GST will aggravate India’s huge tax litigation problem

A user-friendly GST would not only lower litigation, but also boost compliance and consequently revenue collections, which so far have been below expectations.

Litigation, said Ambrose Bierce, is a machine which you go into as a pig and come out of as a sausage. To get a sense of how many pigs are being turned into sausages in India, or how severe the problem of lawsuits can get, look no further than this year’s Economic Survey. It points out that more than 200,000 tax cases, amounting to nearly 4.7% of India’s gross domestic product (GDP), are stuck in appellate litigation across all levels of the judiciary. The introduction of a rather complex goods and services tax (GST) will aggravate the problem.

“Many a time, tax officers consider issuing tax notices and leave it to the courts to finally take a call on the tax position. This gets accentuated on matters where more than one interpretation is possible. Also, once a tax demand had been issued for a particular year, recurring notices are issued for all subsequent years till the matter attains finality. This increases litigation manifold and the amount stuck becomes huge,” said Anita Rastogi, indirect tax partner at PwC India.

This is possibly one reason why the majority of the cases are finally decided in favour of the taxpayer. The Economic Survey says the department loses 65% of its cases and what’s more, the success rate of the department has been declining.

Thankfully, some measures were announced in the Union budget to smooth the dispute resolution processes and to reduce litigation. Improvements have been made in the advance rulings system, pre-notice consultations and in the rules for show cause notices.

However, the survey does not cover the impact of GST implementation and global experience shows that during initial years of GST implementation, tax litigations dramatically shoot up. India is unlikely to be an exception, especially given the controversial anti-profiteering clause.

“So far, after GST implementation, more than two dozen writ petitions on different issues have already been filed in various courts. While the GST Council is pragmatically addressing the matters reaching the writ Courts, new issues such as benefits to backward areas may add to the already pending list,” said Abhishek A. Rastogi, partner, Khaitan and Co.

Since there are plenty of grey areas with respect to GST, some tax experts say that one way to nip this problem in the bud would be to include the concept of pre-notice consultation in GST rules as well.

Jane McCormick, global head of tax, KPMG in the UK said that a further simplification of India’s complicated GST framework would prove helpful in containing the litigation menace. “Given the size of the Indian economy, GST-related teething troubles could last for more than three years. So, there probably will be an increase in litigation, but I hope India benefits from other people’s experiences on that because it does come back down to having a simpler system. The more complexity there is in the system, bigger the chances that people will disagree and have to litigate. Even a very simple thing, like the difference between confectionary and food will end up litigating it out,” she said.

A user-friendly GST would not only lower litigation, but also boost compliance and consequently revenue collections, which so far have been below expectations.

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