EMERGENCE OF LITIGATION CHALLENGES

The emergence of litigation challenges surrounding the implementation of the Goods and Services Tax (GST) in India has been a significant aspect of the tax reform process. While GST aimed to simplify the tax structure and streamline compliance, it also brought about various legal and procedural complexities, leading to a surge in disputes and litigation. Several factors contribute to the emergence of these challenges:

Complexity of GST Laws:

The GST regime introduced a unified tax system, but it also brought with it a complex set of laws, rules, and regulations. The GST Act, along with numerous notifications, circulars, and clarifications issued by the government, created confusion and ambiguity among taxpayers regarding the interpretation and application of tax provisions. This complexity often leads to disputes between taxpayers and tax authorities over issues such as classification of goods and services, valuation, input tax credit eligibility, and compliance requirements.

Transitional Issues:

The transition from the previous tax regime to GST posed significant challenges for businesses, particularly in terms of transitional credits, valuation of closing stock, and compliance with new GST procedures. Disputes arose regarding the eligibility and calculation of transitional credits, leading to disagreements between taxpayers and tax authorities. Lack of clarity on transitional provisions and delayed implementation of transitional mechanisms exacerbated the litigation challenges during the initial phase of GST implementation.

Technology Glitches:

The GST regime introduced a technology-driven tax compliance system with the Goods and Services Tax Network (GSTN) serving as the IT backbone for GST administration. However, technical glitches and operational issues with the GSTN portal, such as system downtime, errors in return filing, and delays in processing refunds, hindered smooth compliance and gave rise to disputes between taxpayers and tax authorities. These technological challenges added to the burden of taxpayers and contributed to the escalation of litigation.

Interpretational Differences:

The interpretation of GST laws and provisions by taxpayers, tax consultants, and tax authorities often varies, leading to conflicting views and legal disputes. Differences in understanding and application of tax provisions, ambiguous language in the law, and conflicting judicial precedents further complicate matters and contribute to litigation challenges. Issues such as the scope of exemptions, determination of place of supply, and treatment of composite and mixed supplies are frequently contested in GST disputes due to interpretational differences.

Compliance Burden:

The compliance requirements under GST, including filing of multiple returns, maintenance of detailed records, and adherence to strict invoicing norms, impose a significant burden on businesses, especially small and medium enterprises (SMEs). Non-compliance or errors in compliance often result in penal actions, tax demands, and litigation initiated by tax authorities. The compliance burden adds to the overall litigation challenges in the GST ecosystem.

PHASES OF GST LITIGATION:

1. GST Audit & Assessment:

Tax authorities conduct an audit of taxpayer-provided information, including returns and relevant records. In case of inconsistencies, they issue show-cause notices.

Notice Under Section 73 of the CGST Act, 2017: For demands under the normal period.

Notice Under Section 74 of the CGST Act, 2017: For demands under the extended period.

2. Protest:

Taxpayers can register objections if they disagree with the audit or assessment findings.

3. Adjudication:

If objections are not resolved, the case is referred to the adjudicating authority for a final decision.

4. Appeal:

Taxpayers have the right to appeal to the appellate authority if they are dissatisfied with the decision.

TYPES OF NOTICES ISSUED BY GST DEPARTMENT

Notices are issued by the GST department at various stages. Mainly these stages can be categorized into three parts: pre-litigation notices, notices during litigation and other miscellaneous notices. The provisions that provide such notices have a combination of different sections by the help of which authority clears such matters. They are listed as below

1. PRE-LITIGATION NOTICES:
2. Section 61: Scrutiny of Returns:

The proper officer may scrutinize the return and related particulars furnished by the registered person to verify the correctness of the return and inform him of the discrepancies noticed, if any, in such manner as may be prescribed and seek his explanation thereto.

2. Section 65:Notice for conducting Audit (by tax authorities):

The commissioner or any officer authorised by him, by way of a general or a specific order, may undertake audit of any registered person for such period, at such frequency and in such manner as may be prescribed. The registered person shall be informed by way of a notice not less than fifteen working days prior to the conduct of audit in such manner as may be prescribed.

3. Section 66: Special audit by Chartered Accountant/Cost Accountant (who is appointed by tax authorities):

If at any stage of scrutiny, inquiry, investigation or any other proceedings before him, any officer not below the rank of Assistant Commissioner, having regard to the nature and complexity of the case and the interest of revenue, is of the opinion that the value has not been correctly declared or the credit availed is not within the normal limits, he may, with the prior approval of the Commissioner, direct such registered person by communication in writing to get his records including books of account examined and audited by a Chartered Accountant or a Cost Accountant as may be nominated by a Commissioner.

4. Section 67: Inspection, search and seizure

The power authorised not below the rank of Joint commissioner shall have the power to inspect, search and seize in case of any discrepancies, notices.

 

5. Section 70: Summons: The proper officer under this Act shall have power to summon any person whose attendance he considers necessary either to give evidence or to produce a document or any other thing in any inquiry in the same manner, as provided in the case of a civil court under the provisions of the Code of Civil Procedure, 1908. Every such inquiry referred shall be deemed to be a “judicial proceedings” within the meaning of Section 193 and Section 228 of the Indian Penal Code.

