There has been an air of anticipation amongst stakeholders about the establishment of the GST Appellate Tribunal (GSTAT). Expectations wax and wane depending on news that arrives from time to time. Although many milestones have been crossed, including the notification of its procedure a few weeks ago, its operations have commenced, somewhat shakily, only last week with only one member of the Principal Bench in position. As the last port of call for determination of points of fact and the first ‘independent’ forum for adjudication of disputes beyond the pale of GST administration, it is indeed a critical piece in the GST Dispute Settlement architecture.
Owing to the involvement of judicial members, who have the requisite skills and knowledge for reading and interpreting the law without being steeped in the ways of tax administration, there is a perception that it would impart much greater objectivity and fairness in resolution of disputes compared to internal adjudications or appeals within the department. Moreover, it will enable substantial time-saving in dispute resolution compared to the more expensive alternative of invoking the writ jurisdiction of High Courts for securing relief.
Deep fault lines
All the same, it would be naive to assume that the commencement of operations of the GST Appellate Tribunal would itself transform the dispute settlement landscape or that it would be a silver bullet. The fault lines are deeper and it is the entire dispute settlement mechanism for GST that needs a revisit for it to function with the expected fairness, efficiency and speed. Even though GST subsumed many pre-existing indirect taxes such as Central Excise duty, Service Tax and Value Added Tax and to that extent carries forward their essential features, it is a new law with new concepts (example, supply and not manufacture or provisioning of service or sale) and lexicon.
That being so, an elevated incidence of disputes in the early stages was inevitable. But a tax system where a large number of disputes arise, their resolution takes time resulting in a pile up and the slate has to be cleaned frequently through amnesty schemes is obviously not the most ideal. What complicates the mix further is that the outcome of dispute resolution at the primary stages of adjudication or appeal is perceived to be tilted unfairly in favour of revenue or the tax administration. It is rare that the taxpayer secures a favourable outcome at these stages pushing her to approach the High Court in appeal — a proposition that is both expensive and time-consuming.
Apart from the big ticket reforms such as rate rationalisation being discussed in the context of GST 2.0, having in place a fair and efficient dispute resolution mechanism is critical and must be ensured. This needs tackling on several fronts with the objective of both preventing the occurrence of disputes and their timely and fair resolution. The proposed simplification of the rate structure, currently being examined by a Group of Ministers, would itself be an important means of preventing or curbing disputes. However, that would happen only if a reduction in the number of rates is accompanied by the broad-banding of rates for items belonging to the same commodity group such as food products.
One fallout of such broad-banding — especially if done at the merit rate and not standard rate — could be the creation of rate inversions. For instance, if it is decided to apply the merit rate of tax to all kinds of bread, rotis, parathas, dinner rolls and so on, it is likely that their inputs (say plastic packaging materials) or input services (for instance, GST paid on rentals) would attract the standard rate. But this can be tackled through a robust mechanism of refund of Input Tax Credit accumulated owing to the inversion. Presently, refunds are not permitted if the inversion occurs between input services and output goods. There is no compelling logic for it to be so. As such, refunds of accumulated input tax credit on account of rate inversions need to be permitted regardless of whether the pile up is on account of input goods or services.
The system of Advance Rulings is also a standard trade facilitation tool for taxpayers to obtain certainty of treatment and, thereby, prevent disputes. Owing to each State having its own GST collection machinery, a separate authority for advance rulings has been created at the State level. While this has made it easy for taxpayers to access the forum, it has often resulted in divergent rulings being given by different authorities on the same issue. In the absence of GSTAT, the process for getting these rulings ironed out is a long drawn and expensive one- requiring the intervention of High Courts. One possibility could be to digitalise the database for advance ruling right from the application stage at the national level so that two separate authorities are prevented from pronouncing rulings on the same issue resting on an identical factual matrix. For such a system to work, the States would also need to agree that rulings would be valid throughout the country and not just in the State where they have been issued. If it helps improve acceptability of nation-wide applicability of rulings, States can be given the option of making their submissions to the Advance Ruling authority in another State that is examining a particular issue.
Data discrepancies
There are three broad sources of GST disputes. A substantial number arise due to data discrepancies across various returns filed by a taxpayer or between GST returns and other data sources with which data is triangulated at the back end. This could be owing to genuine errors in recording data in returns filed at different points in time, a gap in understanding of what a particular data field in the return denotes or even pointers to avoidance or evasion of tax. These gaps are normally detected using data-interrogation technology, analytics and even AI based on risk parameters and culminate in a large number of system-generated notices being issued over a short period of time.
While such errors cannot be eliminated, there is scope for reducing their incidence if businesses exercise due caution or diligence so that data errors are minimised across returns. For achieving this, regular sensitisation sessions or boot camps need to be organised for businesses or tax practitioners. Alternatively, online tutorials or pre-approved software utilities with in-built validations or checks could also be used. Further, GSTN- the company that manages the IT backbone — should issue advisories from time to time pointing out commonly-noticed errors so that they may be avoided in the future. This is necessary particularly when return formats are changed.
