Approach to Notices and Litigation Under GST: A Comprehensive Guide

This comprehensive guide provides insights into the approach to notices and litigation under GST (Goods and Services Tax) in India. It covers the introduction to GST, advantages of GST, the meaning of GST litigation, types of tax litigation, reasons behind GST litigation, key players involved, types of notices issued by the GST department, the procedure of GST litigation, and the need for drafting good notices and orders. Additionally, effective GST litigation management strategies are discussed.

INTRODUCTION TO GST

The Goods and Services Tax (GST) is a unified tax system that has replaced multiple indirect taxes imposed by both the Central and State Governments. This new tax structure grants authority to both the Central and State Governments to impose and collect taxes on goods and services. The primary aim of implementing GST is to enhance the efficiency of tax collection, reduce corruption, and simplify inter-state movement of goods. GST serves as an indirect tax, effectively replacing various indirect taxes in India, including excise duty, VAT, and services tax. The Goods and Services Tax Act was enacted by the Parliament on March 29, 2017, and was implemented on July 1, 2017. GST is levied on the supply of goods and services, operating as a comprehensive, multi-stage, destination-based tax that is imposed at each value addition.

ADVANTAGES OF GST

The implementation of GST has had several significant impacts on the taxation system in India. One of the key benefits is the elimination of the cascading effect on the sale of goods and services. By removing the tax on tax, the cost of goods has been reduced, leading to a more efficient and streamlined tax structure.

Here are some of the notable changes brought about by GST:

1. Removal of the cascading effect of tax: Under the previous tax regime, taxes were levied on top of each other, resulting in a cascading effect. GST has effectively addressed this issue by allowing businesses to claim input tax credit, which means they can offset the tax paid on inputs against the tax liability on the final product. This has helped in reducing the overall cost of goods and services.

2. Higher threshold for GST registration: GST has increased the threshold for mandatory registration, reducing the compliance burden for small businesses. This means that small-scale enterprises with lower turnovers are exempted from registering under GST, easing the administrative and financial burden on them.

3. Composition scheme for small businesses: To further support small businesses, GST introduced a composition scheme. This scheme allows eligible businesses to pay tax at a lower rate based on their turnover and simplifies the compliance process for them.

1. Simpler online facilities for GST compliance: GST has implemented online platforms and systems that make compliance procedures more accessible and user-friendly. Businesses can easily file returns, make payments, and complete other GST-related processes through simplified online portals, reducing paperwork and saving time.

2. Relatively lesser compliances under GST: The GST regime has consolidated multiple taxes into one, leading to a reduction in the number of compliances for businesses. This has simplified the tax administration process and reduced the compliance burden on taxpayers.

3. Defined treatment for e-commerce activities: GST has established clear guidelines for the taxation of e-commerce activities. It ensures that online marketplaces and sellers operating in the digital space are appropriately taxed, providing a level playing field for traditional and online businesses.

4. Increased efficiency in logistics: GST has improved the efficiency of logistics and supply chain management by eliminating the complexities associated with multiple tax checkpoints at state borders. With seamless movement of goods across states, businesses can optimize their operations and reduce transportation costs.

5. Regulation of unorganized sectors: GST has brought several unorganized sectors into the formal economy by making compliance more transparent and streamlined. This has resulted in better tax compliance, increased accountability, and enhanced revenue generation for the government.

Overall, GST has brought about significant changes to the tax landscape in India, simplifying tax procedures, reducing costs, and promoting a more transparent and efficient taxation system.

MEANING OF GST LITIGATION

GST litigation refers to legal disputes or conflicts that arise within the framework of the Goods and Services Tax (GST) system. It involves cases and issues related to the interpretation, application, and compliance of GST laws and regulations. Here are some examples of matters and issues that can be categorized as GST litigation:

1. Carrying forward transitional credits: When GST was implemented, businesses had to transition from the previous indirect tax system. Disputes may arise regarding the eligibility and proper calculation of transitional credits, which allow businesses to carry forward the tax credits from the earlier regime to offset their GST liabilities.

2. Input tax credit eligibility: Input tax credit (ITC) allows businesses to claim a credit for the GST paid on inputs (purchases of goods or services) against their output tax liability (GST charged on sales). Litigation can occur when there are disagreements over the eligibility of certain goods or services for claiming ITC or the correct calculation of ITC amounts.

