Challenges In Current GST Structure And Implementation In India

 

Source:DNSIndia

This paper is authored by Sarthak Chauhan, Gourav Asati, Aryan Singh Chouhan, Abhinav Bishnoi and Shruti Rai Khanna final-year student at Institute of Law, Nirma University, Ahmedabad. 

Keywords

Goods and Services Tax Act, 2017, Harmonized System of Nomenclature (HSN), GST Appellate Tribunal, GST Council, Government, Indirect Taxes

1.    Introduction

 

Before 2017, the system of Indirect Taxes levy in India was very different. Various taxes such as Service Tax, Sales Tax, Octroi, Luxury Tax, Value Added Taxes, etc. were applicable depending on the kind of transaction. In July 2017, the Constitution (One Hundred and First Amendment) Act, 2016 introduced the Goods and Services Tax Act, 2017. This tax was made with the objective of forming an integrated indirect tax that shall be levied on manufacture, sale and consumption of goods and services. Indirect Taxes are levied on expenses and hence are regressive in nature. These taxes have a fixed rate or formula for calculation and depend on the supply, therefore are indifferent to a customer’s income. GST is levied on the Supply of Goods and Services and is a Destination-Based tax and makes free flow of tax credit in both inter and intra state transactions. Article-269A was also inserted which stipulates that GST in case of inter-state trade or commerce shall be levied and collected by the Central Government of India.[1] On the other hand, in the case of intra-state transactions, the state government shall levy and collect the GST amount. Further, the amendment brought in the insertion of new Article-279A which states that the President shall within sixty days from the introduction constitute a Council to be called the Goods and Services Tax Council.[2] The article further provides the details on who shall be the chairperson as well as members of the GST Council.

 

Its been four years since the introduction of the Goods and Services Act, however, various problems are yet to be solved by the government and the GST Council. In this paper, we aim to discuss the various issues faced in the GST Regime by the people and genuine technical problems in the system faced due to poor planning and structuring.   

 

2.    Non-constitution of GST Appellate Tribunal

 

Every person has the natural right to appeal to higher authorities if they are not satisfied with the award given by the lower authority. The Central Goods and Service act also provides this right to appeal under section 107 states that where it is stated that when a person who is not satisfied with the award passed by adjudicating authority of GST may appeal the same to the appellate tribunal.

Section 107(1)[3] of the CGST Act also stipulates that such appeal from the order of adjudicating authority shall be made within 3 months of the order of adjudicating authority.

Section 109[4] of the CGST Act, demonstrates how the appellate tribunal shall be formed and that it is the duty of government to constitute the GST appellate tribunal whereas section 109(3) of the CGST act states that the appellate tribunal shall be constituted with the following members:-

(1) 1 Judicial Member

(1) 2 Technical Members One of Technical Member(Centre)

The composition of GST Appellate Tribunal was challenged before the Madras High Court in the case of Revenue Bar Association v. Union of India[5] wherein it was alleged that since technical members are administrative officers and the government is generally the party in such cases, therefore technical members cannot exceed the number of judicial members and that such composition is not valid.

The Madras high court also agreed with the contention that since the government is generally the party in the cases, the composition of GST Appellate tribunal cannot be such where the technical members exceed the judicial members which could affect the independence of the judicial fora and thus the madras high court struck down the section 109(3) and 109(9) of CGST Act.

Thereafter there has been no changes made in the struck down provisions and as a result, even after 4 years of enactment of the GST Act, the GST tribunal has not been constituted.

One of the biggest problems faced by the aggrieved is that as per section 107 of the CGST Act any person who wants to challenge the decision of appellate authority had to challenge the award before the GST Appellate Tribunal within 3 months of the passing of the award, but since the GST Appellate tribunals had not been constituted yet how can the aggrieved challenge the award within the limitation provided to him.

To answer the same and to provide general relief to aggrieved parties, the CBDT released Circular No. 132/2/2020[6] in which they had acknowledged the fact that since the composition of GST Appellate Tribunal had been struck down by Madras High Court, GST Appellate Tribunals had not been constituted and that therefore people cannot file an appeal to appellate tribunal within 3 months and they further stated that to provide relief with the government by passing order on 03 December 2019 had stated that the period of 3 months to appeal to GST Appellate Tribunal will be counted from the period when President or State President enters the office.

