GST 2.0: Changes needed to reform dispute mechanism and tackle profiteering

GST2.0 has entered the lexicon of the 2019 election manifesto. But, any effort to improve the indirect tax regime has to deal with two key pain points faced by businesses — the dispute settlement mechanism and the anti-profiteering measures. A mix of legislative changes and structural reforms are what experts prescribe to deal with these two issues.

Consider this: Determination of the place of supply of goods and services is one of the most contentious issues under the GST law. However, it does not take precedence in the advance ruling dispute settlement mechanism.  

A recent report by Vidhi Centre for Legal Policy (‘Legislative changes to strengthen the GST regime: First report on specific research issues’) notes: “There are numerous bona fide taxpayers who are operating under uncertainty. For instance, a number of these rejected rulings pertained to determination of the place of supply of the goods/service in question or its characterisation as interstate or intrastate supplies.”

Key reasons for the infirmities in the dispute settlement mechanism under the GST regime, the report says, pertain to lack of clarity on matters pending in proceedings, conflicting rulings, poor application of legal principles, and complicated administrative and enforcement structure.

“The scope of Advance Ruling should be expanded to cover issues relating to the place of supply”, says V Lakshmikumaran, managing partner, Lakshmikumaran & Sridharan.

Experts point out that the Authority for Advance Ruling is state-specific, which at times results in conflicting rulings issued in different states. “There is an urgent need for having a centralised appellate mechanism to resolve such disputes,” says Lakshmikumaran.

In the absence of a mechanism to resolve issues where conflicting or contradictory rulings have been given by different states’ advance ruling authorities, businesses are bound to suffer, say legal experts.   Laksmikumaran says: “Unless machinery is provided for, the assessee will have to take up the matter in the high court and then in the Supreme Court.”

This uncertainty also becomes a cause of concern for contractual disputes. Companies face issues where lack of clarity leads to confusion, not only in terms of reporting but also in terms of financial planning, says Sandeep Chilana, managing partner, Chilana & Chilana Law Offices.

While the GST Council has considered the option of having a centralised appellate authority to deal with conflicting advance rulings, necessary legislative changes are awaited.

Mekhla Anand, partner at law firm Cyril Amarchand Mangaldas, points out that an inadequate representation of judicial members in various Authorities for Advance Rulings has resulted in a pro-revenue bias as far as decisions are concerned. “Such officers, by training, are revenue biased, and therefore, the authorities have, in many cases, mechanically interpreted the law in the manner that serves the revenue generation purposes, rather than critically interpreting the new law with legal finesse,” says Chilana.

The Vidhi study suggested that the number of judicial members on the authority must be more than that of technical members. This would ensure maintenance of a certain standard to the ruling passed by state authorities across the country.

The primary critique of the anti-profiteering scheme under the GST law is the absence of clarity on how and when the ‘profiteering’ and ‘commensurate reduction in price’ are to be calculated. Further, the law does not prescribe a time period or a timeframe within which reduction in prices is to take place. “The absence of a clear mechanism has also been the primary argument against the constitutional validity of the anti-profiteering scheme,” notes the Vidhi study.

According to Sudipta Bhattachar-jee, partner, tax controversy management & contract documentation, Advaita Legal, the government has to come up with detailed, sector-specific, guidelines/FAQs on the calculation of profiteering.  “They should clearly discuss sector-specific transactions and outline the range of compliant behaviour which can be followed by the relevant sectoral players,” he adds.

Most legal experts agree that the powers granted to the National Anti-profiteering Authority (NAA) need to be re-thought in light of the purpose behind its establishment as mentioned in the parent Act.  “Some of the powers envisaged under the Rules are excessive in light of the limited purpose for which the NAA was established. Necessary amendments need to be made to address this concern,” says the Vidhi study.

“The only way to correct this anomaly would be a retrospective amendment to Section 171 (of the GST Act) to include detailed policy level guidelines for determination of profiteering, the power to recover the profiteered amount, power of cancellation of registration, power of levy of interest, etc,” says Bhattacharjee.