Buyback Tax: An Anti-Abuse Measure Wrapped in a Tax
Finance Bill, 2026 proposes to amend buyback tax. Yet again. The proposed amendment simultaneously simplifies and complicates buyback tax. Latter because of the proposal to create a separate tax slab for promoters of companies who participate in buyback of shares. Former because shareholders will be liable for capital gains instead of paying tax on the entire amount received on buyback. Too early to say if a separate tax slab for promoters is warranted, but the added layer of complexity neatly ties into chequered history of buyback tax, as depicted here.
A simple conception of buyback tax would be – taxable amount is the difference between amount received by a shareholder on buyback and issue price of shares. And the amount is taxable in hands of shareholder as capital gains. But, akin to love, Indian tax policy on buybacks has rarely followed a straight path. In this article I provide a descriptive account of the origin and subsequent evolution of buyback tax in India upto its latest modification. I conclude that buyback tax is an example of how the Revenue, in its attempt to plug tax avoidance, unduly complicated the provisions of Income Tax Act, 1961 (‘IT Act, 1961’) in relation to buyback tax.
Origin of Buyback Tax – Tied to Dividend Distribution Tax
India introduced Dividend Distribution Tax (‘DDT’) in 1997 and made companies liable for tax on dividends. The Budget Speech of 1997 – by then Finance Minister P. Chidambaram – reasoned that introduction of DDT was to enable efficient collection of tax on dividend. It was easier to collect tax on dividends at the company level instead of tracking multiple shareholders. Also, DDT was introduced to discourage companies from distributing ‘exorbitant dividends’ to shareholders and instead further invest their profits. Consequent to introduction of DDT, companies started pursuing buyback of shares as an avenue to avoid payment of DDT. If a company was profitable, buyback of shares achieved the same objective as payment of dividends, i.e., sharing profits with shareholders.
To prevent companies from circumventing their DDT obligations, buyback tax was introduced in 2013. Section 115QA, Income Tax Act, 1961 levied tax on ‘amount of distributed income’ by the company on buyback of shares. And distributed income was defined as the difference between consideration paid by a company for buyback and amount received by it on issue of shares. Buyback tax was a convoluted tax since its inception. A company which was paying money to buy shares from its shareholders was made liable for buyback tax instead of the shareholders who received the money. But the original convoluted version of buyback tax can be explained in the context of DDT.
DDT imposed tax liability on companies if they distributed dividends and buyback tax was introduced to prevent them from using buyback route to avoid payment of DDT. Imposing the burden of buyback tax on companies ensured that dividend distribution and buyback of shares attracted similar tax liabilities for companies. And companies did not use the latter for mitigating their DDT liability. In fact, the Memorandum to Finance Act, 2013 clearly stated that buyback was an anti-abuse measure. And the tax rates of DDT and buyback tax were also similar to prevent one being a more attractive option vis-à-vis the other. Buyback tax received the label of a tax but was, in effect, a backstop to prevent companies from circumventing their DDT obligations.
Dividend Distribution Tax Laid to Rest
In 2020, India abolished DDT and reverted to the classical system of dividend taxation where dividends are viewed as income in hands of shareholders. From 2020 onwards, tax liability for dividends is imposed on shareholders receiving dividends instead of companies distributing the dividends. DDT, the Union realized, was cumbersome and unnecessarily added to compliance obligations of companies. And presumably the original reason of discouraging companies from declaring exorbitant dividends was also a redundant policy. Nonetheless, the abolition of DDT removed the original incentive of companies to indulge in buyback of shares. And from here on we enter an even more confused – and difficult to fathom – domain of Indian tax policy in relation to buyback tax.
Buyback tax was an anti-abuse measure for DDT and removal of latter demanded a simultaneous modification of the former. Ideally a removal of buyback tax altogether. But Indian tax policy doesn’t inhabit an ideal world. Far from it.
Buyback Tax Complicated via Finance Act, 2024
In the period of 2020-2024, there remained a dissonance between dividend taxation and buyback tax. The burden of tax of the former was on shareholders while that of latter continued to be on companies. To correct this anomaly, there were two possible modifications for buyback tax:
First, altogether remove it from the IT Act, 1961 since the original reason for its introduction, i.e., DDT ceased to exist.
Second, by way of abundant caution shift the tax liability of buyback shares to shareholders aligning it with the classical system of dividend taxation implemented in 2020. Such a modification would have maintained tax parity between distribution of dividends and buyback of shares.
Instead, Finance Act, 2024 propelled buyback tax to a complicated territory. Section 115QA of the IT Act, 1961 was amended to state that buyback tax shall not apply to buyback of shares that took place on after 1 October 2024. Effectively, ending the original avatar of buyback tax.
However, the Finance Act, 2024 also simultaneously expanded the definition of dividend under Section 2(22) of the IT Act, 1961. Clause (f) was added which stated that dividend includes:
any payment by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 68 of the Companies Act, 2013 (18 of 2013);
The above expansion of dividend simply meant that any amount received by a shareholder as part of buyback of shares would be taxed as dividends. This was an opportunity to simplify the buyback tax. The Revenue could have chosen to levy income tax on shareholders on the difference price received on their shares and their cost of acquisition of such shares. The difference would have been classified as capital gains in hands of the shareholders. Instead gains from buybacks were clubbed with dividends. And to complicate the scenario further, Finance Act, 2024 also amended Section 46A of the IT Act, 1961 by adding the following Proviso:
Provided that where the shareholder receives any consideration of the nature referred to in sub-clause (f) of clause (22) of section 2 from any company, in respect of any buy-back of shares, that takes place on or after the 1st day of October, 2024, then for the purposes of this section, the value of consideration received by the shareholder shall be deemed to be nil.
Cumulative effect of both amendments was that the entire amount received on buyback of shares was taxable as dividends in hands of the shareholders under the head ‘income from other sources’. The more obvious choice of charging capital gains tax to shareholders on difference in cost of acquisition and consideration on sale of shares was bypassed. Instead, the cost of acquisition of shares was treated as capital loss because it was reasoned that shares were extinguished due to buyback. The Memorandum accompanying the Finance Bill, 2024 stated that:
Therefore when the shareholder has any other capital gain from sale of shares or otherwise subsequently, he would be entitled to claim his original cost of acquisition of all the shares (i.e. the shares earlier bought back plus shares finally sold). (emphasis added)
The tax liability on buyback after Finance Act, 2024 can be explained through this example: A shareholder acquired a share for Rs 100, sold it for Rs 150 during buyback. As per the above provisions the shareholder was liable to pay tax on the entire Rs 150. The amount of Rs 150 would be treated as dividend and taxable under the head ‘income from other sources’. To offset the taxation on entire consideration, shareholder was entitled to claim Rs 100 as a capital loss in the subsequent years and offset it against any potential capital gains earned in subsequent years. Apart from the complicated mechanism, an obvious flaw in this version of buyback tax was that capital loss could be offset ‘if’ a capital gain is earned in subsequent years. In the absence of a capital gain against which to offset capital loss the taxpayer could suffer an onerous tax burden.
Speculation – and informed guesses – suggest that the above version of buyback tax was adopted in 2024 to prevent taxpayers from taking advantage of lower tax rates of capital gains. And instead tax was levied on entire consideration under the head of ‘income from other sources’. There is some credibility to this guess but it doesn’t reveal a sound tax policy. There is little debate as to whether shares constitute capital assets. Any gains earned on their sale are, in their true nature, classifiable as capital gains. Whether the sale happened as part of a buyback or in course of normal alienation of shares should be immaterial. To gain marginally more revenue, provisions were amended and complicated to classify the gains under another head of income. In simple terms, the modification of buyback tax in 2024 sacrificed simplicity and unduly complicated the relevant provisions of IT Act, 1961.
