GST Issues Demand Notices To India Inc
#IndiaInc grapples with a deluge of #GST notices. Will companies get legal relief?
In conversation with Rastogi Chambers' Abhishek Rastogi and Lakshmikumaran & Sridharan Partner Attorneys’ L Badri Narayanan. #BQLive
In conversation with Rastogi Chambers' Abhishek Rastogi and Lakshmikumaran & Sridharan Partner Attorneys’ L Badri Narayanan. #BQLive
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NewsTranscript
00:00 has been dealing with a flurry of GST notices and it's not just the gaming industry. Of course,
00:06 it's the gaming industry that hit the headlines last week with tax notices of huge proportions.
00:13 In many cases, the demand for tax unpaid as claimed by the GST authorities was even larger
00:20 than the total revenue of the companies. But it's not just gaming. There have been tax notices
00:26 going out to companies like ICICI Lombard, Maruti and many, many more. Now, what exactly is going on?
00:32 Why have we seen so many notices coming in by the end of September? Of course, in a lot of these
00:39 cases, the demand has been challenged in court. Will these claims actually stick? We're going to
00:45 be breaking down this story and I have two excellent legal experts with me. But first,
00:51 I'm going to go across to my colleague, Janani, who has been tracking these details, speaking to
00:56 experts and including those in the finance ministry to understand what really the reason is. So,
01:01 Janani, why this hurry to send out so many tax notices, especially before September 30th?
01:07 That's right, Tawana. As you pointed out, there is in fact a spate of notices that have gone
01:16 and it's not just particular to the gaming industry as we would have seen perhaps in the
01:20 case of Delta Corp or Dream 11. It's also to insurance companies. It is also to individual
01:25 taxpayers. And I would like to bring out that there is a common thread, which is we have to
01:29 notice the period of the notice that is being specified and the charges that are being levied.
01:34 Now, the period of notice in almost all of these cases starts July 2017 from the implementation
01:39 of GST till the period of 2022. And the charges have been mostly under Section 74 of the GST Act.
01:46 Now, the jargon of that is a willful miscalculation or a suppression of details with an intent to
01:53 evade taxes. Now, it's important that this section is pointed out because it comes with a timeline
01:59 that any adjudication on the matter needs to be intimated by the 30th of September. And by the
02:05 end of this particular calendar year, it needs to be adjudicated or at least the proceedings must
02:10 begin on that account. So, that could be one of the possible reasons that we're seeing a spate
02:14 of charges being levied across industries. Now, giving has come more into the limelight,
02:18 particularly because there is an ongoing issue with respect to the Gaines Crafts particular case,
02:24 whether it is going to be on which part of the levy. Is it going to be on the 18 percent that
02:29 they used to pay for this past period? Or is it going to be the 28 percent that was clarified
02:34 in the 51st GST Council that happened in August? In fact, that time, the finance ministry said
02:39 this amendment is clarificatory in nature, which means this has always been the case.
02:44 So, whether this will be in the upcoming GST Council meeting is also something we have to see.
02:48 That's important. That's important. Janani is going to be tracking that GST Council meet,
02:53 which will take place on 7th of October. So, that's important. Also, just an addition,
02:57 when we're talking about gaming, the federation, that is the All India Gaming Federation has written
03:02 to the finance ministry saying that don't start implementing this 28 percent tax, which
03:07 started from 1st of October. So, it's actually in process right now. Their argument is don't
03:13 implement it because there are at least 15 states right now that haven't changed their laws yet or
03:18 haven't amended their laws yet. And as per the Supreme Court order, you can only start collecting
03:24 this tax when state and center are on the same page. So, that's once again another bit as far
03:30 as the gaming industry is concerned. But like we said, this is a larger issue. So, what's going on?
03:34 L. Badri Narayan, executive partner of Lakshmi Kumaran and Shri Dharani Partner Attorneys is
03:40 with me. I'm speaking with Abhishek Rastogi, lawyer and founder of Rastogi Chambers. Welcome
03:44 to both of you. Great to speak with you on BQ Prime. I'm sure this GST notices are keeping
03:49 both of you very, very busy. That's why I'm seeing that big smile on Abhishek Rastogi's face.
