India's GST set for years of court action

A Hindu devotee at the annual Rath Yatra, or chariot procession, in Ahmedabad, India, on Sunday, with a message on his back asking if the new tax is a boon or burden. The GST will be rolled out next month.
A Hindu devotee at the annual Rath Yatra, or chariot procession, in Ahmedabad, India, on Sunday, with a message on his back asking if the new tax is a boon or burden. The GST will be rolled out next month.PHOTO: REUTERS

Complex new tax, with four tiers, bound to attract thousands of lawsuits, say lawyers

NEW DELHI • India's new goods and services tax (GST) will spark a flood of litigation on everything from which tax brackets companies fall into to the revenue they generate, some of the country's top lawyers predict.

The complex nature of India's GST - which has four tax brackets ranging from 5 per cent to 28 per cent - is bound to attract thousands of lawsuits in a legal system that already has a backlog of more than 24 million cases, the lawyers said.

Even before the planned July 1 roll-out, about 100,000 indirect tax appeals were clogging India's judicial system at the end of March 2015, locking away some US$23 billion (S$32 billion) in potential government revenue, according to a government report.

The government insists the GST will decrease tax-related litigation.

But for lawyers who recall McDonald's 12-year legal saga to have soft serve ice cream classified a tax-exempt dairy product, and not ice cream which attracted a 16 per cent duty, the potential for years of billable hours is plain to see.

"I absolutely expect more litigation, so we are increasing our team," said Mr Sandeep Chilana, a partner at Shardul Amarchand Mangaldas & Co, adding: "The most impacted industry by GST is my industry. And we are obviously impacted positively."

 
 
 

One of Prime Minister Narendra Modi's most ambitious reforms, the tax will combine more than a dozen levies, creating a uniform market across India for the first time. Most goods and services will fall into four main "slabs" or brackets: 5, 12, 18 and 28 per cent. Many staples, such as fresh vegetables, are exempt.

The multiple rates have helped Mr Modi's government mitigate political controversy, including the potential for food price inflation on vegetables like onions, which have been known to sway election results. But the different levies, along with huge compliance requirements and the potential for state- versus-central government disputes makes the tax prone to litigation, lawyers said.

"Classification issues are the biggest contributors to disputes," said Mr Mukesh Butani, managing partner at BMR Legal.

"The present GST is the most complex in the world," Mr Arvind Datar, a senior lawyer who practises at the Supreme Court, said.

The new regime will raise classification and valuation disputes as companies dispute which brackets they fall into or push to keep their valuations lower, legitimately or not. "When there are different tax rates, there is always a possibility that someone will want to be in the lower slab," Mr Chilana said of the McDonald's case.

In another case, the Supreme Court ruled coconuts were neither dried fruit nor vegetables, but an entity unto themselves that must attract entry duty.

The Delhi High Court also recently ruled that footwear without back straps were sandals rather than "chappals", or slippers, as the government contended.

And lawyers themselves have already challenged a law in the apex court that brings certain lawyers under the current service tax net, arguing the extra cost to litigants is against the Constitution's aim to ensure justice to all.

Despite state representation on the federally organised GST Council during negotiations, India's myriad local governments could still challenge the council's legitimacy in court, said another lawyer.

"It will settle down in another five to 10 years - it will take that much time - but it will settle down," said Mr V. Lakshmikumaran, founder of Lakshmikumaran & Sridharan.

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A version of this article appeared in the print edition of The Straits Times on June 28, 2017, with the headline 'India's GST set for years of court action'. Print Edition | Subscribe