Taxation

Indirect Tax Disputes in India:  Court Decisions & Their Impact on Businesses

Indirect taxes play a significant role in the Indian economy, with businesses collecting them from consumers and paying the same to Government. However, the collection and payment of indirect taxes can often lead to disputes between businesses and the government. These disputes can arise due to various reasons, such as the interpretation of tax laws, the classification of goods and services, and the calculation of tax liabilities. Resolving these disputes can be a time-consuming and costly process for businesses. The courts in India have played a crucial role in settling indirect tax disputes, with several landmark decisions providing guidance and clarity on the taxation of goods and services. In this blog, we will explore the common types of indirect tax disputes faced by businesses in India, the role of courts in resolving these disputes, and the impact of court decisions on businesses.

Types of Indirect Taxes in India

1. Goods and Services Tax (GST):

GST is a comprehensive indirect tax that was introduced in India in 2017, replacing multiple indirect taxes like VAT, Excise Duty, Sales Tax and Service Tax. GST is levied on the supply of goods and services and is collected by businesses registered under GST. It is a destination-based tax, which means that it is levied at the point of consumption rather than at the point of origin. The tax rate varies depending on the type of goods or services supplied.

2. Excise Duty:

Excise duty is a tax levied on the manufacture or production of goods in India. It is typically paid by manufacturers and producers and is included in the price of the goods. Excise duty is levied on a wide range of goods, including tobacco, petroleum products, and alcoholic beverages. Excise duty rates can vary based on the type of goods and are typically revised in the annual budget.

3. Customs Duty:

Customs duty is a tax levied on the import and export of goods in India. It is collected by the customs department and is typically paid by importers or exporters. Customs duty rates can vary based on the type of goods and are typically revised in the annual budget. Customs duty is levied to protect domestic industries from foreign competition and to generate revenue for the government.

4. Service Tax:

Service tax was a tax levied on the provision of services in India. It was typically paid by service providers and was included in the price of the services. Service tax was levied on a wide range of services, including telecommunications, transportation, and hospitality services. Service tax rates varied based on the type of services and were typically revised in the annual budget.

Common Indirect Tax Disputes Faced by Businesses

Indirect tax disputes are a common occurrence in India, with businesses facing disputes over various aspects of indirect taxes. Here are some common disputes faced by businesses for each of the primary types of indirect taxes:

a. GST Disputes:

1. Input Tax Credit (ITC) Disputes: One of the most common GST disputes faced by businesses is related to input tax credits. ITC refers to the credit that businesses can claim for the GST paid on goods and services used in the course of business. Disputes can arise when businesses claim Input Tax Credit for ineligible expenses or when they are unable to reconcile the ITC claimed in their GST returns with the ITC reflected in their books of accounts.
2. Classification Disputes: Another common GST dispute faced by businesses is related to the classification of goods and services. GST rates vary depending on the classification of goods and services, and disputes can arise when businesses classify their products or services incorrectly, resulting in incorrect GST liability.
3. Place of Supply Disputes: Place of supply is a critical aspect of GST, as it determines the jurisdiction in which GST is payable. Disputes can arise when businesses are unable to determine the place of supply correctly or when the place of supply is disputed by the GST authorities.

b. Excise Duty Disputes:

1. Valuation Disputes: Valuation of goods is a critical aspect of excise duty, as the duty is typically levied on the value of goods manufactured or produced. Disputes can arise when businesses incorrectly value their goods or when the valuation methodology used is disputed by the excise department.
2. Classification Disputes: Similar to GST, classification disputes can also arise in the case of excise duty. Disputes can arise when businesses classify their products or services incorrectly, resulting in incorrect excise duty liability.
3. Refund Disputes: A refund of excise duty is a common issue faced by businesses, especially when the duty paid on goods is higher than the actual duty liability. Disputes can arise when businesses are unable to prove their entitlement to the refund or when the excise department disputes the refund claim.

c. Customs Duty Disputes:

1. Valuation Disputes: Valuation of goods is also a critical aspect of customs duty, as the duty is typically levied on the value of goods imported or exported. Disputes can arise when businesses incorrectly value their goods or when the valuation methodology used is disputed by the customs department.
2. Classification Disputes: Similar to excise duty, classification disputes can also arise in the case of customs duty. Disputes can arise when businesses classify their products or services incorrectly, resulting in incorrect customs duty liability.
3. Country of Origin Disputes: Country of origin is a critical aspect of customs duty, as the duty rate varies depending on the country of origin of the goods. Disputes can arise when the country of origin is disputed by the customs department or when businesses misrepresent the country of origin to avail of lower duty rates.

d. Service Tax Disputes:

1. Classification disputes were similar to GST and had arisen in the case of service tax. Disputes had arisen when businesses classified their services incorrectly, resulting in incorrect service tax liability.
2. The place of provision had been a critical aspect of service tax as it determined the jurisdiction in which service tax was payable. Disputes could have arisen when businesses were unable to determine the place of provision correctly or when the place of provision was disputed by the service tax authorities.
3. Refund disputes were a common issue faced by businesses in the past, especially when the tax paid on services was higher than the actual tax liability.