03:54 GST notices are great news for lawyers, isn't it?
03:57 I think there has to be a balance with what sort of notices are coming. And as we speak,
04:08 I am defending for petitioners here in Goa, speaking from Goa. But I think to answer to
04:14 the question that why this hurry is happening, I think the answer is threefold. One is on the
04:20 judicial side, if you see the gaming decision of Karnataka High Court and the Supreme Court.
04:26 Now, because there is no stay on the order and the revenue has got an advantage because there is
04:34 no stay and nothing. So, you know, a lot of these demands, etc. are now taking place. Show
04:39 cause notices are being issued because Supreme Court has tilted in favor of the revenue. So,
04:43 that's on the judicial front. On the technical front, yes, Janani spoke a very valid point that
04:49 a lot of these notices may become time bar and extended period of limitation,
04:55 malafide intent, etc. will have to be proved. So, from that perspective, also, it is a hurry.
05:00 The last but not the least could be, you know, we are running towards the election year and there
05:06 are pressures with respect to targets. We need to see the economic front as well as far as fiscal
05:14 deficit and GDP to tax ratios, etc. are concerned. So, I think all of these cumulatively is leading
05:20 to a lot of this issuance of these notices, demands, course of recoveries, whether for
05:26 gaming or for insurance companies or otherwise. And I think in next three to four months, yes,
05:32 of course, they will keep us on the toes. The advocates will be on the toes.
05:36 Okay, advocates are on their toes. I don't know how much of the fiscal deficit is going to be
05:40 reduced by these astronomical notices because someone has to be able to pay them as well.
05:44 Before that happens, it will all go to court like it has in a lot of these cases. Badri,
05:50 you know, what's your take? How many of these are going to stick? And let me start specifically
05:56 with the gaming part of it. Now, it's been made very clear that the tax rate is 28%.
06:02 It's going to be on the upfront amount that a patron buys to play any of these games. There is
06:10 no differentiation been made between game of skill, game of chance. This is the money that has
06:15 to be paid. Is that the end of the story as far as the gaming industry is concerned? Or do they have
06:22 the legal room to make a case that they should not be applied, the tax should be applied not in this
06:29 manner? Thanks Amarna. And like I said, always pleasure to be speaking with you and my good
06:37 friend. So I just come from the gaming industry. I think, like you said, very nicely, the fact
06:43 sometimes the tax demands are much more than the revenue that these companies are
06:49 collecting or have collected. I'm always for a situation where the law is clear. And even if the
06:55 tax is a little bit higher, the industry is clear and is able to adjust for it and determine based
07:01 on that, the way that tax should not be a problem. However, I feel for the past period, what the
07:07 demand has been sought by the department based on what they think has been an amendment or a
07:13 clarification issue now is a bit excessive in terms that they are really trying to tax the
07:19 gaming industry on what they call as contrast entry amount, the entry fee that you pay,
07:24 in terms of paying the tax, which includes the price pool, which is never part of the revenue
07:29 or books of the gaming company. The gaming companies earn money by providing platform fees
07:34 and platform services. And so they've been paying 18% on that. If you pay 28% on that,
07:41 we have no problem clarifying on an issue. But effectively tax the entire price pool
07:48 and that also on a retrospective basis, because you're saying that it is now clarificatory.