3. Denial of refund claims: GST provides provisions for businesses to claim refunds for excess taxes paid or for certain specified circumstances. Disputes can arise when the tax authorities deny or delay the processing of refund claims, leading to litigation to seek the rightful refund amount.

4. Non-payment or short payment of output tax liability: GST mandates businesses to collect and remit the appropriate GST amount on their sales or services provided. Litigation may occur if a business fails to pay the full amount of GST liability or there are disagreements regarding the proper determination of the tax amount.

These examples highlight some common areas where disputes and legal challenges can arise within the GST framework. Resolving these litigation matters typically involves legal proceedings, such as filing appeals, representation before adjudicating authorities or appellate forums, and potentially reaching resolution through courts or alternative dispute resolution mechanisms.

Correct, tax litigation can be broadly categorized into two types: direct tax litigation and indirect tax litigation. Let’s explore each type in more detail:

1. Direct Tax Litigation: This type of tax litigation pertains to disputes and legal issues related to direct taxes, such as income tax, corporate tax, capital gains tax, and wealth tax. Direct tax litigation involves matters concerning the interpretation, computation, and assessment of tax liabilities based on the provisions of direct tax laws. Disputes in this category are typically resolved through the income tax department, tax tribunals, and courts that specialize in direct tax matters.

2. Indirect Tax Litigation: Indirect tax litigation deals with disputes and legal matters related to indirect taxes, including goods and services tax (GST), customs duty, excise duty, and service tax. As you mentioned, GST litigation falls under the category of indirect tax litigation. This type of litigation involves issues such as input tax credit, taxability of goods and services, valuation of goods, refund claims, compliance-related matters, and disputes with tax authorities. Indirect tax litigation cases are usually resolved through the GST department, appellate authorities, and courts that handle indirect tax matters.

It’s important to note that while direct tax litigation is specific to the particular taxpayer’s income and assets, indirect tax litigation can affect a broader range of businesses and individuals as it relates to the tax treatment of goods and services in a country.

REASONS BEHIND GST LITIGATION

Understanding the reasons behind GST litigation is crucial for taxpayers to avoid disputes with the authorities. Here are the key factors contributing to GST litigation in India:

i. Different Interpretations of the Law

The GST Act is a complex tax law that can be interpreted differently by taxpayers and regulatory authorities. This often leads to misunderstandings regarding the applicability of GST on specific goods and services, as well as whether they qualify for exemptions or are subject to higher GST rates. These differing interpretations can give rise to GST litigations.

ii. Ambiguity in GST Circulars

Taxpayers often receive circulars from the Central Board of Indirect Taxes and Customs (CBIC) that require clarification on various GST laws, including provisions for concessions and rebates. The ambiguity in these circulars can create confusion and disagreements, eventually leading to litigation.

iii. Discrepancies in GST Returns

Discrepancies in tax documents, whether due to misunderstanding tax laws or errors in data entry, can result in litigation with the authorities. If these discrepancies are not resolved within a specified timeframe, legal proceedings may be initiated.

iv. Inaccurate Opinions

Many GST payers rely on tax professionals or advisors to assist them in filing their returns. However, if the advice or opinions provided by these advisors are inaccurate, it can result in non-compliance and subsequent litigation. For instance, if certain goods and services are misclassified based on the improper opinion of a tax advisor, taxpayers may face penalties and legal disputes.

v. Supreme Court Rulings

Supreme Court rulings play a significant role in shaping GST laws. While a ruling by the Supreme Court determined that GST rates apply to work contracts and are eligible for input tax credits, there have been several judgments that have burdened taxpayers due to misunderstandings or misinterpretations. These discrepancies have led to a rise in legal disputes and litigation.

vi. Modifications to GST Law

Since its inception, there have been several modifications to the GST laws, some of which have had retrospective effects. Retrospective changes mean that previous transactions may be subject to new regulations. The lack of awareness or misunderstandings surrounding these alterations can lead to taxpayers filing incorrect returns and becoming involved in litigation.

To avoid litigation, taxpayers should stay updated with the latest developments and changes in the GST tax regime. Understanding the reasons behind GST litigation can help prevent future disputes with the authorities.

