Year: 2022

CONCEPT OF ADVANCE RULING
As per Section 95 of CGST/SGST Law, an advance ruling means a decision provided by the authority or the Appellate Authority to an applicant on matters or on questions specified in section 97(2) or 100(1) of CGST/SGST Act in relation to the supply of goods and/or services proposed to be undertaken or being undertaken by the applicant. Thus, AAR answers questions. Questions relating to applicability of GST or rate of tax or classification or exemptions. The purport being advance agreement with the tax authorities in order to avoid disputes. It is like a pre-nuptial agreement, which we all know leads to divorce.

The Supreme Court in Columbia Sportswear Company vs. Director of Income-tax, Bangalore1, expounded the law on these authorities and held that AAR is a tribunal within the meaning of the expression in Articles 136 and 227 of the Constitution of India. However, a concept lost on some.

ENCROACHMENT OF POWER BY EXECUTIVE?
The constitution of AAR is found under section 96(2). It consists of one member from amongst the officers of the Central Tax and one member from amongst the officers of the State Tax which shall be appointed by the Central and State Governments respectively. The Appellate Authority for Advance ruling (AAAR) if formed under section 99(2). It consists of the Chief Commissioner of Central Tax and Commissioner of State Tax having jurisdiction over the applicant. Appeal from Caeser to Caeser’s wife.

1   (2012)
11 SCC 224

As per Supreme Court, first, only Judges and Advocates can be considered for appointment as Judicial Members of the Tribunal. Only High Court Judges, or Judges who have served in the rank of a District Judge for at least five years or a person who has practiced as a Lawyer for ten years can be considered for appointment as a Judicial Member. Second, persons who have held a Group A or equivalent post under the Central or State Government with experience in the Indian Company Law Service (Legal Branch) and Indian Legal Service (Grade-1) cannot be considered for appointment as judicial members. The expertise in Company Law service or Indian Legal service will at best enable them to be considered for appointment as technical members. Third, only officers who are holding the ranks of Secretaries or Additional Secretaries alone can be considered for appointment as Technical members and also a Technical Member presupposes an experience in the field to which the Tribunal relates. Fourth, the Two-Member Benches of the Tribunal must always comprise of a judicial member. For larger or special benches, the number of Technical Members should not be more than the Judicial Members. Clearly, the said guidelines are not adhered to.

This, especially when existing authorities under section 28F of the Customs Act or Section 245-O of the Income tax Act, 1961, provide for AAR which comprises of a Chairman who was a Judge of the Supreme Court or a Chief Justice of the High Court or at least seven years a Judge of a High Court and such number of Vice-chairmen who has been a Judge of a High Court; revenue Members and law Members. Hence, there was no need for any deviation for GST. Deviation, often, is mischievous. The reason seems to be evident.

2   (2010)11
SCC 1

CONTRARY RULINGS?
Apart from the above, the rulings themselves are not worthy of a read. They lack substance and evidence. There have been several instances, that too in a short span of time, where contrary rulings are delivered by different states on the same subject matter. An expected by-product. Too many cooks. This adds to confusion and litigation. It leads to representations to CBIC. A circular of CBIC clarifies an order passed by AAR. All in the name of “clarity”. God save tax (GST) payers.

In Clay Craft India Pvt. Ltd.4, the AAR at Rajasthan held that GST is leviable on salaries paid to directors on reverse charge basis. However, in Alcon Consulting Engineers (India) Pvt. Ltd.5, the AAR Karnataka held otherwise on the same issue. This resulted in CBIC issuing Circular No: 140/10/2020 – GST dated 10th June, 2020 clarifying that no GST is payable on remuneration paid to directors, on reverse charge basis, where the said directors are employees of the Company.

In Columbia Asia Hospitals Pvt. Ltd6, the AAAR Karnataka upheld the decision of the AAR which held that that activities carried out by an employee of one office of a company for another office located in another state would be a taxable supply. This, in turn, led to a PAN India debate. Owing to this, the Law Committee in the 35th GST Council Meeting, placed before the Council, a draft circular providing clarification on the taxability of activities performed by an office of an organization in one State to the office of that organization in another State. However, due to lack of agreement on the draft circular during the Officer’s Meeting, and suggestion by State of Karnataka to not issue any circular where the AAR had given a ruling, the issue was deferred for further examination by the Law Committee.

3   Civil
Writ Petition No. 4207/2018

4   RAJ/AAR/2019-20/33
dated 20.02.2020

5   KAR
ADRG 83/2019 dated 25.09.2019

6   KAR/AAAR/Appeal-05/2018

In Karnataka Cooperative Milk Producers Federation Ltd9, the AAR Bengaluru held that Flavoured milk is classifiable under the Tariff heading 0402 99 90 which covers “milk and cream, concentrated or containing added sugar or other sweetening matter” and held that the flavoured milk is covered under tariff heading 04029990 and 5 per cent GST is applicable. However, previously in Gujarat10, Tamil Nadu11, and Andhra Pradesh12, it was held flavoured milk would attract 12 per cent GST. Does the same assesse pay different rate of taxes in different states? One nation one tax?

NATIONAL APPELLATE AUTHORITY
Sheer incoherence, lack of understanding of the law and bluster of the officers of the State led to this situation. Consequently, due to contradictory rulings by the State Advance Ruling Authorities, a National Appellate Authority is sought to be constituted (Section 101B) (from a date to be notified). Appeals of appeals? Is this an authority for advance ruling or advance assessment order?

REPLACEMENT ALREADY?
In fact, the Centre intends to replace the AARs with a Central Board of Advance Ruling. According to them, the Centralised Board will address issues relating to conflicting rulings on a single issue. This will diminish conflicts at the state level over applicability of taxes. It is also proposed that the Central Board of Advance Ruling would comprise of retired judges, thus, it would be able to co-exist with AARs and function as an Appellate Body. Not even five years of GST (including 2 years of COVID pandemic), the AAR losing its sheen?

7   2021-TIOL-10-AAAR-GST

8   2021-TIOL-145-AAR-GST

9   2021-TIOL-37-AAR-GST

10 M/s
Gujarat Co-Operative Milk Marketing Federation Ltd reported in
2021-TIOL-142-AAR-GST

11 M/s.
Britannia Industries Limited reported in 2020-TIOL-101-AAR-GST

12 M/s.
Tirumala Milk Products Pvt. Ltd reported in 2020-TIOL-244-AAR-GST

Second, in any case, the advance rulings, in terms of section 103 of the Act, would be binding only on the applicant therein and the jurisdictional officer thereof. The said rulings would not be binding on any other assessee or the Tax officer or the Court.

Third, AARs are used as a tool for purposes other than what it is intended for. The parties filing applications at many times, do not even intend to undertake any such supply. There is no investigation into the bonafides of the applications. Many applicants seek ruling that they are liable to pay GST, irrespective of the fact whether they are liable or not, to settle scores with their competitors and invite demands on them. Several rulings are sought to encash accumulated input tax credit. AARs are also used to decide contractual disputes. They are taking the place of civil courts. Rulings are sought to seek reimbursement of taxes from customers.

Fourth, the quality of the rulings is pathetic. It leads to appeals and writ petitions across High Courts. Now, with the National Appellate Authority or Central Board for Advance ruling, has it reduced litigation or opened up unwanted litigation?

CONCLUSION
It is strongly recommended, “Do not seek any advance ruling”. Should you need to commit suicide, no permission is required.

I like what Steve Jobs has said in this context: let’s go invent tomorrow instead of worrying about what happened yesterday! There is a significant value evolution of embedding smarter ways of doing things in Tax. These have advanced into rule-based processing, standardized extraction, automated transformation, focus only on exceptions, end to end integration, sharper reconciliations and leveraging analytical reports.

RECENT PAST OF TAX REPORTING

EMERGING FRAMEWORK FOR REPORTING OBLIGATIONS

This is triggering deeper and deeper integration of Tax into commercial and operational matters. Tax no longer remains a subject of post-mortem or a team that gets involved after all the transactions have been completed and accounting is over. It is emerging as a subject that is shared responsibility of multiple stakeholders of the organisation and is embedded at the source of the transaction itself. Given the volume and complexity of business transactions and the attendant risks of interest and penalties [in case a particular tax is not appropriately discharged, or return is not correctly filed] are getting steeper by the day. At the same time regulators across the world are expecting record-to-report-to-return reconciliations. Advanced jurisdictions are also expecting a return-to-report-to-record reconciliations. This means that taxpayers are expected to track back a transaction to source at all points in time and reconcile a tax filing with the financials at a transaction level and not merely at an aggregate level.

GLOBAL PERSPECTIVE
This is an emerging trend, and there are a few countries who have taken long strides in the process, for example, Spain. Many other countries like India, countries in South America, China, Russia, Portugal, Hungary and Turkey are making rapid progression in this direction. From a mere (1) e-filing which is prevalent in most countries other than Central Africa, most jurisdictions are enhancing the digital tax administration [DTA] to move to (2) e-accounting i.e. reporting transactions as they happen; further on to (3) e-match by sharing data of counter parties and expecting taxpayers to be able to establish a connection between their reporting and reporting by their vendors; to (4) electronic audits where the same data is now being used and reused for performing sharp analytics and asking pertinent questions. Some countries like Spain have also introduced (5) e-assessments, where the base data is used directly to make an assessment of failure to meet tax obligations. This is a journey and I expect that most countries will travel these five steps over the next 5 to 10 years with countries like Spain, India, and countries in South America leading the way.

INDIA STORY
As we know in the Indian context, DTA had a significant point of inflection in 2017 with the rollout of GST. The objectives of the transformation were to digitise tax compliance, to simplify processes, to establish a tracking across the value chain, and to boost tax collections through data analytics. For the first time a unique model of setting up a special purpose vehicle called GSTN and involving the private sector under a GST Suvidha Provider system was rolled out enabling creation of a framework of high-speed connectivity with the Government system. The journey since July 2017 has seen some significant milestones. The picture below reflects the landmark developments.

E-INVOICE TRANSFORMATION
One of the key transformations in this journey has been the introduction of e-invoicing from October 2020. It was felt that while transaction level reporting has been enabled from July 2017, and e-way bills from 2018, there was a need for a more real-time capture of the transaction information itself for all types of supplies, not just limited to supply of goods in excess of certain value travelling beyond a certain minimum distance. Through data analytics performed for the first three years, it was also observed that instances of fraudulent invoicing were creeping into the system. While GST neutrality could be achieved for such transactions, these would certainly lead to an impact on other regulatory matters including possibility of carousel frauds resulting in higher refunds, possibility of higher deductions in income tax and therefore reduction in tax collections, distortion of value of transactions from one to the favour of the other, and also overall distortion of all the data analytics coming through from the system. Therefore, an authentication system to identify transactions at source that are required to be reported even before a tax invoices issued was rolled out.

Connecting these reporting is directly to the monthly return filing process ensured that compliances were happening at source and an ecosystem was established of real-time reporting and communication of the same transaction to the buyer. NIC was introduced in addition to GSTN to drive implementation of e-invoicing. The initial strategy was implemented with a much higher turnover threshold of 100 crores, which has now been reduced to 20 crores from 1st April 2022. A central de-duplication facility has been operational to make sure that the same transaction is not reported multiple times, and a connection with e-way bill system has been established for a singular reporting of common data.

Furthermore, e-invoicing generates both invoice reference numbers and an authenticated QR code string embedded with NIC’s digital signature, which is required to be printed on the invoice itself. This ensured that a transaction once reported he is unlikely to escape assessment. Also, if there are gaps in payment of tax at the end of a particular tax period, the speed at which regulators are able to react and reach out to the taxpayer to ensure compliance improved quite significantly. Connection with e-way bills has also ensured that every authenticated transaction can be verified during transport, as well as post facto reviews. The flow diagram for how the new compliance processes will work is provided below:

INDIA’S RAPID STRIDES IN DTA

Provisions regarding the ability to recover from the buyer in case the vendor has not deposited taxes, or the transaction is not reported by the vendor, have created the need for the entire chain to be compliant on a near real-time basis. This is definitely improving the quality of compliance overall. Expansion of e-invoice requirements is expected to continue. On the analytic side government has been able to build traceability of transactions through several supply chains by building network visualisation across the country.

TRANSFORMATION IN B2C
For B2C transactions, starting October 2021, a dynamic QR code was required to be incorporated in invoices with turnover above 500 crores. DQR can be used to make quick and easy digital payments, and enables wider capture of transactions at source. This is expected to be expanded over a period of time; covering more and more taxpayers to meet their compliance obligations. It is also being evaluated whether Mera Bill Mera Adhikar scheme should be rolled out. Under this, B2C invoices will also be required to be reported on the IRP to obtain a reference number on a real-time basis by taking certain additional information from the buyer. This will be an optional scheme, at the buyers discretion. It is likely to all taxpayers without any turnover threshold. The reference number so obtained may then operate like a lottery number to the buyer, who will then be rewarded based on a raffle at the end of a period. The idea of the process is to have an upward push from the consumer on the small medium and micro B2C establishments to report all transactions.

PROBLEM STATEMENT FOR THE TAXPAYER
So, what does all this mean for the taxpayer? To understand this better we need to understand what are the key aspects of the organisation that get impacted by some of these developments.

• First is tax technology itself,
• the second would be data management,
• the third is dealing with evolving digital tax administration,
• the fourth relates talent to deal with these requirements,
• the first pertains to evolving business landscape and alignment of that with the evolving tax and technology landscape, and
• the sixth is reputational risk and risk of financial loss in terms of interest and penalty in case of failure of processes.

Three of the six parameters are related to technology big data and dealing with tax administration.

The key, therefore, will be to set up systems and processes:

• for records keeping
• for reconciliations
• for exception management
• for analytics
• for engagement with the regulators

If these are sorted, DTA framework should evolve as a contributor rather than a burden. Generally, the typical response of a taxpayer has been driven by 1-to-1 resolution of issues; once a question arises there is a quick response teams across functions to resolve the challenges. The approach is driven by firefighting, and a significant part of the client machinery is there involved in rehashing the past, in guesstimating what was done, in relying on presumptive backups, in making reconciliation and in trying to find an acceptable compromise to close the matter. There are several reasons for such reactions; and I can classify them into four broad buckets, process-based, system-based, people based and others.

