Introduction
On May 6, 2024, the GST Appellate Tribunal (GSTAT) appointed its first chairman, Mr. Sanjay Kumar Mishra (Retd. Justice). Although GST was introduced as a simplified ‘one nation, one tax’ system, it has faced numerous challenges. Like every other law, there are legal complexities, interpretation issues, and ambiguities. Consequently, GST has evolved over the years with numerous corrections and amendments. Since no law is perfect and foolproof, in GST too litigations are inevitable. The operationalisation of GST appellate tribunal is a sign of ever-increasing GST litigations. Within just seven years, the number of pending appeals has risen to 14,227. In this blog, we will explore the primary reasons for rising GST litigation and the various dispute resolution mechanisms available.
GST Dispute Resolution Mechanism: Hierarchy and Flow of Appeals under GST
Adjudicating authority stands at the foundation of the GST appellate structure whereas the Supreme Court is the topmost authority in the pyramid. Let us understand the hierarchy and functions of each of the levels of GST appellate structure:
1. Adjudicating Authority
The Adjudicating Authority is the first point of contact for taxpayers in the GST dispute resolution process. For irregularities related to classification, valuation, refund claims, or tax or duty payable, the Adjudicating Authority issues a notice to the taxpayer. Thus, these authorities try to resolve GST disputes at the departmental level. For this, the taxpayers must respond to show cause notices within the specified timeframe. Consequently, based on the taxpayer’s reply, the adjudicating officer will issue an order either confirming or cancelling the demand raised in the notice.
2. First Appellate Authority
When a taxpayer wishes to contest an order passed by an adjudicating authority, such as an assessing officer or commissioner, the appeal is directed to the First Appellate Authority. Thus, this authority functions as a quasi-judicial body and typically holds a higher rank than the officer whose order is under appeal. The First Appellate Authority has the power to review and potentially overturn the decisions made at the departmental level.
3. Appellate Tribunal
The Appellate Tribunal was a missing link in the GST dispute resolution process. Initially, administrative issues delayed its operationalization. Consequently, appeals against orders from the First Appellate Authority will now go to the Appellate Tribunal. This shift will alleviate the burden on High Courts and reduces pending litigations.
4. High Court
The High Court acts as an appellate authority for disputes unresolved at the Tribunal level. Therefore, taxpayers or the department can appeal Tribunal decisions in the High Court. However, only cases involving substantial questions of law are eligible for this appeal. Thus, the High Court provides a critical layer of judicial review in the GST appeal process.
5. Supreme Court
The Supreme Court is the final authority for all GST disputes involving substantial questions of law. Notably, Supreme Court decisions are conclusive and often set precedents that result in amendments to the law. Additionally, these rulings are binding on lower courts and tribunals, providing a final resolution to complex GST litigation issues.
This structured hierarchy ensures a comprehensive review process, allowing taxpayers multiple levels of appeal to resolve disputes effectively.
Common reasons for GST Litigation:
Since the introduction of GST, numerous litigations have arisen due to a variety of factors. Let us examine these issues in detail:
1. Place of Supply
Determining the place of supply is one of the complex aspects of GST. Accurate determination of the place of supply is particularly crucial in cases of intra-state, inter-state, cross-border, or SEZ transactions. However, significant differences often arise in interpretations between taxpayers and GST authorities, leading to disputes. Notably, place of supply provisions are governed by Sections 7 and 8 of the IGST Act. Incorrectly determining the nature of supply as inter-state or intra-state will result in paying the wrong type of tax. For example, instead of CGST and SGST, a taxpayer might pay IGST, and vice versa.
2. Input Tax Credit
A majority of cases for GST litigation arise due to ITC mismatches between GST returns and the data held by tax authorities. Numerous frauds involving fake ITC claims have surfaced, often involving significant amounts. Consequently, GST officers exercise extra caution when scrutinizing ITC claims. In many instances, they issue show cause notices arbitrarily, without sufficient backing. Additionally, non-compliance by suppliers frequently leads to the denial of ITC to buyers resulting in litigations. This chain reaction underscores the importance of accurate compliance and vigilant oversight in the GST framework.
3. GST Valuation
GST is a tax payable on the transaction value, provided that the price is the sole consideration, in accordance with Section 15 of the CGST Act, 2017. The transaction value with respect to GST means the price actually paid or payable for the supply of goods or services. However, when the transaction value is not the sole consideration, the taxpayer must determine the value as per the CGST Rules, 2017. Misinterpretations are very common regarding what should be included or excluded in the transaction value.
