Rav Singh
GST @8: A Journey Via Eight Amendments
Introduction
Goods and Services Tax (‘GST’) came into force eight years ago on 1 July 2017. Eight long, eventful years that have been full of sound and fury. But, do they signify something? Yes and No. Yes, because GST, at times, operates like a tinkered version of State-VAT laws and not a transformative reform of India’s indirect tax regime. At other times, GST reveals glimpses of its potential as a transformative reform, only to be bogged down by unexplained and reactive changes introduced by a heavy handed tax administration. On average, GST continues to meander between these two versions. As I argued elsewhere before, it is a reform that is continuously deformed.
In this article, let me take you through GST’s journey of eight years via the prism of eight statutory amendments. And, like most amendments to Indian tax laws, a majority of the amendments to Central Goods and Services Act, 2017 (‘CGST Act of 2017’) are tied to the hip with judgements that didn’t align with the Revenue Department’s view. In this article, I focus only on eight amendments to underline the nature of some of the changes made to GST. In no particular order, here is the list:
Journey in Eight Amendments
1. Actionable Claims become Specified Actionable Claims
Originally, only three actionable claims were subject to GST: betting, lotteries, and gambling. GST was hit with the curveball of online gaming, which wasn’t expressly included or excluded from GST’s scope. Courts classified a species of online gaming, i.e., fantasy games, as games of skill which immediately put them out of the purview of three actionable claims and beyond GST’s scope. The Revenue Department took the stance that all online gaming amounted to gambling and was subject to GST, and the value of supply was the entire amount staked by players and not just the platform fee collected by the online intermediary. The Revenue Department accordingly issued show cause notices to online gaming companies alleging obscene amounts of tax evasion. Eventually, the Karnataka High Court pronounced the Gameskraft judgment dismantling the Revenue Department’s entire (mis)understanding and deliberate misinterpretation of gambling law jurisprudence. But, CGST Act of 2017 was amended almost immediately thereafter in 2023 to include online gaming and casinos in the amended definition of ‘specified actionable claims’. Whether the amendment will have retrospective effect is an open question, though the Revenue Department would certainly prefer going back in time to collect taxes by claiming that the amendment is only clarificatory in nature. Which it is certainly not. The Supreme Court, currently seized of the appeal against the Karnataka High Court’s judgment, may provide some clarity, though the amendment of 2023 has ensured that all kinds of online gaming – games of skill or games of chance – are now expressly within the purview of GST. Irrespective, the amendment of 2023 may now pave way for the Revenue Department to actually recover the huge tax amounts it claimed has been evaded by online gaming companies. The Revenue Department’s claims of amount of tax evaded may prove to be a fantasy or a bountiful reality. Time will tell.
2. Doctrine of Mutuality is Buried, But Alive
The simple concept underlying doctrine of mutuality is that a person cannot transact with themselves and such transactions cannot be subjected to sales tax or service tax. Indian courts applied the above doctrine to keep transactions between a club and its members outside the tax net by reasoning that there was complete identity between the two constituents. To bring transactions between clubs and its members within the tax net, the 46th Constitutional Amendment introduced a legal fiction via Article 366(29-A)(e) in the Constitution and seemingly buried the doctrine of mutuality. Decades later in 2019, the Supreme Court in Calcutta Club Ltd case held that the Parliament only intended to include unincorporated clubs in Article 366(29-A)(e) and not incorporated clubs. The Supreme Court concluded that doctrine of mutuality continued to be applicable to incorporated and unincorporated member’s clubs even after the 46thConstitutional Amendment. To contain the spillover effect of the Supreme Court’s decision in GST, the Revenue Department immediately amended Section 7 of CGST Act of 2017 which defines supply. The amendment implemented with retrospective effect, introduced clause (aa) to Section 7 of CGST Act of 2017 and was intended to undo the effect of the Calcutta Club judgment as it incorporated a legal fiction that a constituent and its members were distinct persons. And transactions between them constituted supply. After the amendment, all was seemingly well and doctrine of mutuality was inapplicable to GST, until the Kerala High Court declared the amendment of Section 7 of CGST Act of 2017 as unconstitutional. The Kerala High Court reasoned that the legal fiction of treating a single person as two, went beyond the Constitutional understanding of the term sale which necessarily involves two members. Prima facie the Kerala High Court seems to have correctly found a gap in the Constitutional prescription and statutory definition. Presumably, the Supreme Court will have the final word on this issue.
