GST's New Battlefront
As the basic law and rates settle down, authorities are bracing for the next round - legal challenges from businesses.
In June 2018, when the Goods and Services Tax (GST) was about to complete a year, BT had asked former revenue secretary Hasmukh Adhia if the government was worried about the more than 100 writ petitions filed in various high courts against many of the new tax system's provisions. A confident Adhia had then said that "many writ petitions, 200-300, have been filed (against GST)" and the government was prepared to fight those petitions.
The number of writ petitions has gone up since then, and if the tax and legal fraternity is to be believed, it is beginning to worry the government as well. The revenue department, say experts, is not prepared to face these cases. "The department side was not well represented in high courts, so much so that the government had to issue a circular saying that (tax) commissioners should support (lawyers representing the revenue department) in these litigations," says a GST consultant at a Big Four audit firm.
Even though the assessment of GST returns is yet to begin (the deadline for filing annual returns and GST audits has been extended from December 31, 2018, to June 30, 2019), tax and legal experts are expecting a flood of litigation as taxpayers begin to read the fine print of the law and take a close look at their tax liabilities, input tax claims, etc.
Initially, businesses were just filling forms, running to catch the bus, says Mekhla Anand, Partner, Tax Practice, Cyril Amarchand Mangaldas. Now, they have started reading the fine print, she adds. "There are a lot of concerns about transitional input (tax) credits, area-based exemptions, issues regarding inverted duty structure, conflicting laws, etc," she says.
Anand and like her most tax lawyers/consultants say a major chunk of disputes or litigation is from two areas - advance ruling and anti-profiteering orders. These, along with transitional input credit, account for most GST-related cases.
The government set up Authorities for Advance Ruling (AARs) in each state for giving clarity on questions that businesses might face on applicability of GST, tax rates, etc. However, their rulings have created confusion. One tax consultant calls some of these rulings "killer". Others accuse people who man AARs of complete lack of understanding of how businesses are run. AARs together have passed over 150 orders so far. Many have been contradictory to rulings by others.
For example, on whether supply for turnkey engineering, procurement and construction (EPC) solar power plants, where both goods and services are supplied, can be considered as composite supply, the Maharashtra AAR has ruled that it is a works contract and, therefore, should attract 18 per cent tax. The Karnataka AAR has ruled that GST on installation be charged at a concessional rate of 5 per cent.
In some cases, the rulings contradict the provisions of law, in some they go against the explanatory circulars issued by the department. For instance, on whether recovery of food expenses from employees attracts GST, the Gujarat AAR has ruled that the provision of food, beverages and other eatables through in-house canteens comes under the category of outdoor catering services and not restaurant and, therefore, should attract 18 per cent GST. The Central Board of Indirect Taxes and Customs had earlier said that no GST would be payable if services were provided free of charge.
In some cases, say tax experts and businesses, the rulings defy logic. For example, on whether complimentary IPL tickets should attract GST, the Punjab AAR has said that giving free tickets equals supply under GST and, hence, tax should be paid and input credit claimed by those providing the tickets.
Anita Rastogi, Partner, Indirect Taxes, PwC, says that under GST any free supply to related parties should be subjected to tax, but in this case (IPL complimentary ticket case), the tickets are given to third parties and, hence, should not have attracted GST. "If this ruling is correct, then nothing is free under GST," she says.
Some rulings are threatening the business models of many companies in India. For example, the Maharashtra AAR has ruled that back offices of foreign entities are "intermediary services, not exports" and, hence, will attract 18 per cent GST. This, say experts, can kill the entire back-office business model in India by taking away the cost advantage. Given the lakhs of people these back-offices employ, the ruling can put a lot of jobs at stake.
The appellate advance ruling authorities, say experts, are not helping either. They mostly concur with the decisions given by AARs.
Tax experts also point towards the composition of these authorities. A common complaint is that they are manned by tax department officials who are biased in favour of the revenue department. "The constitution of these AARs is being challenged because the judicial member composition may not be as per the guidelines. There have to be more judicial members than technical members (who are mostly commissioner-level VAT and service-tax officers) but this is not happening in many AARs," says Anand of Cyril Amarchand Mangaldas.
Most of these cases will end up in higher courts, further clogging the already burdened judiciary (indirect tax cases involving over Rs 2 lakh crore were pending in different courts and appellate forums as of March 2017, according to Economic Survey 2018).
The confusion created by AARs is giving rise to calls for a centralised AAR. "It is desirable to have a national forum where industry-wide issues of importance are deliberated upon and common decisions applicable throughout the country taken," says M.S. Mani, Partner, Deloitte India.
The GST Council has recently approved in principle a centralised AAR. But only time will tell if this will address the concerns of businesses.
Overstepping the Mandate?
The anti-profiteering provisions under GST are unusually short. There are only a few details about the mechanism to determine profiteering and the manner in which GST benefits are to be passed on to consumers, timelines for change the price, etc. Most businesses had to interpret these provisions on their own, leading to disputes and litigation.
"Section 171 (of Central GST law, or the anti-profiteering law) talks about only two factors - output taxes and input taxes - not other factors that can affect prices of goods and services. There is no procedural mechanism to determine the quantum of profiteering. In the absence of a mechanism to determine profiteering, the orders suffer from vagueness and arbitrariness," says Abhishek Rastogi, Partner in law firm Khaitan & Co. Rastogi challenged the constitutional validity of the anti-profiteering provisions in the Delhi High Court after one of his clients, Pyramid Infra, a real estate company, was charged with profiteering and asked to pass on the benefits of GST to 2,600 homebuyers.