07:54 While we know for a fact that have been audits have taken place, there have been reviews
07:58 taking place and there have been adjudications have taken place, which have basically said that
08:02 the price pool is not taxable. So I don't know how much this is going to stick. But having said that,
08:07 the core issue which is coming up before the Supreme Court and you're part of the GameStop
08:11 litigation is really whether real money gaming is a game of skill or game of chance,
08:20 but more importantly, whether the way in which it is played online, will it convert a game of
08:25 skill into a game of chance, which I think is a more fundamental and it goes to root of not just
08:31 that, but of other areas of law. So it'll be interesting to see how this is. My own sense
08:35 is that probably this will be a, even if it sticks and I hope it doesn't, and I'm pretty sure
08:40 a good reason not to, it probably won't have a huge impact. I don't think they're going to
08:44 be able to collect these amounts from these companies. Companies are not going to be in a
08:48 position to be able to pay this. So I really don't understand the rationale behind this, except to say
08:54 this has been our stated position and this is our policy. So this is where I am on this. It'll be
08:58 interesting to see where it goes. Hard for it to crystallize and recover and maybe harder for it to
09:05 stay. Okay, so let's take this conversation a little beyond just the gaming industry. The positions are
09:11 pretty clear and fairly well known as far as the gaming industry is going and let me come to you
09:15 Badri with a question I asked Abhishek. Why now, why the quantum and clearly it's beyond gaming
09:22 in terms of the companies and sectors which are getting notices. There are reports of individuals
09:27 getting notices. There's some reports saying that these are AI generated. I don't know if that's
09:32 true or not but what's your take? What's your take about why this is happening now in such
09:40 great numbers or is this or is this power for the cause? I think the one thing we need to understand
09:47 is that there's been a pent-up demand or pent-up period where these demands should have
09:53 been kind of crystallized and bought through. The reason that we've been seeing for the last couple of years
09:58 especially post-COVID 2021 onwards, a lot of investigations taking place in a variety of
10:04 industries. We've seen investigation take place in the insurance industry, in the auto industry,
10:10 in the EV industry, in pharma industry, in healthcare services. So many areas we've had
10:18 investigations going on and all these investigations had reached a stage where they had
10:25 reached a stage of issuing of notices but they were all waiting for it to go out.
10:31 There was a period of limitation which applies to the adjudication of these notices by a
10:38 certain period for every financial year. So for the period 2017-2018, the latest date by which
10:46 adjudication can take place is end of this year 30th December 2023 and they have to give a
10:52 mandatory 120-day period of notice before it can be adjudicated. Hence 30th September 2023
10:59 was a important date by which they had to issue notices for them to be able to crystallize these
11:05 demands. If they miss this date then these demands basically became time-barred and so all of this
11:12 pent-up investigation issues, position the department was taking has all got crystallized
11:19 because we've reached that stage where the date for adjudication got set and the department was
11:25 supposed to basically issue and we're probably going to see this on a yearly basis going forward
11:29 where every year based on whatever other positions and issues which are there are probably going to
11:35 be issued around about this time or earlier in the year and there will be an adjudication
11:40 around about September to December every year and that's how we will probably go into CV cycles
11:44 I'll go through very okay now the thing with adjudication is and we talked about how many of
11:50 these cases will eventually stick where they will go in court and I'm coming to Abhishek Rastogi
11:54 with this question is that it still costs the company or the entity that is the recipient of
12:00 the tax notice to even fight it in court isn't it they have to deposit 10 percent and that will
12:07 hit cash flows what what is the impact there from the company's point of view see I think you are
12:14 bang on the point if these demands are confirmed by the lower adjudicating authority the pre-deposit
12:22 amount under the GST regime is significantly higher than the pre-GST regime here till tribunal
12:29 it will be 10 plus another 20 so 30 percent goes out and this is 30 percent of the tax amount
12:35 so what has happened in a lot of these cases is that what Badri mentioned that you know a lot of
12:41 these notices are now being issued in haste because to meet these deadlines and in that process what
12:47 has happened is that the pre-show cost notice consulting has not happened in a lot of cases
12:52 in a lot of these cases they are saying you pay this even in at the pre-SCN consulting stage
12:58 now of course that we understand in law that this is discretionary because the word shall has been
13:04 replaced by the word may now but supreme court in plethora of cases have held that even when these
13:09 are discretionary you have to be very cautious that how this discretion is to be exercised
13:14 and if you see a lot of these notices being issued to insurance companies or to the gaming
13:19 companies recently they have not used that discretion appropriately and that is one more
13:27 reason or a ground because of which these petitioners can go to the court and say that
13:33 this discretion has not been exercised appropriately so i think that has been done in
13:39 haste to meet these deadlines and of course the hard part of it would be the litigation cost
13:45 which would be high amount and percentage of pre-deposit and hence there have been representations
13:51 made to not block that in absence of these tribunals and for the notices which are of higher
13:59 value let there be reconsideration of the percentage of pre-deposit and get this percentage
14:04 at par with the pre-GST regime. Yeah no absolutely because the process is going to become the punishment
14:10 and could really be untenable okay broad question broad question before we wrap up about
14:17 seven years now since GST became a part of everyone's life and I'm going to come to Badri
14:23 first on this we are still working through these kinks in terms of what is an evasion
14:32 there are many many sub-headers under which these tax notices have come related party transactions
14:38 input tax credit and it's not just in small amounts it's not just smaller companies there
14:44 are large enough companies with large compliance teams who are also getting these notices what is
14:49 it telling us about how well GST has settled in I mean we celebrate the high collections every month
14:55 that's a good sign but what is it telling us about the nuts and bolts of how the system is working.