The non-constitution of GST Appellate Tribunal has caused a lot of problems to the aggrieved parties and created an additional burden in High Courts, as the remedy to file an appeal under GST Appellate Tribunal is not functional, the only option that is left with the parties are then to file the appeal under High Court, which thus creates an additional burden on High Court leading to a backlog of cases, therefore, there is an urgent need for the constitution of GST Appellate Tribunals which shall be made after taking in consideration the judgment given by Madras High Court.

 

 

3. GST Portal Issues

 

The Goods and Services Tax is still in its infancy, putting enormous pressure on the government to address some of the burning issues and problem-solving issues that plagued the year-old indirect tax regime. The finance ministry, as well as the GST council, must address the issues concerning the GST portal and form-related implications that all taxpayers must deal with. Small business units, or SMEs, are the backbone of the Indian economy. It would be unrealistic to expect small businesses to make the shift to an online IT platform and file returns without problems. For the majority of our workforce, it is a difficult assignment to deal with the complexity of the virtual GST platform, these individuals have limited knowledge about computer and digital spaces.

The GST portal automatically generates GSTR 2A which is a purchase-related return. GSTR 2A is different from the previous GSTR2 return form in the sense that it could not be edited.  It obtains information about goods or services purchased in a given month from the seller's GSTR-1. A registered buyer can use the GSTR-2A for input tax credit details when filing GSTR-3B and GSTR-9.

In the recent case of Union of India V. Bharti Airtel Ltd. & Ors [7]issue related to Form GSTR 2A was raised before the Supreme Court. Bharti Airtel Ltd had failed to claim certain input tax credits from July to September 2017 and only noticed the fault after the lapse of one year. They argued before the Court that because the common portal was not completely operational during that time therefore they were unable to verify the accuracy of the input tax credit. It was called out an operation issue of GST web portal, also the company claimed that there was lack of an option to revise the return, they were unable to claim the input tax credit.[8]

The Supreme Court of the view that a person registered under the GST is required to maintain books of accounts and records as mentioned under Chapter VII of 2017 Rules. It essentially includes self-assessment documents about Input Tax Credit and Output Tax Liability. Form GSTR-2A is merely a tool to help you make an informed decision about your self-assessment. Non-operation of Form GSTR-2A shall not hinder the assessment process since the exemption provided at the relevant time required the registered person to complete returns on the premise of self-assessment.[9]

 

4.    Issues surrounding not getting GST refunds in time

 

Refund under GST Regime

If any amount is due from the tax administration to the taxpayer then it is refunded under the present system of taxation. Under CGST Act, 2017 and SGST Act, 2017 important provisions of refund are laid down by the GST law, with other delegated provisions the provision of refund is also delegated to it. Section 54 CGST Act, 2017, Section 77 CGST Act, 2017, and Rule 89(2) CGST Rules, 2017[10] are the provisions that state the relevant procedure and submission of documents for dealing with the refund of the claim. The issue of a refund is very strained for both the administrator and taxpayer as well therefore it is needed to be defined very clearly under the law.[11] The doctrine of Unjust Enrichment is followed under the GST regime which states that no benefits are to be retained if it is inequitable and unjust. If any benefit or amount belongs to someone else in good conscience, equity, and justice and it is retained by someone else then it will be Unjust enrichment.[12]  GST being the indirect test needs every claim to be passed by this test of Unjust enrichment because it is a tax that is borne by the customer. The process of the refund of GST can be initiated by the taxpayer on submission of certain documents with the declaration to the authorities for making a claim.[13] To make this process hassle-free the adequate and uninterrupted mechanism is very crucial for the tax administration. If the refund is blocked then it could affect the expansion of the existing business which can be done by utilizing of refund as working capital.[14]

 

4.1.  Legal Sanctity and Timeline

The automated report of cash ledger available on GST portal in electronic form is demanded refund process which lacks the legal justification being the certified automated report.[15] Similarly, the requirement to upload GSTR-2A which is an auto-populated report is also not reasonable during the filing of refund application.[16]  The provisions of the GST states that after applying within 15 days the acknowledgement is to be issued in case of other refunds than cash ledger refund, on the satisfaction of fulfilment of the needs the order of refund within 60 days is passed. But, the problem lies related to the timeline which is not specified under the law for the issuance of deficiency memos. The circular passed in November 2019 can be interpreted for deciding the timeline but due to no specific provision, this is not adhered to due to which the process stuck for months. This goes against the very principle of timelines which are being introduced for fastening the process of refund.

