Where GST legislation needs a change to bring it in sync with business realities

It cannot be stressed enough that practical experiences and societal changes necessarily shape any law. GST is no exception. A revenue oriented theoretical approach relying solely on abstract principles cannot sustain any meaningful economic growth. Adaptability is the vital life force of any statute. Like our constitution, we need tax laws that are reflective of a living and breathing society that is transforming and evolving, the amendments being a testimony to the same.

Taxation in an economy has three important facets – tax policy, tax administration, and tax litigation. The ideal objective of any tax policy design is that the administration of the same results in optimum revenue collection without a burdensome compliance cost for the taxpayers. This, by default, minimizes any subsequent litigation.

Regressive Patterns in GST

The real world, while disconnected from such ideal constructs, is constantly struggling to integrate new business models with old policy designs. A progressive tax policy adapts and accommodates such integration. However, GST has witnessed certain regressive patterns – abolition of settlement commission, non-closure of prosecution proceedings even if tax and consequential interest / penal liabilities are paid, blocking of credits even before notifying taxpayers, freezing of bank accounts etc.

It is unfortunate that very progressive and industry friendly provisions – 11 C of the Central Excise Act or 28 A of the Customs Act are not in the purview of the GST framework.

Pragmatic Aspects of Old Sales Tax Regime

These two provisions – 11C and 28A – found resonance in various Sales Tax statutes legislated by different states in the erstwhile era like Section 45A of the Bombay Sales Tax Act, 1959. In essence, all these sections allowed for exemption from payment of taxes – short paid or not paid - arising because of general practice that existed at any given point in time. Legislated through amendments in the respective laws with effect from 01.07.1978 – when our country was still in the clutches of the inspector raj - the said two sections provided pragmatic solutions to otherwise tricky legal entanglements.

The reality of business structures juxtaposed with the bona fide nature of the tax assessments ensured that industry practice prevailed over the existing law. Simply put, all that the notifications issued under the said Sections did was that the practices that were followed till then were accommodated into the law by way of delegated legislations. Pieces of benevolent legislation, as they came to be known, put to rest mammoth tax litigations which had become to consume unwarranted investigative and unnecessary judicial bandwidth.

Applying Judicial Decisions Prospectively

The said sections provide relief to taxpayers in multiple instances. One such scenario is when a judicial forum holds any activity taxable consequent to litigation which the industry in general interpreted and believed as non-taxable. The Government by virtue of these sections had the authority to take a pragmatic stand based on the circumstances of the matter to not let the judicial decision affect the practice adopted by the industry in the past but to make it applicable only from the date of the decision.

Another scenario is when the Government decided to correct an anomaly that may have resulted in policy making. In a famous episode from the Service Tax era, when services provided to and by schools were exempted from service tax, there was a period during which it so happened that auxiliary educational services and renting of immovable property services provided to the schools were exempted, but such services provided by schools were not exempted. So, in effect, if a school hired a bus to pick up students and drop them off at school, there was an exemption on service tax because the provider of the pickup and drop services was providing such service to the school. But if the school owned the bus, then the drop and pick up being offered by the school was not exempt from service tax.

This position existed from 01.04.2013 to 11.07.2014 after which an exemption was granted on such services provided by schools. Given the anomaly and the general practice that the schools did not pay service tax on such services provided by them, the power under section 11C was exercised and a notification was issued to the effect that such tax was exempted for the period in question.

GST Needs To Be Mindful Of Realities

These sections have been used often across a variety of industries to ensure the tax administration does not become a mindless application of the law divorced from the realities of business. The beneficiaries under the said sections encompass erection of transmission towers, schools, museums, pharmaceuticals etc. As recently as February 2024, Section 28A has been used in Customs law to provide an exemption to wearable devices illustrative of the continued relevance of the said sections.

However, the conspicuous absence, in the GST law, of a provision akin to Section 11C of the Central Excise or Section 28A of Customs law is a major hindrance.

It is severely hurting industries, in some cases even posing existential threats. Availability of such a provision in the hands of a government sympathetic to industry hardship could also potentially address concerns like retrospective applicability of tax amendments. Particularly in matters pertaining to rates, where understanding the circumstances and law in a given period could be appreciated from the prism of general practice adopted by the industry.

The lack of a provision like 11C/28A has deprived the economy of a possible dispute resolution mechanism beyond litigation. This needs to be fixed urgently, if not for the sake of industries, to ensure a healthy economy.

The writer is an independent advocate based out of Delhi and previously worked in the Government of India.

Views are personal and do not represent the stand of this publication.