This may result in some tax payment also possibly interest and penalties, but it may be the only way to resolve the issue given the fact that the record-to-report-to-return, and return-to-report-to-record reconciliations are missing, the embedding of technology in each process is missing, the identification of key tax attributes for every transaction is incomplete, and processes around storing the big data and reconciling the data with the financials is insufficient. This reflects lack of broader vision on part of taxpayers resulting in an inefficient way to manage tax compliance.

In this new era of digital tax administration there are certain additional risks with this approach: people and dependence on people. Processes in organisations that have not moved up the curve on technology enablement tend to depend quite significantly on people. There is heavy reliance on individual memory and poor documentation and creation of institutional records. There is significant loss of intellectual property (IP) once there are exits in the team. There is very limited documentation of the IP, and therefore every situation requires a re-invention of the wheel to reach resolutions. In GST, further complications may arise given state is the unit of jurisdiction resulting in different teams of different states following multifarious approaches and not leveraging on each other entirely.

NEED FOR A DIFFERENT APPROACH
So, what should be the new approach for organisations in this new DTA era? To my mind the guiding principle should be reuse of data, use of IP, and leveraging technology. There are three addressable aspects and all three need to be played out in cohesion.

• For people, it involves reskilling of your talent to deal with this new environment. You need to provide them professional enrichment and job satisfaction, so that they are involved only in exception management and strategy rather than engrossed in dealing with data and working off-line to meet basic tax obligations due to system limitations.

• For process, the organisation needs to re-engineer them so that every part of the entity is tech-and-tax sensitised, understands the role and responsibility, and is working in unison to meet tax obligations. Process engineering also makes sure that there is efficiency, and sufficient automation. Processes will ensure shared responsibility and integration of teams, which ultimately results in better outcomes.

•    For technology, the entity should create a single source of truth using tax applications and off-the-shelf solutions. Technology should be suitably leveraged to integrate systems and complimentary solutions are used to create an ecosystem of end-to-end automation. Several accounting systems and ERPs also support tax sensitisation. It is incumbent for taxpayers to evaluate the capabilities of existing systems to make sure that tax attributes are captured at source, and sufficient traceability is created. Given that Government is investing heavily in data analytics and exception management, taxpayers will also need to use technology to identify exceptions and deal with them before any audit, scrutiny or assessments. Analytics will also help highlight differences and distortions, it will help understand cash flow and p&l risks, and it will help identify areas where further strengthening of processes required. The next level in technology will be machine learning and artificial intelligence. These tools should be suitably used depending on the size and scale of operation to automate and analyse all data and processes of the organisation.

In the diagram above, I have reflected what (in my view) should be the future state of tax function in organisations. It has to move from transaction processing to analytics with controls and verification as a middle layer. The more time you spend on analytics, the better utilisation of your people, and better opportunities for them to continue to feel challenged, to add value to themselves and in turn to the organisation. Transaction processing will need strategic thinking to outsource aspects which are common across taxpayers reducing investment in technology, but at once evaluating whether certain bespoke additional development is required to be made to suit special needs.

THREE DIMENSIONS OF BENEFITS ARISING OUT OF TAX TECHNOLOGY
The positives of tax-tech transformation journey can be divided into three broad areas:

• Creating efficiency (E)
• Managing risk and improving governance (R)
• Optimization (O)

E is about doing more with less, staying at par with the Government on requirements, and process automation. R is about creating a best-in-class risk management and governance framework, and reduce people dependency. O involves working capital optimisation, p&l risk mitigation, input credit efficiencies, and overall staying ahead of the Government.

If you were to look at examples of E, it will involve the compliance basics of GST like automation of GST and withholding tax returns, integration of e-invoice and e-way bill compliances with the ERP, transformation of data without manual intervention, focus move away from any type of break in the data flows, real-time extraction, technology enabled validations, etc. For companies involved in import and export transactions, automation will also extend to automating all compliances under import and export STP EOU or SEZ compliance, EBRC downloads and reconciliation, refund application filing and back up, etc.

For R, it is critical to deal with the transaction at source. Decisions involving tax determination automation, classification and related validations, GSTIN master data confirmation, QR validation, workflow tools and escalation matrices, dashboards, MIS, litigation tracking, monthly record-to-report to-return reconciliation and so on.

For O, focus should be on making sure input tax credit related processes are strong and real-time, lost credits are identified and understood, fake invoice risk mitigation, matching of input tax credit using dynamic and fuzzy logics, etc. O will also include using technology to do self reviews for tax risk assessment; so that you are better prepared for any audits conducted by the Revenue. A 360° perspective is necessary to integrate and compare GST, customs, income tax, and all other regulatory filings to make sure that you are future ready. As long as the goals are clear, there is definitely an opportunity for Tax to add value back to business.

IN CONCLUSION
Tax is rapidly moving towards being deeply connected with business on a real time basis. There is strong appreciation of the “value” it can bring to the table. Technology is one of its strongest “enablers”. Let’s make the most of this. Let’s update our organisation and personal goals around tax-tech. Let us learn new skills. Let us work with new ideas. Let us challenge ourselves to be “accretive” at all times. The era of taxologist is here to stay – for a long time to come.  

2.    Before introduction of GST, there were multiple taxes, i.e, Excise Duty, VAT, Entry tax, Entertainment tax, Service tax, Octroi, etc. Additionally, there were various cesses imposed by State and Central Government like Krishi Kalyan Cess, Clean energy cess, etc. These factors made the tax structure very cumbersome. In many instances, there was an imposition of tax on tax which led to a cascading effect and affected the final price. For eg. sales tax was charged even on the amount of excise duty that was levied on manufacture. To that extent the purpose of introduction of GST has been met as GST has subsumed all the other indirect taxes and consolidated them in one levy. This has resulted in lowering of indirect tax burden which is beneficial for consumers.

3.    To compensate the state’s loss, Goods and Services Tax (Compensation to States) Act, 2017 was implemented, the constitutional validity of which was upheld in Union of India vs. Mohit Mineral Pvt Ltd [2018] 98 taxmann.com 45 (SC).

4.    The rollout of GST has also brought in federalism in a true spirit as the Central Government and the State Governments are taking decisions collectively through a constitutionally constituted GST Council.

5.    Digitization and use of technology was also a hallmark of the GST law. In the initial few months there were technology challenges with regard to operating the GST portal which have been ironed out over a period of time. Implementation of E-way bills, E-invoicing and other steps taken by the authorities have further helped in checking the errant taxpayers.

6.    However, the chapter on GST returns, though introduced with the hype of matching system, could never be implemented. This has resulted in complexities on reconciliation of Input Tax Credit i.e. GSTR-2A & GSTR-2B with GSTR-3B; back-door introduction on restriction on input tax credit provided in Rules 36(4), blockage of Electronic Credit Ledger under Rule 86A and 1% payment of output tax liability in cash under Rule 86B of the CGST Rules, 2017. It has also resulted in Section 16(2)(c), which provides for denial of input tax credit to buyer on account of default in payment of tax to the government by supplier, look draconian.

7.    So far, issues relating to e-way bill, provisional attachment of property and transitional credit have been fiercely litigated. Constitutional issues too have surfaced but with minimal success ensuring to the petitioners. Below, we shall have a topic-wise glimpse of how the courts have dealt with various issues arising under GST law.

JURISDICTION & POWERS OF AUTHORITIES

8.    In Indo International Tobacco Ltd vs. Vivek Prasad [2022] 134 taxmann.com 157 (Delhi), the question was whether issuance of multiple summons and initiation of investigations by multiple agencies is violative of Section 6(2)(b)1 of the CGST Act. Investigations were initiated by various jurisdictional authorities against different entities. A common thread involving the petitioner was allegedly found in the investigations. Transfer of investigations undertaken by different authorities to Ahmedabad Zonal Unit of Office of Director General, GST Intelligence, was done to bring investigations under one umbrella. It was held that Section 6(2)(b) was not applicable in this case. Transfer of investigation is not prohibited under GST law. Multiple investigations and proceedings may lead to contradictory conclusions by jurisdictional authorities. Transfer of investigation by proper officer having limited territorial jurisdiction to proper officer having pan India jurisdiction depends on the facts of each case. It looks as if the High Court has not taken note of the fact that business entities exist so that they can do business and not keep busy with attending to multiple calls from various authorities. If each assessee is mapped to an assessment unit or officer, what remains of this sanctity with officers all over India interfering in anyone’s assessments.

Section 6(2)(b) states that where a proper officer under
the State Goods and Services Tax Act or the Union Territory Goods and Services
Tax Act has initiated any proceedings on a subject matter, no proceedings shall
be initiated by the proper officer under this Act on the same subject matter.

10.    In Maa Geeta Traders vs. Commissioner Commercial Tax [2021] 133 taxmann.com 81 (Allahabad), it was held that Section 5(3) grants a general power to Commissioner to sub-delegate all or any of his powers/ functions to any other officer who may be subordinate to him. Functional and pecuniary jurisdictions have been sub-delegated and assigned to various officers including Deputy Commissioner by an office order issued by Commissioner in exercise of powers vested in that Authority under section 2(91) of the Act r/w section 4(2) of the Act. It was therefore held that officers of State tax may draw their function-jurisdiction from simple sub-delegation under an administrative order issued by ‘Commissioner’ with reference to his powers to sub-delegate granted under section 5, without any gazette notification of such order.

TAXABILITY

11.    In case of Builders Association of Navi Mumbai vs. Union of India 2018 (12) GSTL 232 (Bom), the question was whether City Industrial and Development Corporation of Maharashtra Limited (‘CIDCO’), an agency created under an act of the government, was liable to collect GST on the total one-time lease premium amount payable by the successful allottee. It was held as follows:

a.    CIDCO is a ‘person’ and is engaged in business of disposing land by leasing it out for a consideration styled as one-time premium.

b.    The activities performed by CIDCO cannot be equated with activities performed by sovereign or public authorities under the provisions of law, which are in the nature of statutory obligations and are excluded from the purview of the CGST Act. Therefore, Maharashtra Industrial Development Corporation case 2018 (9) GSTL 372 (Bom) (supra) would not apply in the context of CGST Act.

c.    Section 7(2)(b) of the CGST Act is unambiguous in as much as activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services. Since no notification is enacted in this behalf, activities carried out by CIDCO would indeed be taxable under the CGST Act.

d.    The High Court relied on II Schedule to the CGST Act independently of Section 7, which classifies leasing as a supply of service and went on to conclude that CIDCO, engaged in such a business and receiving lease premium as consideration was indeed supplying service2.

This is a classic case of applying the law literally and not seeing its consequences. Having the state to collect stamp duties and registration fees and again see GST being collected was exactly what everyone wants to avoid.

12. Another case that may be referred to is that of Bai Mamubai Trust vs. Suchitra 2019 (31) GSTL 193 (Bom).

a.    The facts of the case were that a suit was filed seeking to recover possession of three shops, which together constituted a restaurant, where the plaintiff trust is carrying on business in the name and style of “Manranjana Hotel” (“suit premises”).

b.    The suit proceeded on the cause of action of trespass / unauthorized occupation. Plaintiff filed Notice of Motion for interim reliefs before the Bombay High Court pending the hearing and final disposal of the suit.

c.    Bombay High Court appointed a Receiver of the Suit Premises, pending final decision. The Court Receiver was to receive consideration in the form of fees and also ad-hoc royalty from the defendant for occupying the disputed premises.

d.    The defendant was permitted to remain in possession of the suit premises as an agent of the court receiver under an agency agreement to be executed with the Court Receiver, on payment of monthly ad-hoc royalty of Rs. 45,000.

e.    The High Court held that the court receiver would not be liable to pay GST on the amount of royalty paid by the defendant for ‘illegally’ occupying the premises. It was held that an act of illegal occupation, which may be compensated in damages by mesne profits, does not amount to a voluntary act of allowing, permitting, or granting access, entry, occupation or use of the property.

f.    The payment of royalty as compensation for unauthorized occupation of the suit premises is to remedy the violation of a legal right, and not as payment of consideration for a supply. It was further observed that the court receiver is merely the officer of the court to whom the payment is made and there are no reciprocal enforceable obligations to consider this as supply of services by court receiver.

g.    ‘Supply’ under Section 7 does not encompass a wrongful unilateral act or any act resulting in payment of damages.

2.     2.  
The position of law on which the High Court had
relied upon in arriving at the conclusion has changed slightly now. Prior to
29.08.2018, as per Section 7(1)(d), the expression ‘supply’ included all
“activities or transactions to be treated as supply of goods or supply of
services as referred to in Schedule II” to the Act. However, the CGST Amendment
Act, 2018 (w.e.f. 29.08.2018), omitted the said Section 7(1)(d) with
retrospective effect from 01.07.2017. It further inserted Section 7(1A) which
clarifies that only when activities or transactions constitute a supply in
accordance with Section 7(1), only then shall they be treated as supply as of
goods or services under as referred to in Schedule II of the Act. The effect of
this amendment is that regardless of what is contained in Schedule II of the
CGST Act, the activity must first fulfil the essential ingredients specified in
Section 7(1)(a) above.

a.    To overcome the argument of the assessees that the object of GST was to avoid cascading effect of taxes, it was held that source of power contained in Article 246 r/w List I of VII Schedule cannot be defeated by resort to argument based on objects of GST.

b.    As to legislative competence, it was held that sources of power under Article 246A and Article 246 are mutually exclusive and could be simultaneously exercised. On a purposive and harmonious construction, though Article 246A contains a non-obstante clause, power under Article 246 stands protected and continues to be the source of power even post introduction of Article 246A.

c.    Aspect theory was used to overcome the argument of double taxation advanced by the petitioner. It was held that levy on the same taxable event may amount to double taxation and still be accepted. A single subject from different aspects could be a subject matter of different taxes. Thus, levy of surcharge would subsist even if the goods were subjected to levy of GST. Aspect of supply under GST law would be distinct from the aspect of manufacture which is sought to be taxed by levy of excise. Taxable event under GST would be supply while it is manufacture under excise and both are two different legally recognized aspects and would not lead to an overlapping and would result in treating the levy on different aspects.

d.    Attack on the basis of Article 14 was supressed by holding that levy of NCCD is for the purpose of discouraging consumption and cannot be described to be a classification without any basis. Choice of the category of goods for the purpose of revenue generation cannot ipso-facto be a ground of judicial review; something more is required such as hostile discrimination and singling out a particular category of goods. Choice of category of goods may also be influenced by the objective of discouraging consumption and cannot be held arbitrary.

e.    NCCD was in the nature of a surcharge under Article 271 and could be levied independently. Exemption granted on excise duty cannot prohibit imposition of other additional duties or levy such as NCCD.

f.    Legislature has wide latitude to decide on methodology of revenue generation. Courts should not rush and must tread carefully while dealing with legislation based on fiscal policy. Selecting objects to tax, determining the quantum of tax, legislating conditions for the levy and the socio-economic goals which a tax must achieve are matters of legislative policy and these matters have been entrusted to the Legislature and not to the Court. Levy of tax is a product of legislative choice and policy decisions are the prerogative of the executive.