The help of technical advancement is taken for making the procedure easier and convenient for the taxpayer. When the officer found a deficiency then issues a deficiency memo to the taxpayer on GST Portal and sometimes sends directly mail it to the taxpayer, but the updates of the process are not being put on the portal regularly and it shows pending for a long period. In the wake of COVID-19, the government tries to resolve the numerous problems related to the claim of GST refund. To avail of the tax credit, it is necessary according to the GST framework that in the government portal the corresponding invoice should be reflected. The government issued a circular in the year 2020 that stated if the exporters could not match the invoices with the vendors then they can’t claim tax credit refunds. The invoices that are not being reflected automated from GSTR-2A which is created based on GSTR 1. The government waived the late fees for filing GSTR-1 therefore the corresponding invoices can’t be submitted and not reflected which will seize the crores of an input tax credit of the exporter.

 

GST being the standardized mechanism for claiming a refund contained the provision of refund and procedure to claim it. For dealing with this issue expeditiously special drive by the CBIC has been flung for dealing the cases of refund in a month.[17] The government is also taking strong steps and making changes i.e. refund application withdrawal facility, to exclude the deficiency memo issuance period from the 2 years for filing new refund application. It is necessary because time is the essence in the tax administration, the refunds if timely provided then the blocked fund can be utilized as working capital in modernization and expanding the business.

 

4.2. Need of Structural Change

The framers of the GST provided the law which simplified the procedure and resolves the issue in a time-bound manner while taking advantage of technological advances with minimal intervention of humans between the authorities and taxpayers.[18] Amidst this law surplus of faulty filing and glitches in procedures led to blockage of crore of rupees of exporters with the government. The changes brought by the government and other facilities have given relief to the taxpayers but still, there are issues in the practical application which are very essential to be addressed being the vital aspect of GST. The lacunas of law should not affect the large numbers of people in the process when they claim of refund under GST as per provisions. The issue of long-pending refunds can be solved but still needs the law to be amended for synchronizing the primary provision with the rules, this fill, on one hand, solve the disputes related to refunds and on another hand will certainly lessen the upcoming disputes in the future related to refund claims.

 

 

5.    Ambiguity in sections

 

Litigation of cases involving GST has recently begun and already a lot of cases are pending since there is a lot of confusion as to the applicability of sections and the grey areas concerned with the same. Ambiguities persist not just in sections but also in the rules, procedures and compliances. This when addressed to the department, circulars are issued by the government to address the same, however, a lot of issues remain unaddressed. These are the cases that ultimately lead to the courts.

 

Recently, in the case of Dharmendra M. Jani v. Union of India & Ors.[19], the High Court of Bombay, delivered a judgment with respect to intermediary service under GST. Intermediary means a broker, an agent or any other person who arranges or facilitates the supply of goods or services between two or more persons but does not include a person who supplies such goods or services or both on his own account.[20] The case was heard by a two-judge bench wherein both the judges, Hon’ble Justice Ujjal Bhuyan and Hon’ble Justice Abhay Ahuja gave differing judgements. Now the case will be decided by the Chief Justice of Bombay High Court. This case is one such example of how unclear the provisions under this act are.

 

6.    Harmonised System of Nomenclature (HSN) code

 

Harmonised System of Nomenclature (HSN) code is a system for the systematic classification of goods and services all over the world. This system was formulated by the World Customs Organisation (WCO) which came into effect in 1988. It is generally practised and accepted worldwide.[21]

It is a 6-digit code arranged logically and legally for around 5,000 plus commodities. Over 98% of the merchandise in international trade uses the HSN system. There is a well-defined set of rules provided for the uniform classification in order to facilitate international trade. HSN system is used by over 200 countries for:-

1.     Uniform classification

2.     The base for the custom tariff

3.     Collection of international trade and statistics   

India is a member of the World Customs Organisation (WCO) since 1971. Initially, India uses the 6-digit HSN code for the Customs and Central Excise commodities. But later the Customs and Central Excise added 2 more digits in order to make codes more precise. Now in India there is an 8-digit HSN code used for the commodities.