Proposed Amendment in Finance Bill, 2026
Realizing the complications created by amendments of 2024, the Memorandum accompanying Finance Bill, 2026 states the reasons for new set of amendments as:
It is proposed to rationalise the taxation of share buy-backs by providing that consideration received on buy-back shall be chargeable to tax under the head “Capital gains” instead of being treated as dividend income. (emphasis added)
The Union complicated buyback tax in 2024 and in 2026 the Union proposes to ‘rationalise’ it. How? By doing what it should have done in the first place: treat the consideration received during buyback of shares as capital gains and not dividend.
But since this buyback tax, even in 2026 it has not outgrown its convoluted origins. The Finance Bill, 2026 proposes to levy buyback tax on promoters at a special tax rate because they hold a distinct position and exercise influence on corporate decision-making particularly buyback of shares. Accordingly the reason for special tax rate was in following words:
it is proposed that, in the case of promoters, the effective tax liability on gains arising from buy-back shall be thirty per cent, comprising tax payable at the applicable rates together with an additional tax. In case of promoter companies, the effective tax liability will be 22%.
Treating promoters distinctly seems to flow from the suggested rationale of 2024 amendments. Levying buyback tax at a higher rate. While the 2024 amendments tried to sweep all shareholders in the higher tax rate, the 2026 amendments have limited the high tax rates to only promoters of companies. Though whether this will lead to a differential tax burdens for resident and non-resident promoters maybe worth examining, but maybe in a separate article. Here, it may suffice to say that time will reveal the durability of this version of buyback tax.
Conclusion
The lifecycle of buyback tax can be summarised as a journey from an anti-abuse measure to an enduring revenue source. Buyback tax was not conceived as a tax per se. Originally, buyback tax was an anti-abuse measure to prevent companies from using it as means to avoid payment of DDT. While the original avatar of buyback tax – introduced via Section 115QA of the IT Act, 1961 – was convoluted, but it could be understood in the context of DDT. However, the removal of DDT left little reason to continue with buyback tax in its original version. But the amended version introduced in 2024 morphed buyback from an anti-abuse measure to a revenue source. And complicated buyback tax that it betrayed some basic principles of taxability. Devoid of the context of DDT, buyback tax from 2020 onwards has been a site of confused – and may I dare say – Revenue’s greedy tax policy. Nonetheless, the complications introduced in 2024 have been reckoned with via the Finance Bill, 2026. Though promoters of companies are unlikely to be too relieved at the latest proposed modification in buyback tax.
DDT and Buyback Tax: Skeletal Timeline
This is a skeletal timeline of the evolution of buyback tax in India. A descriptive analysis can be read here.
Supreme Courts Uses Tax Sovereignty to Hunt Tiger Global
The Supreme Court recently handed a significant legal victory to the Income Tax Department (‘Revenue’) in The Authority for Advance Rulings (Income-Tax) & Ors v Tiger Global International III Holdings (‘Tiger Global case’). And in the process created a significant shift in our understanding of income tax jurisprudence and tax treaty obligations. But, before we get to what the Supreme Court held, a short prologue.
Prologue: Underlying Procedural Knot
Justice Mahadevan, in his leading opinion, concluded that the Revenue has proved that transactions in ‘the instant case are impermissible tax-avoidance arrangements, and the evidence prima facie establishes that they do not qualify as lawful.’ (para 50) (emphasis added)
The above conclusion – lacking adequate basis – is crucial because of procedural backdrop of the case. Tiger Global companies (‘Tiger Global’) had filed an application before Authority for Advance Ruling (‘AAR’) seeking clarity on their obligation to withhold taxes. But, AAR rejected Tiger Global’s application on the ground that its arrangement was for avoidance of tax in India. If a transaction is ‘designed prima facie for the avoidance of income tax’, then AAR is obligated to reject the application under proviso (iii) to Section 245R(2). AAR found the above provision to be ‘squarely applicable’ to the case and rejected the application. The core finding of AAR was that Tiger Global incorporated in Mauritius lacked economic substance and its head and brain were located in the United States of America. Tiger Global, AAR noted, were ‘conduits’ for investments in Singapore and Mauritius.
Tiger Global impugned AAR’s ruling before the Delhi High Court (‘High Court’). The Revenue contended that AAR had only given a preliminary opinion on chargeability to tax and there was no justification for the High Court to exercise judicial review. The High Court reasoned that reports of both Commissioner of Income Tax and AAR had ‘trappings of finality’ and ‘evident element of resolute decisiveness’. The High Court’s view was fortified by AAR’s observations on treaty eligibility and on chargeability of capital gains. The High Court, convinced that AAR had made substantial findings and not expressed a prima facie view, pronounced a detailed decision on merits. The High Court held that Tiger Global was not liable to tax in India and could avail treaty benefits under the India-Mauritius tax treaty.
In appeal against the High Court’s decision, the Supreme Court has pronounced a detailed judgment but not gone into merits of the case. A fact that is difficult to come terms with once you read the judgment. Nonetheless, as per the Supreme Court the core question before it was: whether AAR was right in rejecting applications for advance rulings on grounds of maintainability and whether enquiry can be made if capital gains is chargeable.
In view of the above procedural history, the Supreme Court’s conclusion that the Revenue has succeeded in proving that ‘prima facie’ Tiger Global’s arrangements are unlawful is vital. Since the Supreme Court Revenue has ruled in favor of the Revenue, the assessment of Tiger Global will materialize. Tiger Global, if it chooses, can lend quietus to the issue and pay tax or challenge the imminent assessment orders and indulge in another round of legal bout with the Revenue. That is all in the untold future, until then we have the Supreme Court’s judgment to contend with.
Introduction
Supreme Court’s judgment can be analyzed on various axes: international tax law-domestic law dynamic, application of judicial anti-avoidance rule, prospective and retrospective applicability of amendments, trajectory of India-Mauritius tax treaty, eligibility for tax treaty benefits, relevance of secondary legislation such as circulars issued by the Revenue and norms of judicial propriety. Two crucial threads of the case – in my view – are the relevance of tax residency certificate (‘TRC’) and applicability of GAAR.
In brief, Supreme Court has held that TRC is necessary but not a sufficient condition to claim tax treaty benefits. Tiger Global possessing TRC of Mauritius does not preclude the Revenue from applying the substance over form test and deny assessee tax treaty benefits. In this article, I forsake an exhaustive commentary on the case, to make two narrow claims:
First, the Supreme Court in holding that TRC is a necessary but not sufficient condition for claiming tax treaty benefits plays fast and lose with strict interpretation of Section 90(4) of the Income Tax Act, 1961 (‘IT Act, 1961’) and instead places greater reliance on legislative history and legislative intent while ignoring binding judicial precedents.
Second, I suggest that Tiger Global case unsettles well-entrenched axioms in income tax and tax treaty landscape. The most significant rupture is of the doctrine that tax treaties override domestic law if the former are more beneficial to the assessee. The Supreme Court had no qualms in stating that GAAR contained in a domestic law can be used to deny tax treaty benefits. An observation that appears unblemished, if we look at the underlying provision(s), but holds wider consequences for India’s tax treaty obligations.