The very object of subsuming most taxes into one tax gets derailed further and we only hope that this derailment does not continue at the end of the States.

RETURNS

14. The recent judgment of the Supreme Court in Union of India vs. Bharti Airtel Ltd [2021] 131 taxmann.com 319 (SC) would be the best mention:

a.    The Delhi High Court had, taking note of technical glitches in GST portal during initial period, read down paragraph 4 of Circular No. 26/26/2017-GST, dated 29th December, 2017 to extent it restricted rectification of Form GSTR-3B (issued as stop gap arrangement) in respect of period in which error had occurred. In effect, the High Court allowed assessees to rectify Form GSTR-3B for period in which error had occurred, i.e, from July to September 2017.

b.    Whereas the said circular, provided for reporting differential figures and rectification of errors in subsequent period in which error is noticed.

c.    Grievance of the assessee was that official mechanism to check data authenticity to claim input tax credit was absent in initial period of GST. At the time, GSTR-2A (which gives assessee access to information regarding ITC available in the electronic credit ledger) was not operationalised. This resulted in payment of huge output tax liability by cash while Input Tax Credit (ITC) was already available to its credit in electronic credit ledger.

d.    The Supreme Court reversed the judgment of the High Court.

e.    In this regard, it was held that registered person was obliged to do self-assessment of ITC, reckon eligibility to ITC and of output tax liability based on office records and books of account. For submitting periodic return, registered person had to maintain books of account either manually or electronically on basis of which self-assessment could be done for availing of ITC and determining output tax liability.

f.    This was what was being done in the pre-GST regime. Assessee was expected to continue same in GST regime and should not be dependent on common electronic portal. Common GST portal was only a facilitator to feed or retrieve information and it needed not be primary source for self-assessment.

g.    The factum of inability to access the electronic portal to submit return within the specified time due to technical faults in the portal is entirely different than the assertion to grant adjustment of amount voluntarily paid in cash by the assessee towards output tax liability. Payment for discharge of tax liability by cash or by availing ITC was an option and having exercised such option, same could not be reversed or swapped. No express provision permitted swapping of entries in electronic cash ledger with electronic credit ledger and vice versa.

h.    GSTR-3B return was notified as stop-gap arrangement but having basis in section 39 of the CGST Act and Rule 61 of the CGST Rules. Though not comparable to electronically generated GSTR-3, GSTR-3B is a return ‘prescribed’ and required to be furnished by registered persons.

i.    Merely because mechanism for furnishing return in terms of sections 37 and 38 was not operationalized during relevant period (July to September 2017) and became operational only later, efficacy of Form GSTR-3B would not stand whittled down in any manner. GSTR-3B is to be considered as a return for all practical purposes.

j.    Section 39(9) of Central Goods and Services Tax Act provides for correction of omission or furnishing of incorrect particulars in GSTR-3B return in return to be furnished in month or quarter in which such omission is noticed. This very position has been restated in Circular No. 26/26/2017-GST and therefore, this circular is not contrary to section 39(9). High Court order noting that there is no provision for such rectification is erroneous.

k.    Thus, High Court order allowing rectification of GSTR-3B contrary to the circular was not sustainable and same was to be set aside.

15. While so holding, the judgment of the Gujarat High Court in AAP And Co vs. Union of India [2019] 107 taxmann.com 125 (Gujarat) was also reversed, though, it was formally done in a separate order reported in 2021 (55) GSTL 513 (SC). In that case, the petitioner had challenged press release which clarified that input tax credit (ITC) for invoices issued during July 2017 to March 2018 can be availed until last date of filing Form GSTR-3B for September 2018, i.e., until 20th October, 2018 on the ground that the same was ultra vires Section 16(4). It was contended that return prescribed under section 39 is a return required to be furnished in Form GSTR-3 and not Form GSTR-3B. Since GSTR-3 was not operational, Section 16(4) could not be enforced. Accepting the contention, the High Court had held that GSTR-3B was not introduced as a return in lieu of return required to be filed in Form GSTR-3 but was only a temporary stop gap arrangement until due date of filing return in Form GSTR-3 was notified. This was vindicated by the fact that the government, on realising that return in Form GSTR-3B is not intended to be in lieu of Form GSTR-3 omitted such reference retrospectively. The Supreme Court did not notice the amendment made to Rule 61(5) from 1st January, 2021 which was the first time the GSTR 3B alone was mentioned as a return. We cannot blame them as the government keeps amending the law on a daily basis.

REFUND

16. A detailed judgment was rendered by the Supreme Court in case of Union of India vs. VKC Footsteps India Pvt Ltd 2021-TIOL-237-SC-GST:

a.    The context of the case revolves around Clause (ii) of the 1st Proviso to Section 54(3) read with Rule 89(5) of GST Rules which provide for refund of unutilized ITC in cases relating to inverted duty structure.

b.    Clause (ii) of 1st Proviso to Section 54(3) inter alia specifies that refund of unutilized ITC can be claimed where the credit has accumulated on account of rate of “tax on inputs” being higher than the rate of tax on output supplies. The meaning of “tax on inputs”, i.e, “input tax” is already noted above to include tax charged on supply of ‘any’ goods or services and not only inputs.

c.    From 1st July, 2017 to 18th April, 2018, the definition of “net ITC” therein was said to carry the same meaning as contained in Rule 89(4) (supra). However, through an amendment on 18.04.2018, “net ITC” for the purposes of Rule 89(5) was defined to mean ITC availed on inputs only and excluded input services from its ambit. This was the grievance of the assessees in the above case. Again, by 5th Amendment Rules, 2018, the amendment carried out on 18th April, 2018 was given retrospective effect from 1st July, 2017.

d.    The Gujarat High Court had observed, in a case reported as VKC Footsteps India Pvt Ltd vs. Union of India 2020 (43) GSTL 336 (Guj), that Section 54(3) allows refund of “any unutilised input tax credit”. The term “Input tax credit” is defined in Section 2(63) to mean the credit of input tax. The phrase “input tax” defined in Section 2(62) means the tax charged on any supply of goods or services or both made to any registered person. Both ‘input’ and “input service” are part of “input tax” and “input tax credit”. Thus, when as per Section 54(3) ‘any’ unutilised ITC (which includes inputs and input services) could be claimed as refund, Rule 89(5) cannot restrict such refund to only inputs. Consequently, Explanation (a) to Rule 89(5) which defined the term ‘Net ITC’ was held to be ultra vires Section 54(3) to the extent it restricts the refund only on ‘inputs’.

e.    Per contra, the Madras High Court had observed, in a case reported as Transtonnelstroy Afcons Joint Venture vs. Union of India 2020 (43) GSTL 433 (Mad), that though Section 54(3) allows refund of “any unutilised ITC”, clause (ii) of proviso to Section 54(3) uses the words “accumulated on account of” rate of tax on inputs being higher than rate of tax on output supplies. If the proviso is interpreted merely to be a condition to claim refund of entire unutilised ITC, the words “accumulated on account of” would become redundant. It was held that the proviso, in addition to prescribing a condition also performs the function of limiting the quantity of refund. Further, Rule 89(5) was made and amended on the strength of the rule making power under Section 164 and is in line with Section 54(3). In fact, the un-amended Rule 89(5) wherein refund of both inputs and input services was available exceeded the scope of Section 54(3). Refund claims other than a claim for excessive taxes paid inadvertently on account of the erroneous interpretation of applicable law or the declaration of a provision as unconstitutional is in the nature of a benefit or concession. Right of refund is purely statutory and cannot be availed of except strictly in accordance with the prescribed conditions.

f.    The Supreme Court upheld the Madras High Court judgment and set aside the Gujarat High Court judgment.

g.    It was held that the Parliament has wide latitude for classification. Thus, the non-conferment of the right of refund to the unutilised input tax credit from the procurement of input services cannot be said to be violative of Article 14 of the Constitution of India. Refund is a matter of a statutory prescription. Parliament was within its legislative authority in determining whether refunds should be allowed of unutilised ITC tracing its origin both to input goods and input services or, as it has legislated, input goods alone.

h.    The phrase “no refund of unutilised input tax credit shall be allowed in cases other than” occurring in the 1st proviso to Section 54(3) makes it clear that refund of unutilized ITC can be granted only in two categories of cases, viz zero-rated supplies and cases relating to inverted duty structure.

i.    To construe ‘inputs’ occurring in Rule 89(5) so as to include both input goods and input services would do violence to the provisions of Section 54(3) and would run contrary to the terms of Explanation 1 to Section 54. Reading the expression ‘input’ to cover input goods and input services would lead to recognising an entitlement to refund, beyond what was contemplated by Parliament.

j.    The 1st proviso to Section 54(3) is not a condition of eligibility but a restriction which must govern the grant of refund under Section 54(3). Therefore, there is no disharmony between Rule 89 on the one hand and the proviso to Section 54(3) on the other.

k.    A discriminatory provision under tax legislation is not per se invalid. A cause of invalidity arises where equals are treated as unequally and un-equals are treated as equals. Both under the Constitution and the CGST Act, goods and services and input goods and input services are not treated as one and the same and they are distinct species.

l.    Rule 89(5) would be valid as it can be traced to the general rule making power in Section 164 of the CGST Act. For the purpose of making rules, it is not necessary to use the word ‘prescribes’ at all times in the main Section. The rules may interstitially fill-up gaps which are unattended in the main legislation or introduce provisions for implementing the legislation. So long as the authority which frames the rules has not transgressed a provision of the statute, it cannot be deprived of its authority to exercise the rule making power. It is for this reason that the powers under Section 164 are not restricted to only those sections which grant specific authority to frame rules. If such a construction, were to be acceptable, it would render the provisions of Section 164 otiose.

m.     Certain inadequacies might exist in the formula. The use of such formulae is a familiar terrain in fiscal legislation including delegated legislation under parent norms and is neither untoward nor ultra vires. An anomaly per se cannot result in the invalidation of a fiscal rule which has been framed in exercise of the power of delegated legislation.

n.    The formula in Rule 89 is not ambiguous in nature or unworkable, nor is it opposed to the intent of the legislature in granting limited refund on accumulation of unutilised ITC. It is merely the case that the practical effect of the formula might result in certain inequities. However, the court cannot read down the formula for doing so would result in judicial recrafting of the formula and walking into the shoes of the executive or the legislature, which is impermissible.

o.    It appears that the Supreme Court has interpreted an enabling provision for exports and inverted duty structure into an exception not noticing that such provisions for exports continued under the old regime too.

PROVISIONAL ATTACHMENT

17. At the inception of GST, court cases were rife with issues pertaining to provisional attachment. However, after several judgments that analysed the provisions of law in detail and laid down strict guidelines for the department to adhere to, litigation on this front have dwindled.

18. One case that is worth noticing is that of Radha Krishan Industries vs. State of Himachal Pradesh [2021] 127 taxmann.com 26 (SC). It was held that power to order a provisional attachment of property of taxable person including a bank account is draconian in nature; exercise of power for ordering a provisional attachment must be preceded by formation of an opinion by Commissioner that it is necessary so to do for purpose of protecting interest of government revenue.

a.    More specifically, the ingredients of Section 83 was spelt out as: (i) the necessity of the formation of opinion by the Commissioner; (ii) the formation of opinion before ordering a provisional attachment; (iii) the existence of opinion that it is necessary (and not just expedient) so to do for the purpose of protecting the interest of the government revenue; (iv) the issuance of an order in writing for the attachment of any property of the taxable person; and (v) the observance by the Commissioner of the provisions contained in the rules in regard to the manner of attachment.

b.    Further, the Court held that Rule 159 of the CGST/HPGST Rules, 2017 provides two safeguards to the person whose property is attached. Firstly, it permits such a person to submit objections to the order of attachment on the ground that the property was or is not liable for attachment. Secondly, Rule 159(5) posits an opportunity of being heard. Hence it was observed that both the requirements are cumulative in nature.

c.    The Court further observed that to invoke the powers of provisional attachment, there must be pending proceedings against a person whose property is being attached. The attachment cannot be sought based on the contention that there are pending proceedings against a third party. Allowing such interpretation (allowing attachment of property based on the proceedings against other persons) would be an expansion of a draconian power such as that contained in Section 83, which must necessarily be interpreted restrictively.

PLACE OF SUPPLY OF INTERMEDIARY SERVICES

19. Place of supply which in-turn determines the tax that is supposed to be charged i.e, IGST or CGST/SGST. For various types of situations, the law deems a particular place to be the “place of supply” for levying tax. As a result, tax is sought to be levied when, in effect, no tax ought to be paid. The case in point here is “intermediary services”. The intermediary renders services to a foreign principal and earns money in convertible foreign exchange is liable to pay tax. This is against the general rule wherein place of supply is deemed to be the place of the recipient. Such instances are forcing businesses to relocate abroad to remain cost-effective.