Things are even more complicated for FMCG companies. Recently, the authority passed an order against FMCG major Hindustan Unilever (HUL) asking it to pay the Rs 383 crore gain it allegedly made by not passing on the benefits of GST rate reduction and input tax credit, to consumers. HUL plans to appeal against the order.
A few orders of the authority give some indication of its thinking. One thing that comes out clearly is that it wants prices to be reduced commensurately on each packet or stock keeping unit (SKU) if there is a rate reduction or benefit due to input tax credit. This is not practical. "In FMCG, you have a large number of SKUs, at times hundreds and thousands, and then there is the value chain - you manufacture a product in a factory, it goes to the godown, from one warehouse it goes to another and then it goes to the stockist, from there to the wholesaler and from there to the retailer. It is a challenge to effect the change across this chain in a short time," says a spokesperson of a large FMCG company. He further says, "when GST rates are reduced, there are other costs that a company may incur to effect these changes immediately because you have to change the packets. Stickering is not possible - they are saying you can't do stickering because stickers can be easily removed."
Also, since the FMCG sector has small packs, ranging from Rs 1 to Rs 400 or more, a 10 per cent reduction for small packets can create problems - how can one pay 90 paise on a pack that cost Rs 1 earlier. The companies demanded they be allowed to instead increase grammage. But it seems the authority is contesting the increase in grammage, too.
The anti-profiteering authority justifies its move to disallow "increase" in grammage in some cases. "What we have seen is that brands and businesses give higher grammage as part of their promotional activities in normal course. These cannot be passed off as 'reduction in price' due to GST. In many cases, the increase in grammage was not found to be in line with the reduction in cost due to GST or input tax credit," says a top official of the authority on condition of anonymity. On the issue of not giving the companies enough time to implement price changes, the official says changes in prices have happened overnight even in the past.
There is a view among businesses and lawyers that the anti-profiteering authority is at times overstepping its "mandate" and being too aggressive. "Even now, a lot of complaints have been filed by the commissioners themselves rather than the consumers. I thought the essence (of anti-profiteering provisions) was that if a consumer had a complaint, he had the right to challenge it," says a tax lawyer.
A tax consultant cites the example of a case against Flipkart, in which a Godrej almirah was ordered before GST but delivered after the rate change. Though the authority rejected the profiteering complaint, it ordered an audit of all major e-commerce portals to see if they had refunded the excess GST charged. Tax experts and businesses feel this suo motu action amounts to overstepping the mandate and can lead to litigation.
However, anti-profiteering authority officials say the law allows everyone, including a tax commissioner, to file a complaint. "In fact, it is the duty of tax officers to inform us if businesses are not passing on the benefits to consumers," he says.
On transitional credit (unclaimed input credit on taxes paid before GST), there is an issue around what happens to credits that are more than 12 months old. GST was implemented on July 1, 2017, so one can claim input credit only for the period after June 30, 2016.
Several petitions have challenged these timelines. Rastogi of Khaitan & Co. says six-seven writs have been filed in Delhi High Court alone. "There are many transitory issues that people are finding out now because they are doing audits and finalising their numbers. Some credits, either by mistake or due to oversight, were not availed," says L. Badri Narayanan, Partner at law firm Lakshmikumaran & Sridharan.
Businesses have also realised that they are not going to get transitional credit on capital goods. They are going to court against this. "The goods were purchased in the old regime and received in the new regime. You did not take credit in the old regime because it was not in the books then. The new regime is not allowing credits on excise duty paid on it," says Narayanan. He cites a case in which he is representing RSPL, makers of Ghari Detergent. The Gujarat High Court has rejected their plea (for input credits), so they are now challenging the order in Supreme Court.
Excise Tax Promises
Also, many companies in exempted states such as Himachal Pradesh, Uttarakhand and J&K are moving court against reduction in/rejection of excise refunds after GST. Many units had invested in these states on the promise of excise duty refunds. However, after the GST came into effect, refunds have been curtailed from full excise duty to 58 per cent of the Central GST and 29 per cent of IGST.
"The first issue is the quantum of refunds. Earlier, these units used to get 100 per cent excise refund. Now, they are getting 29 per cent of IGST, and that too in cash. The second issue is that the refund claims have been rejected for one reason or the other. Not even 29 per cent of IGST has been given in many cases," says Rastogi of Khaitan & Co. He says many units in these states have not received refunds for 18 months. Many are moving high courts.
Then there are issues such as refunds under the inverted duty structure where tax on inputs is more than the tax on outputs. Though the law allows excess input credit under certain conditions, it is not that simple. "While the initial concern regarding the formula and availability of refund to suppliers of both goods as well as services stands addressed, the restriction as to the unavailability of refund of unutilised credit pertaining to input services and capital goods continues to exist. Additionally, rationalisation of refund processes for exporters and unutilised input tax credit to due inverted duty structure is yet to be achieved. The delay in processing of refunds is creating problems for the industry at large" says Mekhla Anand of Cyril Amarchand Mangaldas," In essence, she says, a lot of people are not getting the refunds that they think they should get.
As GST is a new law, some legal challenges are to be expected. However, most tax experts and lawyers feel that the number of related disputes and litigations are much more than expected. And they believe that the number will only go up once assessment of returns and audits take place. If the flurry of writ petitions against GST provisions, and appeals against anti-profiteering orders and advance rulings are anything to go by, GST is going to test both judicial and tax appellate forums of the country.