I conclude that the sub-par reasoning of the Supreme Court is attributable to its half-baked idea of tax sovereignty. The concurring opinion of Justice Pardiwala invokes tax sovereignty expressly while the leading opinion of Justice Mahadevan relies on it impliedly. In Tiger Global case, Indian Supreme Court has couched tax sovereignty in legal sophistry, without articulating it in any meaningful manner. In fact, the Supreme Court has exhibited a shallow view of international law – and by extension tax treaty – obligations by viewing them as dispensable and permitted unilateral actions by the Revenue in the name of tax sovereignty.
I make the above claims fully cognizant of the fact that the Supreme Court’s judgment is, technically, not on merits of the case. But the Supreme Court’s observations are sufficiently detailed and such judicial observations deserve a scrutiny irrespective of narrowing framing of the issue.
Factual Background
The brief facts of the case are that Tiger Global acquired shares in Flipkart Singapore before 1 April 2017. The value of shares of Flipkart Singapore was primarily due to the assets the company held in India. In simpler terms, Tiger Global held some shares in holding company of Flipkart – Flipkart Singapore – which in turn controlled subsidiary Indian companies. And the value of shares of Flipkart Singapore was derived from the business and assets owned by its Indian subsidiaries. In August 2018, Tiger Global sold the shares as part of the larger restructuring wherein Walmart acquired majority shareholding in Flipkart Singapore.
The sale of shares was an ‘indirect transfer’ because sale of shares of Flipkart Singapore indirectly transferred control of Flipkart’s Indian companies and business to Walmart. The sale, as per the Revenue was chargeable to tax under IT Act, 1961. Since the value of shares in Flipkart Singapore was primarily due to the assets it held in India, the legal fiction under Explanation 5, Section 9 was applicable as it deems such shares as located in India. Tiger Global contended that it was a resident of Mauritius, it had acquired the shares before 1 April 2017, and as per the India-Mauritius tax treaty it was liable to pay tax only in Mauritius.
Tiger Global was riding on two major factors: firstly, that under the India-Mauritius treaty all investments made by residents of Mauritius before 1 April 2017 were grandfathered and were liable to tax only in Mauritius; secondly, if an assessee is resident of India’s tax treaty partner the IT Act, 1961 will only apply if it is more beneficial to the assessee. Thus, as per Tiger Global even if the transaction was liable to tax under Section 9, IT Act, 1961 the India-Mauritius tax treaty exempted it from tax in India and the treaty should override the statute. Widely held views amongst lawyers backed the former claim, decades of jurisprudence the latter.
The Supreme Court rejected the arguments of Tiger Global and wrote a judgment premised on fanciful ideas of tax sovereignty and autonomy.
Tax Residency Certificate: Necessary but not Sufficient
In April 2000, the Revenue had issued Circular No. 789 to address the anxieties about tax liabilities of FIIs and other investment funds which operated from Mauritius and were incorporated there. The relevant portion of the Circular stated that:
It is hereby clarified that wherever a Certificate of Residence is issued by the Mauritian Authorities, such Certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC accordingly. (emphasis added)
In October 2003, the validity of Circular No. 789 was upheld by a Division Bench of the Supreme Court in Union of India v Azadi Bachao Andolan and Anr. The Supreme Court in upholding the Revenue’s power to issue Circular No. 789 endorsed its contents and the Revenue’s interpretation of the India-Mauritius tax treaty. In Tiger Global case, the Supreme Court instead of accepting this unequivocal position of law and engaging with it a meaningful manner, pursued the tangent of legislative history and amendment of Section 90 to conclude that TRC is not sufficient evidence of residence. The legislative history was the amendments made to IT Act, 1961 in 2012 and 2013 to primarily undo the effect of Supreme Court’s judgment in the Vodafone case.
Finance Act, 2012 amended Section 90(4), IT Act, 1961 to state that an assessee is not entitled to claim relief under a tax treaty unless he obtains a certificate of being residence. In 2013, Finance Bill, 2013 proposed to introduce Section 90(5) in IT Act, 1961 to state that:
The certificate of being a resident in a country outside India or specified territory outside India, as the case may be, referred to in sub-section (4), shall be necessary but not a sufficient condition for claiming any relief under the agreement referred to therein.
Due to backlash and concerns about the effect of proposed sub-section(5) on the Mauritius route, Finance Act, 2013 dropped the above version and instead introduced the current Section 90(5) which states that an assessee referred to in sub-section(4) shall also provide ‘such other documents and information’ as may be required.
Presuming the legislative history of Section 90 is relevant to adjudicate the issue in Tiger Global case, it is possible to derive two possible views from the above developments. One, adopted by the Delhi High Court was that:
issuance of a TRC constitutes a mechanism adopted by the Contracting States themselves so as to dispel any speculation with respect to the fiscal residence of an entity. It therefore can neither be cursorily ignored nor would the Revenue be justified in doubting the presumption of validity which stands attached to that certificate bearing in mind the position taken by the Union itself of it constituting ―sufficient evidence‖ of lawful and bona fide residence. (para 199)
The High Court cited the Vodafone case to note that the Revenue’s power to investigate despite a TRC was confined only to cases of tax fraud, sham transactions or where an entity has no vestige of economic substance.
The Supreme Court pointed the needle in other direction. The Supreme Court referred to the Explanatory Memorandum of Finance Bill, 2012 to observe that intent of amending Section 90(4) was that TRC is necessary but not sufficient evidence of residence. Reliance on supporting sources instead of interpreting the provisions is a curious approach and even the High Court traversed this path for no clear reason.
The Supreme Court noted that while the legal position – that TRC is necessary but not sufficient – could not be codified due to withdrawal of previous version of Section 90(5), introduction of current version of Section 90(5) still introduced ambiguity if TRC was sufficient. But the Finance Ministry issued a clarification in 2013 that the Revenue ‘will not go behind the TRC’ and Circular No. 789 continues to be in force. And yet, the Supreme Court’s conclusion seems at odds with the clarification issued by the Finance Ministry. The Supreme Court concluded that:
Section 90(4) of the Act only speaks of the TRC as an “eligibility condition”. It does not state that a TRC is “sufficient” evidence of residency, which is a slightly higher threshold. The TRC is not binding on any statutory authority or Court unless the authority or Court enquires into it and comes to its own independent conclusion. The TRC relied upon by the applicant is non- decisive, ambiguous and ambulatory, merely recording futuristic assertions without any independent verification. Thus, the TRC lacks the qualities of a binding order issued by an authority. (para 37)
The legislative intent in amending Section 90(4) was that TRC is necessary but not sufficient to claim treaty benefits. But such an unambiguous position never found its way in the statute. Instead, the Revenue to clarify the import of amendments to Section 90 stated – via the Finance Ministry – that Circular No. 789 is still in force. But the Supreme Court, relied on legislative intent and observed that TRC has ‘limited evidentiary value’ because of the statutory amendments that govern the field. Failing to note that the Finance Ministry issued its clarification in March 2013 – after the amendments.
The import and of Section 90(5) was understood by the Supreme Court in following words:
Section 90(5) mandated that the assessee shall also provide such other documents and information, implying that the existence of a TRC alone need not be treated as sufficient to avoid taxation under the domestic law. (para 12.24) (emphasis added)
Even if legislative history is relevant, the failure to engage with a binding judicial precedent – Azadi Bachao Andolan case – is indefensible. Supreme Court’s refuge was that amendments to IT Act, 1961 have changed the law. In stating so, it refused to acknowledge jurisprudence that High Courts have developed jurisprudence on TRC even after the amendments and the judicial view has largely been consistent with Azadi Bachao Andolan case. Perhaps engagement with the reasoning of High Court judgments and expressing better reasons for disagreement could have lent some credibility and weight to Supreme Court’s conclusions. And as the Revenue itself argued, Vodafone was not a treaty case, it involved interpretation of statutory provisions. Amendments to IT Act, 1961 in 2012 and 2013 to undo Vodafone cannot be used to bypass treaty obligations.