20. Dharmendra M. Jani vs. Union of India [2021] 127 taxmann.com 730 (Bombay) was a case that related to constitutionality of section 13(8)(b) of IGST Act. In this case, a split verdict rendered by the division bench of the High Court and is now still pending. Regarding constitutionality of section 13(8)(b), Justice Ujjal Bhuyan held as follows.

a.    The Constitution has only empowered Parliament to frame law for levy and collection of GST in the course of inter-state trade or commerce, besides laying down principles for determining place of supply and when such supply of goods or services or both takes place in the course of inter-state trade or commerce. Thus, the Constitution does not empower imposition of tax on export of services out of the territory of India by treating the same as a local supply.

b.    There is an express bar under Article 286(1) that no law of a state shall impose or authorize imposition of a tax on the supply of goods or services or both where such supply takes place in the course of import into or export out of the territory of India.

c.    “Intermediary services” is certainly a supply of service from India to outside India by an intermediary. Petitioner fulfils the requirement of an intermediary as defined in Section 2(13) of the IGST Act. That apart, all the conditions stipulated in sub-section (6) of Section 2 for a supply of service to be construed as export of service are complied with. The overseas foreign customer of the petitioner falls within the definition of “recipient of supply” in terms of Section 2(93) of the CGST Act read with section 2(14) of the IGST Act.

d.    Therefore, it is an ‘export of service’ as defined under Section 2(6) of the IGST Act read with Section 13(2) thereof. It would also be an export of service in terms of the expression ‘export’ as is understood in ordinary common parlance. However, section 13(8)(b) of the IGST Act read with section 8(2) of the said Act has created a fiction deeming export of service by an intermediary to be a local supply i.e., an inter-state supply. This is definitely an artificial device created to overcome a constitutional embargo.

e.    From the scheme of the IGST Act it is evident that the same provides for levy of IGST on inter-state supplies. Import and export of services have been treated as inter-state supplies in terms of Section 7(1) and Section 7(5) of the IGST Act respectively. On the other hand, Section 8(2) of the IGST Act provides that where location of the supplier and place of supply of service is in the same state, the said supply shall be treated as intra-state supply. However, by artificially creating a deeming provision in the form of Section 13(8)(b) of the IGST Act, where the location of the recipient of service provided by an intermediary is outside India, the place of supply has been treated as the location of the supplier i.e, in India. This runs contrary to the scheme of the CGST Act as well as the IGST Act besides being beyond the charging sections of both the Acts.

f.    The extra-territorial effect given by way of Section 13(8)(b) has no real connection or nexus with taxing regime in India introduced by GST system; rather it runs completely counter to the very fundamental principle on which GST is based i.e, it is a destination-based consumption tax as against principle of origin-based taxation.

g.    However, in the dissenting judgement, it was noted that power to stipulate the place of supply as contained in Sections 13(8)(b) of the IGST Act is pursuant to the provisions of Article 269A (5) read with Article 246A and Article 286 of the Constitution. It was further observed that once the parliament has, in its wisdom, stipulated the place of supply in case of Intermediary Services be the location of the supplier of service, no fault can be found with the provision by artificially attempting to link it with another provision to demonstrate constitutional or legislative infraction.

21. On the same issue, the Gujarat High Court delivered a contrary judgment in Material Recycling Association of India vs. Union of India [2020] 118 taxmann.com 75 (Guj):

a.    Upon a conjoint reading of section Section 2(6) and 2(13) which defines ‘export of service’ and ‘intermediary service’ respectively, then the person who is intermediary cannot be considered as exporter of services because he is only a broker who arranges and facilitates the supply of goods and services or both.

b.    Vide Notification No. 20/2019-IT(R), Entry no. 12AA was inserted to provide Nil rate of tax granting exemption from payment of IGST for service provided by an intermediary when location of both supplier and recipient of goods is outside the taxable territory i.e, India. It, therefore, appears that the basic logic or inception of Section 13(8)(b) of the IGST Act, considering the place of supply in case of intermediary to be the location of supply of service is in order to levy CGST and SGST and such intermediary service, therefore, would be out of the purview of IGST.

c.    There is no distinction between the intermediary services provided by a person in India or outside India. Merely because the invoices are raised on the person outside India with regard to the commission and foreign exchange is received in India, it would not qualify to be “export of services”, more particularly when the legislature has thought it fit to consider the place of supply of services as place of person who provides such service in India.

d.    There is no deeming provision in Section 13(8) but there is a stipulation by the Act legislated by the Parliament to consider the location of the service provider of the intermediary to be place of supply.

If the services provided by intermediary is not taxed in India, which is a location of supply of service, then, providing such service by the intermediary located in India would be without payment of any tax and such services would not be liable to tax anywhere.

TRAN-1: VALIDITY OF RULE 117 AND DIRECTIONS TO OPEN PORTAL, OR ALLOW MANUAL FILING

22. Five years on, transitional credit still appears to be an area that is intensely litigated in the Courts. Notwithstanding several judgment of various High Courts delineating the scope of transitional provisions, the litigation hasn’t seemed to attain quiescence. Some of the judgments on this aspect may be seen.

23. In Tara Exports vs. Union of India [2018] 98 taxmann.com 363 (Mad), it was held that GST is a new progressive levy. One of the progressive ideals of GST is to avoid cascading taxes. GST Laws contemplate seamless flow of tax credits on all eligible inputs. The input tax credits in TRAN-1 are the credits legitimately accrued in the GST transition. The due date contemplated under the laws to claim the transitional credit is procedural in nature. In view of the GST regime and the IT platform being new, it may not be justifiable to expect the users to back up digital evidences. Even under the old taxation laws, it is a settled legal position that substantive input credits cannot be denied or altered on account of procedural grounds. Accordingly, the court directed to the authorities either to open portal, so as to enable assessee to file the TRAN-1 electronically for claiming transitional credit or accept manually filed TRAN-1 and allow input credits if otherwise eligible in law.

24. In Siddharth Enterprises vs. Nodal Officer [2019] 109 taxmann.com 62 (Guj), the Court held as follows:

a.    The right to avail such credit a substantive right and cannot be allowed to be lapsed by application of Rule 117 on failure to file necessary forms within due date prescribed therein. Such prescription in violation of Article 14 of Constitution of India.

b.    Denial of credit against doctrine of legitimate expectations.

c.    Such action also in violation of Article 19(1)(g) ibid as it would affect working capital of assessees and diminish their ability to continue with business.

d.    Cenvat credit earned under erstwhile Central Excise Law being property of assessees cannot be appropriated on mere failure to file declaration in absence of Law in this respect and Government should have provided for it Act and not have taken it away by virtue of merely framing Rules in this regard.

e.    Due date contemplated under Rule 117 ibid for purposes of claiming transitional credit procedural in nature and should not be construed as mandatory provision.

25. In Brand Equity Treaties Ltd vs. Union of India [2020] 116 taxmann.com 415 (Delhi):

a.    Time limit prescribed under rule 117(1) is directory in nature which also substantiate that the period for filing TRAN-1 is not considered either by the legislature or the executive as sacrosanct (very important) or mandatory. This is mainly because, in exercise of powers vested with the Commissioner under proviso to Rule 117, the 90 day time period to transition credit, as originally envisaged in the Rules, had still not expired for a specific class of persons. These extensions have been largely on account of its inefficient network. It is not as if the Act completely restricts the transition of CENVAT credit in the GST regime by a particular date, and there is no rationale for curtailing the said period, except under the law of limitations.

b.    This, however, does not mean that the availing of CENVAT credit can be in perpetuity. Transitory provisions, as the word indicates, have to be given its due meaning. Transition from pre-GST Regime to GST Regime has not been smooth and therefore, what was reasonable in ideal circumstances is not in the current situation. In absence of any specific provisions under the Act, it was held that in terms of the residuary provisions of the Limitation Act, the period of three years should be the guiding principle and thus a period of three years from the appointed date would be the maximum period for availing of such credit.

c.    Vested right cannot be taken away merely by way of delegated legislation by framing rules.

d.    Relying on A.B. Pal Electricals vs. Union of India [2020] 113 taxmann.com 172 (Delhi), it was further held emphasized that the credit standing in favour of the assessee is a vested property right under Article 300A of the Constitution and cannot be taken away by prescribing a time-limit for availing the same.

e.    “Technical difficulty” is too broad a term and cannot have a narrow interpretation, or application. Further, technical difficulties cannot be restricted only to a difficulty faced by or on the part of the respondent. It would include within its purview any such technical difficulties faced by the taxpayers as well, which could also be a result of the respondent’s follies. It cannot be arbitrary or discriminatory, if it has to pass the muster of Article 14 of the Constitution. The government cannot turn a blind eye, as if there were no errors on the GSTN portal. It cannot adopt different yardsticks while evaluating the conduct of the taxpayers, and its own conduct, acts and omissions.

26. In SKH Sheet Metals Components vs. Union of India [2020] 117 taxman.com 94 (Delhi):

a.    By this time, vide Section 128 of the Finance Act, 2020, the government had promulgated retrospective amendment to validate the existence and mandatory nature of time limit in Rule 117.

b.    Although the legality of the retrospective amendment was not dealt with, it was held that no matter how well conversant the taxpayers may be with the tax provisions, errors are bound to occur, therefore, taxpayer should not be criticized and the solution should be found. Law should provide for a remedial avenue. The stand of Central Government, focusing on condemning the Petitioner for the clerical mistake and not redressing the grievance, is unsavoury and censurable.

c.    It was further held that the decision in case of Brand Equity in not merely based on grounds of time limit and therefore continue to apply with full rigour even today, regardless of amendment to Section 140 of the CGST Act.

27. In Adfert Technologies Pvt Ltd vs. Union of India [2019] 111 taxmann.com 27 (Punjab & Haryana), it was held that the introduction of Rule 117(1A) and Rule 120A and absence of any time period prescribed under Section 140 indicate that there is no intention of Government to deny carry forward of unutilized credit of duty/tax already paid on the ground of time limit. Further, GST is an electronic based tax regime, and most people of India are not well conversant with electronic mechanism. Most are not able to load simple forms electronically whereas there were a number of steps and columns in TRAN-1 forms thus possibility of mistake cannot be ruled out. Also, the authorities were having complete record of already registered persons and are free to verify fact and figures of any petitioner. Thus, in spite of being aware of complete facts and figures, the respondent cannot deprive petitioners from their valuable right of credit.

28. In Filco Trade Center Pvt Ltd vs. Union of India 2018 (17) GSTL 3 (Guj), it was held that Section 140(3)(iv) of the CGST Act lays down conditions which limit the eligibility of first stage dealer to claim credit of eligible duties in respect of goods which were purchased from manufacturers prior to twelve months of appointed day. Such condition, though does not make hostile discrimination between similarly situated persons, imposes a burden with retrospective effect without any basis limiting scope of dealer to enjoy existing tax credits. Further, no such restriction existed in prior regime. Thus, Section 140(3)(iv) was held to be unconstitutional and liable to be struck down.

29. In JCB India Ltd vs. Union of India [2018] 92 taxmann.com 131 (Bombay), however, the Bombay High Court took a contrary view on the same question as above. One of the main grounds for arriving at a contrary conclusion was that cenvat credit was a concession and not an accrued right. To buttress this proposition, reliance was placed on Jayam & Company vs. Assistant Commissioner (2016) 15 SCC 125, a decision rendered in the VAT regime (which was based on the “origin-based consumption tax” principle). It was held that protection of existing rights must always be consistent with conditions already imposed under existing (erstwhile) law for their enjoyment. It was further, noted that since period or outer limit for availing Cenvat credit also existed under Rule 4(7) of the Cenvat Credit Rules, 2004 and thus held that even the erstwhile Central Excise/Service Tax laws did not give assessees unrestricted and unfettered right to claim Cenvat credit.

30. Inter alia on the strength of the above judgment, the Bombay High Court, in Nelco Ltd vs. Union of India [2020] 116 taxmann.com 255 (Bombay) took a view that Rule 117 was intra vires. What it held was that where the assessee alleged that authorities did not permit its request of filing TRAN-1 Form as it could not be filed due to problems on common portal, since technical difficulty faced by the assessee could not be evidenced from GST system logs, no direction could be issued to respondents to treat instant case as falling within ambit of rule 117(1A).

31. The above case also drew from the judgment of the Gujarat High Court in Willowood Chemicals Pvt Ltd vs. Union of India [2018] 98 taxmann.com 100 (Gujarat). In this case, it was held that plenary prescription of time limit for declarations was neither without authority nor unreasonable. It was within rule making power available under Sections 164(1) and 164(2) of CGST Act. It was not arbitrary to provide for finality on credits, transfers of such credits and all issues related thereto, when tax structure of country was being shifted to new framework. Doing away with the time limit for making declarations could give rise to multiple largescale claims trickling in for years together, after the new tax structure is put in place. This would, besides making the task of matching of the credits impractical if not impossible, also impact the revenue collection estimates. If the time limit in Rule 117 was held to be directory, it would give rise to unending claims of transfer of credit of tax on inputs and such other claims from old to the new regime.

32. In Assistant Commissioner of CGST and Central Excise vs. Sutherland Global Services Pvt Ltd [2020] 120 taxmann.com 295 (Madras), it was held that assessee was not entitled to carry forward and set-off of unutilized credit of Education Cess, Secondary and Higher Education Cess, and Krishi Kalyan Cess against its output GST liabilities in terms of Explanations 1 and 2 to Section 140.

INPUT TAX CREDIT

33. One of the features of the GST law is the flow of seamless credit across the value-chain. However, there are multiple situations artificially created in the law which deny the credit to the recipient of the goods/service even though the goods/services are utilized for the furtherance of business. One example which comes to mind is ITC in respect of construction and works contract in Section 17(5)(d). In case of Safari Retreats Pvt Ltd vs. Chief Commissioner of CGST (2019) 25 GSTL 341 (Orissa):

a.    The petitioners were mainly carrying on business activity of constructing shopping malls for the purpose of letting out of the same to numerous tenants and lessees.

b.    Huge quantities of materials and other inputs in the form of cement, sand, steel, aluminium, wires, plywood, paint, lifts, escalators, air-conditioning plant, chillers, electrical equipment, special facade, DG sets, transformers, building automation systems etc. The petitioners had also availed services in the form of consultancy service, architectural service, legal and professional service, engineering service, etc for the purpose of construction of the said malls. Input taxes were paid on all goods and services purchased by the petitioners.

c.    In one of the shopping malls, the petitioner had let out different units on rental basis. Such activity of “letting out” is also a “supply of service” under CGST Act and chargeable to tax.

d.    The petitioner sought to discharge their tax obligation on provision of renting service through the ITC accumulated on inputs, etc. used for construction of shopping malls. The respondent disallowed utilization of such ITC in view of Section 17(5)(d). Aggrieved, the petitioner approached the High Court seeking utilization of ITC accumulated on inputs, etc. purchased for construction against renting of immovable property.

e.    The petitioner inter alia advanced the following arguments:

i.    Section 17(5)(d) must apply only in cases of constructions where tax chain is broken. Its purport must be restricted to cases where the intention to construct a building, is to sell it after issuance of completion certificate. In the instant case, the construction was neither “intended for sale” nor “on his own account”. Section 17(5)(d) cannot be applied if construction was not on “his own account”, far less when the construction of the immovable property is intended for letting out.

ii.    The sale of a property after issuing of a completion certificate is not taxable in the GST regime as per entry 5 of III Schedule to CGST Act. Therefore, the chain of taxation gets broken and restricting ITC in such cases would be completely valid.

iii.    However, in the instant case the tax chain continues as the mall which has been constructed generates rental income which is liable to GST. Hence, the taxation which starts when the petitioner buys goods and services for the construction of the mall, continues till the taxation of rental income arising out of the same construction.

iv.    Further, under section 16 of the CGST Act, GST registered persons are entitled to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business. It contemplates availment and utilization of ITC by persons who have a uniform tax chain in their transactions from input till output.

v.    Therefore, the petitioner cannot be denied the benefit of ITC in the facts and circumstances of the present case.

f. The High Court acceded to the above arguments and read down Section 17(5)(d) by allowing use of ITC on goods and services consumed in construction of shopping mall against paying GST on rentals received from tenants in shopping mall. In general terms, Section 17(5)(d) was read down to allow use of ITC on inputs used in construction in B2B cases and deny ITC only in cases of B2C cases.