3. ITC Conditions Become Increasingly Onerous
Section 16 of the CGST Act, 2017 prescribes conditions to claim Input Tax Credit (‘ITC’) for taxpayers. The conditions for ITC have changed in the past eight years including phasing out provisional ITC. The most significant change in claiming ITC was Section 16(2)(aa) which was introduced in 2021. Section 16(2)(aa) restricts ITC of a taxpayer until the details of the invoice or debit note have not been furnished by the supplier in their monthly output statement and the same have been communicated to the recipient. In simpler terms, a purchaser cannot claim ITC for the GST paid on their inputs/purchases until their supplier accurately and timely uploads the relevant invoices in their monthly returns. For it is only when the supplier completes and files their monthly returns with invoice details would the purchase be reflected in the purchaser’s relevant return and provide basis of their ITC claim. The introduction of Section 16(2)(aa) effectively made the purchaser dependent on the supplier for claiming ITC. Making a purchaser dependent on the supplier for ITC was an exception or an outlier in pre-GST regimes, and reserved only for cases where there was prima facie or established collusion between a purchaser and a supplier. Under GST, it has now become the default policy. The mere fact that the purchaser possesses the invoice or debit/credit note reflecting the purchase and payment of GST is not enough evidence of a genuine supply. The amendment with introduction of clause (aa) is good as the Revenue Department outsourcing to the purchaser the obligation of verifying the bona fide and tax habits of its supplier(s). Equally, the purchaser shares the burden of making sure the supplier remits the GST to the State, else the purchaser may not be able to claim ITC despite having paid GST to the supplier.
4. Scope of Provisional Attachment Expands
Section 83 of the CGST Act, 2017 originally empowered the Commissioner to issue an order for provisional attachment during the pendency of proceedings. And, if in the opinion of the Commissioner, it was necessary to attach the property to protect the interest of the Revenue an order for provisional attachment could be issued against a property owned by the taxpayer. After a few judgments, the Revenue Department discovered that the safeguard of ‘pendency of proceedings’ was a hurdle to its desire of arrogating to itself unfettered powers. Equally, the courts clarified that power of provisional attachment only extended to the property owned by the taxpayer. For example, the Bombay High Court clarified that powers of provisional attachment only extended to taxpayers against whom proceedings were initiated against the relevant provisions of the CGST Act, 2017. And that the Revenue Department could not automatically attach properties of other taxpayers.
In 2021, Section 83 of the CGST Act, 2017 was amended to provide the Commissioner power to provisionally attach property any time after initiation of proceedings. Also, the Commissioner could provisionally attach property of any person mentioned in Section 122 implying the property attached need not necessarily belong to the person against whom proceedings were initiated. The expansion of scope of powers of provisional attachment is at odds to its repeated characterisation as a draconian power with far reaching effects. Ideally, the power of provisional attachment should be kept narrow and circumscribed unless there is a compelling reason to expand it. The amendment of Section 83 seemed achieved the opposite effect to the detriment of taxpayer rights. The Central Board of Indirect Taxes and Customs in recognition of debilitating effect of the amendment has issued guidelines for officers to exercise restraint in exercise of such powers. However, the amendment expanded the scope of power of provisional attachment diluting the safeguards in the guidelines. While the power of provisional attachment is necessary in some cases, the expansion of its scope power that has titled the scales of intrusion and intervention heavily in favour of the Revenue Department.
5. Confiscating Goods, and Removing a Non-Obstante Clause
Originally, Section 129 and Section 130 of the CGST Act of 2017 began with a non-obstante clause giving birth to an interpretive question: which provision will supersede the other? Equally, while both provisions provided for procedure of detention and confiscation respectively, there was also an inter-linkage between the provisions. Detention of goods under Section 129, on non-payment of penalty, could lead to confiscation of goods under Section 130. This gave rise to the second question, i.e., whether confiscation is linked to detention? Courts tried to interpret the provisions harmoniously multiple times clarified that both provisions were independent of each other. In 2021, the non-obstante clause from Section 130 was removed to ‘delink’ both the provisions and bring more clarity. However, an equally pertinent issue of the Revenue Department mechanically and routinely confiscating goods remains addressed. Courts had repeatedly cautioned the Revenue Department to not invoke Section 130 unless the taxpayer had an intention to evade tax. However, we haven’t seen the practice of directly confiscating goods abate even after the amendment. Absence of a single document or a patent misdescription of goods, misclassification of goods or any similar ground can lead to confiscation of goods. The threshold remains low leading to unnecessary adversity for taxpayers.