The non-engagement with Azadi Bachao is what led Supreme Court to say that since the object of a tax treaty is to prevent double taxation, ‘for the treaty to be applicable, the assessee must prove that the transaction is taxable in its State of residence.’ (para 19) How damaging is this statement, we will only know in due time. For now, it suffices to say that it flies in the face of settled law on treaty interpretation that to avail a treaty benefit, a resident must only be liable to tax in another jurisdiction. Liability to tax cannot be equated to actual payment of tax.
Also, interpreting tax statutes based on implication is a rare approach. Courts, including the Indian Supreme Court, have repeatedly exhorted that tax statutes need to be interpreted strictly. Adherence to strict interpretation is a sine qua non that courts only abandon in the face of ambiguity in a provision. In Tiger Global case, the Supreme Court seemed comfortable relying on legislative intent – revealed by Explanatory Memorandum – and dismissing binding judicial precedents and valid circulars by pointing at statutory amendments.
Cumulatively, Supreme Court’s observations on TRC fall foul of strict interpretation of tax laws, disrespect judicial precedents, allow the Revenue to conveniently sidestep its own binding circulars and bring into question legitimacy of documents issued by India’s treaty partners. A stirred cocktail of tax misgovernance.
Tax Treaty Overrides Domestic Law, GAAR is an Exemption
The Revenue’s argument was that TRC only constitutes prima facie evidence of residence and cannot override substance over form. Even if TRC was not considered as sufficient, the Revenue had to rely on anti-tax abuse rules to claim that Tiger Global was a sham or a conduit. But the Limitation of Benefits clause (‘LOB clause’) in the India-Mauritius treaty was inapplicable to the transaction. So? GAAR came to the rescue. But the Supreme Court had to jump a few interpretive hoops to allow the Revenue to apply GAAR.
Section 90(2) states that where the Union has entered a tax treaty with another State or jurisdiction that provisions of IT Act, 1961 shall apply to the extent they are more beneficial to the assessee. The import of this provision is that if a tax treaty is more beneficial it shall apply even if it is at variance with the IT Act, 1961. In successive decisions courts have upheld the above legal position and held that charge of income tax and determination of scope of income under sections 4 and 5 of IT Act, 1961 are subject to tax treaties. An uncontroversial position until 2012.
In 2012, the Finance Act added sub-section (2A) to section 90 which states that:
Notwithstanding anything contained in sub-section (2), the provisions of Chapter X-A of the Act shall apply to the assessee even if such provisions are not beneficial to him.
Chapter X-A contains provisions relating to General Anti-Avoidance Rule, also introduced via the Finance Act, 2012. Section 90(2A) empowers the Revenue to apply a statutory anti-tax abuse rule to assessees who are covered by tax treaties. The exception in subsection (2A) then ensures that if the LOB clause of a tax treaty is not sufficient, GAAR can be invoked to address tax avoidance strategies.
The Supreme Court took cognizance of the above provision, interpreted it strictly and noted that GAAR can apply to assessees covered by tax treaties. On the touchstone of strict interpretation, the Supreme Court was right in observing that GAAR can apply to assessees covered by tax treaties. But Supreme Court’s failure to engage to engage with decades of judicial precedents stating that domestic tax law cannot override tax treaties remains a fatal flaw of the judgment. Unless tax treaty provides that GAAR can apply in the absence/insufficiency of a LOB clause, Section 90(2A) amounts to a unilateral amendment of tax treaties. And the Supreme Court seems to have endorsed it.
The other hurdle was grandfathering. Rule 10U(1)(d), Income Tax Rules, 1962 states that Chapter X-A containing GAAR shall not apply to income accrued or arisen from investments made before 1 April 2017. Tiger Global argued against application of GAAR citing the grandfathering contemplated in the domestic provisions. But the Revenue relied on Rule 10U(2) which states that:
Without prejudice to the provisions of clause (d) of sub-rule (1), the provisions of Chapter X-A shall apply to any arrangement, irrespective of the date on which it has been entered into, in respect of the tax benefit obtained from the arrangement on or after the 55[1st day of April, 2017]. (emphasis added)
Rule 10U(2), on first glance, negates the grandfathering contemplated by Rule 10U(1)(d). The Revenue made a similar argument. The High Court had refused to interpret ‘without prejudice’ to mean that GAAR could be applied to income from arrangements entered before 1 April 2017. The High Court noted that it should ‘eschew from’ interpreting a provision in a domestic statute that conflicts with a treaty provision. And concluded that accepting the Revenue’s argument would mean:
A subordinate legislation would thus stand elevated to a status over and above a treaty entered into by two nations in exercise of their sovereign power itself. (para 230)
The Supreme Court did not have similar qualms as the High Court and accepted the fine distinction made by the Revenue. The distinction was that Rule 10U(1)(d) only grandfathered investments, while Rule 10U(2) uses the word ‘arrangement’ and thus the grandfathering benefit can only extend to investments and not tax avoidance arrangements, even if the latter were entered into before 1 April 2017. A strict interpretation of both Rules – supported by observations of the Shome Committee – will place Supreme Court’s conclusion in a defensible category. But what does it mean for India’s tax treaty obligations?
A two-pronged thorn emerges:
First, tax treaty override over domestic law will no longer be exhaustive by virtue of Section 90(2); Revenue can apply GAAR if LOB clause of tax treaty is insufficient by invoking Section 90(2A) read with Rule 10U. Domestic law, specifically, GAAR will act as a backstop to prevent tax avoidance. A legal position that the Supreme Court has accepted in Tiger Global case but flies in the face of decades of jurisprudence on income tax law and tax treaty interpretation.
Second, relevant provisions of the India-Mauritius tax treaty refer to ‘gains’ not to investments or arrangements. Can domestic laws – including secondary legislation – now determine the scope of taxability and allocation of rights agreed upon tax treaties? The High Court said a categorical no, the Supreme Court said yes. The Supreme Court took refuge in the fact that amendments of IT Act, 1961 – specifically Section 90 – had changed legal landscape. Domestic landscape, yes. Treaty obligations, not. But, I guess, we are a sovereign country that can act independently and if need be in flagrant disregard of our treaty obligations.
Conclusion
Tiger Global case is an attempt by Indian Supreme Court to flex tax sovereignty, without truly understanding it. The concurring opinion of Justice Pardiwala exemplifies this lack of understanding. He lauds India’s unilateral revocation of Bilateral Investment Treaties in 2016 and adds that an assertion of tax sovereignty is the power to make unilateral moves. What is being termed as tax sovereignty is polite speak for reneging on tax treaty commitments if revenue demands are not accepted unconditionally. Such prescriptions appeal to baser instincts of the State and do not aspire to tax governance founded on rule of law. Justice Pardiwala perfunctorily adds that India should negotiate tax treaties by including certain safeguards such as: GAAR should override tax treaty benefits. Another example of how he misunderstands manifestation of tax sovereignty. Is the assumption here that India’s treaty partners will simply agree to such clauses and not extract similar concessions for themselves. Justice Pardiwala not only exceeds his remit by providing policy prescriptions but provides them based on a shallow understanding of treaty dynamics and negotiations.
To book end this article, Justice Mahadevan’s conclusion cited at the beginning where he concludes that the transactions of Tiger Global are impermissible anti-avoidance arrangements is based on facts that seem only privy to him and the Revenue. There is nothing in both the leading opinion and the concurring opinion to even provide a glimpse of reasons as to why the transactions and arrangements are impermissible anti-avoidance arrangements. If only Supreme Court judgments on tax issues were to provide us less tax history lessons, fewer policy prescriptions and substitute them with better reasoning, sound analysis of facts and accurate application of law.