34. The rational therefore, for allowing input tax credit accumulated on account of inputs purchased/used for construction of immovable property against renting of immovable property is that supply of input goods for construction of a shopping mall and the same being used for renting out units in the mall constitute a single supply chain and benefit of ITC should be available to the assessee. The investment (including the taxes suffered on inputs) in construction of the mall is now being utilized to generate rent, which is also taxable under the provisions of GST. Therefore, it is part of the same tax-chain and both taxes at stage of input and output are not liable to be taxed independently.

35. The above judgment, however, has been currently stayed by the Supreme Court.

E-WAY BILL, INSPECTION & CONFISCATION

36. In Assistant Commissioner vs. Satyam Shivam Papers Pvt Ltd [2022] 134 taxmann.com 241 (SC), goods were kept in the house of a relative for 16 days by the officer and not in designated place for safe keeping. The goods were confiscated, in the first place, for the reason that the goods in question could not be taken to the destination within time (of expiry of e-way bill) for reasons beyond the control of respondent-taxpayer including traffic blockage due to agitation. Section 129 not at all being attracted, the court imposed a cost of Rs. 59, 000 considering the conduct of GST officer and harassment faced by taxpayer.

37. In Shiv Enterprises vs. State of Punjab [2022] 135 taxmann.com 123 (Punjab & Haryana), confiscation proceeding under Section 130(1) initiated on the ground that sellers/suppliers of the assessee are not having inward supply but only engaged in outward supply without paying any tax. It was held that the confiscation was completely unsustainable for the following reasons: (i) Goods and conveyance in transit were accompanied with invoice and e-way bill as prescribed under Rule 138A; (ii) No discrepancy has been pointed out in invoice and e-way bill and reply filed by respondent-department; (iii) No finding with respect to contravention of any provision by petitioner with intent to evade payment of tax; (iv) Contravention of provision alleged is against supplier of petitioner on the ground of showing outward supply without having inward supply; (v) Invocation of Section 130 must have nexus with action of person against whom proceedings are initiated. Petitioner cannot be held liable for contravention of provision of law by any other person in supply chain.

38. In Synergy Fertichem Pvt Ltd vs. State of Gujarat 2020 (33) GSTL 513 (Gujarat), it was held that while section 129 provides for deduction, seizure and release of goods and conveyances in transit, section 130 provides for their confiscation and, thus, section 130 is not dependent on or subject to section 129. It was further held that for issuing notice of confiscation under section 130, mere suspicion is not sufficient, and authority should make out a very strong case that assessee had definite intent to evade tax. At the stage of detention and seizure of the goods and conveyance, the case has to be of such a nature that on the face of the entire transaction, the authority concerned should be convinced that the contravention was with a definite intent to evade payment of tax. The action, in such circumstances, should be in good faith and not be a mere pretence.

39. The High Courts have quashed proceedings relating to e-way bill initiated on account of minor and clerical errors. For example, typing 470 kms as the distance instead of 1470 kms [See: Tirthamoyee Aluminium Products vs. State of Tripura [2021] 127 taxmann.com 680 (Tripura)]; minor detours enroute [See: R. K. Motors vs. State Tax Officer [2019] 102 taxmann.com 337 (Madras)]; mistake in vehicle no. in part-B of e-way bill when all other documents were in place [See: K.B. Enterprises vs. Assistant Commissioner of State Taxes & Excise [2020] 115 taxmann.com 250 (AA- GST – HP)]; wrong valuation or classification of goods at the time of interception [See: K.P. Sugandh Ltd. vs. State of Chhattisgarh [2020] 122 taxmann.com 291 (Chhattisgarh)], etc.

40. While various High Courts have been proactive in this front, the Supreme Court has not been progressive. For instance, in State of Uttar Pradesh vs. Kay Pan Fragrance Pvt Ltd [2019] 112 taxmann.com 81 (SC), High Court had passed an interim order directing State to release seized goods, subject to deposit of security other than cash or bank guarantee or in alternative, indemnity bond equal to value of tax and penalty to satisfaction of Assessing Authority. The Supreme Court held that the order passed by High Court was contrary to section 67(6) and authorities would process claims of concerned assessee afresh as per express stipulations in section 67, read with relevant rules in that regard. Similarly, in Assistant Commissioner of State Tax vs. Commercial Steel Ltd [2021] 130 taxmann.com 180 (SC), Competent Authority by an order passed under section 129(1) detained goods of assessee under transport and served a notice on person in charge of conveyance and High Court, on writ petition filed by assessee, set aside action of Competent Authority. However, it was held that since assessee had a statutory remedy under section 107 and there was, in fact, no violation of principles of natural justice in instant case, it was not appropriate for High Court to entertain a writ petition and impugned order of High Court deserved to be set aside and assessee was to be permitted to take appropriate remedies which were available in terms of Section 107.

ARREST & PROSECUTION

41. The key issue that has been litigated on this front is as to what must happen first – determination of tax liability or arrest? There is, again, a dichotomy of judicial views in this regard.

42. In PV Ramana Reddy vs. Union of India 2019-TIOL-873-HC-TELANGANA-GST, the following observations were made:

a. Even though Section 69(1) does confer power to arrest in case of non-cognizable and bailable i.e, the four offences listed in Section 132 above, if the amount involved is between Rs. 3 Crore and Rs. 5 Crore, Section 69(3) deals with the grant of bail, remand to custody and the procedure for grant of bail to a person accused of the commission of non-cognizable and bailable offences. It is not known how a person whom the Commissioner believes to have committed an offence specified in clauses (f) to (l) of sub-section (1) of section 132, which are non-cognizable and bailable, could be arrested at all, since section 69(1) does not confer power of arrest in such cases.

b. It was held that offences mentioned in Section 132 have no co-relation to and do not depend on any assessment and adjudication and therefore, prosecution can be launched even prior to the completion of assessment. It is important to note the fact that until a prosecution is launched, by way of a private complaint with the previous sanction of the Commissioner, no criminal proceedings can be taken to commence, was not disputed.

c. Further, persons who are summoned under section 70(1) and persons whose arrest is authorised under section 69(1) are not to be treated as “persons accused of any offence” until a prosecution is launched was also not disputed. It was also acknowledged that officers under various tax laws such as the Central Excise Act etc., are not police officers to whom section 25 of the Indian Evidence Act, 1872 would apply. The power conferred upon the officers appointed under various tax enactments for search and arrest are actually intended to aid and support their main function of levy and collection of taxes and duties. Further, the statements made by persons in the course of enquiries under the tax laws, cannot be equated to statements made by persons accused of an offence. Consequently, there is no protection for such persons under article 20(3) of the Constitution of India, as the persons summoned for enquiry are not persons accused of any offence within the meaning of article 20(3).

d. It was also held that writ proceedings can be converted into proceedings for anticipatory bail if the enquiry by the respondents is not a criminal proceeding and yet the respondents are empowered to arrest a person on the basis of a reason to believe that such a person is guilty of commission of an offence under the CGST Act. However, a writ of mandamus would lie only to compel the performance of a statutory or other duty. No writ of mandamus would lie to prevent an officer from performing his statutory functions or to direct an officer not to effect arrest.

e. Further, it was observed that despite the fact that the enquiry by the officers of the GST Commissionerate is not a criminal proceeding, it is nevertheless a judicial proceeding in terms of Section 70 of the CGST Act.

f. To say a prosecution can be launched only after the completion of the assessment, goes contrary to section 132. The prosecutions for these offences do not depend upon the completion of assessment. Therefore, argument that there cannot be an arrest even before adjudication or assessment, is not appealing.

g. The objects of pre-trial arrest and detention to custody pending trial, are manifold as indicated in section 41 CrPC, i.e, to prevent such person from committing any further offence, proper investigation of the offence, to prevent such person from causing the evidence of the offence to disappear or tampering with such evidence in any manner and to prevent such person from making any inducement, threat or promise to any person acquainted with the facts of the case so as to dissuade him from disclosing such facts to the Court or to the police officer. Therefore, it is not correct to say that the object of arrest is only to proceed with further investigation with the arrested person.

43. Per contra, in Jayachandran Alloys Pvt Ltd vs. Superintendent of GST & Central Excise, Salem [2019] 25 GSTL 245 (Madras), the Madras High Court ruled that:

a. The power to punish set out in section 132 would stand triggered only once it is established that an assessee has ‘committed’ an offence. It has to necessarily be after determination of demand due from an assessee which itself has to necessarily follow process of an assessment.

b. It was observed that Section 132 imposes a punishment upon the assessee that ‘commits’ an offence. The allegation of the revenue in the instant case was that the petitioner had contravened the provisions of section 16(2) and availed excess input tax credit.

c. Further, it was found that there was no movement of the goods and the transactions were bogus and fictitious, created only on paper, solely to avail input tax credit. The offences contained in Section 132 constitute matters of assessment and would form part of an order of assessment, to be passed after the process of adjudication is complete and taking into account the submissions of the assessee and careful weighing of evidence and explanations offered by the assessee in regard to the same.

d. The use of word ‘commits’ make it more than amply clear that the act of committal of the offence is to be fixed first before punishment is imposed. It was thus held that ‘determination’ of the excess credit by way of the procedure set out in section 73 or 74, as the case maybe is a pre-requisite for the recovery.

e. Sections 73 and 74 deal with assessments and as such it is clear and unambiguous that such recovery can only be initiated once the amount of excess credit has been quantified and determined in an assessment. When recovery is made subject to ‘determination’ in an assessment, the argument of the department that punishment for the offence alleged can be imposed even prior to such assessment, is clearly incorrect and amounts to putting the cart before the horse.

f. The exceptions to this rule of assessment are only those cases where the assessee is a habitual offender, that/who has been visited consistently and often with penalties and fines for contraventions of statutory provisions. It is only in such cases that the authorities might be justified in proceedings to pre-empt the assessment and initiate action against the assessee in terms of section 132, for reasons to be recorded in writing. Support in this regard was drawn from the decision of the Division Bench of the Delhi High Court in the case of Make My Trip (India) (P.) Ltd. vs. Union of India [2016] 58 GST 397 (Delhi), as confirmed by the Supreme Court reported in Union of India vs. Make My Trip (India) (P.) Ltd. [2019] 104 taxmann.com 245 (SC), reiterating that such action, would amount to a violation of Constitutional rights of the petitioner that cannot be countenanced.

44. The correctness of both the above cases is pending before a larger bench of the Supreme Court in Union of India vs. Sapna Jain 2019-TIOL-217-SC-GST.

CONCLUSION

45. On weighing all the case laws seen above, what can be said is that the courts have been treaded cautiously while dealing with constitutional issues surrounding GST, in fact, on all occasions so far, upholding validity of the impugned provisions of GST law. Whereas on issues such as confiscation of goods and vehicles, provisional attachment of property, blocking of electronic credit ledger, carrying forward of transitional credit and failure of natural justice, the courts have been pro-active in coming to the rescue of the assessees.

46. On when economic legislation is questioned, the Courts are slow to strike down a provision which may lead to financial complications. Taxation issues are highly sensitive and complex; legislations in economic matters are based on experimentations; Court should decide the constitutionality of such legislation by the generality of its provisions. Trial and error method is inherent in the economic endeavours of the State. In matters of economic policy, the accepted principle is that the Courts should be cautious to interfere as interference by the Courts in a complex taxation regime can have large scale ramifications.

47. During the last 5 years, there have a slew of notifications/circulars/orders that have been issued. While this does complicate the law but it also shows that the Government is listening to the issues raised by the stakeholders. However, the changes in law every time there is an adverse judgement to the government shows lack of grace. Accepting defeat honourably requires a mindset which assesses are used to – what about the government?

“One Nation, One Tax” and “Good and Simple Tax”

I. PRE-IMPLEMENTATION

The proposed Indian GST law was unique in many senses. It was dual GST plus IGST for interstate supplies administered by States and Union simultaneously. Therefore, trade and industry were highly apprehensive about its impact on their businesses and doubted the success of the new tax regime.

The main fears were –

1.    Registration in each State: Prior to GST, the service sector was required to comply with the service tax regime which was a Union levy which did not require maintenance of state-wise records and state-wise registration for every state in which one carries on business. It was a herculean task to align business processes to comply with the requirement of state-wise reporting. If not done proactively, it would have business impact of missing input tax credits and the consequences of non-compliance.

2.    Dual administration: GST being administered by State and Union simultaneously, the industry was sceptical about whether both authorities would subject the taxpayer for audits and assessments, which may result in difference of opinions, multiple proceedings and demands. However, better sense prevailed, and the State and Union agreed to divide the administration of taxpayers such that, the taxpayer is required to report to a single authority.

3.    Place of Supply: Another fear of the industry was the determination of the place of supply in a ‘bill to ship to’ model and certain services such as intermediary services, hotel accommodation etc.

4.    Working capital blockage: The Industry was further apprehensive of the working capital blockage which would arise due to the division of input tax credits into state-wise SGST, CGST and IGST and the restrictions on cross utilization of funds.

