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Legal Capsule by Economic Law Practice


Tax Litigation: The Saga Continues


INTRODUCTION

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.

TRANSITIONAL CREDIT

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.




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