6. Amendment to ‘Operationalise’ GSTATs
In 2019, the Madras High Court declared the provisions for composition of GSTATs as unconstitutional. The judgment proved to be a spoke in the wheel preventing immediate operationalisation of GSTATs, but what followed was an exemplary display of snail-paced policy making that continues its slow march. Neither did the Revenue Department appeal against the Madras High Court’s judgment, nor were the relevant provisions amended with a sense of urgency that the issue demanded. Eventually, after 4 years, via the Finance Act, 2023 provisions relating to composition of GSTATs were amended to provide an immediate spring for operationalisation of GSTATs. However, vis-à-vis GSTATs, only piecemeal changes have been made since 2023. A semi-operational website, regular recruitment advertisements, appointment of some personnel for ceremonial purposes have been completed, but GSTATs continue to be in limbo. I’ve previously argued that the GST’s rule of law foundation is proving to be weak and effective given that GSTATs are not operating. GSTATs form a crucial role in dispute resolution as they are designed as the first appellate forum and a fact finding authority. But, despite the amendment of 2023, little progress have been made to provide a sounder footing for fair dispute resolution under GST. Instead, the burden is being borne by advance authorities, whose rulings are typically poorly authored and binding only on the parties to the petition. Equally, the High Courts continue to shoulder the disproportionate burden of adjudication via writ petitions where they have to undertake the fact finding exercise and lay down the law in detail of a relatively novel law. A less than ideal, in fact dismal state of affairs for GST – a law that has been repeatedly touted as a transformative reform of indirect tax regime.
7. ‘Or’ Becomes ‘And’ to Nullify Safari Retreats Judgment
‘And’ does not mean ‘Or’, was Supreme Court’s strict interpretation in Safari Retreats case. The Supreme Court opined that if use of ‘Or’ was a legislative mistake, then it could have been corrected in the interim period between the High Court’s judgment and hearing before the Supreme Court. The Revenue Dept, after the Supreme Court’s decision said yes, it was an error. And we will correct it now, via a retrospective amendment. No explanation given as to why the legislative ‘error’ was not corrected after the High Court’s judgment and why the Revenue Department chose to fight a prolonged litigation if the ‘error’ was apparent and well-known. And why the Revenue Department file a review petition despite deciding – after recommendations of the GST Council – to amend the CGST Act of 2017 retrospectively. The broader issue that the amendment brings into focus is lack of hesitation in introducing a retrospective amendment. While the CGST Act of 2017 has been amended retrospectively previously – for example, when amending the definition of supply under Section 7 to nullify the Calcutta Club case ratio – this amendment after Supreme Court’s judgment revealed that not much has changed under GST regime. The Revenue Department fought a case and advocated a particular interpretation. When the Supreme Court did not agree with the Revenue Department’s view, the law was amended swiftly. The Revenue Department continues to assert that the Supreme Court did not interpret ‘legislative intent’, a standard excuse when any judgment doesn’t align with the Revenue Department’s interpretation.
8. Anti-Profiteering Regime Ends
While not a statutory amendment, this policy change was one of the most welcome changes brought to the GST regime. National Anti-Profiteering Authority (‘NAA’) was established to protect consumer interests due to implementation of GST. NAA, however, never satisfied the parameters of a fair dispute resolution body. Its biggest contribution to GST was in November 2022, when its mandate was brought to an end and its remit was officially transferred to the Competition Commission of India. NAA, during its existence, pronounced a large volume of orders which were essentially a replica of each other. The orders were full rhetoric, obfuscation, devoid of basic legal reasoning, and imposed multiple and heavy penalties on taxpayers for seemingly violating the anti-profiteering mandate contained in Section 171 of the CGST Act, 2017. Thus, a formal end to the NAA’s regime was a net positive contribution to GST. While the Delhi High Court, in a sub-par judgment has upheld the constitutionality of NAA, it doesn’t whitewash the rhetoric-filled and nuanced deprived NAA orders. And the Delhi High Court has allowed the taxpayers to challenge the individual orders of NAA on the ground of arbitrariness, among others. While the entire superstructure of NAA could have been easily held to be unconstitutional, we may see some redemption for taxpayers if some of the individual orders of NAA are struck down in the future. The biggest solace remains that NAA will not be issuing any new orders. That may remain the biggest win for taxpayers.
Conclusion
Amendments in any law, are par for the course. For tax law even more so. The frequency or no. of amendments sometimes do not tell the real story. Sometimes, a large no. of amendments indicate an instability in the law and tax policy. But often amendments do not reveal if the law was drafted properly in the first place necessitating frequent amendments. However, GST laws were drafted after marathon deliberations and discussions. Though the Parliamentary debates were woefully short and unproductive, the draft and model laws that were released to the public were continuously modified after feedback and comments.