5.    Valuation: Supply of services to own branches was classified as a deemed taxable supply for the first time under GST. Valuation of supply to own branches was a major concern for businesses with branches located across multiple states. The first and second proviso to Rule 28 of the CGST Rules has given big respite to the businesses by providing a valuation mechanism.

6.    Technology: It was pronounced that all compliances including registration of the taxpayers should be done online using GST Network (GSTN) portal. In India, where in use of technology not only taxpayers but various State tax administrations were on different maturity levels, it was a very ambitious decision to adopt paperless tax administration. While there were initial glitches, troubles and learning curves for both administration and taxpayers, it now seems to have stabilized and taxpayers have also learned to comply digitally.

7.    Transition of tax credits: Trade and Industry were also fearful of being able to successfully transition legacy tax credits to the GST regime. However, the fears were unfounded since excepting initial technical glitches, for most tax-payers transition balances of input credits under legacy tax systems were successfully flown to GST regime. However, some businesses had to seek relief from courts for transfer of their credit balances.

II. IMPLEMENTATION

During the implementation phase, the GST council and tax administration were proactive and supportive, made swift decisions, provided immediate clarifications, carried out changes in the provisions of law which were impossible to comply and extended timelines many times at the request of the business community, which helped in boosting the faith and confidence of the business community in the new tax system.

III. POST-IMPLEMENTATION

Achievements:

1.    India as a single Market: Prior to 2017, the market in India was fragmented and there were distortions due to different tax policies of the States. The biggest achievement of GST is, today the whole country from Kashmir to Kanyakumari and from Mumbai to Manipur is a single homogeneous market. Taxes on supply of goods and services are uniformly charged.

2.    Reduced compliances: There is a substantial reduction in compliances due to subsuming of various fiscal legislations of Central, State, and local governments. Businesses operating in multiple states benefited the most and could centrally manage the compliances.

3.    Reduction in effective rate of tax: For many goods, there is a substantial reduction in the rate of collective state and central taxes applicable after GST compared to the past regime.

4.    Removal of cascading of taxes: GST is consumption tax based on value-add principle, therefore, except the restriction put in under section 17(5) of the CGST Act, GST paid on all other procurements made for doing business are allowed as input which has resulted into lower sunk tax cost on output supply made by the businesses.

5.    Higher registration threshold: Prior to GST there were different points of levy and threshold limits under the State and Central laws. The GST council decided to keep the higher common registration threshold limit of Rs. 20 lakhs per year (for goods suppliers now it is Rs. 40 lakhs per year) which has provided great relief to small business and professionals.

6.    Digitisation of compliance processes: The availability of taxpayers’ services through GSTN portal 24×7, seamless integration of State and central taxes and digitisation of compliance processes is a huge step to achieve transparency and faceless tax administration. It is one of the biggest achievements of GST.

7.    Level playing field by having control over tax evaders: Tax evaders and dishonest taxpayers could exploit the Pre-GST tax regime, resulting in a skewed market with higher tax burden upon honest taxpayers. Digital reporting and input credit mechanism under GST is incentivising honest and compliant tax payers.

IV. WAY FORWARD:

Fiscal reforms are dynamic and constantly evolving.There is a long way to reach to just, equitable and ideal goods and service tax based on value-add principle. To achieve the same the Council, Union and State Government need to look into following issues on an urgent basis.

1.    Broadening of tax base: Currently, sectors crucial to the economy, such as real estate, petroleum, and power are outside the remit of GST regulations and continue to be governed by old tax regimes. No businesses or industries run without use of power/energy or real estate hence the legacy regime taxes levied on supply of petroleum goods and power and the GST levied on goods and services used for construction of real estate are a cost to the businesses who are consumers of these sectors. To that extent the cascading of taxes remains in the system which is detrimental to economic growth.

2.    Removal of restrictions under section 17(5): Section 17(5) of CGST Act blocks input credits on works contract, motor vehicles, health insurances services etc., procured by the businesses, which results in cascading of taxes. Ideally, except the goods and services which are personally consumed by the employees (not while performing their duties), other business expenses should be made eligible for input credits.

3.    Removal of blockage of working capital: The restriction on ITC availment and state-wise division of credit pool block precious working capital of the business. Therefore, the taxpayer should be provided an option to unconditionally transfer credits amongst various registrations (distinct persons) of the tax payer.

4.    Reverse charge reporting by way of accounting to be permitted: Tax on import of services is required to be made only in cash and cannot be paid using the accumulated credits. It leads to major cash outflow for exporters and businesses under the inverse tax rate regime. Also, it is wash tax for the revenue. This regressive provision was contained in the previous service tax regime and has been continued under GST regime and is unique to only Indian GST. All major countries where VAT/GST is applicable only require the tax payer to account tax on import of services but do not require payment in cash if sufficient input credit balance is available. Adoption of this system by India will be a great relief to the exporter community. Alternatively, similar to provision under the Australian GST law, the Government may consider completely removing reverse charge payment for exporters and businesses whose output is taxable.

5.    Setting up of effective dispute resolution mechanism: No tax system is complete without an efficient dispute redressal system. India has completed five years of the GST but GST Tribunals have not been constituted in the country. High Courts and Supreme Courts are flooded with tax petitions and justice to the tax payers is delayed and denied. It is the need of the hour that the Centre, States and the GST Council collectively take immediate steps to establish GST tribunals. Further, it is a common trade and industry sentiment that advance rulings under GST do more harm than good. In multiple instances, two State advance ruling authorities have taken different views on the same issue. Therefore, to make these provisions effective, the GST Council and Union and State governments must consider creation of a national advance ruling & appellate authority, whose orders are appealable before High Courts/the Supreme Court.

6.    Administrative reforms: There is an increasing need for standardization of administrative processes like assessments, audits, investigation and refunds across the states keeping ease of doing business in mind. Special training needs to be given to Tax Officers to transform them from coercive recovery agents into facilitators of honest taxpayers.

V. CONCLUSION

While a lot has been achieved in the first five years of GST, India should target implementation of the measures listed above in the coming years to truly make GST a just, equitable and ideal good and simple tax.

The general feeling is that any new legislation would have teething troubles and that the hurriedly introduced GST Law was no exception. A key question is whether teething troubles were converted into problems that required surgery by the series of amendments. Some statistics (as on 29th April, 2022) with reference to number of amendments and changes through Notifications are relevant and given below:

While some of the amendments have proved to be critical, the rest can certainly be considered a knee jerk reaction to market or business behavior; or attributable to the sole objective of nullifying judicial decisions or bringing about the change through a Notification without having necessary power in the statute and then amending the statute to confer such power.

INTRODUCTION OF SECTION 7(1A) WITH RETROSPECTIVE EFFECT FROM 1ST JULY, 2017 AND AMENDMENT TO SECTION 7(1)

To illustrate Entry 5(e), Schedule – II refers to agreeing to the obligation to refrain from an act, or tolerate an act or a situation, or to do an act. This alone is not sufficient for the levy to sustain. This should translate into a supply for consideration and consequently consideration for supply in order to be taxable. In the service tax regime, there was an attempt to classify certain services and declare them as taxable. While the same exercise was carried out through Schedule – II, the amendments and the introduction of Section 7(1A) has completely diluted the scope of the Entries in the Schedule and these Entries on a standalone basis cannot create liability unless they constitute a supply under Section 7(1).

AMENDMENT TO SECTION 7(1) BY THE FINANCE ACT, 2021

Finance Act, 2021 has amended Section 7(1) in order to insert clause (aa) and the said clause shall be deemed to have been inserted with effect from 1st July, 2017. The clause reads as under:

the activities or transactions, by a person, other than an individual, to its members or constituents or vice versa, for cash deferred payment or other valuable consideration.
    
Explanation: For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one person to another.

Finance Act, 2021 had amended Schedule II to the CGST Act, 2017 by omitting para 7.

The amendment to Section 7(1) by Finance Act, 2021 with retrospective effect from 1st July, 2017 is clearly an attempt to nullify the decision of the Supreme Court in the context of the principle of mutuality. Interestingly, while the decision was in the context of sales tax and service tax, the principle was that tax could not be levied since firstly there were no two persons in existence and the 46th amendment to the Constitution was not adequate; and secondly the amounts paid by the member did not constitute ‘consideration’. The Supreme Court referred to the fact that consideration in Section 2(d) of the Contract Act necessarily posits consideration passing from one person to another. This is further reinforced by the last part of Article 366(29A), as under this part, the supply of such goods shall be deemed to be sale of those goods by the person making the supply and the purchase of those goods by the person to whom such supply is made.

The amendment to Section 7 again refers to valuable consideration and the question is whether the amendment has really addressed the issue identified by the Supreme Court. The amendment may not be adequate enough to nullify the doctrine of mutuality, given the fact that the Supreme Court in the Calcutta Club case had examined Article 366(29)(e) and found the same to be inadequate. In the Calcutta Club judgement, the Supreme Court also noted that the expanded dealer definition may not be sufficient to get over the decision of the Young Men Indian Association case since even in the said decision the court was concerned with the similar definition.

There is a possibility of the amendment to Section 7(1) being challenged but until the provisions are struck down or read down, the objective of the amendments is to bring clubs and associations into the ambit of taxation and to address any doubts that arose on account of the Calcutta Club judgment.

An interesting question that can be raised is whether the amendment is to nullify a decision or is an independent retrospective amendment. Para 25.8 of the 39th GST Council Minutes dated 14th March, 2020 reads as under:

Next, Table Agenda No. ll(viii) was taken up for discussion by PC, GSTPW. It was explained that the proposal was for amendment in the CGST Act so as to explicitly include the transactions and activities involving goods and services or both, by, to its members, for cash, deferred payment or other valuable consideration along with an explanation stating that for the purpose of this section, an association or a body of persons, whether incorporated or not as taxable supply w.e.f 1st July, 2017. It is also proposed that such an association or a body of persons, whether incorporated or not and member thereof shall be treated as distinct persons under section 7(1) of the CGST Act. Consequently, para 7 of Schedule II of the CGST Act is proposed to be deleted. It was informed that this had become necessary to make this retrospective amendment in view of pronouncement in this regard by the Hon’ble Supreme Court in a case involving levy of service tax on supplies of taxable services by the Clubs to its Members. PC, GSTPW informed that this had also been agreed to in the Officers’ Committee meeting held on 13th March, 2020.

The Agenda points for discussions are an interesting read and are given below:

TABLE AGENDA (VIII): AMENDMENT TO SECTION 7 OF CGST ACT, 2017 TO INCLUDE SUPPLY BY INCORPORATED/UNINCORPORATED ASSOCIATION OF PERSONS TO ITS MEMBERS (2/2)

•     Proposal to save the GST levy:

•     Amend Section 7(1) of the CGST Act, 2017, to insert new clause followed by an explanation with retrospective effect “(e) the supply of goods or services or both, by an association or a body of persons, whether incorporated or not, to its members, for cash, deferred payment or other valuable consideration. Explanation-i.e., the purpose of this section, an association or a body of persons, whether incorporated or 110t, and member thereof shall be treated as distinct persons”

Maharashtra view is that amendment is not required in view of definition of ‘business I and’ person I in the GST Act

It is therefore clear that the sole objective of the amendment is to ensure that the levy of GST on clubs or associations is not in any manner compromised on account decision of the Supreme Court in Calcutta Club. Therefore, even though Calcutta Club was not concerned with reference to levy of GST, the principle laid down that there cannot be any sale or service inter se between association and members is the subject matter of the retrospective amendment.

Parliament is empowered to amend the law prospectively or retrospectively. There are enough instances where law has been amended retrospectively to nullify decisions of the Court. The case at point would be the amendment to Section 9 to nullify the decision of the Supreme Court in Vodafone’s case with retrospective effect which finally ended in arbitration and compromise.

It is well settled that the Parliament in exercise of its legislative powers can frame laws with retrospective effect. A retrospective law may be struck down by the Court if it finds it to be unreasonable or not in public interest or violative of the Constitution or manifestly arbitrarily or beyond legislative competence. In the instant case, it would be difficult to state that there is no legislative competence or that there is a violation of the Constitution. Whether the amendment is manifestly arbitrarily is one aspect which may have to be tested by the Courts.

A Division of the Karnataka High Court in the case of Netley B Estate vs. ACIT (2002) 257 ITR 532 has held that the State has every right to bring in amendments retrospectively and to bridge a lacuna or defect. The State also has every right to add Explanation by way of amplification of a Section in the Act by an amendment; but such amendments brought retrospectively must not be only for the purpose of nullifying a judgment where there was no lacuna or defect pointed out in the Act.

The Supreme Court in the case of D. Cawasji & Co. vs. State of Mysore and Others (1984) 150 ITR 648 has held that it may be open to the Legislature to impose the levy at a higher rate with prospective operation but the levy of taxation at higher rate which really amounts to imposition of tax with retrospective operation has to be justified on proper and cogent grounds.

The Supreme Court in the latest judgement in the case of Madras Bar Association LSI-492-SC-2021(NDEL), held that

(i)     Retrospectivity given to Section 184(11) is only to nullify the effect of interim orders of this Court which are in the nature of mandamus and is, therefore, a prohibited legislative action.

(ii)     Sufficient reasons were given in MBA – III to hold that executive influence should be avoided in matters of appointments to tribunals – therefore, the direction that only one person shall be recommended to each post. The decision of this Court in that regard is a law laid down under Article 141 of the Constitution. The only way the legislature could nullify the said decision of this Court is by curing the defect in Rule 4(2). There has been no such attempt made except to repeat the provision of Rule 4(2) of the 2020 Rules in the Ordinance amending the Finance Act, 2017. Ergo, Section 184(7) is unsustainable in law as it is an attempt to override the law laid down by this Court. Repeating the contents of Rule 4(2) of the 2020 Rules by placing them in Section 184(7) is an indirect method of intruding into judicial sphere which is proscribed.

AMENDMENT TO SECTION 9
The original Section 9(4) created chaos since it mandated a registered recipient to pay GST on reverse charge basis on supply of goods or services or both by an unregistered supplier. This was also not equitable since there was a registration threshold of Rs. 20 lakhs. Taking into account the complexity of the provision, attempts were made to dilute the scope through various Notifications. Subsequently, CGST (Amendment) Act, 2018 substituted Section 9(4), whereby it is now confined to a notified class of registered persons who would be liable to pay GST under reverse charge mechanism in respect of supplies received from unregistered suppliers. Members of the real estate sector under the new regime of Notification 3/2019 – CTR are now identified as a class of registered persons for the purpose of Section 9(4).

