GST: Treading on a legal minefield

With no precedent for GST in India, there could be several interpretations of new framework: Experts

If the present uncertainty surrounding India’s gargantuan indirect tax overhaul is an early indicator, the new goods and services tax (GST) framework is set to make extensive appearances in the country’s courtrooms over the months and years ahead. Experts feel the complexity and short timeframe given to adopt the new system will add thousands of lawsuits to India’s already burdened judicial system with over 24 million pending cases.

According to N Meyyappan, leader, indirect tax, Nishith Desai Associates, since there is no precedent for the GST in India, there could be several interpretations of the new framework. “These differences in opinion are bound to increase indirect tax litigation. Even previously settled positions of law may have to be decided once again and will require a pro-active approach by the tax tribunals and the apex court,” adds Meyyappan.

This observation stands in severe opposition to the government’s claims that the GST will consolidate several levies and greatly reduce indirect tax disputes — which had accounted for around 100,000 appeals and locked up about $23 billion of potential national revenue at the end of March 2015. However, issues with classification, valuation, availability of input tax credit, Centre-state apportionments, compliance, and anti-profiteering obligations under the new regime are instead expected to stretch these figures much further. "As with any tax reform of such significance, the potential for additional litigation is very high,” says V Sivasubramanian, executive partner, indirect tax, Lakshmikumaran & Sridharan.

The GST system contemplates a differential tax levy — ranging between zero and 28 per cent. Depending on whether an activity involves a good or a service and in which category it falls under, the classification of the transaction could be a matter of much dispute. Experts highlight that the GST Council’s decision to prescribe multiple rates for similar classes of transactions and the possibility of not contemplating a particular business activity in advance will make disputes along these lines inevitable.

According to Sujit Ghosh, partner & national head, Advaita Legal, concerns also exist over business activities that involve composite supplies. A composite supply is a transaction that involves both a goods component as well as a service aspect in a naturally bundled manner. The conclusion reached by the tax authorities as to which component is dominant in such cases will drastically vary the rate of tax. 

The valuation of a business activity for determining the amount of tax payable is also expected to pose complexities even after the notification of the valuation rules by the government. As imported goods will be scrutinised by both the GST and the customs authorities, using different methods, there may be discrepancies with regard to the determination of the taxable amount. Related-party supplies, which involve the fixation of market value, will also add to valuation disputes, adds Ghosh.

The availability or denial of input tax credits — which is the focal point of the GST system — is expected to be yet another avenue of dispute. 

Since the GST is a destination-based tax and involves the classification of an activity as intra-state or inter-state, the tax authorities’ interpretations of the place of service rules  are likely to be challenged by various service-based businesses. The fact that the state authorities have never dealt with the taxation of services and were not needed to consider segregating transactions in such a manner could roil the waters even further.

State apportionments of Integrated GST (collected on inter-state activities by the Centre) could also be challenged by the states in the constitutional courts of the country. According to Sivasubramanian, the delay in formalising these settlement rules and in outlining the method of distribution of Integrated GST credits to the states increases the possibility of such issues approaching the doors of the judiciary.

Other interpretational aspects of the untested law, when coupled with the newfound opportunities for the state tax authorities under the GST framework, may further complicate matters with each faction choosing to read the law to suit their own interests. Anti-profiteering obligations. which have been imposed without providing for a way to calculate the benefit accrued under the new system, as well as the enhanced compliance-based requirements, could also lead to penalties imposed by the tax authorities on non-compliant entities. These actions will be subject to challenge if the authorities do not take a business-friendly approach while transitioning to the new structure.

"The intention of simplifying the indirect tax structure and reducing the potential for litigation through the implementation of the GST seems to have been lost somewhere along the line. It will take several years for the courts to iron out the creases and make the system fully functional," notes Meyyappan.

On a parting note, Sivasubramanian also highlights the pressing need to make the administrative and judicial infrastructure for indirect tax more robust and to ensure effective and time-based resolution of grievances if the system is to ever live up to its hype and expectation. Without this, the minefield of potential legal issues could prove to be the Achilles heel of India’s new GST framework.