In my view, the GST laws have not been frequently amended due to sub-par drafting but to incrementally align the statutory provisions with the Revenue Department’s view. The expansion of the scope of power of provisional attachment, inclusion of all online games including games of skill within the scope of GST, nullifying the Supreme Court’s view in Safari Retreats case, expanding scope of supply to nullify doctrine of mutuality – all point towards an obstinate Revenue Department insisting on paving its GST way as per its own desire. And the fact that some of the amendments have a retrospective effect does not augur well for tax certainty and predictability. The promise of no retrospective amendments in GST laws stands buried for now. Hopefully, it will resurrect soon and cure the imbalance in GST administration that currently is in favour of the Revenue Department, at the expense of taxpayer rights and convenience.
Liquidation After Approval of Resolution Plan: The IBC Faces Tough Challenges
The Supreme Court within a span of few months delivered two judgments – State Bank of India & Ors v The Consortium of Mr. Murari Lal Jalan and Mr. Florian Fritsch & Anr (Jet Airways) and Kalyani Transco v M/S Bhushan Steel Power and Steel Ltd & Ors (Bhushan Steel) – where it ordered liquidation of the corporate debtors in question. The common theme of both the judgments was that the Committee of Creditors (CoC) and the National Company Law Tribunal (NCLT) had approved a resolution plan, but its implementation failed. The successful resolution applicants in both cases used delay tactics by repeatedly seeking extensions of time limits provided in the resolution plan, interpreted the conditions relating to payments in a self-serving manner, and overall displayed a lack of credibility to salvage the corporate debtor resulting in the Supreme Court – invoking its powers under Article 142 of the Constitution – ordering liquidation of the corporate debtors. Section 33(3), Insolvency and Bankruptcy Code 2016 (IBC) does envisage liquidation after approval of the resolution plan, but the impugned judgments reveal novel challenges facing the IBC and raise questions that may not have easy answers.
In this article, I identify two major challenges revealed by the impugned judgments: lack of a statutory time limit to implement resolution plans and imprecise role of monitoring committees in ensuring implementation of resolution plans. I argue while under the IBC time is of the essence for the Corporate Insolvency Resolution Process (CIRP), the lack of a statutory time limit to implement a resolution plan works like a double-edged sword: it provides the freedom to customize resolution plans but also offers scope for the successful resolution applicant to seek extensions of timelines agreed upon in the plan. Additionally, after the Supreme Court’s judgment in the Jet Airways case, the Insolvency and Bankruptcy Board of India (IBBI) has proposed to make constitution of monitoring committees mandatory to oversee implementation of the resolution plan. But their composition and lack of precise powers is not an adequate response to the challenge of ensuring timely and full implementation of resolution plans.
No Statutory Timeline for Resolution Plans
In the Jet Airways case, the Supreme Court correctly stated that excessive statutory control regarding implementation phase of the resolution plan may prove to be counterproductive to the corporate debtor. Silence of the IBC as to the ideal timeline for implementation of a resolution plan is prudent because each resolution plan will be different as per the needs of the corporate debtor. And the timelines for different stages of compliance may vary in each resolution plan. This is where paradox of the IBC emerges: it is vital to prescribe an outer time limit for the CIRP to maximize value of the corporate debtor’s assets but a statutory time limit for implementation of a resolution plan may amount to over legislation.
While an approved resolution plan typically contains various time-related and stagewise obligations for the resolution applicant, seeking extensions is par for the course. And the NCLT frequently agrees to the requests delaying the implementation of the resolution plan. If not time-related, resolution applicants can seek other modifications that can cause delays. For example, in the Jet Airways case the successful resolution applicant prayed for adjustment of performance bank guarantee against the first tranche of payment it was required to make under the resolution plan. The request was agreed upon by the National Company Law Appellate Tribunal (NCLAT) until the Supreme Court held otherwise. But the issue was not resolved as the resolution applicant did not adhere to the Supreme Courts’ directions resulting in the next round of litigation which culminated with the Supreme Court finally ordering liquidation.