15:00 So Damana one thing you need to understand is that we have the most complex GST system in the
15:06 entire world. We have a federal GST which probably has been experimented in no other country
15:14 at least not at our scale. We have lots of issues in the GST regime because of that where
15:21 we transfer credit from one state to another state we being one person to be multiple persons across
15:26 different states we have peculiar rules with respect to international supplies and receipts
15:32 we have very peculiar rules with respect to certain industries. So I think at a global level we must
15:38 be appreciative of the fact that GST has been very successful in being able to reduce the complexity
15:44 of the tax regime which used to be there previously with excise, same, stax, off-line all of those
15:49 other issues. You must acknowledge that this GST is not a simple GST and these are things and we
15:55 are at a very early stage of our GST evolution. So I expect over the next 10 years things to
16:00 happen and I'm not saying one year two I'm saying 10 years at the minimum for there to be a cycle
16:05 where this GST laws which have been implemented get adjudicated, get tested, get streamlined and
16:12 we have data to show what needs to be done for the purpose of being able to improve it. I still feel
16:17 it's a step in the right direction with respect to what we are doing but the complexity of the
16:23 business added with the complexity of our GST rules is always going to have these kind of things
16:29 to the entire system and that's where I think we need to kind of acknowledge but at the same time
16:33 try and find a way by which we keep improving the system so that we are able to reduce the friction
16:40 for all the taxpayers. Well, you know that same question to you Abhishek, I'd like to know your
16:46 view on how you're looking at it. GST has no doubt been a success story but why are we still trying
16:53 to iron out these wrinkles seven years later if indeed and I must sort of counter you know
17:00 put that in perspective if indeed these are unfair tax notices for all you know these are going to
17:06 go through in court and this is money that companies had to pay. I think when we are going
17:14 and taking these matters to court what we have been arguing is whether this provision is or the
17:21 notice is manifestly arbitrary and when I say that I say that with full responsibility. Now,
17:27 if you talk about insurance companies the question which arises is that in that entire transaction
17:33 is there an evasion of tax. If you talk about the gaming industry the question comes on the valuation
17:40 and when we ask this question that whether the valuation for online gaming companies or for
17:47 casinos could be different from what is prescribed in the scheme the answer is clearly that there is
17:54 an exception which has been created for online gaming companies and hence the questions which
18:00 are there before the courts to test the constitutional validity of these provisions
18:04 and these notices is this whether there could be a differential treatment for online gaming
18:10 companies when it comes to valuation for all other service providers you are taxing my revenue but for
18:16 online gaming companies you are creating an exception and when you talk about actionable
18:21 claim can the valuation go to an extent where the money relates to participant to participant.
18:27 Similarly, if you see about these credits lot of being talked about insurance companies and other
18:32 than more than 10,000 of such notices on credits have been issued the question is whether there
18:37 is evasion that is one. Secondly, even when we talk about the block credits and that's what we
18:42 are arguing before supreme court also that there is an exception which is being created under section
18:47 17.5 and hence whether these exceptions are good or arbitrary or whether there is lack of intelligible
18:56 differential will all have to be tested based on reasonability vagueness and hence article 14 and
19:02 19 will come into play for a lot of these provisions which are exceptional which are
19:06 beyond the scheme. All right so these are going to be very important test cases as they go into court
19:12 meanwhile for companies this is something they have to budget for as we come into this period
19:19 October, November, December where litigation is going to pile up remember their deadline for
19:24 adjudication is also 31st December so interesting period ahead. Thank you so much
19:29 Badri and Abhishek for joining us on the show pleasure as always.
19:34 Thank you so much.
19:47 (typewriter clacking)