GST: One Nation, One Tax, But Too Many Interpretations Remain - Can The Council Fix It?
The GST Council plays a major role in creating a harmonised tax structure and fostering a unified national market by facilitating decision making and consensus between Centre and State.
By Smita Singh, Prateek Sagar, and Kshitij Sehrawat
GST was implemented with a vision of “One Nation - One Tax - One Market” which eventually replaced multiple indirect taxes levied by the Central and State Governments, such as excise duty, service tax, value-added tax (VAT), and others. It brought uniformity in the tax structure across India, with an objective of seamless flow of input tax credit (ITC) by eliminating the cascading effect of taxes, uniform tax rates across States, to make the whole nation as a unified common market.
As a continuous effort in streamlining the processes and ease of doing business under GST, the Prime Minister of India, on the occasion of 79th Independence Day highlighted that GST is a significant reform which has benefitted the nation. During his address, he announced a comprehensive GST reform, describing it as a “Diwali gift”.
Technical issue affecting seamless flow of ITC
One of the primary objectives of GST is to enable seamless flow of ITC in the entire supply chain. The Government has brought in several proactive amendments in the law to address key concerns on availment of ITC and to address practical difficulties on issues faced by the taxpayers. However, there are some issues as well which affect the intention of a unified tax structure.
One such example is that of transfer of unutilised ITC upon amalgamation to a person located in a different State, which under GST is not allowed. This has led to loss of ITC in cases of mergers and acquisitions involving entities registered across different States, causing financial inefficiencies, contradicting the objective of GST and disrupting the seamless flow of ITC across the supply chain.
While dealing with this issue, the Goa Bench of the Bombay High Court in the case of Umicore Autocat India has held that inter-state transfer of unutilised ITC following amalgamation is eligible. However, it is very plausible here that other States may not accept the position set by the Bombay High Court and continue to block the ITC. This leads to uncertainty among taxpayers who are bound to approach the GST Council with a representation for clarity or litigate in respective States by way of writ petitions if the issue arises.
With respect to the issue of inverted duty structure under GST, several industries such as textiles, footwear, and fertilisers, edible oils are facing considerable challenges in availing full benefit of ITC, since the tax rate on inputs exceeds that on finished goods, resulting in the accumulation of unutilised ITC. Industries have been demanding reforms to address multiple tax rate structure, inverted duty structure, faster refund processing among various other reforms.
In this regard, the Prime Minister recently announced that the Government is set to bring significant reforms in GST. It is proposed that GST rates on common-man items and aspirational goods will be reduced and the GST Council will consider moving from multi rate structure to a two-tier GST structure. With revision of rate structure, issues such as inverted duty structure are likely to be addressed and streamlined.
Further, with strong political consensus driving the proposals, States are unlikely to oppose the move of GST rate rationalisation, viewing it not as a revenue loss but as a coordinated move towards broader economic alignment. It is expected that the GST Council will attain its commitment to rationalising tax rates and addressing structural anomalies which have been long overdue, eventually reducing the cascading effect of taxes in the supply chain.
Thus, a fine tuning of some issues which needs to be dealt with is required to be taken care of.
Interpretational issues
GST framework is a multi-tiered tax system with four tax slabs and having various exemptions and procedures. Disputes have arisen on transactional and interpretational matters ranging from incorrect ITC availment and short tax payments to issues which were treated to be “settled” under the erstwhile tax regime. Such as taxability on notice pay, cancellation charges, and liquidated damages, where the department has continued to raise demands irrespective of prior judicial precedents. These inconsistencies have significantly increased litigation and diluted the simplicity envisioned under GST. Although the CBIC from to time has issued Circulars providing clarification on the taxability on various issues, however there needs to be stricter adherence to the instructions to GST authorities.
The Apex Court has recently set precedents and has decided on various persistent issues. In the case of Safari Retreats, wherein it has been held that ITC on construction of building can be availed if building’s construction work is integral to providing taxable services such as renting or leasing an immovable property and the building may then be considered as ‘Plant’ under GST on case to case basis. Similarly, the Supreme Court, in Mohit Minerals has held that GST charged on ocean freight for imported goods is unconstitutional. Hopefully the precedents set will be followed by the authorities and again a different interpretation is not raked up.
However, pursuant to Supreme Court decision in the case of Northern Operating Systems, there have been demands raised on Indian companies having foreign nationals working in India by GST Authorities, without considering whether secondment arrangements have been entered into or not. Further another issue which has been dredged up is w.r.t. taxability of online gaming, whether game of skills vs game of chance. This issue has created turmoil in the online gaming industry. The Government has since amended the legislation and levied a higher rate of GST on the total amount paid to online gaming companies.
Other such issues that have now become unsettled are related to taxability of corporate guarantees and arbitral awards.
Beyond interpretational disputes, transactional issues like denial of ITC on various grounds, e-way bill compliance, and use of ITC for pre-deposits to the permissibility of rectifying returns after statutory deadlines have also triggered litigation, compelling assessees to contest the same matter across multiple jurisdictions because of inconsistent State-level interpretations. It is because of this reason that an overwhelming number of writ petitions have reached High Courts on seemingly minor matters.
Further, the Advance Rulings provided by different States on similar issues have been plagued with inconsistencies.
In one such example, an assessee (Giriraj Renewables Pvt Ltd) received divergent tax rates on the same transaction from the Maharashtra State Advance Ruling and Karnataka State Advance Ruling. Such instances bring fundamental challenges to the Assessee’s dealing in multiple States and jurisdictions and require immediate attention of the GST Council and the Government.
Therefore, varied interpretations on issues across States have not only built up the numbers of litigious matters, it has also hampered the stability on such issues for companies having presence in more than one States. The varied advance rulings to lack of GST Tribunal has added to this problem.
The Role of the GST Council
GST Council is an institution to facilitate consensus-driven decision-making between the Centre and the States on GST policy, tax rates, exemptions, and the apportionment of revenue under the integrated GST mechanism. However, recommendations of the GST Council are advisory in nature and cannot encroach upon the legislative authority of Parliament and State legislatures. This has been clarified by the Supreme Court in the case of Mohit Minerals, wherein it has been observed that while the GST Council plays a pivotal role in shaping fiscal policy, its recommendations do not possess binding legal force.
There is no doubt that the GST Council ensures uniformity in taxation across states and provides a platform for cooperative federalism where States and the Centre work cohesively. This has resulted in facilitation of quick decision-making on various issues, ultimately promoting ease of doing business. Thus, the GST Council plays a critical role in creating a harmonised tax structure and fostering a unified national market for goods and services by facilitating decision making and consensus on various crucial issues between Centre and State.
It can be concluded that GST has replaced multiple indirect taxes with the aim of developing one nation – one tax regime. There is no doubt that with implementation of GST, one tax rate is applicable in every State for a particular product or service. Tax administration is easier with the Central Government deciding the rates and policies. Tax compliance has also become better as taxpayers do not have to be bogged down with multiple return forms and deadlines. In the past 8 years of GST we have seen various developments that have helped in removing hard creases in the system and working towards a unified system of indirect tax compliance in India’s complex political and economic structure.
(Author Smita Singh is a Partner at S&A Law Offices, while Prateek Sagar is the Principal Associate and Kshitij Sehrawat is an Associate at the firm)
[Disclaimer: The opinions, beliefs, and views expressed by the various authors and forum participants on this website are personal and do not reflect the opinions, beliefs, and views of ABP News Network Pvt Ltd.]
Related Video
Union Budget 2025: Arvind Kejriwal lists the shortcomings of the Modi government's budget | ABP News | AAP
Top Headlines
