– By Rajat Mohan
The Goods and Services Tax (GST) is a comprehensive indirect tax levied on the supply of goods and services in India. More than half a decade has passed since the onset of implementation of Goods and Services Tax (GST) and GST Litigation is still at nascent stage. It is expected that more and more disputes will crop up as the time swiftly passes by. Problems related to transition credits, delay in filing of returns, non-filing of returns, refunds of taxes, complexities in import & export duties, e-way bill structures and many more areas are popping up which will pave the way for future litigation. With this backdrop, it is important to understand the meaning of GST Litigation.
1. What is GST Litigation?
GST litigation specifically refers to disputes arising out of application of goods and services tax with respect to interpretation, application, enforcement of tax laws, classification of goods & services, calculation of tax liability, applicability of GST exemption and other issues related to administration of GST in India.
2. What is the reason behind GST litigation?
Interpretation of law: Different Interpretation of law by taxpayers and tax authorities with respect to applicability of GST on specific supply of goods and services leads to confusion, disagreement & conflict between both the taxpayer and tax authorities.
Compliances mismatch: Mismatch in the returns filed by the taxpayers and data available with the tax authorities leads to initiation of proceedings against tax payers for non-compliance.
Pronouncement of Rulings: Pronouncement of rulings by high courts, apex authorities & advance ruling authorities on the same subject have led to disputes between tax payers and tax authorities. For Instance, different judgments were pronounced by several high courts on the subject matter relating to refunds arising on account of inverted duty structure. However, the same issue was settled by the ruling pronounced by the apex authority in the case of VKC Footsteps.
Retrospective Amendments in the Act: Some of the amendments made in the Act have retrospective effects. However, the taxpayer might not be aware about such tax positions and might have taken different tax positions leading to disputes and disagreements.
3. What are the stages of GST litigation?
Audit & Assessment: This the first stage of GST litigation where the tax authorities conduct audit of the details submitted by the taxpayer such as returns, tax invoices & other relevant records. If a tax authority comes across some irregularities, then a show cause notice is issued to the taxpayer as follows:
a. Notice under section 73 of the CGST Act, 2017: Show cause notice for demand under normal period.
b. Notice under section 74 of the CGST Act, 2017: Show cause notice for demand under extended period
Objection: In case of disagreement by the taxpayer with assessment or audit, the taxpayer can file an objection with the tax authorities.
Adjudication: If objection is not resolved, the matter is referred to adjudicating authority for final decision. The adjudicating authority takes the final decision after considering the objections filed by the taxpayer.
Appeal: If the taxpayer is not satisfied with the decision of the tax authority, then they may appeal to appellate authority.
4. Deliberated cases in GST litigation
Classification and Rate Disputes
One of the key areas of litigation in GST revolves around the classification of goods and services and the applicable tax rate. Taxpayers often face challenges in determining the correct classification and rate for their supplies, as the GST law provides a vast number of categories and rates. Disputes may arise when there is ambiguity or difference of interpretation in classifying certain goods or services, leading to tax authorities issuing notices and taxpayers challenging the same.
Input Tax Credit (ITC) Denial
ITC is a crucial element of GST, allowing taxpayers to set off the tax paid on inputs against their output tax liability. However, tax authorities have been stringent in verifying the eligibility of ITC claims, leading to disputes and litigation. Issues such as non-compliance with documentation requirements, disputes related to ITC on specific expenses, or mismatches in the invoices and returns are common reasons for ITC denial, resulting in litigation.
Place of Supply
GST is a destination-based tax, and determining the place of supply is critical for determining the tax liability. However, disputes often arise when determining the place of supply, especially in transactions involving goods or services across different states or jurisdictions. Taxpayers and tax authorities may have differing interpretations, leading to litigation related to the correct place of supply and the associated tax liabilities.
Anti-Profiteering Investigations
The GST law incorporates an anti-profiteering provision to ensure that businesses pass on the benefits of tax rate reductions or input tax credit to consumers. Anti-profiteering investigations involve examining whether businesses have effectively reduced their prices to pass on the benefits of GST. Disputes arise when businesses and tax authorities disagree on the quantum of price reduction or the methodology employed to determine compliance, leading to litigation.
Transitional Credit
The implementation of GST brought about a transition from the earlier indirect tax regime, and businesses were allowed to claim transitional credit for the taxes paid under the previous regime. However, disputes have arisen regarding the eligibility, calculation, and availment of transitional credit. Tax authorities have been scrutinizing transitional credit claims, and discrepancies have resulted in litigation between taxpayers and authorities.
Mismatch in input tax credit claimed in GSTR-2A/2B vis-à-vis GSTR-3B
Under the GST regime, businesses are required to file various returns, including GSTR-2A and GSTR-3B. However, a persistent issue faced by taxpayers is the mismatch between these two returns. The most deliberated cases in the ongoing litigation nowadays result from the procedural aspects such as Mismatch in GSTR-2A/2B vis-à-vis GSTR-3B. Mismatch between GSTR-2A and GSTR-3B can result in differences in the ITC claimed by businesses. This can lead to potential tax liabilities or losses if the ITC claimed in GSTR-3B exceeds the eligible credit available in GSTR-2A. Tax authorities closely monitor the mismatch between GSTR-2A and GSTR-3B. Discrepancies may attract scrutiny and audits, potentially resulting in penalties or additional compliance obligations for businesses.