The absence of a statutory time limit implies that judicial forums must evaluate factual matrix to permit or deny extensions or modifications of the resolution plan while ensuring that excessive leeway is not given to the resolution applicant. Preservation of this judicial discretion is preferable than a statutorily prescribed straitjacket time limit that may limit options to revive the corporate debtor. In fact, a focus on ensuring that the CIRP is completed in a timebound manner may partially address the downside of delays or failure to implement a resolution plan. Too often the outer time limit to complete the CIRP is breached. For example, in the Bhushan Steel case it took one and a half years for the CoC to approve a resolution plan breaching the IBC’s prescribed deadline of 270 days (as applicable then). The CoC approved a resolution plan in February 2019 which was followed by delays and more negotiations. Eventually, the Supreme Court in May 2025 ordered liquidation of the corporate debtor. In the Jet Airways case, the resolution plan became ‘incapable of being implemented’ due to delays and other factors. Delays in the CIRP create a double whammy if liquidation is caused by failure to implement the resolution plan. As evidenced in both the impugned judgments, orders of liquidation in such circumstances not only defeat the primary aim to salvage the corporate debtor but also prevent timely liquidation that may maximize asset value.
Imprecise Role of Monitoring Committees
The Supreme Court in the Jet Airways case recommended that there should be a statutory provision for constitution of a monitoring committee to ensure smooth implementation of the resolution plan. At that time, Regulation 38(4), IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) provided that the CoC may consider appointment of a monitoring committee for implementation of the resolution plan. The IBBI has since amended Regulation 38(4) which now states that the CoC ‘shall’ consider appointment of a monitoring committee making its constitution mandatory. Monitoring committees may be comprised of the resolution professional, representatives of the CoC, and representatives of resolution applicant. The mandatory constitution of monitoring committees is a step in the right direction, but will it prove to be a meaningful step?
In the Bhushan Steel case, the Supreme Court noted that the resolution professional and CoC both acted in contravention of the statutory provisions of the IBC and the CIRP Regulations. In such situations, where two entities key for success of the CIRP act in blatant disregard of the law, their conduct is unlikely to be any different as part of the monitoring committee. One can argue that the Bhushan Steel case is an outlier, and the entities involved will not always take decisions that contravene the law. Perhaps. But even previously the monitoring committees created under the resolution plan were trying to achieve similar objectives. Albeit they will now perform their role under the aegis and as part of a more formal body.
The Supreme Court in the Jet Airways case observed that the monitoring committee should monitor and supervise the resolution plan, ensure statutory compliances are obtained timely and report the progress of implementation to adjudicating authorities and creditors on a quarterly basis. The aim, as suggested by the Supreme Court is to ensure that a formal body oversees the implementation, and that the implementation happens in a collaborative manner. The Supreme Court clarified that the duty to implement the resolution plan is not solely of the successful resolution applicant, but it is shared with the creditors. And the latter should not be obstructive but facilitative in the process of implementation of the resolution plan. The emphasis on collaboration and shared responsibility of implementation of the resolution plan is welcome, but monitoring committee is also supposed to consist of representatives of financial creditors: how will they effectively prevent or address any misconduct by the creditors themselves?
Monitoring committee may not be able to alter the status quo significantly if the resolution applicant doesn’t intend to implement the resolution plan in its true form. Even in the Jet Airways case there was a monitoring committee headed by the resolution professional as part of the terms of resolution plan. Did it prevent any delays or the resolution plan going off the rails? A statute backed monitoring committee maybe be able to make timely recommendation of liquidation of the corporate debtor or bring disagreements to the notice of the NCLT/NCLAT. But it is unlikely that a monitoring committee can contribute and make a more substantial change to the current situation. Agreed that the monitoring committee will have a narrow focus and a legal mandate, but the latter cannot provide insurance against irresponsible conduct of either the creditors or the successful resolution applicant. Neither can a monitoring committee prevent any extensions that the NCLT/NCLAT may grant, correctly or otherwise.
Way Forward: Re-Emphasize Existing Elements of the IBC
There should be a meaningful attempt to emphasize some of the existing elements in the IBC to address the issue of implementation of a successful resolution plan. The IBC repeatedly enjoins the need to consider the feasibility of a resolution plan before its approval. Regulation 38(3), CIRP Regulations enlists the mandatory contents of a resolution plan and requires that a resolution plan must demonstrate that it is feasible and viable and has provisions for its effective implementation. Section 30(2)(d), IBC enjoins the resolution professional to examine that each resolution plan provides for its implementation and supervision. Section 30(4), IBC mandates that the CoC to approve a resolution plan after considering its feasibility and viability. Section 31, IBC in turn requires the NCLT to satisfy itself that the resolution plan approved by the CoC under Section 30(4) satisfies the requirements referred in Section 30(2). If that is not sufficient, the proviso to Section 31 states that:
Provided that the Adjudicating Authority shall, before passing an order for approval of resolution plan under this sub-section, satisfy that the resolution plan has provisions for its effective implementation.
