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Tax litigation, the saga continues with GST
November, 26th 2019

GST, as it is being perceived by the industry, is falling short of success on a core parameter for judging tax reforms i.e. reduced litigation.

Litigation," said Ambrose Bierce, "is a machine which you go into as a pig and come out of as a sausage."

A look at this 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, close to Rs 9.46 lakh crore is held up in tax litigation.

Given the increasing indirect tax woes being faced by industry, the Government of India introduced Goods and Services Tax (GST) in 2017. For businesses to flourish, it is imperative for the tax environment to be conducive. A fear that haunts business entities doing business in/with India is the rampant litigation and the amount of time taken for litigation to conclude.

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One of the key objectives to be achieved with the introduction of GST was to reduce litigation. 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 two years have passed since the introduction of GST. 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.

Apart from the litigation, which is more in nature of issues being faced during transitioning from old indirect tax regime into the new one, the issues that challenge the jurisdiction of actions taken by the Revenue department are going ahead in full steam.

The issues

The transition of education cess, Secondary/Higher Education Cess and Krishi Kalyan Cess (KKC) into GST has been one such controversial issue. Clarifications were issued by the the Central Board of Indirect Taxes and Customs vide FAQs that the said credit would not be allowed to be transitioned under GST.

On challenge, however, the Madras High Court allowed the writ petition and held that the transition of the said credit under GST was valid under law. It is yet to be seen how the other High Courts of the country interpret the provisions with regards to this issue. This lack of consistency between the courts and the administration has flummoxed industry.


Another debatable issue is 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) which is certainly likely to result in an apparent imbalance in rendering justice and could undermine the impartiality of the Tribunal.

The Madras High Court, on challenge, held that the number of expert members could not 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.

Power to arrest

While the issues mentioned above affect businesses across India, another critical aspect of GST is the power to arrest for the violation of GST laws.

Under GST, the officers have been granted the power to arrest a person in case he has a reason to believe that the person has committed certain offences including supply of goods or services without issuance of an invoice, collecting tax without passing it onto the government and issuing an invoice/bill without the supply of goods or services and, thus, wrongly availing/utilizing input tax credit.

If the amount of tax evaded or input tax credit wrongly availed exceeds Rs 5 crore or Rs 2 crore, the person is liable to be imprisoned (along with the payment of fine) for five years or three years respectively.

The heinous offences of collecting but not paying the tax and issuance of fake invoices coupled with the availment of credit basis the same are covered under the scope of arrest. These offences are non-bailable and cognizable.

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 taxpayers took the route of challenging the action of arrest by filing writ petitions. Contrary views were expressed by the High Court of Telangana and Bombay on the said issue.

On appeal, the Supreme Court directed the constitution of the larger bench to resolve the issue which is still pending. There are taxpayers who, on such impending arrests, approach the High Court seeking bail under the provisions of Section 439 of Criminal Procedure Code/. Generally, on consideration of Bail applications, the taxpayers have been allowed bbail on a deposit of a huge sum with a condition for daily appearance before the police authorities.

And, the saga continues

Considering the size of the Indian economy and the complex business models, disputes between the taxpayers and the tax authorities are 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 Department 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 how the judiciary will be able to address the challenges in a time-bound manner.

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