The first two digits represent the chapter number of the article for that commodity. The next two numbers represent the heading number, and the last two numbers represent the product code. The last two digits used in India is for deeper classification of the tariff item.[22]There are about 21 sections, 99 chapters, 1,244 headings and about 5,225 sub-headings. The sections are divided on a broader perspective and on the other hand chapters are divided more specifically.

For the services, just like goods, have the same system i.e., called Services Accounting Code (SAC). In this, the first two digits are the same as they represent ‘services’ itself. Then the next two digits represent the major nature of the service, and the last two digits represent the detailed nature of the service. 

Any sort of changes, addition, or formulation in the HSN code in India is done by DGFT (Director General of Foreign Trade).

 

6.1. How to find HSN code and its importance

First, the person has to visit the government website of the Central Board of Indirect Taxes and
Customs or ACES website. The person has to type the product name in the search box, and he will find the 4-digit HSN code. Then click on the code in order to get the 8-digit code for the import and export purpose. Also, there is a list of product details with the HSN codes which are divided into 23 sections. One can navigate there to find the HSN code.[23]

It is mandatory to mention the HSN code on the shipping bill and failing to which the tax benefits will not be rendered. Though in India the HSN code is not mandatory for the products below 1.5 crores rupees or if the person is registered under the compensation scheme of GST. If the turnover is between 1.5 crores to 5 crores then only a 2-digit HSN code is mandatory. And trader having turnover more than 5 crores has to mandatorily mention the 4-digit HSN number. And the 8-digit HSN code is mandatory for import and export purposes.

Mentioning the HSN code makes it easy for the taxpayer as this code will automatically pick up the dealers’ details and will thereby reduce the efforts as they then will not have to mention the product details separately.  

 

6.2. Problems with reporting of Harmonised System of Nomenclature (HSN)

The taxpayer has to check for the HSN code provided on the GST portal manually for each product. The excel sheet appears before him, containing the list of such codes along with commodity detail. But many a time the taxpayers have to face the problem of unavailability of HSN code and are reported missing.[24]

The other major problem faced by the people is that if the code is available then sometimes it is not accepted by the e-invoice/e-way bill portal. Such technical glitch has been reported many times and it makes the experience unpleasant for the people.[25]

Another problem that is faced by the people is that there sometimes happens to be more than 1 code for a product available and the lack of clarity to apply which code makes the situation difficult. For example, if the HSN code is “0900 37 38”, then the 6-digit HSN corresponding to 8-digit is available in the Custom Tariff Act. Therefore, the same is available on the GST portal/Eway portal. Another example would be, if the trader is trading in any bread product and now there are different codes available for many bread products but not for that very exact product, then it would be upon the trader to choose the code that would cost him less tax.[26] Hence more time update is required in order to minimise this problem in the system. 

 

7.    Conclusion

GST was constitution after many years of debates and the main aim of GST was to resolve the complications in the Indirect Taxation regime of India which it did by subsuming 16 indirect taxes, but unwillingly it has created new problems for the taxpayers due to which they are suffering. The non-availability of GST Appellate tribunal is one such example, which even after 4 years of enactment of the act has not been constituted creating a lot of confusion and problem for aggrieved parties. Also while enacting GST, the government has focused on digitising the taxation regime wherein everything related to GST has to be done through the GST portal which helps in improving accountability, stability and transparency in the system, but there are certain problems with the GST portal like the issue related to revising the returns filed due to which the assesses are facing several issues and since everything is done through the portal if they face the problem related to GST problem then to rectify it by writing the same to GST officers which is a time-consuming method. The assesses has also faced problems to receive their refunds in GST which is a big problem and needs to be addressed quickly.