If all the three entities – resolution professional, CoC, and the NCLT – re-emphasize on the feasibility, viability, and provisions for implementation of the resolution plan, it is likely that the situations that arose in the impugned judgments can be avoided. If not avoid altogether, possibly address similar situations in a time and manner that does not set at naught the CIRP.
[A version of this post was first published on irccl.in, in July 2025. ]
Service Charge, its Similarity with Tax, and a ‘Double Whammy’ for Consumers: Some Thoughts
Introduction
The Delhi High Court (‘High Court’) recently ruled that levy of mandatory service charge by restaurants violates customer rights. The High Court’s reasoning, anchored in consumer protection laws, termed a mandatory service charge as deceptive and misleading for consumers. The High Court also made a few casual references to tax laws. For example, the High Court took umbrage at the nomenclature of ‘service charge’ and its potential to confuse customers with a tax levied by the Government. There is merit to the High Court’s observation, but service charge and tax have a deeper connection that is only superficially referred to in the judgment. In this article, I try to scratch the surface a bit deeper.
I elaborate on two potential misgivings about service charge that the High Court’s judgment may entrench:
First, the High Court noted that addition of service charge below the cost of food followed by levy of GST in the bill, created a ‘double whammy’ for the customers. I argue that restaurants by adding service charge before calculating GST were adhering to the mandate under CGST Act, 2017. In complying with GST laws, restaurants seem to have tripped over the Consumer Protection Act, 2019. Unless there is a change in any of the two laws, restaurants are now faced with the challenge of squaring a circle.
Second, the High Court’s view that service charge can be confused for a tax prompted it to recommend that a change in nomenclature may be worth exploring. The High Court recommended that the Central Consumer Protection Authority (‘CCPA’) can permit restaurants to levy ‘tip’, ‘gratuity’, or ‘fund’ on a voluntary basis. The nomenclature issue was two-fold: first, service charge per being mistaken for a tax by customers; second, use of abbreviations by restaurants – such as ‘charge’, ‘VSC’, ‘SER’ – which further misled the customers if the levy was a mandatory levy by the State or restaurants. I query whether ‘confusion’ is the touchstone to determine if a levy by private entity should be disallowed or is its perceived mandatory nature?
GST on Food Cost + Service Charge
The High Court noted in its judgment that:
Moreover, when the bills of establishments are generated, it is noticed that the service charge is added right below the total amount of the cost of the food, followed by GST and taxes. For any consumer who does not examine the bill thoroughly, the impression given is that the service charge is a component of tax; (para 122)
The High Court’s above observation hints at two things:
one, the restaurants are trying to inflate the cost of food bill by calculating GST on the cumulative of food bill and service charge;
second, the mention of service charge just before GST creates a confusion that the former is a tax.
Let me examine the first implication in this section.
Section 15(2)(c), CGST Act, 2017 states that the value of supply of goods or services or both shall include:
incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services; (emphasis added)
Thus, if a restaurant was adding service charge to the food bill before computing GST, it was adhering to the mandate of GST law and not trying to ‘inflate’ the bill on its own accord. Once a restaurant decides to levy any additional charge including packing charges, etc., then as per Section 15(2)(c) it needs to be added to the total cost in a bill before computing GST. Adding all the ancillary costs ensures that the base value for calculating GST is as high as possible. Enhancing underlying value of the supply is a statutory policy aimed to enhance revenue collections, and leaves business entities such as restaurants no option to exclude charges such as service charge from the cost. One could question the statutory policy, but I doubt restaurants at fault for adding service charge to the food cost before computing GST.
In adding the service charge to food cost, as per the mandate of CGST Act, 2017, restaurants though seem to have tripped over the consumer protection law. How to ensure compliance with both? The High Court has offered a suggestion that service charge could be renamed to something that cannot be confused with a tax, though its payment should remain voluntary.
Service Charge Can be Confused With Tax
The High Court, as noted above, was concerned about mention of service charge just above GST in the restaurant bill and its potential to confuse customers former with a tax. The High Court also noted that:
In some cases, service charge is being confused with service tax or a mandatory tax imposed by the government. In fact, for the consumers, the collection of service charge is proving to be a double whammy i.e., they are forced to pay service tax and GST on the service charge as well. This position cannot be ignored by the Court. (para 123)
Latter part of the High Court’s judgment, of course, is a bit inaccurate. Service tax has been subsumed by GST since July 2017. Also, payment of GST on service charge is not a ‘double whammy’ as the High Court observes. It is, as noted above, payment of GST as per statutory mandate. It is simply, a ‘whammy’ as inclusion of service charge in value of supply though prejudices the taxpayer, is not qualitatively dissimilar from inclusion of any charges that suppliers compulsorily collect from their recipients.