4. Discrepancies in GST Returns
Central tax officers have issued around 33,000 GST notices to businesses for discrepancies in returns filed and short payment of taxes for the 2017-18 and 2018-19 financial years. Common discrepancies in GST returns include differences in GST liabilities declared in GSTR-3B and GSTR-1, differences in ITC claimed in GSTR-3B and GSTR-2A, and discrepancies between e-way bills generated and outward supplies reported in GSTR-1. Consequently, these issues often lead to compliance challenges and potential legal disputes.
5. GST refunds and Interest Litigation
Delays by tax authorities in issuing refunds are a significant cause of GST litigation. Additionally, the denial of refunds due to mismatches in ITC claims and issues with refunds for exports and zero-rated supplies contribute to disputes. Furthermore, the calculation of interest on delayed refunds and the denial of refunds due to failure to meet other procedural requirements also lead to legal challenges.
Landmark cases on GST refunds & Interest
- Union of India v. Bharti Airtel Ltd. (2021)
The Hon’ble Supreme Court did not permit telecom giant Bharti Airtel i.e. from seeking GST Refund of ₹ 923 crore by rectifying its GSTR-3B return.
- Union of India Vs. Cosmo Films Ltd.
Hon’ble Supreme Court directed the department to issue a circular providing the appropriate procedure to be followed in order for respondent to claim refund or ITC.
6. Frequent Amendments and Updates
As stated earlier, no law is perfect, and the GST law is no exception. It is constantly evolving based on feedback received from taxpayers, professionals, and other stakeholders. However, this continuous evolution often leads to ambiguities. Questions about whether amendments are retrospective or prospective lead to disputes. Additionally, changes in tax rates, classifications, and compliance requirements can be interpreted differently by various parties. Provisions like e-invoicing requirements to businesses with turnover above ₹5 crore, bringing small businesses under its ambit, may attract litigations as these businesses are often less organized in following processes.
7. Ambiguities in GST Law
Like every other law, the GST law is ambiguous in several areas. When interpreting the GST law, one can read multiple provisions in different ways. Definitions of ITC, conditions for eligibility, classification of goods and services, procedural requirements, and place of supply rules are all potential causes of disputes and litigation. These ambiguities make compliance challenging and increase the likelihood of legal challenges.
8. Differing Interpretations by Tax Authorities
Laws are always open to interpretation, and GST is no different. Differing interpretations by tax authorities and taxpayers are a major reason for litigations in GST. The most complex interpretations are then handled by the Supreme Court. The Supreme Court serves as the final authority to decide matters involving issues related to interpretation.
9. Inadequate Compliances and Procedural Lapses
Inadequate compliance and procedural lapses are significant causes of GST litigations. Issues such as lack of supporting documentation, mismatches between GSTR-3B and GSTR-1, failure to generate e-way bills correctly, and delayed GST payments can result in notices, penalties and demands.
10. GST Classification
GST law involves complex interpretations, particularly in cases like composite supplies or bundled services. Different tax rates on similar categories of goods often lead to litigation as businesses attempt to reduce their tax liability. Determining the principal supply in composite supplies is another area of contention. Furthermore, misinterpretation or incorrect classification of HSN codes frequently results in classification disputes.
11. e-way bill compliance disputes
Within the first month of the E-way Bill implementation, numerous cases of goods seizure and vehicle detention due to procedural gaps were reported. Despite government clarifications, field officers still faced implementation challenges. Furthermore, new developments in E-way Bill compliance requirements can lead to ambiguity. Also, non-compliance with E-way Bill provisions may prompt the department to initiate action on an organization’s other GST-related assessments. This includes requests for reconciliation between the supplies reported to generate an E-way Bill and those detailed in GST returns.
12. Anti-Profiteering Investigations
The goal of anti-profiteering provisions is to ensure that businesses pass on the benefits of rate reductions further along the supply chain. Departmental officers regularly assess whether businesses are adhering to these provisions and adequately passing on the benefits to the next person in the chain. Often, disagreements arise regarding the amount of reduction and the calculation method, which is a major cause of GST litigation.
