, non-commercial research institutions, restrictions on migration of certain forms of pre-GST tax credits, etc.
The moot question to be asked of businesses is, are these points of friction? We are reminded of a quote by the U.K. House of Lords in the famous Duke of Westminster case, “[e]very man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be.”
It seems, there is a reluctance to change or perhaps a usual business practice for extracting the maximum benefit. Even if the benefit of doubt is given to businesses, it is impossible for any tax administration to deal with such challenges proactively.
Anti-Profiteering Cases And Arrests
Then are two other contentious disputes which have attracted the attention of the media.
The National Anti-Profiteering Authority has frequently been spoken about its orders directing businesses to pass the reduced tax incidence. The correctness of various orders are now sub-judice before the High Courts. Most relate to fact-based questions on economic theory for demonstrating its compliance or otherwise. Select NAA cases to be tested by the courts will lay down a set of precedent of principles for others, given that the mandate of the authority has been extended.
The ramifications on personal liberty of taxpayers and arrests for violation of GST laws has lately garnered attention. We wonder if these can be perceived as disputes. Instead, they must be examined in the light of the priority of the government to sternly deal with the menace of the parallel economy. A close look at the arrest cases coupled with the recent detailed judgment of the Telangana High Court, in particular, reveals a systematic and brazen violation of GST laws with the material quantum of evasion defying imagination, even of the government.
Yes, the commissioner, while exercising its power for arrest is expected to act in a judicious manner, by application of mind on facts of each case, we are ,though, yet to see specified guidelines on the same. We don’t see any let up by the government to relax the law on specified forms of GST evasion, which could result in arrest without an assessment. Having said that, a larger three-Judge bench of the Supreme Court is expected to examine the question of law on ‘powers of arrest’ and ‘right of bail’, in relation to hosts of regulations, including under the GST law.
Advance Rulings
The last remaining set of disputes relate to the orders of the Advance Rulings. Though these are on issues far and wide, from a macro perspective, two aspects stand out. The first is classification related and second on exemptions. Classification of goods has always been a complex and challenging area. Given the evolving GST rate structure and changes implemented by the GST Council, which dabble with various rates, it was expected that such disputes would continue. However, lately, the number has increased due to different rates of tax on services. Services can now be taxed from zero percent to 28 percent. Furthermore, there are classes of services, subject to tax without benefit of input taxes, say for instance standalone restaurants. It is natural to expect businesses to minimise the tax incidence.
The medium to long term solution is rate rationalisation by collapsing the slabs.
The second category of advance ruling relates to claims for exemptions. It is surprising that the PSUs and government-affiliated SPVs have led this area of dispute. To illustrate, exemptions were introduced for a distinct class of government authorities known as ‘government entities’. An essential criterion for exemption is that they must have 90 percent equity or control of government. Whereas the equity participation of government is measurable, control is a vague concept, without proper guidance. Further, there is exemption class for ‘pure services’, and in any case activities which are akin to functions undertaken by municipalities is an additional criterion. These are mixed questions of law and fact, and a clear answer is complicated.
Similarly, whether an activity of supply, to begin with, constitutes export or import, whether it is supply simpliciter or in the nature of composite or mixed supply, whether input credit is available in a given set of specific supplies, etc. are other matters before Advance Ruling authorities.
Given that the new indirect tax regime which has instituted new postulates and fundamentally altered existing rules, a tussle between the taxpayer and the tax administration is bound to occur. Thus, the system cannot be insulated from passionate contests and controversial rulings, given the litigious mindset of taxpayers and the administration. However, if the overall intent is to install a ‘fair and efficient’ dispute settlement mechanism, digressions would be addressed without much ado.
On an overall assessment, a large number of disputes have arisen in past two years, but then there is also no denying that compared to the size of the Indian economy, and the complexities of business models, the journey, though painful, is an outcome of the ongoing settling process. The tax administration has its task cut-out to address such challenges in a time-bound manner, but simultaneously, it needs to be complimented for a progressive approach with frequent intervention.
Mukesh Butani is the founder of BMR Legal. Tarun Jain is an independent advocate.
The views expressed here are those of the authors, and do not necessarily represent the views of BloombergQuint or its Editorial team.
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