Procedure of GST Litigation in India

As the Indian economy grows, the importance of tax compliance and management has only increased. However, with this growth, tax disputes and litigation are becoming more common. If you’re facing tax litigation, it’s important to understand the process and steps you can take to manage the situation effectively.

GST is a comprehensive indirect tax levied on the manufacture, sale, and consumption of goods and services, and non-compliance can result in substantial penalties and interest charges. In this blog, we will provide a comprehensive guide to managing GST litigation in India, including the steps involved, the key players involved, and the common challenges faced by businesses.

What is Tax Litigation in India?

Tax litigation refers to the legal process that involves disputes between taxpayers and tax authorities over the interpretation, application, and enforcement of tax laws. Tax litigation typically involves the resolution of disputes arising from assessments, penalties, and other tax-related issues.

GST litigation, specifically, refers to legal disputes that arise from the application of the Goods and Services Tax (GST) in India. GST is a consumption tax that is levied on the supply of goods and services in India. GST litigation may involve disputes over

classification of goods and services,
calculation of tax liability,
application of GST exemptions and concessions,
and other issues related to the administration of GST in India.

Types of Tax Litigation

The term ‘litigation’ is explained as the procedure of taking a matter in a court of law and taking legal action. Mainly, there are two types of tax litigation;

Direct Tax litigation and
Indirect Tax litigation

The Litigation relating to GST falls under the category of “Indirect Tax litigation” in the country.

Reasons for GST Litigation

Different interpretation of Law: The GST Act is a complex piece of legislation, and its provisions are open to different interpretations. This leads to confusion and disagreement between taxpayers and tax authorities on the applicability of GST on various transactions. For example, there may be conflicting opinions on whether a particular supply of goods or services is exempt from GST or whether it attracts a higher rate of GST. This can result in disputes and litigations.
Incorrect opinion: Taxpayers may receive incorrect opinions from tax consultants, which may result in non-compliance with GST laws. For example, a consultant may provide incorrect advice on the classification of goods or services, leading to incorrect GST returns being filed. In such cases, taxpayers may be penalised, and litigations may ensue.
Mismatch in returns: In some cases, there may be a mismatch between the returns filed by taxpayers and the data available with the tax authorities. This can happen due to errors in data entry or misinterpretation of the GST laws. The tax authorities may initiate proceedings against taxpayers for non-compliance, leading to disputes and litigations.
Judgement of Supreme Court: The Supreme Court of India has given several landmark judgements on GST, which have set the tone for GST litigation in the country. For example, the Supreme Court has ruled on the applicability of GST on works contracts and the scope of input tax credit. These judgements have significant implications for taxpayers and tax authorities, and their interpretation may lead to disputes and litigations.
Circulars of CBIC: The Central Board of Indirect Taxes and Customs (CBIC) issues circulars to provide clarity on various provisions of the GST Act. In some cases, the circulars may not be clear enough, leading to confusion and disagreement on the interpretation of the law. For example, there may be conflicting opinions on the applicability of GST on discounts or rebates, leading to disputes and litigations.
Amendment in Act – Retrospective: GST laws are subject to frequent amendments, and some of these amendments may have retrospective effects. This means that the changes in the law may apply to transactions that have already occurred. This can lead to disputes and litigations as taxpayers may not be aware of the changes in the law and may have taken incorrect positions in their GST returns.

Types of Notices issued by the GST department

Notices are issued by the GST department at various stages. Mainly these stages can be categorized into three parts: pre-litigation notices, notices during litigation, and other miscellaneous notices. The provisions that provide such notices have a combination of different sections by the help of which the authority clears such matters. They are listed as below;

Pre-Litigation Notices: Following are the provisions that fall within the purview of Pre-Litigation Notices;

Section 61: Scrutiny of Returns
Section 65: Notice for Conducting Audit (by tax authorities)
Section 66: Special Audit by Chartered Accountant (who is appointed by Tax authorities)
Section 67: Inspection, Seizureand Search
Section 70: Summons