Litigations trends in GST
Trends show that the maximum cases of GST litigation are due to mismatches in Input Tax Credit (ITC). Also, recent times have seen various large ITC scams, causing even genuine taxpayers to face notices from the department. Some of these notices are arbitrarily issued without proper backing. Furthermore, ITC denials also lead t disputes related to delayed refunds and miscalculation of interest on delayed refunds. New problems are emerging, such as transition credits, delays in return filings, complexities in import and export duties, e-invoicing compliances, and e-way bill compliances.
The department anticipates a rise in GST litigation. As a result, it is taking swift action taken to operationalize the GST Appellate Tribunal (GSTAT) as early as possible along with its 31 state benches.
Best Practices to Minimize the Risk of GST Litigations
Businesses can adopt the following best practices to avoid GST-related disputes:
- Regularly monitor updates and amendments in the GST law to minimize chances of errors or lapses.
- Use automation tools for GST compliance to reduce errors in return filing, maintain accurate records, and ensure the timely submission of returns.
- Always respond promptly to any show-cause notices to avoid penalties and actions by tax authorities.
- Ensure that you file your GST returns on time and accurately. Invest in training for your staff to keep them updated on compliance requirements. If necessary, consider outsourcing GST filing to professional service providers.
- Regularly review guidelines and circulars issued by the GST Council and the GST department to keep your compliance practices up to date.
- Regularly reconcile Input Tax Credit (ITC) claimed with the corresponding supplier invoices. This practice helps identify and rectify discrepancies early, ensuring that ITC claims are accurate.
- Pay your GST liabilities on time to avoid show-cause notices, interest, and penalties.
- Consult tax professionals or GST experts to decipher complex provisions, implement best practices, and handle disputes effectively if they arise.
Initiatives taken in 53rd Council Meeting
The GST Council in 53rd meeting proposed several recommendations aimed at reducing complexities of law.
Recommendations related to appeals under GST
- Handling of Anti-profiteering cases by the Principal Bench of the GST Appellate Tribunal (GSTAT).
- Amendment in Rule 142 of the CGST Rules and issue a circular to prescribe a mechanism for adjusting payments made through FORM GST DRC-03 against pre-deposits for filing appeals.
- Amendment in Section 112 of the CGST Act to allow the three-month period for filing appeals before the Appellate Tribunal to start from a date to be notified by the Government.
- Setting monetary limits for filing appeals under GST: GSTAT (Rs. 20 lakhs), High Court (Rs. 1 crore), Supreme Court (Rs. 2 crores).
- Amendment in Section 107 and Section 112 of the CGST Act to reduce the amount of pre-deposit required for filing appeals under GST.
- Amendment in Section 122(1B) of the CGST Act retrospectively from October 1, 2023, to apply penal provisions only to e-commerce operators required to collect tax under Section 52.
Additional Initiatives in GST Council Meeting to Minimize Litigations
The GST Council has issued clarifications and proposed recommendations which will minimize litigations. These recommendations will reduce interpretational difficulties, ease procedures, and mitigate compliance challenges. The major recommendations include:
- Adjusting the taxability of various goods and services to clarify and simplify the tax structure.
- Resolving input tax credit (ITC) issues on specific goods and services that have been subjects of dispute.
- Easing ITC conditions under Section 16(4) of the CGST Act, 2017, to facilitate better compliance.
- Granting waivers of interest and penalties on demands related to previous years, alleviating the burden on taxpayers.
- Providing clear guidelines on return filing frequencies and exemptions for small taxpayers to reduce administrative burdens.
- Bringing uniformity in the tax rates of similar goods to avoid classification disputes and ensure consistency.
- Granting tax exemptions for certain categories of services, such as those related to railways, special purpose vehicles, and accommodation services, to streamline compliance.
By addressing these issues and streamlining processes, the GST Council aims to minimize disputes and create a more transparent tax environment.
The Final Word
Litigations are inevitable, especially when interpreting complex laws like GST. Although not completely unavoidable, adhering to best practices can significantly reduce the chances of litigation. Furthermore, fighting disputes in court consumes valuable time and resources and hampers the smooth functioning of a business. Hence, the Council is taking several initiatives to reduce litigation. Additionally, businesses can do their part by being compliant, staying updated, following departmental procedures, and implementing robust processes to ensure accurate and timely adherence to GST regulations. By doing so, they can minimize legal challenges and focus on their core operations.