Health and National Security Cess: Some Context
The Lok Sabha on 5th December 2025, passed the Health Security se National Security Cess Bill, 2025. The Health se National Security Cess (‘Health and National Security Cess’) is an unusual marriage of public health and national security. And an example that when the State is determined for revenue, even tax law is not alien to creativity.
In the first part of this article, I examine the Union of India’s previous conceptualization – but inability to operationalize – a standalone National Defence Fund. Instead, six years after mooting the idea of a National Defence Fund, the Union seems to have adopted the relatively easy way of levying another cess for funding national security related expenses. In the second part of this article, I address the public health component. I state that income taxpayers currently pay a Health and Education Cess. The introduction of Health and National Security Cess means we have two ‘partial cesses’ for public health. Public health is crucial – and underfunded – to necessitate additional money via two cesses, but not crucial enough to deserve its own dedicated cess. Ironically, we still won’t know how much money from both cesses is will be specifically spent on public health.
I conclude that while both national security and public health are crucial, the need for a cess apart from the general budgetary allocation requires a stronger – and better articulated – jusitifcation. Merely saying that the State needs additional revenue is not sufficient. Union and even States increasingly prefer cesses because they offer an easy route to raise additional money without adequate accountability. Successive Finance Commissions have recommended reduction in cesses on grounds of their misuse and lack of transparency. But the Indian tax policy landscape stubbornly moves in the opposite direction.
I. Introduction
Preamble of the Health Security se National Security Cess Bill, 2025 (‘Bill’) states that resources need to be augmented for meeting expenses on national security and for public health. The Health and National Security Cess has been termed as a ‘special excise cess’. Clause 3 of the Bill imposes tax liability on any person who owns, possesses, or controls or undertakes a process by which specified goods are manufactured. And Schedule I of the Bill lists pan masala as the specified good. Though the Union of India is empowered to notify ‘any other goods’ as specified goods under the Bill. Clearly the Health and National Security Cess can be extended to other ‘demerit’ goods to further augment revenue collection. Why do we need this cess? Augmenting of revenues is a standard reason and can be used for any tax and doesn’t fully explain the imposition and levy of Health and National Security Cess. The proximate reasons for the Health and National Security Cess are two-fold:
One, as the finance minister explained in the Rajya Sabha, until September 2025 the levy of GST Compensation Cess ensured that de-merit goods such as tobacco and pan masala were subjected to a high tax rate of approximately 88%. With the rationalization of GST rates, the highest tax rate is now 40%, and GST Compensation Cess has been phased out. The Health and National Security Cess aims to preserve the previous revenue stream from demerit goods such as pan masala without disturbing the new three-tier GST rate structure.
Second – and this is specifically for national security – the Union has been unable to operationalise a standalone Defence Fund. The idea of a Defence Fund was mooted by the Union six years ago. The Union in July 2019, amended the Terms of Reference of the 15th Finance Commission (‘Commission’) to specifically require the Commission to examine a separate mechanism for funding defence and internal security. The Commission was required to examine if a standalone Defence Fund should be set up and how it should be operationalized. The Commission in its final report – submitted in October 2021 – recommended establishment of the Defence Fund and also provided detailed and specific targets for a five-year period. But the Union did not take any concrete steps. Eventually, in December 2025 the Union has instead adopted the familiar path of levying a cess, i.e., the Health and National Security Cess.
II. Defence and Internal Security
a. A ‘Defence Fund’ Conceptualized
The Terms of Reference (ToR) of the 15th Finance Commission required it to examine whether a separate mechanism for funding of defence and internal security ought to be setup and how to operationalize the fund. The above clause was added in ToR via an amendment. And the request was also unprecedented since no previous Finance Commission had been tasked with a similar obligation. The immediate concern from States was that the Union may reduce funds available in the common divisible pool by earmarking a portion of States’ funds towards the ‘Defence Fund’. Various States made similar representations to the Commission arguing that they were not opposed to a Defence Fund if it does not shrink the common divisible pool.
The Union – primarily through the Ministry of Defence and Ministry of Home Affairs – made a strong case for a Defence Fund before the Commission. Both Ministries made similar arguments, i.e., the budgetary allocations were insufficient to meet their capital expense needs for defence and internal security. And a Defence Fund will partially meet the shortfall.
The Commission examined the issue in detail and recommended that the Union setup a dedicated, non-lapsable fund called Modernisation Fund for Defence and Internal Security (MFDIS). The Ministry of Defence was to retain exclusive rights over the MFDIS and Ministry of Home Affairs could only utilize a part amount for internal security. The Commission identified four specific sources for incremental funding and even provided annual targets to the Union of India. A screenshot from the Finance Commission’s report below shows it ambitious plan to earmark funds for defence and internal security.
If the Commission’s recommendations were followed in totality, then in the past five years the fund would have accumulated more than two lakh crore rupees. While the amount may seem optimistic, we didn’t witness even an effort by the Union in meeting the Commission’s target. There was no public dissent from the Commission’s recommendations or a disagreement about its estimation or mention by the Union about the feasibility of a Defence Fund as understood by the Commission.
b. Defence Fund ‘Abandoned’, Cess Operational
We have no publicly available information whether the concept of Defence Fund has been permanently abandoned. Or Defence Fund as envisaged by the Commission was not agreeable to the Union. We do have a curious situation where the entire idea of a standalone Defence Fund mooted by the Union seems to have been abandoned by it with no explanation. The Commission not only endorsed the idea of a Defence Fund but also provided a roadmap for operationalizing it. But the Union seems to have moved on. And instead, in December 2025, the Union has chosen to levy a Health and National Security Cess to meet defence needs. And the cess name indicates, it is a half measure towards defence needs. All funds raised through the Health and National Security Cess will not be exclusive to defence; a portion will be earmarked towards internal security needs and another portion towards public health. In what proportion will the funds of Health and National Security Cess be divided between defence, internal security, and public health is unknown. And probably will be for life.
II. Public Health
Under Seventh Schedule of the Constitution, public health has been included in the State List. But income tax is the Union’s domain. The Constitution is silent if the Union can collect cess on a subject listed in the State List. The ‘constitutional silence’ on legislative competence on cess has allowed the Union to collect Health and Education Cess over and above the income tax. And the same leeway will probably extend to the Health and National Security Cess.
a. Health and Education Cess
Under the Income Tax Act, 1961 a ‘Health and Education Cess’ is levied and collected on 4% of income tax payable by an assessee. It is a compulsory levy on all income taxpayers. Again, how much of the money collected under this cess is allocated to health and education respectively remains unknown. From 2004 to 2018, income taxpayers paid an Education Cess which was levied at 2% and was later increased to 3% of income tax. In 2018, Education Cess was renamed to Health and Education and the rate was increased to 4% of total income tax. The Finance Minister estimated an additional Rs 11,000 crores annually because of the increase in cess rate. But the Finance Minister didn’t specify if the additional amount would be allocated to public health or education or generally the proportion in which the amount will be split between the two. Are we to presume that the additional 1% of the money collected under the Health and Education Cess is allocated to public health? Or is the money now equally divided between public health and education? We don’t have any clarity.
b. Another Health Cess
Despite there being a Health and Education Cess, the Union has chosen to levy the Health and National Securiy Cess. A relevant question is: if there is an already existing health cess, why levy another one? Is the money collected under the pre-existing Health and Education Cess insufficient for public health expenses? If yes, why not levy a dedicated public health cess? And what is the justification of coupling public health with national security? National security encompasses both defence and internal security. It won’t be unreasonable to presume that national security will claim lion’s share of the funds collected under the Health and National Security Cess. And since public health is not the Union’s domain, it is difficult to hold it accountable for utilization of funds for public health. At the same time, it is evident that the Union considers public health important to warrant two ‘partial cesses’. But not enough for public health to deserve a dedicated cess. Two half measures don’t make a full one.