Role of Courts in Resolving Indirect Tax Disputes

The role of courts in resolving indirect tax disputes is crucial in India, as businesses often face disputes related to various aspects of indirect taxes. Here are some ways in which courts play a role in resolving indirect tax disputes:

1. Interpretation of Laws: Courts play a critical role in interpreting laws related to indirect taxes. As the laws and regulations related to indirect taxes can be complex and subject to interpretation, courts can provide clarity on the interpretation of these laws, which can help businesses avoid disputes in the first place.
2. Adjudication of Disputes: When disputes arise between businesses and tax authorities, courts can provide a platform for adjudication of these disputes. Courts can hear arguments from both parties and provide a decision on the matter, which can be binding on both parties. This can help resolve disputes between businesses and the tax authorities and ensure that the correct amount of tax is paid.
3. Judicial Review: In some cases, businesses may challenge the decisions of the tax authorities in court, which can lead to a judicial review of these decisions. Courts can review the decisions of the tax authorities and provide a decision on the matter, which can either uphold the decision or overturn it. This can provide a mechanism for businesses to challenge decisions that they believe are incorrect or unfair.
4. Precedent Setting: Decisions made by courts in one case can set a precedent for future cases, which can impact how businesses approach indirect tax disputes. Precedent-setting decisions can provide clarity on the interpretation of laws and regulations related to indirect taxes, which can help businesses avoid disputes in the future.

Landmark Court Decisions Related to Indirect Tax Disputes in India

Several landmark court decisions related to indirect tax disputes have been made in India. Here are some of the significant court decisions related to indirect tax disputes:

a. Balaji Theatre v. Chief Secretary [2020] (Madras) In this case, the Madras High Court held that the municipality’s levy of entertainment tax on cinema theatres was constitutional and valid under the GST regime. The petitioner, a cinema theatre owner, had challenged the municipality’s order to pay entertainment tax after the introduction of GST. The petitioner argued that admission to cinema halls is treated as a supply of service chargeable to GST under the GST legislation. The municipality could not collect a separate entertainment tax. However, the court observed that the Puducherry Municipalities Act, 1973, was still in force and empowered the municipal council to impose a tax on entertainment. The court held that unless the introduction of the PGST Act repealed the act, the municipality could collect entertainment tax.

b. Smt. Kanishka Matta v. Union of India [2020] (Madhya Pradesh): In this case, the Madhya Pradesh High Court held that GST authorities had the power to seize cash from an assessee under Section 67(2) of the CGST Act^[1]. The petitioner was the wife of the proprietor of a firm involved in confectionery and pan masala items. The department had conducted a search operation and seized cash of around Rs. 66 lakhs. The petitioner argued that the department needed to be more competent in seizing cash since it could not be treated as a document, book, or thing under Section 67(2) of the CGST Act. However, the court held that the word “thing” needed to be interpreted widely and would include money as well. Therefore, the department had rightly seized the cash, and the question of releasing the amount only arose once the investigation was completed.

c. Skill Lotto Solutions (P.) Ltd. v. Union of India [2020]: In this case, the Supreme Court held that the levy of GST on lotteries was neither discriminatory nor violative of Articles 14, 19(1)(g), 301, and 304 of the Constitution of India. The petitioner, an authorized agent for the sale and distribution of lotteries organized by the State of Punjab, had filed a writ petition challenging the definition of goods under Section 2(52) of the CGST Act 2017, and the notification levying tax on lotteries. The court observed that including an actionable claim in the definition of goods under the CGST Act was not contrary to the legal meaning of goods. Therefore, the court held that the levy of GST on lotteries was constitutional and valid.

Impact of Court Decisions on Businesses

The impact of court decisions related to indirect tax disputes on businesses in India can be far-reaching. Here are some of the ways in which court decisions can impact businesses,

1. Clarity on Laws and Regulations: Court decisions can provide clarity on the interpretation of laws and regulations related to indirect taxes. This can help businesses to understand their tax liabilities, plan their tax strategy, and comply with the applicable laws and regulations. When there is clarity in laws and regulations, businesses can make informed decisions about their operations, including expansion plans, investments, and resource allocation.
2. Reduction in Litigation: Court decisions can help to reduce litigation by providing a mechanism for judicial review of disputes between businesses and tax authorities. This can save businesses time and money, as they do not have to resort to prolonged litigation to resolve their tax disputes. Additionally, reduced litigation can lead to a more efficient and effective tax system, allowing businesses to focus on their core operations instead of protracted legal battles.
3. Precedent Setting: Court decisions can set precedents for future cases, providing guidance to businesses and tax authorities on how similar disputes should be resolved. This can help to create a more predictable and stable tax environment for businesses. When there are clear precedents, businesses can better anticipate the outcome of disputes and make more informed decisions about their tax strategy.
4. Impact on Business Operations: Court decisions can have a direct impact on the operations of businesses, particularly if the decisions result in changes to tax liabilities or compliance requirements. Businesses may need to adjust their operations or tax strategies to account for these changes. For example, a court decision that reduces the tax liability of a business may free up resources that can be used to invest in new products or services, while a decision that increases the tax liability may require the business to adjust its prices or cut costs.
5. Impact on Reputation: Court decisions can impact the reputation of businesses, particularly if the decisions are seen as unfavorable or unjust. Negative publicity can damage a business’s brand, leading to a decline in customer trust and loyalty. Conversely, positive publicity resulting from a favorable court decision can enhance a business’s reputation and attract new customers.

Conclusion

In conclusion, indirect tax disputes can be a major challenge for businesses in India, leading to prolonged litigation, uncertainty, and financial losses. However, court decisions can play a crucial role in resolving these disputes, providing clarity on laws and regulations, setting precedents, and creating a more stable and predictable tax environment for businesses. The landmark court decisions related to indirect tax disputes discussed in this article have had far-reaching implications for businesses in India, impacting their tax liabilities, compliance requirements, and reputation. By understanding the role of courts in resolving indirect tax disputes and the impact of court decisions on their operations, businesses can make informed decisions about their tax strategy and operations, enabling them to navigate the complex and ever-changing tax landscape in India.

Also Read: Corporate Tax in India: Everything you need to know