Divergence in interpretation
The second and perhaps the largest source of disputes is the divergence in interpretation of GST law between authorities and the taxpayer. This could pertain to issues ranging from taxability to the appropriate rate of tax or exemption to be applied to a given transaction or situation. It could even extend to compliance requirements by way of procedure. In any tax law — especially a new one like GST — such disputes are unavoidable to some extent. What has helped enormously in settling such disputes is the alacrity with which the GST Council has approved the issuance of Circulars to clarify the legal position on contentious or open issues.
Regardless of whether a Circular confirms the taxability of a transaction or holds that a higher rate of tax is applicable, it sets out the institutional view loud and clear. In fact, in many cases the Council has while clarifying an issue mandated that matter may be settled on “as is basis” for the past. These Circulars have helped not only close outstanding disputes but also foreclosed the possibility of future disputes.
The expectation is that such Circulars or notifications would continue to be issued by the Council and, depending on the number of disputes, with increasing frequency. A few changes would make this system more meaningful in terms of the actual outcomes. To begin with, it would be useful to think of an early warning system for identifying disputes that either entail a substantial revenue implication; are widespread in terms of their distribution across locations or emanate from differential tax treatment of similarly placed taxpayers so that timely action may be taken to clarify where necessary.
Second, it has been noticed that in certain cases the field formations do not always abide by Circulars and deny extending their benefit to taxpayers (let us say where a refund is due or a tax demand needs to be dropped). It may be useful for the Council to institutionalise the preparation of an Impact Assessment Report on each Circular or notification so that it may be informed whether or not a Circular helped close the majority of disputes it sought to address. If not, it could present reasons such as misapplication by field formations or genuine gaps in covering all corner situations in the Circular or any other. The healthy practice of putting out draft Circulars for comment by taxpayers and other stakeholders prior to their final approval by the Council would also go a long way in improving their efficacy.
Compliance verification
The third source of disputes emanating from compliance verification processes such as scrutiny of returns, audit or investigation has to do with misreporting or misrepresentation of facts in tax returns or the unearthing of modus operandi for evasion of tax. These revolve around the appreciation of facts or evidence and thus there cannot be a general dispensation for their resolution. At the same time, there is a strong case for easing these processes to ensure that they are not applied arbitrarily or as fishing expeditions; they are completed in a timely and transparent manner and a reasonable approach is followed.
There is a deep concern about overlap in their application both across States as well as across processes. So it is not uncommon for businesses that operate in multiple States to be faced with simultaneous audits in different States or audits and investigations at the same time. What compounds the problem is that owing to cross-empowerment, the same issue could be under the lens both of State and Central authorities in different locations or by field formations and DGGI. Most taxpayers do not have the resources or the bandwidth to deal with so many different authorities at the same time — each one of whom may seek a different set of documents and approach the same issue differently. This system is unsustainable.
In the long run, the solution lies in creating functional verticals for these processes at the national level with officers on secondment both from the Centre and the States so that these overlaps are avoided. Moreover, at least for a few sectors where businesses are very large in size and necessarily have presence in multiple States — if not the entire country — such as banks, insurance companies, airlines, the railways etc., a beginning could be made by organising coordinated, centralised, national level audits.
The experience gained from these would be useful in re-engineering the audit process generally for other large businesses having multi-State presence and a turnover above a certain threshold. Pending the fulfilment of this long-term goal, it may be worthwhile to define which legal action by authorities (issuance of summons to a taxpayer) would constitute the commencement of an investigation and then to digitalise the process so that the possibility of more than one authority launching an investigation against the same taxpayer on the same issue is ruled out.
Reskilling and training
Finally, there is no substitute for focusing on reskilling and training tax officials handling GST disputes, investigations or adjudications. The philosophy towards compliance management needs to shift from that driven by entrapment of taxpayers after waiting for them to commit an offence to providing timely guidance and handholding to them. Apart from regular refreshers in GST law and its nuances as well its evolution based on Court judgments, the focus should be on how to interpret and apply the law in a reasonable manner; follow due process; be mindful of the taxpayers’ legitimate rights and abjure from personalising issues.
An analysis of recent orders or judgments of High Courts in GST matters would reveal the disproportionately large number of cases where cases fail simply due to non-observance of principles of natural justice — show-cause notices not served properly; demand issued without providing adequate justification; not affording a personal hearing before passing an adverse order; denying access to all relied upon documents; not meeting all legal arguments raised by the taxpayer in defence when passing orders and so on. The least one may expect from a tax system is that these are non-negotiable principles. Not only should officers be trained until these principles become natural habit to them, there should also be proper accountability where they are given a go by.
CBIC has, in recent months, issued very detailed guidelines or instructions on several business processes and sub-processes that involve intense human interface such as summons, arrests, investigation and prosecution to prevent caprice and excess at the hands of field officers. The Council may consider prescribing these as “good practices” for State officials to follow too. Moreover, a Quality Assurance Review mechanism may be instituted to carry out periodical verification that these guidelines are actually being followed in the day-to-day working of the formations and identifying violations.
To sum up, the setting up and commencement of operations of the GST Appellate Tribunal (GSTAT) would be a very significant step in strengthening the dispute settlement mechanism under GST. But the dispute settlement process is in need of a deeper fix that cannot wait.
The writer is currently retired Chairman of the Central Board of Indirect Taxes and Customs. The views expressed are personal
Source from: https://www.thehindubusinessline.com/opinion/is-gst-appellate-tribunal-a-panacea-for-disputes/article69787476.ece