The substitution of Section 9(4) is clearly a course correction and the provision enables the law maker to step in and implement RCM in segments prone to evasion.

AMENDMENT TO SECTION 16
Section 16 saw the first change when the explanation to Section 16(2)(b) was substituted by the CGST (Amendment) Act, 2018 w.e.f. 1st February, 2019. The original explanation ensured that the effect of Section 10(1)(b) of the IGST Act, 2017 resonates in the context of Section 16(2)(b) which deals with ‘receipt’. The amendment brings parity and covers services provided by a supplier to any person on the direction and on account of such registered person. A question can always arise as to the past period. However, given the nature of the amendment, it can be seen as a clarificatory amendment.

Section 16(2) saw a major change in the form of introduction of clause (aa) by Finance Act, 2021 w.e.f. 1st January, 2022 whereby, the furnishing of GSTR-1 by the supplier has become a condition for ITC. The amendment is a blessing in disguise since it now demonstrates that the entire exercise of comparing GSTR-1 filed by the supplier and GSTR-3B filed by the recipient as an illegal exercise not sanctioned by law. Even though amendments were made to Rule 60 to give some sanction to the exercise, the specific introduction of Section 16(2)(aa) w.e.f. 1st January, 2022 clearly demonstrates that GSTR-3B and GSTR-2A cannot be compared to the period prior to 1st January, 2022.

Section 16(2) has seen one more change in the form of introduction of clause (ba) by Finance Bill, 2022 which provides that details of input tax credit in respect of the said supply, communicated to such registered person, under Section 38 has not been restricted. The amendment is yet to be notified but the amendment clearly nullifies the overall objective of GST which is to eliminate the cascading effect of tax. ITC would not be based on what the portal says as available or what the portal says as restricted. This defeats the entire concept of input tax credit which is the backbone of GST.

AMENDMENT TO SECTION 50
Section 50(1) provides for levy of interest where a person liable to pay tax fails to pay tax within the prescribed period. There is a serious challenge with GST in India that the law states one thing but the portal states something else. Currently, a person is not in a position to file a GST return unless the taxes are paid. This requirement comes from the portal and not from the law. While a supplier may have a liability of say Rs. 10 lakhs and has Rs. 9 lakhs of ITC and has a cash crunch and is not able to pay Rs. 1 lakh, he cannot file the return. He mobilizes the funds and files a belated return and was promptly saddled with interest under Section 50(1) on the entire amount of Rs. 10 lakhs. The contention of the assessee was that ITC was available to the extent of Rs. 9 lakhs, which is nothing but tax already paid and lying with the Government, and interest if any, can only be on Rs. 1 lakh. This reasoning was endorsed by the Madras High Court in the case of Maansarovar Motors Pvt. Ltd. vs. AC (2021) 44 GSTR 126 and other decisions.

A proviso has been inserted to provide that the interest shall be only on the tax paid through the electronic cash ledger. The proviso has a chequered history but it is a well-intended amendment.

Finance Act, 2022 has substituted Section 50(3) giving it retrospective effect from 1st July, 2017 to provide that interest shall be payable only when input tax credit has been wrongly availed and utilised. This amendment reflects the legal position through a number of decisions but the amendment and that too retrospective effect would clearly ensure that there is no unnecessary litigation on this issue.

CONCLUSION
A number of changes in the Rules and the provisions pertaining to input tax credit seem to be driven by the concern of the Government with reference to the fake invoice racket. If one were to see the total GST collection, the loss on account of fake invoice racket and unethical behaviour would be a small percentage. Bad business practices, leading to mining of the tax system are not India centric and globally the position is the same. While the perpetrators of such unethical practices have to be punished, in the zeal to arrest the problem, unfettered powers have been conferred on the tax authorities. Blocking of ITC; attaching bank accounts; threat of arrest; are detrimental to business since they are being applied across the industry. While guidelines are issued, they are seldom followed as can be seen from the number of decisions of the High Court commenting on the restraint action or recovery action. The avalanche of amendments which are based on the menace of fake invoices has only affected the bona fide assessees whose compliance burden has increased manifold. GST is an equitable tax levy on the entire supply chain where the supplier and the recipient are equal. However, the laws are continuously amended to shift the responsibility of tax collection and compliance to the recipient. The continuous attempt to negate the input tax credit in the hands of the recipient for defaults of the supplier is a classic example. Going forward, there must be a freeze on amendments to the Act and the Rules and before making an amendment, there must be a consultative process so that the stakeholders can identify issues if any.

The mood was sort of freedom, like the one that the nation had on 15th August, 1947: Freedom to do business with ease, Freedom from several challenges of the earlier indirect tax regime, Central Excise Duty, Service Tax, VAT; be it interpretation, classification, tax rate or compliances, disputes and litigation. One ought to have witnessed this moment, to feel the excitement of that moment.

The new system of indirect tax (GST), modelled on classic VAT/GST systems prevailing globally though modified to suit requirements of our country, had several welcome features. This was the approach we had adopted back in 1986 when we introduced modified value added tax system in Central Excise Law (tax on manufacture) described as “Modified Value Added Tax” (MODVAT).Post successful implementation of this system for Central Excise Law, it was expanded to encompass Service Tax in 1994 making it more comprehensive and description was changed to Central Value Tax System (CENVAT) since it covered both goods (manufacturing activity) and services. Similarly, modified VAT system was introduced by States (State VAT) encompassing trading activity commencing from 1st April, 2005.

Phased implementation facilitated tax payers to understand nuances of value added tax system and administrations to smoothen the entire process. And, now was the time for next reform: consolidating these three major indirect taxes into one, Goods and Services Tax!

This was expected to be one of the toughest tasks and the stakeholders at large recognised the difficulties and glitches starting from modification of taxation powers entrusted to each level of government in the Constitution of the country.

Initial discussions centred on identification of the model of such system of taxation that would achieve most optimum new system of indirect taxation from Centre and all States perspectives. Broad consensus on several aspects was built, discussed at various levels, Constitutional aspects were examined, systems of other countries, their advantages and complexities as also impact on government revenues and businesses were studied, senior officers met with their counterparts in other countries, different groups comprising of officers of Central Government and State Governments deliberated at length over issues, model laws, rules, regulations. Drafts were published for comments, those were modified and re-modified based on feedback from across. Constitution was amended empowering Centre and State Governments to impose GST, GST Council was established and was functional, requisite GST laws were passed, awareness programs were undertaken, portal was set up, registration facilitation centres were established, transition of existing tax payers was done, officers of government had undergone training and so on.

Finally, the feeling was: we have to begin somewhere; we may not be perfect and there will be glitches and challenges; those will need to be dealt with. And, there we were! The D date was announced; 1st July, 2017. And, no wonder there was so much enthusiasm; midnight oil was burnt by so many of us besides administration to make it a grand success!

The key features that excited all around were:

•    Only one tax (GST) across the country against three taxes

•    Common law across the country

•    Common rules, regulations and procedures across the country

•    Common classification

•    Common rates of tax

•    Uniform threshold across the country and across goods and services, both

•    Digital compliances through common portal like registration, tax payment, return filing, etc.

•    No border check posts

•    Decision on any change or amendment by GST Council only where both, Centre and all the States have representation and effectively, unanimous decisions.

The system promised:

•    Smooth flow of input tax credit particularly, when goods and services move from one state to another, and removal of cascading effect of taxes

•    Reduction in costs due to doing away with border check posts

•    Reduced disputes and litigation and advance ruling mechanism for early clarifications

•    Elimination of unhealthy competition among States using tax as a tool and for businesses using cost inefficient business models from tax perspective

•    Increase in tax revenue (both direct and indirect) for governments due to reduction in leakages – self policing mechanism, enhancing formal economy, which would ultimately lead to lowering tax burden for citizens and increase GDP of the country.

At the same time, there were apprehensions too.

•    How will the new system work – it was a novel system – dual level tax?

•    Will the expected outcomes be achieved?

•    All amendments have to be by GST Council and then Centre and each of the States have to get it passed by Parliament and State Legislatures – how smoothly will that work? Will the decisions be delayed?

•    Petroleum products which contribute about 26% of State Revenues1 will be outside GST so, effectively, even in the new tax system cascading effect will continue.

•    Will the impact be greater for small and unorganised sectors?

•    How will businesses across the country do all compliances electronically – many did not have access to electronic means, power and education level was also an impediment in the minds of businesses coupled with low threshold of INR 20,00,000 (INR Twenty Lakhs) for turnover across the country.

Fast forward to one year, two years and till today, 5 years.

Is the enthusiasm intact? Have the expected benefits flown to the businesses or economy as a whole?

Well, the response, if a comprehensive survey is undertaken, would be mixed.

The negative responses would be on account of many factors. Key ones being:

•    The unique and perhaps, the only workable system for implementation of GST in a federal structure of Governance, dual level GST, has proved to be fairly complex starting from basic questions that started coming up like when to apply state level GST (S-GST) and Central level GST (C-GST) and when to apply integrated GST applicable to inter-state transactions as also imports and exports (I-GST) or how to correct errors in depositing one level tax instead of another or applying one State GST instead of another State GST and resolution was not available quickly.

•    Transition of input tax credit from old regime (related to Central Excise Duty, Service Tax and State VAT) to new regime has proved most complex and has led to significant litigation.

•    Desire to bring large sections of economy in formal one and to ensure minimal revenue leakages saw very tight legal provisions and compliance regime. Practical difficulties pointed out to Government pre-enactment and thereafter, took time to be addressed and that too led to lot of dissatisfaction and agitation. Take for example, the provision that if a business buys goods or services from an unregistered business, the recipient business would need to pay GST on reverse charge basis. No threshold for purchases was provided. Implementation of such a provision was near impossible in practise and threatened to put large number of small businesses out of business. The implementation of this provision had to be put on hold and finally, removed from the law.

•    The process of decision making, be it related to law or rules or rate of tax or classification and others, is taking quite long. And, even after decision is announced by the GST Council, its implementation takes time and it is not simultaneous across the country, in all States.

•    Flow of input tax credit is not smooth and there are blockages with blocked credits and non-eligible credits. The cascading effect has reduced but, not to the extent expected by businesses. Petroleum products continue to be outside GST regime and that continues to contribute to cascading effect of GST.

•    Threshold continues to be low. It has been increased marginally, to INR 40,00,000 (INR Forty Lakhs) for goods and does not apply to services and and even for goods, it is not uniform across States.

•    Introduction of e-way bills (though, this has been done in phased manner) to plug leakages, for movement of goods has, while facilitating higher monitoring and to some extent, leakages, has increased the complexity of doing business.

•    Disputes and litigation has not reduced and compliance cost has increased bellying hopes of reduction. Advance Ruling mechanism has not proved to be effective,

And, the list is long…..

The positive responses would be on account of availability of electronic mode for compliances, common portal for tax payments, return filing, common classification (though, this has also posed challenges for some sectors but, on the whole easier), common rates, common provisions of law and rules. All these have no doubt facilitated businesses.

Revenue growth in the initial two years was not much with all grappling with new system and inevitable challenges. Then, there was the pandemic. Its impact on businesses and spending and consequently, on government revenues was quite severe during F.Y. 2020-21 and to some extent, even in F.Y. 2021-22. This did slow down reform process and possibly, removal of some of the issues and difficulties that businesses were facing. With economic activities near pre-pandemic level now, GST revenues for past two months have been promising.

The promised support to State Governments for first five years of implementation of GST by way of compensation for shortfall in their revenues as per agreed formula placed significant burden on Government especially, during slow-down in economic activities. Cess levied on specified products to garner revenue for compensation could not be phased out after 5 years, leading to dissatisfaction from those segments/sectors of the economy. The rates of GST, in general, could not be rationalised. There were talks, in some circles, of possible enhancement of rates of GST. The sentiments, obviously, are not euphoric any more.

How can we bring back the sentiments of 1st July, 2017, that feeling of ease of doing business and reduced indirect tax costs and compliance?

To my mind:

•    First and foremost and most vital one is to bring about “mindset change”. There was expectation of this change which has not come through at the level expected. Also, the administration must bear in mind and keep revisiting, the age old guidance that inefficient administration collects penalties from large number of tax payers. The success and efficiency of administration is judged by minimum difficulties for tax payers, facilitation, guidance, least and only in cases of gross violation, penalties, and least litigation.

•    Second, review and redraft the law, rules and forms based on the experience of these 5 years and address inadvertent misses and lacunae in them.

•    Third, revisit classification schedule, make it simpler and such that reduces variation in tax rates for similar products described differently in different parts of the country.

•    Fourth, increase threshold, in a time bound manner to say, INR 50 Lakhs based on study to be commissioned. Till that time, make threshold uniform across goods and services and even across States.

•    Fifth, explore possibility of introducing a Blended GST (Combination of Central GST and State GST), on experimental basis, in states which have own revenue of less than say, INR 500 or INR 750 crores whereby Blended GST is levied for intra-state transactions and Integrated GST for inter-state transactions.At the back end, the two elements of Blended GST be bifurcated and transferred to the concerned Government’s Kitty on weekly basis. Considering low volume of taxes, this could bring in ease of doing business and uniformity in administrative aspects. Cost of revenue collection for the States could be an added advantage.

•    Sixth, while this process is on, set up an Education, Training and Facilitation Unit at Centre with branches/sub-units at State level to undertake continuous training with practical examples and facilitate businesses in compliances without creating a fear of charge of fraud and so on and proposing demand for past periods.

•    Seventh, announce a two year moratorium when penalties will not be levied and facilitate tax payers in compliance of law and rules. Many would have made inadvertent errors or they could have taken an interpretation but, now they realise that that was not correct and so on. All of them could be facilitated/guided for tax payment with interest without penalties.

•    Eighth, do away with Advance Ruling Mechanism. Instead, set up a Clarification Unit in GST Council to which issues could be referred to. This Unit ought to have senior officers from Centre and State Administration with Judges from High Courts (as Chairs) and practitioners/law experts. Their decision should be time bound and be placed before GST Council. Decision of GST Council would then be final and binding on all tax administrative authorities. If a tax payer is dissatisfied, it can challenge the same directly before Supreme Court. This will bring in certainty and reduce litigation significantly.