Conclusion
The 15th Finance Commission in its report noted that the Ministry of Defence receives the maximum budget allocation amongst all the Union’s ministries. And yet, the Ministry of Defence argued before the Commission that a separate non-lapsable Defence Fund was necessary to meet increasing need for capital expenses. The Ministry of Home Affairs had also advocated for the Defence Fund since its budgetary allocations were termed as insufficient. And yet for four years – since the Commission provided a roadmap – we haven’t seen any concrete action to make the Defence Fund a reality. Instead, after six years of mooting the idea of Defence Fund and even receiving endorsement from the Commission the Union has decided to levy a cess to partially fund national security expenses. Levying a cess is convenient for the Union as it has to provide no estimate of fund collection, transparency is limited, and there is no clear roadmap of expenses and their allocation. And reliance on yet another cess reveals that national security rhetoric is easier but substantive measures on national security – even on the revenue side – require long, consistent groundwork.
Finally, a general word on cesses. Cesses are a trick on the Constitution. The legal limits on powers to levy cess – of both the Union and States – are hazy. Supreme Court in a few instances has clarified the power to levy cesses in specific contexts, but broader issues remain unresolved and, in some instances, even unknown. It is the legal uncertainty on cesses that allows States to collect a ‘cow cess’ from purchasers of alcohol. It is the same legal uncertainty that allows the Union to levy cess on public health, a State subject. And the same uncertainty allows the Union to levy multiple cesses without appropriate accountability. Despite repeated recommendations from successive Finance Commissions, Comptroller and Auditor General of India, and even some States to reduce the no. of cesses the tax policy landscape in India stubbornly moves in the opposite direction.
In Applause of a Repeal: Place of Supply for Intermediary Services
The Goods and Services Tax Council (‘GST Council’) in its 56th meeting took multiple decisions and made a series of recommendations. The headline, of course, was dominated by the change in tax rates of various goods. An equal, or to my mind, a more substantive reform was the recommendation for omission of Section 13(8)(b) of the Integrated Goods and Services Tax Act of 2017 (‘IGST Act of 2017’).
Section 13 of the IGST Act of 2017 prescribes place of supply rules where location of supplier or location of recipient is outside India. Section 13(2) lays down the general rule and states that the place of supply for the above-mentioned services shall be location of recipient of services. Section 13(8)(b) incorporates a deeming fiction – at variance with the general rule – and states that the place of supply for intermediary services shall be the location of supplier of services. Section 13(8)(b) proved be an interpretive challenge producing a split judgment by the Bombay High Court and subsequently an opinion by a third judge to resolve the interpretive disagreement. And yet, no clear resolution seemed to be in sight. I’ve previously commented both judicial opinions here and here.
In this article, I briefly explain the provision, the interpretive challenge it presented, and the resulting position of law that proved to be unimplementable. I argue that interpretive approach adopted by the third judge – of the Bombay High Court – in upholding constitutional validity of Section 13(8)(b) of the IGST Act of 2017 was not incorrect. But, it resulted in a legal position that resembled a riddle wrapped inside an enigma. I conclude that the impending omission of Section 13(8)(b) of the IGST Act of 2017 is a step in the right direction. It will provide much needed clarity for GST liabilities of intermediary services. And the omission aligns with a core feature of GST – a destination-based tax. Finally, the omission reduces an unnecessary complexity in IGST Act of 2017. While one of the Revenue Department’s arguments was that Section 13(8)(b) was introduced for purpose of collecting additional revenue; removing it introduces more simplicity which may prove to be a more meaningful reform of GST in the long run.
‘Exceptional’ Nature of Section 13(8), IGST Act of 2017
Section 13(2) of the IGST Act of 2017 lays down the default rule to determine place of supply for services where location of either supplier or recipient is outside India. The location of recipient of services is the default place of supply as per Section 13(2). Section 13(8) contains exceptions to the above rule. Section 13(8)(b) states that for intermediaries, the place of supply shall be the location of supplier of services. Thus, if an intermediary with a registered office in Bombay supplies intermediary services to a recipient located outside India, the place of supply shall be Bombay. But wouldn’t a supply of intermediary services to a recipient outside India amount to export of services and thus outside the net of GST? Ideally, yes. But the deeming fiction under Section 13(8)(b) was introduced precisely to levy tax on export of intermediary services by deeming it to be a domestic service. This was just the first level of complication.
Section 8(2) of the IGST Act of 2017 states that:
.. supply of services where the location of the supplier and the place of supply of services are in the same State or same Union territory shall be treated as intra-State supply:
In the above example, the location of supplier and place of supply is Bombay, State of Maharashtra. And as per the mandate of Section 8(2) of the IGST Act of 2017, the supply shall be treated as an intra-State supply. What is the implication of the latter?
Under GST laws, an intra-State supply is subjected to Central Goods and Services Tax (‘CGST’) + State Goods and Services Tax (‘SGST’). The latter is collected by the State if the place of supply is its jurisdiction. In the above example, the SGST component would be levied and collected by the State of Maharashtra under its State-level GST law. Now, we enter the next level of complication.
Article 286(1)(b) of the Constitution states that no law of a State shall impose, or authorize the imposition of, a tax on the supply of goods or of services or both, where such supply takes place in the course of the export of the goods or services or both out of the territory of India.
The embargo placed by Article 286(1)(b) in this context meant that States cannot levy SGST on intermediary services. Why? Because the intermediary services provided by a supplier from India to a recipient outside India are export of services. Section 13(8)(b) via deeming fiction, shifted the place of supply of export of services and deemed it to be a domestic transaction. But a statute cannot incorporate a deeming fiction that empowers State to levy tax beyond the constitutional boundary marked by Article 286(1)(b) of the Constitution.
The deeming fiction contained in Section 13(8)(b) of the IGST Act of 2017 was the subject of a constitutional challenge. And the resulting judicial opinions did not make the legal position any better.
A Split Judgment of the Bombay High Court
In Dharmendra M. Jani v Union of India, the Bombay High Court delivered a split judgment. Justice Ujjal Bhuyan held that Section 13(8)(b) of the IGST Act of 2017 violated Article 286(1)(b) of the Constitution and was unconstitutional. He noted the extra-territorial effect being attempted via Section 13(8)(b) of the IGST Act of 2017 ran counter to a fundamental principle of GST, i.e., it is a destination-based consumption tax. Justice Abhay Ahuja though disagreed and – by applying a convoluted logic – held that Section 8(2) of the IGST Act of 2017 is inapplicable to the transaction of an intermediary providing services to a recipient located abroad. He also stated that the Parliament has the power to determine place of supply for inter-State supplies under Article 246A read with Article 269A of the Constitution. And thus, upheld that vires of Section 13(8)(b) of the IGST Act of 2017 by conveniently ignoring Article 286 of the Constitution.
The obvious result of this interpretive disagreement was a stalemate.