KEY PLAYERS IN GST LITIGATION

In GST litigation in India, there are several key players with distinct roles and responsibilities. Taxpayers play a crucial role as they are responsible for timely and accurate tax payment, compliance with tax laws, and filing returns within the prescribed deadlines to avoid penalties. On the other hand, tax regulators are tasked with enforcing GST laws, collecting taxes, conducting valuations, issuing verdicts, and collecting penalties for non-compliance. The appeal board serves as an appellate body that has the authority to hear and decide disputes against the declaratory authority, while the arbitration board also fulfills a similar role in resolving disputes and taking necessary actions. Understanding the roles of these key players provides valuable insights into the dynamics of GST litigation in India. 

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;

A. PRE-LITIGATION NOTICES:

1. 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.

B. 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 willful mis-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 willful mis-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 willful mis-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”.

C. 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

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 a 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 a 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 Adjudication Authority to defend the case.

EFFECTIVE GST LITIGATION MANAGEMENT IN INDIA

Managing GST litigation is a complex and often overwhelming process. From dealing with legal paperwork to navigating court proceedings, staying on top, all can be difficult. However, with the right strategies, you can streamline your litigation and get the best possible outcome for the case.

1. Stay up-to date: Keep updated with the latest GST Laws and Regulations to avoid non-compliance and disputes with tax authorities.

2. Keep detailed records: Keeping accurate records, including invoices, returns and other relevant documents is critical to supporting your position in the event of a dispute.

3. Get professional advice: Contact a professional tax advisor or attorney who can advise you of your rights and obligations under GST laws and guide through the legal process.

4. Act quickly: If you receive a tax assessment, acting quickly and filing an appeal within thirty days is essential.

5. Make a convincing case: When preparing an objection or appeal, explaining your position and supporting your arguments with relevant evidence and documentation is significant.

6. Be Active: Take proactive steps to conform with GST laws, including organizing regular audits and calculations to curtail the risk of disputes and penalties.

7. Consider dispute substitute: Consider alternative argument resolution methods, such as negotiation or arbitration, as an alternative to formal litigation.

THE NEED FOR DRAFTING GOOD NOTICES AND ORDERS

A reasoned order is one of the requirements of natural justice.

Moreover, not passing a reasoned order has an impact on tax administration. Notices in files which may have all the materials, may get stayed by Honorable High Courts, only for the reason of bad drafting or not containing sufficient materials. It is true for orders also. A badly drafted order not containing sufficient materials or discussions or is not logically coherent can go against the revenue in appellate forums or may be subjected to remand. Remanded orders create extra work on the administration. Moreover, it may be dealt by an officer who may not be party to the original evidence collection or/and proceedings.

Remanded orders and such stays would also affect the revenue recovery mechanism of the departments since; they require extra entries in registers and connected procedure. In these cases, the department would suffer, even though the files would contain sufficient materials for a sustainable order or the law on the issue is in favour of the department. Hence, a sustainable order observing all the principles of natural justice in form and in procedure involved is the key to successful revenue mobilization.

GENERAL CONTENTS EXPECTED IN A NOTICE

1. The statutory provision and the period for which the proposed action is contemplated.

2. The records or evidence which is relied on by the assessing authority for the proposed action has to be invariably marked and referenced.

3. The self-declaration, if any, made by the assessee to the department which is sought to be disapproved or disagreed by the assessing authority has to be stated.

4. Detailed analysis of evidences/ records based on which the proposed action is sought to be made.

5. Conclusion of the assessing authority based on the analysis as stated above.

6. Arithmetic as well as logical calculation resorted by the assessing authority to arrive into the liability proposed has to be provided with reasonable clarity.

7. If any additions or estimations based on the best judgement of assessing authority is made, the special circumstances and reasons which warrants such additions or estimation has to be spelt out.

8. The quantum of additions or estimation should have a realistic bearing on the nature of irregularly detected, size of business etc.

9. The tax payer should be afforded with reasonable time, a minimum of 15 days to show cause against the proposal.

10. The request of the tax payer for perusal/obtaining copies of the documents or records relied by the authority for making such proposal shall be considered and allowed. Copies of documents relied on which can be given, should be given along with the notice itself so as to avoid any delay.

11. The request for cross examination of the witnesses, if any, should be considered judiciously and decided upon.

12. On completion of the above limit, an opportunity of being heard in the matter shall also be given.

13. Requests for adjournment of time and hearing should be granted based on the merit of such requests.

14. The authority should avoid unnecessary imputations which are not cardinal to the matter beforehand. He should be factual in his findings. Such unnecessary imputations would prejudice or vitiate the entire proceedings.

DRAFTING A RESPONSE

The drafting of a reply to a show cause notice is an art. It requires regular practice of reading the law and its daily updates along with the references to landmark judgements pronounced by various judicial fora.

A good and tasty food though prepared well, will not be attractive unless it is presented well. Similarly, the presentation of response matters a lot when it comes to responding to a show cause notice.

Further the environment for drafting of response should be calm and quiet without disturbance which will enhance the quality of reply with proper flow of contents.

Following points should be kept in mind while responding to a notice:

1. Coverage of issues:

The reply should be prepared by responding to each and every paragraph of show cause notice. The drafting should cover response to all the issues and allegations made in the notice. If any of the issue/ allegation is not addressed, the proper officer may deem it as acceptance of the same and it will have a negative impact on the outcome of the adjudication process.

2. Reference to Provisions of Law:

The reply should be crisp and specific to the point and it should not be like beating around the bush. Whenever required, the references of the provisions of law can be quoted and explained in detailed manner which will convey the clear message of how we have interpreted the provisions.

3. Interpretation Issues:

It has been held in many judgements under the erstwhile law that when the issue involves interpretation, penal provisions cannot be invoked on the tax payer. Whenever there is an interpretational issue, the response should contain the structured method of interpreting each and every word, phrase or line of the section or rule and arrive at a conclusion, giving the meaning as understood by us.

4. Classification Issues:

The major contentious issue which is expected to break out will be on classification. The taxpayer would classify certain particular goods or service under a particular HSN Tariff Code/ SAC Code. However, the proper officer may have another view on classification of those goods and services. If the rate of taxes of the goods or services in dispute happens to be the same, it may not have much implication.

5. Calculation Tables:

Whenever the issue pertains to valuation or calculation of tax liability, it should be the endeavour of the notice to give the complete basis and method of arriving at a particular value as per the valuation rules based on which the tax payer has declared the value of taxable supply and calculated tax liability at appropriate rates.

6. Annexure:

The reply should be cluttered by dumping all the details at one place. The times or details which are referred or which cannot fit within the response should always be given as annexure. This will help the reader of the response to develop a positive feel and understand the issue in better manner and also refer to annexures wherever necessary.

7. Documentation and Submission:

The reply to show cause notice shall be printed on the letter head of the notice along with the annexures on white sheets of size A4 or legal as per requirement. In total, three sets of the response shall be prepared. One for submission with the Department, second copy for obtaining acknowledgment and the third one as client copy which will also come handy in time of need. The response shall be printed with page numbers on every page including annexures. The papers shall be neatly assembled and tagged properly before submission to the department.

CONCLUSION

Winning the case or losing the case should be the matter of concern for a tax payer. As a professional, he should be concerned with the professionalism that he shows in handling the matter. The way in which the professional prepares his response, the way in which he expresses the finer points in detail, the way in which he presents himself before the authorities will have a lasting impression. Whenever any professional appears before the authority, the authority should be convinced or he should develop a feeling that, this person will do his job perfectly and he is a perfect gentleman.

This comprehensive guide serves as a valuable resource for understanding the approach to notices and litigation under GST in India. It covers the fundamentals of GST, explores the types and reasons behind GST litigation, discusses the key players involved, explains the types of notices issued by the GST department, provides insights into effective GST litigation management strategies, and emphasizes the importance of drafting good notices and orders. By following the guidelines and strategies outlined in this guide, taxpayers and professionals can navigate the complexities of GST litigation more effectively and achieve favorable outcomes.

References

• https://njjain.com/gst-litigation-in-india-understanding-the-legal-framework-and-key-strategies-for-resolvingdisputes /#:~:text=The%20biggest%20reason%20for%20this,taxes%20levied%20under%20this%20regime.
• Handbook-on-Show-Cause-Notice-Approach-and-Reply-under-GST-2020
• Evolving_jurisprudence_of_ibc
• https://cleartax.in/s/gst-scrutiny-notice-reply.
• GST Act