The first part of the observation points out that service charge can be confused with a tax by consumers who may think they have no option but to pay it, may be misled into paying a private compulsory levy. The misleading part is on two counts, as per the High Court.
First, the mention of service charge just above GST. This can be corrected by tinkering billing software and doesn’t seem like a substantive issue that it beyond correction. One could perhaps mandate restaurants to specifically mention in the bill itself that service charge is discretionary and not a levy by the State.
Second, is the phrase ‘service charge’ itself, which gives consumers the impression that it is a tax. But will a service charge by any other name taste just as bitter? Perhaps.
Even if the CCPA permits restaurants to rename service charge to let us say a ‘tip’, it would have to be on a voluntary basis. Technically, as per CCPA guidelines, service charge was discretionary even before the Delhi High Court’s judgment. And if CCPA permits levy of ‘tip’, we would enter similar issues of restaurants arguing that the ‘tips’ are voluntary and customers can request it to be waived off while customers claiming that the voluntary nature is only a ruse. Restaurants effectively collect ‘tip’ as if it’s a mandatory charge. Equally, GST will have to levied on food cost and ‘tip’, if paid. Thus, the ‘double whammy’ may persist.
Can consumers confuse a ‘tip’ with a ‘tax’? Well, ideally, they should not confuse a service charge with a tax either. Not after July 2017, since the terms service charge and GST are not eerily similar. However, one should not take the view of a tax professional but deploy the standard of an average reasonable consumer. It is difficult to predict with mathematical certitude, but a ‘tip’ or ‘gratuity’ seems like a relatively less confusing option. If CCPA can mandate that no restaurants cannot use abbreviations or alternate names which can lead to confusion as in the case of service charge. There should be one voluntary levy and its name uniform across all restaurants.
Finally, I’m prompted to ask a question: do we mistake any other levy by private entity as a tax? Is there any comparable example?
There have been instances of conmen masquerading as tax officers, and fooling people into paying money, but I cannot think of a comparable levy where an average person has been confused that the money is not being collected by the State, but a private entity. Perhaps some people were confused if the maintenance fee paid to their resident associations was a State levy, but the confusion doesn’t seem as widespread as for service charge. The confusion seems a rather peculiar and unique problem to service charge. And one that may require an innovative solution. Though, equally possibly, restaurants may eschew the path of levying or collecting any ‘tip’ and may simply raise prices of food to compensate. Wait and watch, I guess.
Fraudulent Sale is Supply Under GST: Three Errors of the Advance Ruling
A recent advance ruling by Gujarat AAR is a frustrating read. AAR held that sale by a seller constitutes as supply under GST laws even if the seller was defrauded and did not receive any consideration for such goods. In this article, I argue that there are three obvious errors in the advance ruling, which encompass flaw in applicant’s arguments and AAR’s approach. The three errors are:
First, the applicant’s framing of question.
Second, AAR’s reasoning and identification of relevant provision.
Third, applicant’s argument on why a fraudulent sale should not constitute a supply.
The facts involved a peculiar and may I daresay a novel question that should have led to an interesting analysis of the relevant legal provisions and hopefully a defensible answer. Instead, what we receive via the advance ruling is a superficial analysis and a facile answer.
The basic facts in application were: the applicant supplied submersible pumps for two months and generated several invoices for the said sales only to discover that it had been defrauded. The applicant did not receive any consideration for the supply of goods as the order documents were forged by a fraudulent purchaser by using the name of a reputable purchaser. Applicant approached AAR seeking an answer whether GST can be levied on the above transaction.
First Error
The question before AAR should have been whether such a fraudulent sale of goods constitutes a supply under GST laws, even in the absence of a consideration? Instead, applicant framed the question as:
Whether the goods supplied by us [becoming victim of fraud without receiving consideration] could be considered as supply of goods under the provisions of section 21 under the IGST Act?
Grammatical errors in the question aside, the legal question would be why did the applicant invoke Section 21, IGST Act, 2017? The impugned provision states that import of services made on or after the appointed day shall be liable to tax regardless, whether the transactions for import of such services had been initiated before the appointed day. However, the applicant’s transaction in question was an inter-State supply and nothing to do with import of services. Clearly, the applicant approached AAR with a question that referred to the wrong provision. And AAR also noted the applicant’s reference to the above provision and observed:
How this will be applicable to supply of goods made by the applicant to the recipient in the State of Assam is not understood. We find that the question, at best is vaguely framed. (para 9)
The applicant’s query could not have been answered by referring to the wrong provision and thus another approach was necessary.
