Tax Litigation: The Saga Continues
Litigation’, said Ambrose Bierce, ‘is a machine which you go into as a pig and come out of as
a sausage’. A look at last year’s Economic Survey will give us a sense of how many pigs are being turned into sausages in India. According to the recent Economic Survey 2019, close to INR 9.46 lakh crores is held up in tax litigation.
The Indirect Taxes in India included levy of Central Excise and Service Tax. The Hon’ble Finance Minister (FM) while presenting the Budget for the Fiscal year 2019-20 in her speech mentioned that currently INR 3.75 lakh crores is blocked in litigations in service tax and excise. The quantum of litigation that is pending in various appellate fora for excise and service tax could be imagined with the above statistic.
In order to allow the businesses to unload this baggage and be free from legacy litigations the FM introduced the ‘Sabka Vikas (Legacy Dispute Resolution) Scheme, 2019’ for excise and service tax matters. The scheme has been notified recently and at present not many taxpayers seem to have opted for the scheme considering there are certain grey areas which still leave the question open of whether a taxpayer is eligible to opt for the scheme or not.
Given the increasing indirect tax woes being faced by industry, the Government of India introduced Goods and Services Tax (GST) in the year 2017. Key objectives for the introduction of GST were to remove the cascading effect of taxes, and to allow seamless credit of the taxed paid.
Another aim to be achieved with the introduction of GST was to reduce litigation. For businesses to
flourish, it is imperative for the tax environment to be conducive. One of the fears that haunts business entities doing business in/with India is the rampant litigation and the amount of time taken for litigation to conclude. GST as it is being perceived by industry, is falling short of success on a core parameter for judging tax reforms i.e. reduced litigation.
Looking back, over 2.5 years have passed since the introduction of GST and the given objective seems far from being achieved considering the large amount of writ petitions and advance ruling applications that are being filed every day.
A number of disputes have already arisen in relation to credit transitioned by the taxpayers into GST let alone the credit availed under GST. An overview of some burning issues in the GST regime, which affects businesses across India will reveal the criticality of GST disputes that haunts business entities today.
Most disputes that have arisen are in relation to technical glitches being faced at the time of filing of the Form TRAN-1 for transition of the existing credit by the assessees. Writ Petitions were filed in the jurisdictional High Courts to address the difficulties being faced and many High Courts have entertained the writ petitions and granted relief to the taxpayers.
The other class of disputes that have arisen are in relation to the time-limit for claiming of transitional credit. The Gujarat High Court and Bombay High Court have expressed contrary views on the said issue. The Gujarat High Court following the ratio of the Supreme Court decisions in the erstwhile regime, held that the right to transitional credit is ‘indefeasible’ and the prescription of time-limit for claiming transitional credit is procedural in nature and not mandatory.1
Apart from the above litigations which were more in nature of issues being faced during transitioning from old indirect tax regime into the new one, the other issues which challenge the jurisdiction of actions taken by the revenue are going ahead in full steam. Some of these are articulated below.
There was a huge hue and cry amongst the business community when GST was introduced in relation to transition of Education Cess, Secondary/Higher Education Cess and Krishi Kalyan Cess (KKC) into GST. Clarifications were issued by the CBIC vide FAQs that the said credit would not be allowed to be transitioned under GST. On challenge, Madras High Court allowed the writ petition and held that the transition of the said credit under GST is valid under law2. It is yet to be seen how the other High Courts of the country interpret the provisions with regard to the given issue.
Considering the contrary views taken by the High Courts it appears that the said issues would be settled only by the Supreme Court which would entail costs for the taxpayers.
ADVANCE AUTHORIZATION – EXEMPTION FROM IGST – ‘PRE-IMPORT’ CONDITION
Investigations have been initiated by Directorate of Revenue Intelligence (DRI) against Advance Authorization (AA) holders for claiming exemption from Integrated Goods and Services Tax (IGST) post July 1, 2017 on imports against AA. Gujarat High Court struck down the pre-import condition inserted with effect from 13.10.2017 for claiming exemption from IGST and held it to be ultra vires3 while Madras High Court dismissed the Writ Petition and upheld the constitutional validity4.
