Charting course for indirect tax laws in India

With each passing year, the Goods and Services Tax (GST) undergoes a metamorphosis, unveiling surprise decisions that perplex taxpayers and leave them grappling with the evolving shape of the tax regime.

Taxpayers’ business operations have been significantly influenced not only by these surprise decisions but also by continual amendments in the GST.

RECENT DEVELOPMENTS

Corporate guarantee – does the amendment guarantee the settlement of disputes?

The entire industry has grappled with the issue of the valuation of the corporate guarantee, particularly amid ongoing investigations by tax authorities. To address the ambiguity, the government has introduced a new sub-rule, i.e. sub-rule (2) under rule 28 of the CGST Rules.

The above-mentioned rule has fixed the value of supply of corporate guarantee to be the higher of either 1% of the amount of the guarantee offered or the actual consideration. This rule has undoubtedly given taxpayers much-needed clarity, successfully addressing various concerns related to the valuation of the corporate guarantee for the purpose of payment of the GST.

However, a closer examination of the rules reveals that they have spawned additional questions that need to be addressed.

For instance, the lack of clarity on the meaning of the term “corporate guarantee” has given rise to questions about whether instruments such as letters of intent/letters of comfort provided by the related parties to give assurance with respect to percentage holdings, going concerns and guarantees to infuse funds will also fall under the above-mentioned provisions.

Another question that remains unanswered is whether the provision of guarantees to overseas entities will fall under the purview of export of services when there is no exchange of foreign remittance, particularly when the valuation of such services for the payment of the GST has been deemed to be 1% of the corporate guarantee. Another question needing to be addressed is whether the tax as per the above-mentioned rule must be discharged once, or every year while the corporate guarantee remains in force.Thus it becomes important to examine each transaction in detail before applying the above-mentioned provision to ensure accurate implementation.

Secondment – a glimpse of hopePursuant to the decision of the Supreme Court of India in the case of Northern Operating Systems, almost the entire industry has paid GST (mostly under protest) on the transaction that was earlier considered as secondment of employees (covered under employee/employer relationships). However, recent judicial developments have shone a ray of hope onto the matter. Delhi High Court, having distinguished the matter on the merits, has given relief to the assessee by staying the demand. Further, various high courts, including the Punjab and Haryana High Court, and the Karnataka High Court have stayed the demand on the Indian portion of the salaries of the seconded employees. The development has prompted the assessees to re-examine the facts of each case meticulously. This leaves the industry pondering: Is there still any hope after the Supreme Court decision?

WRIT REMEDY: GUARDIAN AMONG GST NOTICES

The role of the high courts in entertaining writs when petitioners do not have any other recourse or cannot seek alternative remedies before other authorities has become crucial in the GST.

As an exception, writs can be filed in case there is a violation of principles of natural justice, enforcement of fundamental rights is sought, or the notices/orders are issued without any jurisdiction.

Recently, a trend has emerged under the GST law where the tax authorities issue notices lacking detailed reasoning, deny input tax credit (ITC) without giving an opportunity to be heard, and demand taxes at the highest rate without providing any comprehensive reasoning. These circumstances have prompted businesses to turn to high courts for recourse.

While the courts have been quashing the notices and orders, the vague notices and orders have become a matter of concern for many businesses as they not only disrupt the business environment, but they also place an additional burden on businesses to navigate legal complexities swiftly.

Thus it is essential that measures that promote clarity and transparency in notices and orders be provided to reduce the need for frequent intervention from high courts and to foster an environment that is more conducive for businesses to thrive.

EVOLUTION OF THE GST COUNCIL

The inception of the GST was transformational in India’s tax system. When the GST law was introduced, GST Council meetings were envisioned as a pivotal arena for laying down the law.

The GST Council, comprising representatives of central and state governments, was established to foster co-operative federalism and make key decisions regarding tax rates, exemptions and other related matters. Its decisions were thought to carry the weight of legislative mandates, and meetings were perceived as forums where substantial legal determinations were made.

However, the evolution of its role has shifted with decisions stating that the role of the GST Council is primarily recommendatory in nature. (Madras High Court, Parle Agro [2023 (11) TMI 601). The court has also held that the recommendations of the GST Council are not binding (Mohit Minerals, [2022] 138 taxmann.com 331 (SC)).

This shift has raised important questions about decision making within the GST framework. It has prompted the taxpayers and stakeholders to re-evaluate their expectations about the outcomes of GST Council meetings. It will be interesting to see the final outcome of a situation where a state decides not to issue an amendment in the law/notification once the decision is taken to issue the same in the GST Council meeting.

Anti-profiteering verdict concerns Another notable decision has been pronounced by Delhi High Court (2024-VIL-84-DEL), which has upheld the validity of anti-profiteering provisions, against which a special leave petition has been filed.

It is notable that the time limit provided by the Directorate General of Anti-Profiteering for furnishing a report has been held to be directory in nature.

The above-mentioned observation has been a cause of concern for taxpayers, casting a shadow of uncertainty over matters that were not pursued by the national Anti-Profiteering Authority (NAA). This verdict implies a perpetual threat, akin to a knife permanently hanging over the heads of taxpayers. This observation suggests that businesses might face ongoing evaluations, even for matters that were not initially investigated by the NAA. If the provisions are deemed directory, there is a need for clarity about boundaries and the extent of the applicability of the provisions.

While summing up the decision, and upholding the constitutional validity of the provisions, Delhi High Court has also acknowledged and clarified the possibility of the arbitrary exercise of powers under the anti-profiteering provisions by extending the proceedings beyond jurisdiction, or not considering genuine factors such as cost escalations or skewed ITC situations.

However, the high court also held that the remedy for such orders is to challenge the same on the merits, and that the provision itself cannot be struck down. So one will have to reconsider the merits of each case, demonstrating how the benefits have been extended to ensure relief from profiteering allegations.

ISD MECHANISM AWAITS CLARITY

The recent proposal in the Finance Bill 2024 to amend the definition of Input Service Distributor (ISD) pursuant to the recommendations made in the 50th GST Council meeting has stirred the regulatory landscape, particularly with the shift from the previous optional status to the proposed mandatory framework.

The initial clarity enabled by the ISD provisions under section 20 of the Central Goods and Services Tax Act is now muddled, as the proposed amendment in the said section omits specifics on the distribution process, and has undergone a complete transformation.

Consequently, taxpayers await much-needed clarity on the entire ISD mechanism. Timely communication and guidelines on how the said ITC will have to be distributed are crucial to ensure a smooth transition for businesses grappling with the nuances of amended ISD provisions.

It is clear that in the past year of GST implementation, assessees, professionals, the department and the government have shifted their emphasis from mere compliance/matching/mismatching issues to issues involving legal interpretation. This measure would be a significant stride towards more mature GST legislation.

One can only hope that in the coming years the tax tribunals will function efficiently and provide detailed, meaningful and timely redressal of tax disputes, bringing more clarity to businesses over issues involving legal interpretations.