 

1. NOTICES DURING LITIGATION

 

1. Section 73: Show Cause Notice under normal period for demand. It can be issued within 33 months from the due date of GSTR-9:

This section deals about determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized for any reasons other than fraud or any willfulmis-statement or suppression of facts. When a person has not paid or short paid or erroneously received refund or wrongly availed or utilized input tax credit, the proper officer shall serve notice on the said person requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable and a penalty leviable as per the provisions of the act. A show cause notice will be issued in similar form as was being done in erstwhile pre-GST era but online. Additionally, a summary of the total demand in Form DRC-01 also will be issued along with the show cause notice.

2. Section 74: Show Cause Notice under extended period for demand. It can be issued within 54 months from the due date of GSTR-9:

This section deals about determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized by reasons of fraud or any willfulmis-statement or suppression of facts. When a person has not paid or short paid or erroneously received refund or wrongly availed or utilized input tax credit by reasons of  fraud or any willfulmis-statement or suppression of facts to evade tax, the proper officer shall serve notice on the said person requiring him to show cause as to why he should not be asked to pay the amount specified in the notice along with interest payable thereon under section 50 and with 100% of tax as penalty leviable. A show cause notice will be issued in similar form as was being done in erstwhile pre-GST era but online. Additionally, a summary of the total demand in Form DRC-01 also will be issued along with the show cause notice.

3. Section 76: Notice for demand of collected Tax which is not deposited:

This deals with a situation of “tax collected but not paid to Government”. The provision begins with non-obstante clause “Notwithstanding anything to the contrary in any order or direction of any Appellate Authority or Appellate Tribunal or Court or in any other provisions of this Act or the rules made thereunder or any other law for the time being in force, every person who has collected from any other person any amount as representing the tax under this act, and has not paid the said amount to the Government, shall forthwith pay the said amount to the Government irrespective of whether the supplies in respect of which such amount was collected are taxable or not”.

1. OTHER NOTICES (MISCELLANEOUS)

Section 79: Recovery of tax

1. Notice when there is an outstanding amount due to the default of a Vendor
2. E-Way Bill Notices.
3. Investigations by CAG, Intelligence, Preventive or Anti-Evasion

REASONS FOR INITIATING GST LITIGATION

While managing a business, companies take several actions such as filing GST returns, GST refunds, and claiming ITC. And in the course of carrying out such actions, sometimes certain mishaps also happen. These mishaps later get converted into litigation.

The taxpayers must keep in mind that they have to duly follow compliances related to GST. Otherwise, they would be at risk when their tax positions, compliances, and payments would be verified while audited by the tax authorities.

However, the taxpayers should be made aware that penalties would be levied in case of a notice default during audits. Interest implications can also arise if taxes are not paid or are short-paid.

APPEAL AGAINST THE RESULT OF THE AUDIT

Taxpayers have the right to file an appeal when they are not satisfied with the result of Assessments or Audits. To file an appeal there is a fair appeal mechanism provided. Such mechanisms are unbiased and independent of the parties.

When a progressive law like GST is considered, business entities must understand the basics of GST Litigation and Departmental Audits. This would strengthen their defense strategy.

Further, when multiple entities in a group or (in a legal entity) litigations across multiple GSTINs are handled, the following are the most common factors of the Industry given priority when it comes to litigations:

1. keeping a track of all the matters that are actionable,
2. To monitor the progress of the litigations and preparedness regularly,

• To maintain all the required documents and information that is needed during the litigations from its original source,

Considering the fact that GST is a progressive law, it is critical to update the case files of these litigations. Particularly tracking the recent developments through notifications, judicial precedence, and circulars.

THE PROCEDURE OF GST LITIGATION

 

In order to streamline more than one ongoing litigations/case, the assessee can follow the below process-

1. Analyzing the Notice or Show Cause Notice or Order- After receiving the Show Cause Notice or General Notice from the department of GST, it is important for the business entity and the company to firstly verify it and analyze it,
2. Briefing the company – The next step is preparing the brief of the company and then deciding the way to deal with the notice, and also making a plan of action for assurance to defend the company at all possible costs,
3. Collating required information or data or reconciliations- In order to prove the case of your company, a lot of pieces of evidence, data, and related information and certain documents will be required, to produce before the officials,
4. Validating and verifying the aforesaid information and data- After the data is collected, it is necessary to validate and verify it so that the accuracy of data is maintained,
5. Drafting a suitable Appeal or Reply after thorough research for legal precedence- Once the documentation and information are in place, drafting a suitable reply is important, this draft would act as a reply to the notice received,
6. Submitting the Appeal reply- Once the appeal or the reply is ready, it is essential to submit it to the concerned department
7. Appearance before Commissioner, Adjudicating Authority, or Tribunal- The last part of the adjudication process is taking part in the appearance of a case before the concerned Adjudicating Authority to defend the case