•    Ninth, publish GST Council Agenda in advance and, if any representation is being taken up by it for consideration, it should be placed on its website and opportunity ought to be provided to all stakeholders to send in their comments/suggestions which ought to be summarised and placed before the Council and also published.

•    Tenth, establish a Procedural Disputes Resolution Cell at each State level with representation of both, Centre and State level senior officials who can take decision for resolution of disputes relating to procedural aspects or provide clarifications where procedure for specific business activity/operation is not provided in law/rules and send suggestions to GST Council for recommending modification/updation of law/rule. The Cell will need to be open minded and provide clear responses.

•    Eleventh, set up a separate Unit in GST Council with experts in the field that studies cost and benefit of each amendment including that for rate change, that is proposed and presents it, with the proposal, to the GST Council. This will facilitate decision making at the Council and, if the cost of compliance or general cost for economy is higher than the benefit in terms of revenue for the governments, the amendment proposed may not be passed. The decision with the analysis must be published on GST Council’s website. This will add trust and faith in the system.

All these, one would say, are Dreams, Dreams and more Dreams! Most such Dreams rarely come true!

Let us hope some Dreams, if not all, do come true and we would, if not today, over next few years, have a more efficient, user friendly, least complex, least cost, transparent and responsive system of indirect taxation. Till then, let us not stop dreaming!

GST was introduced as a landmark reform with much fanfare on 1st July, 2017. As it completes five years, it is time to take stock of what has transpired over this period and what are the key learnings moving forward. Therefore, the Editorial Board thought it fit to dedicate this special issue to GST. However, a dual indirect tax regime like GST cannot be examined through a single lens. It has many stakeholders, each of them having different (and at times, conflicting) perspectives or motivations. For example, a single policy decision like granting exemption could trigger mixed reactions. The consumer would typically be delighted with the exemption, but the supplier may find the corresponding input tax credit denial burdensome. He may also be anxious about the contingent risk of denial of exemption by an overzealous tax officer. At the Government level, there may be concerns of revenue loss due to the grant of the exemption as well as the risk of misuse by persons for whom the exemption is not intended. When we bring in the social dynamic of anti-profiteering provisions into the equation, the situation may become even more murkier.

This annual special issue is dedicated to understanding the complex interplay of the differing and at times conflicting perspectives of multiple stakeholders. While subsequent articles deal with the specific stakeholder perspective, this article presents an overall bird’s eye-view to the theme of this special issue.

2. IMPACT ON ECONOMY

It is a settled proposition in economics that an indirect tax interferes into the demand-supply equilibrium and erodes economic value beyond the revenues gathered by the Governments. However, all countries including India depend on indirect tax since it is relatively easier to administer and collect. Just a few years ago, the Indian indirect tax structure was plagued with not only this conceptual challenge of interference into the demand-supply equilibrium but also many structural challenges in the form of selective tax structure with fractured credit mechanism, a heavily document-driven tax regime and dissimilar laws. GST was touted as a landmark reform to address these structural challenges and to convert indirect tax into a “Good and Simple Tax”. After five years, have we achieved this objective?

A detailed article by CA Bhavna Doshi analyses the hits and misses of this “Good and Simple Tax”.

It is evident that GST has indeed contributed to the ease of doing business. The World Bank Report has seen the Indian ranking for ease of doing business improve from 130th in 2017 to 63rd in 2021. Simplification of indirect tax laws has been an essential driver towards this improvement. Duly assisted by demonetisation initiative and the digital push (which saw even further acceleration on account of pandemic), the technology backbone of GST has resulted in formalisation of the economy with associated benefits.

Having said so, the onerous compliances and a fairly strict and unforgiving regulatory framework has resulted in many a marginal enterprise being pushed to closure. Perhaps the biggest challenge of GST has been to the MSME sector, which is unable to procure and retain talent either in-house or outsourced and keeps on struggling to comply with this ever-evolving law. Admittedly, the Government has tried to alleviate the miseries by providing a threshold, having an optional composition scheme, having quarterly return filing process, etc.  However, you may ask any MSME and they would cite that most of these provisions are a mere eye-wash and are nullified by a long list of exclusions or paperwork resulting in no tangible benefit.

3. GST COUNCIL

The dual GST was implemented by following the concept of cooperative federalism, which resulted in the constitution of GST Council represented by all the States and the Centre. All decisions taken by the GST Council requires a majority of not less than 3/4th of the weighted votes. Internally, the Centre possesses 1/3rd weightage whereas all the States together possess 2/3rd weightage. Interestingly, the role of the GST Council is recommendatory in nature. At the same time, Article 279A(11) of the Constitution does provide for adjudication of a dispute arising out of the recommendations of the Council or implementation thereof. Recently, the Supreme Court had an occasion to examine the role of the GST Council and the binding effect of the recommendations made by it. The Court rightly held that the recommendations of the GST Council are made binding on the Government when it exercises its power to notify secondary legislation to give effect to the uniform taxation system. However, that does not mean that all of the GST Council’s recommendations are binding. Indeed, this observation of the Supreme Court is in line with the principle of cooperative federalism.

The GST Council has already met 46 times during this period. Various issues have been discussed and almost all the decisions have been taken through consensus building approach between the Centre and the States. The minutes of the meetings are also well-documented on the Council’s website. However, of late it appears that there is some delay in the upload of the minutes.

In fact, prior to implementation of GST, the Council met 18 times to finalise the recommendations on the law, rules, tax rates and the like. The Council also discussed and finalised other aspects like compensation cess to compensate the States for revenue loss. In the ninth meeting, the issue of dual administrative control was discussed and the assesse were allotted State or Central jurisdiction based on certain agreed parameters.

Even after the law was implemented with effect from 1st July, 2017, the Council continued the meetings with a focus on realigning the tax rates and simplifying the procedures relating to filing of returns and matching. In the 24th meeting, the GST Council recommended the PAN India introduction of the eway bill system. The 32nd meeting of the GST Council permitted the introduction of a calamity cess by the State of Kerala, for the first time bringing in a rate disparity amongst the States. While the initial trend was to reduce the tax rates and realign the exemptions and also to grant relief by means of extension of due dates, slowly and steadily, issues relating to enforcing compliance started receiving more attention and the law was made stricter and stricter.

Over the last five years, it is evident that based on the cushion of assured compensation, the States have voluntarily agreed to play a low fiddle and permit the Centre’s ideology to dominate the course of progress of the GST Council recommendations and therefore, the trajectory of the implementation of the law. With the cushion of assured compensation getting diluted in times to come, the GST Council will have a much larger role to play in building up consensus amongst the stakeholders who represent not only different regional opportunities and challenges but also very different political ideologies.

4. LEGISLATION

Any new legislation would have teething troubles. The hurriedly introduced GST Law which incorporated provisions from dissimilar legacy of indirect tax laws like excise duty, service tax and value-added tax was no exception to this statement. A mere glance through the initially enacted law was sufficient to suggest that the said law would require amendments from time to time. The GST Law has undergone legislative amendment eight times in the last five years. Most of these amendments may be in the nature of a response to some external incident. For example, an amendment to Section 7 has been carried out to neutralize the Supreme Court decision upholding mutuality. At the same time, the amendment in Section 50 providing for liability of interest only in cases where the input tax credit has been actually utilized is a welcome step. Have these benevolent amendments really ironed out the creases or have they actually increased the wrinkles?

An analysis of the key legislative amendments/announcements carried out in the last five years is undertaken by Adv. K. Vaitheeswaran and appears as a separate article in this special issue.

5. EXECUTIVE

It is often said that the success of any law depends on its’ implementation. A bad law administered nicely may often be received and appreciated more by the subjects than a good law administered badly. The legacy law was not only mired with complex law but also complex and dissimilar administration and bureaucracy. The dual GST framework actually resulted in a lot of apprehension in the minds of the assesse about the overlapping jurisdiction and duplicity of implementation. The issue received active consideration of the GST Council and in the 9th meeting, this aspect of overlapping powers was debated and discussed. The assesse were allotted jurisdictions and statutory provisions were introduced whereby the respective authorities were cross-empowered to administer all the legislations (i.e. CGST/SGST/IGST). At the same time, to ensure no duplication of efforts, it was also provided that if one officer has initiated any proceedings on a subject matter, no proceedings shall be initiated by another officer on the same subject matter.

While the objective of the above provisions was to reduce the duplication of efforts, at a practical level, the situation is otherwise. The Courts have interpreted ‘proceedings on a subject matter’ in a very narrow manner and restricted to the aspect of adjudication and appeals. Parallel investigations and inquiries have been liberally permitted by the Courts resulting in the entire objective getting frustrated.

Another striking example where a provision is made with a noble objective but in actual implementation, the objective is frustrated is that of advance ruling authorities. The concept of advance rulings was introduced with the objective of bringing certainty to taxation and reducing litigation. However, the Authority (including the Appellate Authority) is constituted purely of Revenue Officials. There are no express provisions for further appeals to a judicial forum like High Court. In the absence of such express provisions, the High Courts are also reluctant in entertaining further appeals. A mere glance at some of the advance rulings would suggest that the same are not well reasoned, bear a bias towards revenue collection and are at times conflicting with each other. Effectively, the advance rulings have effectively preponed litigation in many cases. Why have we entered into this messy situation? Is it that the constitution of the Advance Ruling Authority has a structural defect? Or is it the case of an overzealous assesse seeking answers to all and sundry doubts or an approach to resolve commercial disputes through advance rulings disregarding this structural defect?

A detailed article by Adv. Bharat Raichandani presents a view on this aspect.

6. TECHNOLOGY

Perhaps one aspect which has an over-arching reach across all the stakeholders is technology. As far as the industry is concerned, with elaborate uploading and matching requirements, the need for technology adaptation cannot be understated. The e-invoicing requirements have been made applicable to all the assesse having aggregate turnover above Rs. 20 crores. The sheer volume would suggest that technology can no longer be a support function but would have to be integrated into business processes. From the Department’s perspective, technology is the only means to ensure appropriate compliances with subjective discretionary bias. Data analytics is thus a buzzword and has helped the Department unearth quite a few frauds. But is data analytics a panacea to all Department problems? How technology facilitates and interferes into the GST lifecycle of an honest assesse, who becomes a regular victim to computer-generated notices based on dissimilar reconciliation points (a classic example being e-way bill data and sales reported in GSTR1)?

A detailed article on this ever-evolving piece of the jig-saw puzzle with a futuristic outlook written by CA Divyesh Lapsiwala appears elsewhere in this issue.

7. JUDICIARY

Much was said about GST – it is simple, it removes cascading and offers seamless credits and it is uniform across the country. Much less was written in terms of legislation. Whatever was written also had inherent conflicts and imperfections. An overzealous tax administration could wreak havoc and the only solace for the assesse in such situations is the judiciary. The problems get compounded due to the fact that even five years down the line, the GST Appellate Tribunal has not been established resulting in all and sundry litigation reaching the High Court.

How have Courts looked at this law where what is said and advertised is very different from what is written? A journey down the key judicial pronouncements over the last five years would suggest that in some cases the Courts have been benevolent and empathetic to the situation. Courts have definitely intervened in granting relief to the assesse in cases where the portal presented constraints in claiming transition credit or making amendments to data already submitted. Courts have also intervened in situations where there has been an excessive abuse of power by the Officers. At the same time, when it comes to the interpretation of the benefits and concessions, the Courts have adopted a strict and literal construction.

A detailed article by Sr. Adv. V Raghuraman presents a ring-side view of how Courts have looked at GST.

8. INDUSTRY

Though being a destination-based consumption tax, the tax is to be collected and paid by the industry. Effectively, the subject matter of taxation is the supplier of goods or services. In that sense, industry is the primary stakeholder of this landmark reform. The introduction of GST not only brought opportunities of reduced compliance requirements and uniformity of taxation, but also presented the unique challenge of anti-profiteering. The industry effectively navigated the journey. At the same time, frequently changing processes and systems made sure that the industry was always burning the midnight oil. In such a situation, is it possible to continue with the momentum for long?

On the legislative front, many issues were open-ended. A classic debate of whether cross charge is required or whether input service distributor registration is required for a multilocational enterprise was initiated right at the time of the introduction of GST. The debate continues even today with no assertive answers. Each one is to his own. Will long-term lack of clarity result in structural issues in the growth of the industry?

The volume of representations sent at the time of implementation of GST and thereafter clearly suggest that despite having completed five years, GST continues to be a work in progress. At the time of implementation, what were the key fears from such a sub-optimally drafted law? Has subsequent administration amplified/validated those fears or have they subsided?

A detailed article by Mr. Vinod Mandlik presents a perspective of how a tax implementor in a large corporate set-up has experienced GST.

9. CONSULTING

The legacy indirect tax landscape presented opportunities to varied sub-set of professionals who could offer distinct value propositions to the industry. A set of professionals could track the developments of the respective tax laws and present their perspectives and also offer transaction structuring advises to ensure tax efficiencies. Another set of professionals would undertake the actual compliances. A third set of professionals could offer assurance to the stakeholders that the compliance is in alignment with the legal provisions. One more set of professionals could act as a bridge between the assesse and tax gatherers. In case of non-alignment of the views of the assesse and the tax-gatherer, litigation could be handled by one more set of professionals. In view of the dissimilar set of legislations and the regional preferences, the consulting space, though providing substantial opportunities was fairly fragmented.

While the underlying value proposition remains constant under the GST Regime as well, the consolidation of the dissimilar tax laws has resulted in the consolidation in the consulting space as well. The added emphasis on technology has to some extent resulted in disruption in some pockets of the consulting space where the professional is unable to leverage the technology and realign the cost-benefit spectrum. Further, the non-constitution of the GST Appellate Tribunal has resulted in a situation where the value proposition could be enhanced only through the ability to handle litigation across the judicial forums. While a lot has transpired in this space, it is also felt that moving forward also, the roles will continue to evolve into a more consolidated basis.

10. WRAPPING UP

If all the perspectives have to be summarised, what does one conclude? Should one be saying it is a case of cautious optimism? Should one celebrate the fact that octroi posts are abolished or should one lament on situations where a vehicle is intercepted in transit and there is harassment for small errors? Should one celebrate the fact that input tax credits are available for expenses incurred in other States or should one lament that input tax credit is denied on flimsy grounds by the revenue officers? I think one Hindi phrase summarises the entire mood: