Understanding GST Litigation and the Crucial Role of GST Tribunals in India

India’s Goods and Services Tax (GST) network stands as a monumental achievement in tax administration, processing an astounding over 3.5 billion invoices annually. Given the significant financial and operational implications of tax disputes, a clear understanding of GST litigation is essential for businesses to proactively manage risks and ensure compliance. Here we delve into the intricacies of GST litigation and examines the pivotal role that the much-anticipated GST Appellate Tribunals (GSTATs) are poised to play in its resolution.

The Genesis of GST Litigation

At its core, litigation signifies disputes and conflicts arising from a particular issue. Under the GST regime, the scope of litigation is vast and can stem from a multitude of factors:

1. Rate of Tax: Disagreements on the applicable GST rate for specific goods or services are a common cause of contention. The complexity of classifying items under different schedules often leads to varying interpretations.

2. Classification: Determining the correct Harmonized System of Nomenclature (HSN) code for goods or the Service Accounting Code (SAC) for services is crucial for applying the appropriate tax rate. Ambiguities or differing interpretations can trigger litigation.

3. Valuation: Disputes regarding the taxable value of goods or services, especially in related-party transactions or cases involving discounts and incentives, frequently lead to legal challenges.

4. Interpretation of Statutory Provisions: The GST law is a complex piece of legislation, and its various sections and rules are subject to interpretation. Differing understandings between taxpayers and tax authorities can result in litigation.

5. Applicability of a Notification: The government frequently issues notifications to clarify or amend GST rules and rates. Disputes can arise regarding the applicability or interpretation of these notifications.

6. Improper Application of a Legal Provision: Mistakes or disagreements in applying specific provisions of the GST Act or rules during transactions or compliance procedures can lead to scrutiny and potential litigation.

7. Violation of the Law and its Procedures: Non-compliance with the mandatory provisions and procedures outlined in the GST law, such as registration, invoicing, and record-keeping, can attract penalties and initiate litigation.

8. Delay in Complying with the Statutory Provisions and Filing of the Returns: Failure to adhere to the prescribed timelines for filing GST returns or other statutory compliances can result in penalties and legal proceedings. The penalty for late filing of GST annual returns can be as high as ₹5,000 per day!1 . Solutions like floTax, which automates GST filings with reminders and one-click submissions, can help businesses avoid such penalties1 .

9. Refund Issues: Disputes regarding the eligibility or processing of GST refunds can also escalate into litigation.

 

Essentially, any non-compliance with the law, procedural lapses, misinterpretations of the provisions, or even perceived intentions to defraud the government can culminate in GST litigation.

Relevant Provisions Under the GST Act

Several sections of the GST Act lay the groundwork for potential disputes and the mechanisms for their resolution. Understanding these provisions is crucial for businesses navigating the GST landscape:

• Section 61: Scrutiny of Returns: This section empowers tax authorities to scrutinize the returns filed by taxpayers and seek clarifications or explanations for any discrepancies.

• Section 65: Notice for Conducting Audit by Tax Authorities: Tax authorities are authorized to conduct audits of taxpayers’ records. Discrepancies identified during these audits can lead to demand notices and subsequent litigation.

• Section 66: Special Audit by Chartered/Cost Auditor Appointed by Tax Authorities: In specific circumstances, tax authorities can direct a special audit to be conducted by a chartered accountant or cost accountant. Findings from such audits can also trigger disputes.

• Section 67: Inspection, Search and Seizure: This section grants tax authorities the power to conduct inspections, searches, and seizures if they have reason to believe that there has been a violation of the GST law. Actions under this section are highly susceptible to litigation.

• Section 70: Summons: Tax authorities have the power to issue summons to individuals to appear before them and provide evidence or information. Non-compliance can lead to legal consequences.

• Section 73: Determination of Tax in Non-Fraud Cases: This section deals with the process of determining tax liability when there is no element of fraud, willful misstatement, or suppression of facts.

• Section 74: Determination of Tax in Fraud Cases: This section outlines the procedure for determining tax liability in cases involving fraud, willful misstatement, or suppression of facts, which often carries higher penalties and a longer limitation period.

• Section 76: Tax Collected but not Paid to Government: Failure to remit the tax collected from customers to the government can lead to stringent actions under this section.

• Section 78: Recovery Proceedings: This section empowers tax authorities to initiate recovery proceedings to recover outstanding tax, interest, or penalties.

• Section 107: Appeal with Appellate Authorities: This section provides the first avenue for taxpayers to appeal against orders passed by the original assessing authorities.

• Section 108: Revisionary Powers: This section grants revisional powers to higher tax authorities to review and potentially revise orders passed by their subordinates.

• Section 112: Appeal with Tribunals: This crucial section outlines the provision for appealing against the orders of the first appellate authorities to the GST Appellate Tribunal.

• Section 117: Appeal with High Court: Taxpayers aggrieved by the order of the GST Appellate Tribunal can further appeal to the High Court on substantial questions of law.

• Section 118: Appeal with Supreme Court: The final avenue for appeal lies with the Supreme Court.

As emphasized during the webinar, every topic under GST can potentially become a subject of litigation , making a thorough understanding of these relevant provisions indispensable.

Hierarchy of Adjudicating Authorities

The GST law establishes a multi-tiered hierarchy for resolving disputes:

1. Original Assessing Authority: This is the first point of contact in case of a dispute, typically comprising officers such as the Assistant Commissioner (AC), Deputy Commissioner (DC), Joint Commissioner (JC), Additional Commissioner (ADC), or the Commissioner of CGST or SGST. The specific officer depends on the jurisdiction and the financial limits involved in the case.

2. First Appellate Authority: Taxpayers aggrieved by an order from the Original Assessing Authority can file an appeal with the First Appellate Authority. This could be the JC, Commissioner of SGST, or Commissioner of CGST, depending on the rank of the officer who passed the original order.

3. Second Appellate Authority: The next level of appeal lies with the Second Appellate Authority, which can be the ADC, Commissioner (Appeals) of CGST or SGST, or the GST Tribunal. Notably, if the original order was passed by the Commissioner, the first appeal directly lies with the GST Tribunal.

4. High Court: Aggrieved taxpayers can further appeal to the High Court on substantial questions of law arising from the order of the GST Tribunal6 . Interestingly, the webinar speaker mentioned that classification issues might directly be decided by the Supreme Court, bypassing the High Court.

5. Supreme Court: The apex court serves as the final arbiter in GST disputes. This clearly defined hierarchy ensures that taxpayers have multiple avenues to seek redressal for their grievances.

Role and Significance of GST Tribunals

The GST Appellate Tribunal (GSTAT) is envisioned as a crucial institution for the efficient and effective resolution of GST disputes at the second appellate level. Tribunals, in general, are quasi-judicial bodies established to provide a fast, inexpensive, and decentralized mechanism for adjudicating disputes in various matters, including administrative and tax disputes. It’s important to note that the original Constitution did not contain provisions for tribunals, and they were later introduced through the 42nd Amendment Act of 1976, adding Part XIV-A to the Constitution, which includes Articles 323A (administrative tribunals) and 323B (tribunals for other matters)

The key highlighted distinctions between tribunals and traditional courts are :

• Nature: While courts are part of the traditional judicial system, tribunals are quasi-judicial bodies.

• Jurisdiction: Civil courts possess broad judicial power to try all suits of a civil nature unless specifically barred. Tribunals, however, have the power to try cases related to special matters conferred upon them by statutes, such as income tax tribunals hearing income tax matters and GST tribunals hearing GST matters.

• Independence: The judiciary is independent of the executive, whereas administrative tribunals are often under the purview of the executive.

• Procedure: Courts are bound by the strict Rules of Evidence and the Code of Civil Procedure (CPC). Tribunals, while having powers like a civil court in certain aspects like summoning and demanding documents, are primarily guided by the principles of natural justice and have the authority to regulate their own procedure. This emphasis on natural justice ensures that both parties are given a fair opportunity to present their case and that decisions are reasoned. The webinar speaker stressed that a quasi-judicial order must always be a reasoned order, failing which it can be a primary ground for appeal.

• Composition: GST Tribunals are designed to have a balanced composition, including both judicial members and technical members with expertise in central and state GST matters. This blend of legal and technical expertise aims to facilitate a more informed and expeditious resolution of disputes. The GST Appellate Tribunal composition includes a National Bench in Delhi with a President (a judicial member), another judicial member, and one technical member each from the state and the Centre. Additionally, there are to be 31 State Benches, each consisting of two judicial members, one technical member from the Centre, and one from the state.

The role of the GST Tribunal is therefore paramount in providing an effective appellate mechanism to address grievances arising from the orders of the first appellate authorities. Orders issued by the Tribunal can be enforced as if they were court decrees, further solidifying their authority.

Issues Around the Functioning of GST Tribunals.

Despite the crucial role envisioned for GST Tribunals, their operationalization has faced significant delays. As highlighted in the presentation deck and the webinar, several challenges persist:

• Appointment of Members: The process of appointing judicial, central GST, and state GST members to the National and State Benches is a complex and time-consuming endeavor. States need to constitute search committees, invite applications, scrutinize candidates, conduct background verifications, and obtain necessary clearances. Similarly, the Centre is responsible for appointing CGST and judicial members.  Factors like transfers and promotions within government departments can further complicate this process.

• Provision of Infrastructure: Establishing the necessary infrastructure, including office spaces, support staff, and other resources, for the 31 State Benches and the National Bench is a significant logistical challenge for the respective states.

• Enabling Online Filing: The government intends for all filings with the GSTAT to be online. However, the functional website for online filing of appeals is still pending. While a website address may exist, it is reportedly not yet operational.

• Notifying the Start Date of Functioning: Critically, there has been no official notification regarding the date from which the GST Tribunals will commence their functioning. The webinar speaker noted the absence of any indication about the start date in the recent budget presented on 1st February 2025. Justice (Retd) Sanjay Kumar Mishra was appointed as the first President of GSTAT and took oath on 6th May 2024, but the actual functioning is yet to begin.

• Changes in Hierarchy: Frequent changes in the hierarchy of relevant tax authorities can also contribute to administrative delays. The delay in the constitution and operationalization of GST Tribunals has left taxpayers facing orders from the First Appellate Authorities in a precarious situation, unsure when they can pursue their appeals further.

• Charting the Course: The Way Forward in the Absence of Functional Tribunals. Recognizing the predicament of taxpayers, the government has provided some interim relief. The webinar speaker explained that taxpayers who have received an adverse order from the First Appellate Authority and intend to appeal to the Tribunal can follow these steps:

• Pre-Deposit: Make the required pre-deposit of 10% of the disputed tax amount, subject to a maximum of ₹20 crore each for CGST and SGST. Previously, this was 20% with a maximum of ₹50 crore each. It’s important to note that at the first appellate level, the pre-deposit is typically 7.5% of the disputed amount.

• Letter of Intent: File a letter with the jurisdictional tax department stating the intention to file an appeal with the GST Tribunal once it becomes functional. This letter should include proof of the pre-deposit made.

• Stay on Recovery: The act of making the pre-deposit automatically stays any recovery proceedings against the demand. The department has been instructed not to initiate coercive measures in such cases while taxpayers await the constitution of the Tribunal.

It was Suggested that directly approaching the High Court or Supreme Court through writ petitions in the absence of a functional tribunal is not a default option. These higher courts exercise extraordinary jurisdiction and will typically entertain writs only in cases of serious grievances where the regular appellate mechanism is demonstrably unavailable or ineffective, causing severe hardship. Simply wanting to bypass the established hierarchy is unlikely to be accepted by the courts.

 Outlook and Recommendations:

The establishment of functional GST Appellate Tribunals is crucial for providing an efficient and effective avenue for resolving GST disputes. While the delays in their operationalization are a concern, the appointment of the President and the ongoing efforts to constitute the benches offer a glimmer of hope. The interim measures provided by the government offer temporary relief to taxpayers awaiting the Tribunal’s commencement. Businesses must remain vigilant, understand their rights and obligations under the GST law, and be prepared to utilize the GST Tribunal mechanism once it becomes operational. Leveraging technological solutions like floTax can also play a significant role in automating GST processes, minimizing errors, and thereby reducing the likelihood of litigation. As India’s GST framework continues to evolve, the effective functioning of GST Tribunals will be a vital step towards ensuring a fair and efficient tax dispute resolution system.

Read here to explore how floTax’s features help you meet your GST compliance and managing your GST filing in a simplified system.

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