GST superstructure lacks some basic features even after 5 years

Currently, there is no appellate mechanism in place for rulings by the GST authorities and a group of ministers is deliberating on it

The goods and services tax (GST) system has replaced the national anti-profiteering authority (NAA) with the Competition Commission of India (CCI) this month, a move that would make this mechanism a permanent feature unlike its temporary nature earlier.

However, the CCI too suffers from the core issue of finding an appropriate methodology to gauge profiteering and the quantum of penalty over which NAA is embroiled with litigation in courts.

This, along with the absence of centralised authority for advance rulings and GST tribunals, implied that the superstructure of the GST system lacks basic and core mechanism and methodology.

The decision to subsume NAA with CCI for anti-profiteering purposes comes at a time when 50-odd cases against the constitutional validity of the authority have been clubbed and are being heard in the Delhi High Court. The hearing is expected to resume on Tuesday. The biggest issue is the lack of methodology to calculate profiteering. Though there is no prescribed methodology, NAA has been using some of it in some sectors such as real estate.

For instance, in the case of Pyramid Infratech, the NAA had calculated the amount of profiteering through a ratio of the taxable turnover of the company to the input tax credit availed. The case is related to the construction of flats under the affordable housing scheme in Haryana. The authority had directed the company to refund or reduce Rs 8.2 crore from 2,476 buyers’ last instalment in 2018.

The NAA found that the ratio was 1:1 in the pre-GST era and 7:2 in the post-GST time. As such, the difference between the two, 6:1, is the profiteered amount and must be refunded to homebuyers or deducted from the prices of the flats.

Apart from this, the interest at the rate of 18 per cent per annum was also to be returned to homebuyers, the NAA had ruled.

This quantum was protested by the company’s counsel Abhishek Rastogi, who said the project was not construction-linked but time-linked. In a construction-linked project, this ratio could be relevant, but not in a time-linked one, he said.

Challenging the methodology, he said the ratio also did not take into account the increased prices of raw materials such as steel and cement.

Rastogi, founder of Rastogi Chambers, said the methodology is not prescribed anywhere in the Constitution and rules made thereunder. According to section 171 of the Central Goods and Services Tax (CGST) Act, companies have to give ‘commensurate’ reductions in prices to consumers following the GST rate cuts or input tax credit benefits.

Rule 126 of the CGST Act merely says that the authority may determine the methodology and procedure in this regard.

In 2017, the GST Council told the industry representatives that it would be difficult to come out with norms for calculating profiteering since there are different nuances for different sectors of the economy. To this, the representatives asked the Council to base the norms on sectors and segments given by the Tariff Commission. However, the norms have not yet come in.

Rastogi said while the authority to determine profiteering may change as per the decision of the GST Council, the moot point remains that due to the absence of methodology, the hardships in determining the quantum of profiteering would remain the same.

"Absence of methodology to determine the quantum of profiteering for diverse sectors will have to cross the test of constitutionality at some stage. There are various instances of inconsistencies between different orders in absence of methodology and guidelines to compute the quantum of profiteering," he said.

Centralised AAR

The state-level Authorities for Advance Rulings (AARs) have given conflicting rulings in various cases on the nature of goods which determine the tax slab they fall under. These relate to food items such as ‘papad’, fryums and other areas such as setting up a solar power plant, intermediary services, and so on.

There is a provision in the GST laws to set up a centralised AAR to clarify matters if state-level AARs give conflicting orders. However, the body is yet to see the light of day. “A centralised AAR is in the works, but may take some time,” a key finance ministry official said.

Saurabh Agarwal, tax partner at EY, said as the GST Act is evolving and new practical challenges are arising for which GST registrants are filing advance ruling applications with the concerned state. However, the applicability of advance ruling is restricted to a state in which an advance ruling application is filed and if a GST registrant is registered in more than one state then in all the states application is required to be filed separately.

Also, it could be possible that a GST registrant is applying a different mechanism for a particular transaction in different states. If the centralised advance ruling authority concept is developed then it would help the GST registrants to apply the same processes in the business as a whole, ensure no conflicts in ruling between the states and would result in a reduction of administrative costs for obtaining advance ruling for a particular transaction.

GST Tribunals

There is no appellate mechanism for rulings by the GST authorities at present, even as a group of ministers (GoM) is deliberating on it. Earlier this year, the GoM, convened by Haryana deputy chief minister Dushyant Chautala finalised that  GST Appellate Tribunals (GSTAT) will be set up with a principal Bench in New Delhi and similar Benches at the state level. Now, it is up to the GST Council to take a decision on this issue. After that it can be incorporated in the finance bill of the next year and bodies could be set up by the end of 2023. Till then, there will be no appellate tribunal.

Sandeep Sehgal, partner-tax at AKM Global, said it is strange and unfortunate that it has been five years since the implementation of GST and still the tribunals are yet to get functional.

"Several disputes are unresolved," he said.

Those not satisfied with the rulings of GST authorities may go to high courts but there are already a plethora of other cases in these courts. On top of it, the expensive nature of these cases deters many from approaching the courts.

"The taxpayers may have to approach respective high courts but it is not feasible for high courts to admit all the cases. Hence, there is an urgent need to implement the tribunal at the earliest and make the redressal process effective," Sehgal said.