India is more dependent on the global economy as it is in comparison to what it was in the past and hence it is strengthening its macroeconomics institutions for more sustainable growth. The new GST regime will be more beneficial for every sector and especially the modern era’s E-commerce business. The HSN code in this regard will do a very vital role in order to segregate all the transactions and maintain smooth functioning but it certainly requires some improvement.[27] The government shall formulate a committee in order to check and remove all the difficulties existing in this system and makes the GST, even more, taxpayer friendly. 

One of the biggest boons in the new GST regime is that the interaction between the taxpayers and the tax authorities has been reduced considerably and ultimately because of which the corruption ends. The new system is so modern and advanced that it does not require that interaction between the taxpayer and the concerned authorities because of the use of technology.[28] 

Also Read: Whether GST is levied on the winning prize money? 

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[1] Article 269A, Constitution of India.

[2] Article 279A, Constitution of India.

[3] Section 107, Central Goods and Service Act,2017.

[4] Section 109, Central Goods and Service Act,2017.

[5] Revenue Bar Association v. Union of India [2019] 70 GSTR 277 (Mad).

[6] Circular No. 132/2/2020, Ministry of Finance ,CBDT ,GST Wing Policy[dated 18.03.2020].

[7] CIVIL APPEAL OF 2021, (ARISING OUT OF S.L.P. (C) NO. 8654 OF 2020).

[8] id.

[9] id.

[10] Rule 89(2), CGST Rules, 2017

[11] Section 54, CGST Act 2017.

[12] Dr. Neelam Goyal, A Discussion on Refunds Under the GST Act, Volume 5 I Issue 3 E ISSN 2348-1269

[13] Report of the Joint committee on business processes for GST.

[14] Sachin Dave, Exporters facing GST refund issues as govt makes invoice matching compulsory for input tax credit https://economictimes.indiatimes.com/news/economy/foreign-trade/exporters-facing-gst-refund-issues-as-govt-makes-invoice-matching-compulsory-for-input-tax-credit/articleshow/76973872.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst.

[15] id.

[16] Section 55, Central Goods and Service Tax Act 2017.

[17] Chapter 4, Refund under GST, CBIC. https://www.cbic.gov.in.

[18] id.

[19] Dharmendra M. Jani v. Union of India & Ors, MANU/MH/1461/2021.

[20] Section 2(13) Integrated Goods and Services Tax Act, 2017.

[21] Majumder, Sumit Dutt. “GST AND E- COMMERCE.” National Law School of India Review, vol. 28, no. 2, Student Advocate Committee, 2016, pp. 123–33, http://www.jstor.org/stable/26201829.

[22] PUROHIT, MAHESH C. “Issues in the Introduction of Goods and Services Tax.” Economic and Political Weekly, vol. 45, no. 5, Economic and Political Weekly, 2010, pp. 12–15, http://www.jstor.org/stable/25664058.

[23] Ministry of Finance – Department of Revenue, Central Board of Indirect Taxes and Customs, Government of India, (11 November 2021, 06:00 PM) ,https://cbic-gst.gov.in/gst-goods-services-rates.html.

[24] “GST and Autonomy of States.” Economic and Political Weekly, vol. 45, no. 4, Economic and Political Weekly, 2010, pp. 5–6, http://www.jstor.org/stable/25664030.

[25] SARMA, J. V. M., and V. BHASKAR. “A Road Map for Implementing the Goods and Services Tax.” Economic and Political Weekly, vol. 47, no. 31, Economic and Political Weekly, 2012, pp. 68–75, http://www.jstor.org/stable/23251632.

[26] KISHORE, PRAVEEN. “Administering Goods and Services Tax in India: Reforming the Institutional Architecture and Redesigning Revenue Agencies.” Economic and Political Weekly, vol. 47, no. 17, Economic and Political Weekly, 2012, pp. 84–91, http://www.jstor.org/stable/23214846.

[27] Majumder, Sumit Dutt. “GST AND E- COMMERCE.” National Law School of India Review, vol. 28, no. 2, Student Advocate Committee, 2016, pp. 123–33, http://www.jstor.org/stable/26201829.

[28] PUROHIT, MAHESH C. “Issues in the Introduction of Goods and Services Tax.” Economic and Political Weekly, vol. 45, no. 5, Economic and Political Weekly, 2010, pp. 12–15, http://www.jstor.org/stable/25664058.