Before the judgment was pronounced, the exemption notification was amended to remove the pre-import condition and to insert condition vi(a) and vi(b) whereby in case the export obligation has been fulfilled by the company and the duty free imports are made as replenishment, a bond is required to be submitted that the said imported goods would not be used in the manufacture of exempted or nil rated goods. While these conditions are trickily worded, in view of two conflicting decisions, the scope for litigation does not narrow and the DRI would continue investigating the matters for denial of exemption from IGST.
LEVY OF IGST ON OCEAN FREIGHT
Various Writ Petitions have been filed across the High Courts in the country, challenging the levy of IGST on the component of ocean freight on the ground that the importer of goods not being the ‘recipient of service’ cannot be deemed to be the person liable to pay IGST under ‘reverse charge mechanism’ and supply of service by a person in a non-taxable territory (transporter) to a person in a non-taxable territory (exporter) is beyond the jurisdiction of IGST.
The Gujarat High Court has heard the petitions at length and the judgment is awaited. No final judgment has been received on this issue from any other High Court.
COMPOSITION OF GST TRIBUNAL – UNCONSTITUTIONAL?
The Union Cabinet in January 2019 approved the proposal to set up a national bench of the GST Appellate Tribunal (GSTAT) in the capital city. The composition of GSTAT has come under criticism as there is a single judicial member with two technical members (each from Centre and State). Thus, the number of technical members would outnumber the judicial member which is certainly likely to result in an apparent imbalance in rendering justice and could undermine the impartiality of the GSTAT.
The Madras High Court allowed the writ petition challenging the constitution of the GSTAT and held that the number of expert members cannot exceed the number of judicial members on the bench. The other High Courts are yet to pass a judgment on the said issue.
While the number of appeals currently filed before the first appellate authority is insignificant the decision to constitute GST Tribunal will have a significant impact on the dispute redressal system. Another critical aspect of GST is the power to arrest for violation of GST laws.
ARREST THE GST
Under GST, the officers have been granted the power to arrest a person in case he has a reason to believe that the said person has committed any of the four types of offences listed below and the amount of tax evaded or input tax credit wrongly availed exceeds INR 5 crore (Imprisonment for 5 years with fine) or INR 2 crore (Imprisonment for 3 years with fine) viz.
- Supply of goods or services without issuance of invoice
- Issue of invoice or bill without the supply of goods or services leading to wrongful availment or utilization of credit
- Availment of input tax credit basis the above point
- Collecting the tax but not paying to the Government
The heinous offences of collecting but not paying the tax and issuance of fake invoices coupled with availment of credit basis the same are covered under the scope of arrest. These offences are non-bailable and cognizable.
The Government officials have been robust and swift in their approach to nab such taxpayers dealing in fake invoices or involved in huge tax evasions. The Writ Petition filed by one such taxpayer challenging the action of arrest was dismissed by the Telangana High Court and the said decision was upheld by the Supreme Court. The Bombay High Court however in a similar matter had directed the revenue not to take any coercive steps and continued such relief. The Supreme Court in the appeal filed against the said order held that since contrary views are being expressed by High Courts a larger bench will be constituted by the Supreme Court to clarify the issue. Also, the Apex Court made it clear that in future the High Courts must keep in mind that Supreme Court did not interfere with the order of the High Court of Telangana dismissing the petition.
While the final verdict of the Supreme Court in the above matter is pending, the taxpayers on such arrest proposals approach the High Court seeking bail under the provisions of Section 439 of Code of Criminal Procedure, 1973 and generally, on consideration of bail applications, the taxpayers have been allowed bail on a deposit of a huge sum with a condition for daily appearance before the police authorities. Recently, these conditions were imposed on an MNC executive on grant of bail in relation to case for default in payment of tax after collection of GST5.
…….AND THE SAGA CONTINUES
Considering the size of the Indian economy and the complex business models, disputes between the taxpayers and the tax authorities is inevitable. This saga of tax litigation seems to be continuing in the GST era too. While there is a shift in the model of levy of indirect taxation in India, whether that shift can be aligned in the way the Revenue thinks while administering the law, is the moot question. It would be interesting to see, given the controversial rulings from various High Courts, how the GST laws will shape up and if the government and the judiciary will be able to address the challenges in a time-bound manner.