Opinion of Justice G.S. Kulkarni: An ‘Unimplementable’ Legal Position
In view of the split judgment of the Division Bench, the proceedings of case were referred to Justice G.S. Kulkarni. And he issued a peculiar opinion in Dharmendra M. Jani v Union of India. Though to be fair to him, the peculiarity emerged largely from the deeming fiction contained in Section 13(8)(b) of the IGST Act of 2017. He was tasked with unravelling a knot that could have no simple or elegant result.
Justice Kulkarni accepted that an intermediary service provided by a taxpayer located in India to a recipient located in a foreign jurisdiction amounted to export of services as defined under Section 2(6) of the IGST Act of 2017. And that by virtue of Section 8(2) of the IGST Act of 2017 an export service was deemed to be an intra-State supply of service. But since an intra-State supply is subjected to tax under the CGST Act of 2017 and relevant State GST Act of 2017; Justice Kulkarni added that reading Section 13(8)(b) of the with Section 8(2) amounted to reading a provision of the IGST Act of 2017 into other GST statutes. He observed:
… that the fiction which is created by Section 13(8)(b) would be required to be confined only to the provisions of IGST Act, as there is no scope for the fiction travelling beyond the provisions of IGST Act to the CGST and the MGST Acts, as neither the Constitution would permit taxing of an export of service under the said enactments nor these legislations would accept taxing such transaction.
Justice Kulkarni was clear in one crucial respect: the domain of IGST Act of 2017 was separate – inter-State supplies. CGST Act of 2017 and State-level GST laws also operated in their own respective domains – intra-State supplies. In the absence of a specific incorporation of provision of one statute in another – ideally introduced by the legislature expressly – the provisions of the IGST Act of 2017 cannot by a process of interpretation be applied to other GST statutes.
Based on his above reasoning and understanding of the legislative landscape in GST, Justice Kulkarni concluded that operation of Section 13(8)(b) of the IGST Act of 2017 was to be confined only to the IGST Act of 2017. But he refused to term the provision as unconstitutional. Justice Kulkarni, by upholding the vires of Section 13(8)(b) of the IGST Act of 2017, resolved the stalemate caused by the split judgment. However, it presented the challenge of implementing his opinion. How to confine Section 13(8)(b) of the IGST Act of 2017 only to the IGST Act of 2017?
If the fiction of Section 13(8)(b) was to be confined only to the IGST Act of 2017, it would mean intermediary services exported to other countries could only be subjected to IGST. But IGST is levied only on inter-State supplies. Or imports which are deemed to be inter-State supplies. So, would Justice Kulkarni’s opinion mean that the Union would now levy IGST on export of intermediary services? Such a levy would be diametrically opposite to the underlying policy of levying IGST only on inter-State supplies or imports. Also, wouldn’t levying IGST defeat the fiction contained in Section 8(2) of the IGST Act of 2017? As per Section 8(2) if place of supply and location of supplier are in the same State, the supply is an intra-State supply. But States cannot levy SGST on such supplies by virtue of the opinion of Justice Kulkarni. So, would the net result be that an export of service that is treated as an intra-State supply will be subjected to IGST? If yes, it would not only challenge but practically defeat all fundamental principles that inform the design of GST. One way out of this puzzle would have been to amend the relevant provisions of CGST Act of 2017, and relevant State-level GST laws and specifically incorporate Section 8(2) and Section 13(8)(b) of the IGST Act of 2017 in such legislations. It would address the issue highlighted by Justice Kulkarni but would perhaps risk make the provision even more complex. It is unknown if the option to amend the provisions was seriously considered by the GST Council.
Irrespective, Justice Kulkarni while did not hold Section 13(8)(b) of the IGST Act of 2017 to be unconstitutional; his peculiar – and internally consistent logic – resulted in making the provision unimplementable. At the very least an appropriate amendment to the relevant provisions was needed to levy tax under the deeming fiction contained in Section 13(8)(b).
GST Council Recommends Repeal of Section 13(8)(b) of the IGST Act of 2017
In the face of such a challenge, the GST Council perhaps thought that a repeal of the provision is the best option. But what we don’t know – at least for now – is the precise reason why repeal of Section 13(8)(b) of the IGST Act of 2017 was recommended by the GST Council. Was it truly because the provision has become ‘implementable’? Or is it because an alternate and ‘implementable’ provision to levy tax on cross-border intermediary services is in the works? If one vital reason for incorporation of Section 13(8)(b) of the IGST Act of 2017 was to collect additional tax, is that reason abandoned for good? I guess we will have to wait until at least the minutes of the 56th meeting of the GST Council are made public.
Section13(8)(b) of the IGST Act of 2017: Repeal Recommended in December 2017
We currently do not know the reasons why the GST Council recommended repeal of Section 13(8)(b) of the IGST Act of 2017. However, we do know that a suggestion for repeal was made previously but was not adhered to by the Union and States. In December 2017, a report of the Department Related Parliamentary Standing Committee on Commerce was laid before the Rajya Sabha. The 139th Report titled ‘Impact of Goods and Services Tax (GST) on Exports’ made various recommendations for changes to GST from the perspective of promoting exports. One of the recommendations in the Report specifically stated:
The Government may also cause amendment to section 13(8) of the IGST Act to exclude ‘intermediary’ services and make it subject to the default section 13(2) so that the benefit of export of services would be available. (para 15.3)
The Committee reasoned that since GST was a destination-based tax, the place of supply should as per the default rule under Section 13(2), i.e., location of the recipient of services. And the amendment to Section 13(8) of the IGST Act of 2017 would ensure that the intermediary services provided from India to foreign recipients are treated as exports and receive an exemption from the levy of IGST.
The recommendation of the Committee was based on sound logic. Section 13(8)(b) militated not only against the destination-based character of GST; it also stretched the concept of a deeming fiction too far. By treating an export of intermediary service as an intra-State supply of service, the attempt to gain more revenue created a set of complications that the Revenue Department did not anticipate. Or maybe the Revenue Department was blinded by the thirst for additional revenue.
A Welcome Repeal
Overall, the GST Council’s recommendation for repeal of Section 13(8)(b) is welcome – to some extent – preserves the integrity of GST as a destination-based tax. At the same time, the repeal will reduce an unnecessary complexity from the GST laws, making compliance with and comprehension of place of supply rules easier. As for potential loss of revenue. I think reduced complexity in tax laws only tends to promote business activities. If not directly and immediately, at least in an incidental manner. And reduced complexity in tax laws is always beneficial for revenue collections in the long run. Export of intermediary services, on principle, should not be within the remit of GST since it is a destination-based tax. A deviation from the basic character of GST should be based on sound justification and sounder reasons. Collection of more revenue was a less-than-ideal reason to incorporate and continue with Section 13(8)(b) of the IGST Act of 2017. A more compelling reason seems to have prevailed even if we yet don’t know the precise reason that motivated the GST Council’s recommendation.
Time Restraint on Power of Provisional Attachment under GST
Introduction
The Supreme Court in Kesari Nandan Mobile v Office of Assistant Commissioner of State Tax (‘Kesari Nandan Mobile’) held that an order of provisional attachment under Section 83 of the Central Goods and Services Act, 2017 (‘CGST Act of 2017’) cannot extend beyond one year. A plain reading of Section 83(2) of the CGST Act of 2017 reveals that every provisional attachment shall cease to have effect after expiry of one year. However, Section 83(2) doesn’t expressly prohibit renewal of an attachment order after expiry of one year.