Non-generation of e-way bills
One crucial aspect of the GST system is the implementation of the Electronic Way (e-way) Bill, a document required for the movement of goods above a specified value. The e-way bill mechanism aims to streamline the process of tracking the movement of goods and curb tax evasion. However, non-compliance with e-way bill regulations has led to various litigations and legal disputes. In certain cases, disputes arise due to errors or omissions in the e-way bills. Taxpayers may face legal challenges when tax authorities allege discrepancies in the information provided, such as incorrect values, incomplete addresses, or mismatched product descriptions. These disputes often require businesses to provide evidence supporting the accuracy of the e-way bill details. Tax authorities have the power to seize goods in transit if they find violations related to e-way bills. This can occur when goods are transported without an e-way bill or when the bill does not comply with the prescribed rules. Legal battles may arise when taxpayers contest the seizure, claiming procedural irregularities or challenging the legality of the action. The e-way bill system’s implementation has encountered technical glitches and occasional system failures, causing inconvenience and disruptions for businesses. Instances where genuine attempts to generate e-way bills fail due to technical issues have resulted in litigation.
Refund disputes
The GST refund process involves multiple stages and requires meticulous compliance with various provisions and timelines. Even minor procedural errors can lead to rejections and delays, resulting in prolonged litigation. The GST law is constantly evolving, and new provisions, notifications, and circulars are introduced periodically. These changes often create confusion and differences in interpretation, leading to disputes between taxpayers and tax authorities. Tax authorities are responsible for verifying refund claims, and scrutiny processes are conducted to ensure the authenticity and accuracy of the claims. However, the subjective nature of these verification processes can lead to differences in opinion, giving rise to litigation. Timely processing of refund claims is crucial for businesses to maintain their cash flows. Unfortunately, delays in processing refunds have been a persistent issue, causing financial hardships for taxpayers and increasing the likelihood of litigation.
Cross charge mechanism vis-à-vis ISD mechanism
Since its implementation in India in 2017, the Goods and Services Tax (GST) has been a topic of constant debate and litigation. Among the various issues that have arisen, disputes surrounding cross charge mechanisms and Input Service Distributor (ISD) mechanisms have been a significant point of contention. One of the primary issues in cross charge litigation is determining the nature of expenses that can be considered common and eligible for ITC distribution. Disputes often arise when determining whether certain expenses can be classified as directly attributable to specific units or if they should be considered common and shared among all units. Litigation also arises when tax authorities raise concerns about the distribution of ITC by an ISD, alleging incorrect distribution or non-compliance with the prescribed guidelines. Such disputes often revolve around the quantum of ITC distributed, the allocation methodology used, and the supporting documentation.
Intermediary services
Under the GST regime, services are classified based on their nature and are subject to different tax rates. Intermediary services may fall under various categories, such as commission agent services, agency services, or brokerage services, depending on the specific nature of the service provided. The main issue that often arises in GST litigation surrounding intermediary services is the determination of whether the service qualifies as an intermediary service or falls under a different category. The classification is crucial because it determines the applicable tax rate and compliance requirements. In some cases, disputes arise when the tax authorities consider a service to be an intermediary service, while the taxpayer argues for a different classification. The taxpayer may contend that the service provided should be considered as an agency service or any other category attracting a lower tax rate. This disagreement in classification can lead to litigation and disputes between the taxpayer and the tax authorities.
Litigation in GST has become a common phenomenon due to the inherent complexities of the tax regime. Classification and rate disputes, ITC denial, place of supply determinations, anti-profiteering investigations, and transitional credit issues are some of the emerging trends leading to litigation. To avoid litigation, businesses should ensure proper compliance, maintain accurate records, and seek professional advice to navigate the intricacies of GST. As the GST system continues to evolve, it is expected that more litigation trends will emerge, and businesses should stay updated and proactive in managing their GST obligations
There are many questions of law that remain unanswered due to non-forming of GST tribunal in place which will increase the pace of GST litigation in future as assesses will seek recourse to High courts in order to alleviate the undue hardship caused on account of incorrect orders passed by the first appellate authority. In the absence of appellate tribunal, some of the taxpayers are seeking recourse to advance rulings to seek redressal on various issues. However, different rulings are pronounced by advanced ruling authorities on the same subject and in the absence of National advance ruling authority, many taxpayers are forced to follow the opposing positions.
In order to ease such hardships, the government may explore the prospect of introducing amnesty schemes akin to Sabka Vishwas Legacy dispute resolution scheme (SVLDRS) introduced under erstwhile indirect taxation laws. These schemes will be win-win for both the taxpayers and tax authorities. While on one hand, assesses can settle the pending litigations which have arisen due to non-compliance of procedural aspects, while the government will be able to recover the tax dues without spending considerable time. The GST council can channelize its energies on various aspects such as introducing the GST Tribunal, revamping advance ruling mechanism & re-introducing amnesty schemes. This will ease the tax litigations faced by the taxpayer and will lead to increase in the tax revenue of the tax authorities.
(Rajat Mohan is the senior partner at AMRG & Associates.)
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