Some Budget proposals prone to litigation, may give rise to tax disputes

While Finance Minister Nirmala Sitharaman's Budget speech emphasised the government’s intent on curbing tax-related litigation, there are some proposals which could potentially give rise to newer disputes.

 

Tax experts say one of the most dispute-prone proposals is making "fraudulent availing" of input tax credit (ITC), without an invoice or bill, a cognizable and non-bailable offence. Tightening the noose on fraudulent availing of the input tax credit, the proposal is to widen the coverage of Section 132 of the CGST Act, 2017, from “whoever commits” the offence to “whoever commits or causes to commit and retains the benefit” of the fraud.

 

“This is a reaction to the alarming volume of GST credit frauds being unearthed, almost daily. However, a fall-out of this, which should worry even genuine taxpayers, is that inclusion of ‘fraudulent availing’ of ITC in Section 132(c) brings such cases under preventive arrests,”  says Sudipta Bhattacharjee, partner, Advaita Legal.

 

Earlier, GST rules were amended to empower officers to block input credit of assessees if they had ‘reason to believe’ that credit had been fraudulently availed/ineligible.

 

Bhattacharjee says the ‘reason to believe’ leeway under this new Rule has been grossly misused and thousands of taxpayers have suffered blockage of input credit by way of similarly worded notices from the GST authorities.

 

Another likely point of dispute could be the retrospective amendments made to transitional provisions, say experts. “The amendment seeks to modify Section 140 of the CGST Act and prescribes a time limit on availing transitional credit,” says Rashmi Deshpande, partner, indirect tax, Khaitan & Co. Earlier, the CGST Rules prescribed the time limit.

 

There is a proposal to amend the Customs law to introduce anti-abuse provisions relating to benefits under India’s free-trade agreements. “Reliance on the certificate of origin issued by notified authorities in exporting country will no longer be sufficient and a host of obligations have been cast on the Indian importer, failing which Customs duty benefits under free-trade agreements may be disallowed or temporarily suspended,” says Bhattacharjee.

 

Industry players say many of these new obligations are beyond the control of importers. Legal experts point out any denial of concessional Customs duty benefit to an importer in India based on the new provisions is vulnerable to a constitutional challenge.

 

The proposal to reduce the withholding tax rate on fees for technical services (other than professional services) to 2 per cent from the existing 10 per cent has potentially prepared the ground for other disputes.

 

“There could be various services with respect to which confusion can arise as to their classification as technical or professional services, such as lawyers, chartered accountants, engineering consulting, and doctors. This will add to the burden on the courts, which are already laden with the controversies related to withholding tax issues,” says S Vasudevan, partner, Laksmikumaran & Sridharan.

 

The Budget proposes to curtail the influence of the Income Tax Appellate Tribunal (ITAT) in the dispute resolution mechanism. A minimum deposit of 20 per cent of the tax demand, or furnishing of security, has been proposed as a pre-condition for granting of stay by the ITAT. “The proposal may pave the way for the filing of writ petitions before the high court for getting stay of demand,” says Vasudevan.

 

According to Rajeev Dimri, partner and co-head of tax at KPMG in India, both direct and indirect tax systems in the country are going through a transition. “We have to ensure the transition pains should not become litigation pains.”

Prone to Litigation

 

• Tightening the noose on fraudulent availing of input tax credit
• Retrospective amendments made to transitional provisions on availing of input tax credit
• Anti-abuse provisions under preferential trade/free-trade agreements with other countries
• Confusion around the classification of services, as technical or professional concerning the application of withholding tax
• Curtail the powers of the Income Tax Appellate Tribunal