In Kesari Nandan Mobile, the Revenue Department after expiry of one year issued a new attachment order terming it as ‘renewal’ of the previous attachment order. The Gujarat High Court dismissed the assessee’s challenge to ‘renewal’ of the attachment order. The Gujarat High Court provided two major reasons:
first, prima facie the assessee was engaged in supply of bogus invoices and claiming Input Tax Credit (‘ITC’) based on those invoices. In view of the assessee’s conduct, the Gujarat High Court held that the order of provisional attachment cannot be said to cause any harassment to the assessee;
second, the Gujarat High Court added that under Section 83(2) of the CGST Act of 2017, there was no embargo to issue a new provisional attachment order after lapse of the previous attachment order. And that a provisional attachment order passed after one year was intended to safeguard the revenue’s interest and was not in breach of Section 83(2) of the CGST Act of 2017.
The Supreme Court set aside the Gujarat High Court’s decision by interpreting Section 83(2) in favor of the assessee. The Supreme Court referred to comparable legislations – Income Tax Act, 1961 (‘IT Act, 1961’) as well as Customs Act, 1962 and The Central Excise Act, 1944 – and noted that the authorities can renew an order of provisional attachment only when a statute expressly provides for it. But, if the statute does not expressly confer a power for extension of provisional attachment, the executive ‘cannot overreach the statute’.
In this article, I argue that the Supreme Court in Kesari Nandan Mobile has added a welcome restraint on the Revenue Department’s power of provisional attachment by correctly interpreting Section 83(2) of the CGST Act of 2017. I further suggest that the Supreme Court in the impugned case reinforced the legal framework on provisional attachment elaborated in in M/S Radha Krishan Industries v The State of Himachal Pradesh(‘Radha Krishan Industries’). The Supreme Court in Radha Krishan Industries was categorical that the power of provisional attachment was ‘draconian in nature’ with serious consequences. And the rights of assessees against such a power were valuable safeguards that needed protection. The Supreme Court in Kesari Nandan Mobile builds on the foundation laid in Radha Krishan Industries and expressly states that provisional attachment is only a pre-emptive measure and not a recovery mechanism.
Radha Krishan Industries on Provisional Attachment
The Supreme Court in Radha Krishan Industries noted that the legislature was aware of the draconian nature of provisional attachment and serious consequences that emanate from it. And use of power of provisional attachment is predicated on specific statutory language used in Section 83 of the CGST Act of 2017. Interpreting Section 83(1) of the CGST Act of 2017, the Supreme Court emphasized that the Commissioner must only issue an order of provisional attachment if it is necessary to do so and not because it was practical or convenient. Necessity of protecting the interest of the revenue is the fountainhead reason that triggers the power of provisional attachment.
Supreme Court in Radha Krishan Industries also interpreted Section 83(1) of the CGST Act of 2017 alongside Rule 159 of the CGST Rules of 2017. The latter provided detailed procedure and rights of assessee’s vis-à-vis provisional attachment. The Supreme Court specifically interpreted Rule 159(5) of the CGST Rules and held that it provided two procedural entitlements to the person whose property was attached: first, the right to file an objection on the ground that the property was not or is not liable to be attached; second, an opportunity of being heard. The Supreme Court underlined the importance of these rights and dismissed the Revenue Department’s stance that the right to file objections was not accompanied by a right to be heard.
Finally, in Radha Krishan Industries, the Supreme Court took umbrage that a previous attachment order against the assessee was withdrawn by the Revenue Department after considering representations of the assessee; but a subsequent order of provisional attachment was passed on the same grounds. The Supreme Court observed that unless there was a change in circumstances it was not open to the Revenue Department to pass another order of provisional attachment. While this observation of the Supreme Court was not in the context of outer time limit, it laid down the law that even if a new provisional attachment order is issued within one year, the onus is on the Revenue Department to prove that there was a change in circumstances that necessitated a new order.
It is in the backdrop of the Supreme Court’s above observations in Radha Krishan Industries on provisional attachment that we need to understand the issue of time restraint addressed in Kesari Nandan Mobile.
Supreme Court Adds Time Restraint
In Kesari Nandan Mobile, the Supreme Court was faced with the issue of whether an order of provisional attachment can be issued after expiry of one year of issuance of the previous attachment order. The Supreme Court noted that issuance of an order of provisional attachment after one year cannot be justified on the ground that it is not prohibited under a legislative or executive instrument. The Supreme Court added three more reasons to support its conclusion that provisional attachment cannot take place after expiry of one year:
First, the ‘complete absence of any executive instruction’ that is consistent with the legislative policy of allowing renewal of orders of provisional attachment after expiry of one year.
Second, the Supreme Court reasoned that Section 83(2) of the CGST Act of 2017 must be interpreted in a manner that does not reduce it to a dead letter. As per the Supreme Court, conceding to the Revenue Department’s argument of allowing renewal of provisional attachment after expiry of one year would make Section 83(2) otiose. The Supreme Court – impliedly invoked Radha Krishan Industries – and held that Section 83(1) conferred a draconian power and Section 83(2) should not be interpreted to ‘confer any additional power over and above the draconian power’ upon the lapse of one year envisaged under Section 83(2).
Third, the Supreme Court further observed that issuance of a fresh provisional attachment order on substantially the same grounds as previous one would be in disregard to the safeguard provided under Section 83(2) of the CGST Act of 2017. In Radha Krishan Industries the Supreme Court had disallowed issuance of a fresh provisional attachment order on similar grounds as the previous order. But the Supreme Court’s primary objection was that the new provisional attachment order was issued despite there being no change in facts. However, in Kesari Nandan Mobile, the Supreme Court expressed concern that issuance of new order after expiry of one year may lead to continuous issuance of provisional attachment under the garb of renewal and would be contrary to a plain reading of Section 83(2).
The Supreme Court’s observations in Kesari Nandan Mobile are an important win for taxpayer protection, a plain reading of tax statutes, and a welcome restraint on the Revenue Department’s power. The Gujarat High Court’s decision was influenced by dishonest conduct of the taxpayer. Ideally, the taxpayer’s conduct should not intervene in plain and strict reading of the tax statutes unless the context warrants otherwise. In the impugned scenario, there was little reason for the Gujarat High Court to interpret Section 83(2) in a way that provided additional powers to the Revenue Department. Especially when the powers in question are intrusive and can cause permanent damage to the assessee’s business.
Incongruity Between Section 83(2) and Rule 159(2)
The Supreme Court in Kesari Nandan Mobile also took note of the incongruity between Section 83(2) of the CGST Act of 2017 and Rule 159(2) of CGST Rules of 2017. The former provides that every order of provisional attachment shall cease to have effect after expiry of one year. Rule 159(2) in turn provides that an order provisional attachment shall cease to have effect only when the Commissioner issues written instructions. Thus, even after expiry of one year the provisional attachment continues unless written instructions are issued by the Commissioner. The Supreme Court noted that the incongruity had been brought to the notice of the GST Council and an amendment to Rule 159(2) was proposed. The amendment to Rule 159(2) will provide that a provisional attachment shall cease to have effect after one year or from the date of order of the Commissioner, whichever is earlier.
But even though the proposed amendment – though approved by the GST Council – has not been effectuated, the Supreme Court held that it is important that Section 83(2) is complied with strictly. Implying that an order of provisional attachment should not extend beyond one year.
Conclusion
The power of provisional attachment is certainly intrusive, but at the same time necessary. The necessity stems from preventing an eventual frustration of the tax demand because the assessee has disposed of their properties. At the same time, as courts have reminded the Revenue Department: the power of provisional attachment is not a recovery measure. It is temporary until the investigation is over. And failure to complete the investigation or recover tax cannot be used as a cover to extend the duration of provisional attachment beyond the statutory mandate. And each time, the Revenue Department must be mindful of the consequences that provisional attachment entails and its disruption to assessee’s business and profession.