Notices during Litigation

Section 73: Show Cause Notice under Normal Period for Demand. It can be issued within 33 months from the due date of the GSTR-9
Section 74: Show Cause Notice under Extended Period for Demand. It can be issued within 54 months from the due date of the GSTR-9
Section 76: Notice for the demand of collected Tax which is not deposited

Other Notices (Miscellaneous)

Section 79: Notice when there is an outstanding amount due to the default of a Vendor
E-Way Bill Notices
Investigations by CAG, Intelligence, Preventive or Anti-Evasion

Stages of GST Litigation in India

Audit and Assessment: The first stage of the GST litigation process is the audit and assessment of the details submitted by the taxpayer at the time of return filing. This involves a review of the taxpayer’s returns, invoices, and other relevant records. The tax authorities may also conduct an on-site inspection or GST departmental audit to verify the taxpayer’s compliance with the GST laws. After reviewing the records, the tax authorities may issue a Show Cause Notice if any discrepancies have been found.
Objection: If the taxpayer disagrees with the assessment or audit, they have the right to file an objection with the tax authorities within the prescribed time limit (mostly 7 to 30 days) of the assessment. This must be done in writing, and the taxpayer must provide a detailed explanation of the grounds for the objection.
Adjudication: If the objection is not resolved, the matter will be referred to the Adjudicating Authority for a final decision. The Adjudicating Authority will consider the taxpayer’s objection and the tax authorities’ response and issue a ruling on the dispute.
Appeal: If the taxpayer is dissatisfied with the Adjudicating Authority’s decision, they may appeal to the Appellate Authority. The Appellate Authority will review the case and issue a final ruling, which may be further appealed to the Appellate Tribunal and later to the High Court or Supreme Court.

Appeal against the result of the Audit

Taxpayers have the right to file an appeal when they are not satisfied with the result of Assessments or Audits. To file an appeal there is a fair appeal mechanism provided. Such mechanisms are unbiased and independent of the parties.

When a progressive law like GST is considered, business entities must understand the basics of GST Litigation and Departmental Audits. This would strengthen their defense strategy.

Further, when multiple entities in a group or (in a legal entity) litigations across multiple GSTINs are handled, the following are the most common factors of the Industry given priority when it comes to litigations:

keeping a track of all the matters that are actionable,
To monitor the progress of the litigations and preparedness regularly,
To maintain all the required documents and information that is needed during the litigations from its original source,

Considering the fact that GST is a progressive law, it is critical to update the case files of these litigations. Particularly tracking the recent developments through notifications, judicial precedence, and circulars.

The procedure of GST Litigation

Analyzing the Notice or Show Cause Notice or Order- After receiving the Show Cause Notice or General Notice from the department of GST, it is important for the business entity and the company to firstly verify it and analyze it,
Briefing the company – The next step is preparing the brief of the company and then deciding the way to deal with the notice, and also making a plan of action for assurance to defend the company at all possible costs,
Collating required information or data or reconciliations- In order to prove the case of your company, a lot of pieces of evidence, data, and related information and certain documents will be required, to produce before the officials,
Validating and verifying the aforesaid information and data- After the data is collected, it is necessary to validate and verify it so that the accuracy of data is maintained,
Drafting a suitable Appeal or Reply after thorough research for legal precedence- Once the documentation and information are in place, drafting a suitable reply is important, this draft would act as a reply to the notice received,
Submitting the Appeal reply- Once the appeal or the reply is ready, it is essential to submit it to the concerned department
Appearance before Commissioner, Adjudicating Authority, or Tribunal- The last part of the adjudication process is taking part in the appearance of a case before the concerned Adjudicating Authority to defend the case

What is GST litigation?

GST litigation refers to the legal process involved in resolving disputes or disagreements related to the Goods and Services Tax (GST) between taxpayers and tax authorities.

What is a Show Cause Notice (SCN) in GST?

An SCN is a notice issued by tax authorities to a taxpayer outlining the discrepancies found during an audit or assessment and asking the taxpayer to explain why tax, interest, or penalties should not be levied.

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