Second Error
In adopting the alternate approach, the AAR made an error by referring to Section 12, CGST Act, 2017 which states the time of supply of goods. Time of supply goods is a concept under GST which helps us determine at what point in time did the supply in question took place. To delineate and cohere various situations, the provision lays down certain rules including deeming fictions. AAR referred to Section 12 and noted that time of supply of goods is either the date of issue of invoice by the supplier or date on which the supplier receives payment with respect to the supply, whichever is earlier. Applying the above rules to the facts, AAR noted that the supplier had issued invoices in June 2023 and July 2023, thus the point of taxation in respect of supply of goods will be the date of issue of invoice. AAR thereby concluded that the applicant had supplied goods under relevant provisions of GST laws.
The error in the above analysis by AAR is that it did not consider if supply had been made. Time of supply as the phrase indicates is only relevant for a supply. The more relevant question for AAR was if a supply had been made and not the time of supply. Latter was contingent on the former. AAR, instead, assumed that the supply had been made and relied on time of supply and invoices to state that a supply had been made.
Third Error
This leads us to the third error: applicant’s argument that no supply had taken place. The applicant relied on Sales of Goods Act, 1930 to argue that a valid sale had not taken place since all the essential ingredients of a sale were not satisfied in absence of a consideration. AAR declined to accept applicant’s above argument and referred to Section 7, CGST Act, 2017 which defines supply. However, instead of analysing if the ingredients of supply were satisfied in the impugned case, AAR took a short route and simply noted that ‘it is not disputed that a supply has been done by the applicant’. (para 14) AAR concluded that while a fraud may vitiate the contract of sale, the applicant has not explained how a fraudulent sale moves outside the ambit of supply.
The error here is actually two-fold: first, the applicant invoking Sales of Goods Act, 1930 instead of categorically stating that the ingredients of supply are not satisfied in the impugned case; second, AAR only reproducing the definition of supply in its ruling rather than examining if a supply can take place under Section 7, CGST Act, 2017 even if the purchaser pays no consideration. To be fair though, AAR would not undertake the latter exercise if the applicant doesn’t argue for it. And it seems the four people representing the applicant before AAR didn’t make the argument and instead surprisingly relied on Sales of Goods Act, 1930 to argue that a sale had not taken place.
Conclusion
The first instinct is to club Gujarat AAR’s impugned ruling with the wide swathe of sub-par advance rulings under GST. While AAR is not completely faultless in this ruling and did commit its own error, the applicant approached AAR with a wrongly framed question and made some misjudged arguments. There is only so much that AAR can do when the applicant adopts such a flawed approach. AAR to some extent did salvage the situation. But just about. Irrespective, I doubt we have heard the last word on this issue.
Legislative Intent or Error: Puzzle of Indian Tax Policy
Introductory Questions
Let me start with a question: how does one discover legislative intent in a provision of tax statute? Through a plain reading of the provision or through a subsequent statement by the State’s legal counsel stating its intent? Positivist thinking would point us to the former, and rightly so. A statement, even a sworn statement in a court shouldn’t override what is contained in the statute. Deference to the legislature cannot extend to a point where despite what the statute contains, court interprets the provision based on legislature’s statement explaining its intent.
The question in your mind may be: why am I asking this question? Well, for those who follow tax developments, you may already know. For others, I’m asking the question in the context of Safari Retreats case and the latest amendment to CGST Act, 2017 via the Finance Act, 2025.
One key question that the Supreme Court had to answer in Safari Retreats case was: Did the legislature intentionally use the conjunction ‘or’ instead of ‘and’? Or did the legislature commit a mistake? A simple question that acquires tremendous urgency if a taxpayer needs the answer to assess its tax liability which in this was a few crores.
During the hearing, the State’s counsel argued that use of the conjunction ‘or’ was a legislative error and further pressed that ‘or’ should be read as ‘and’. What should have been the ideal response of the Supreme Court? One view – subscribed by the State – is that Supreme Court should have declared ‘or’ means ‘and’ and interpreted the provision accordingly even if it meant throwing all grammar and interpretive rules out of the court complex. Or was there more justification in the Supreme Court responding the way it did: legislative intent can only be revealed by the legislative text and not by the State counsel’s statement about the text. And in doing so, restrict the amount of deference that courts accord to the legislature in tax laws.
And equally importantly, how should we respond? Resign to yet another retrospective amendment to a tax statute and raise our hands in exasperation while letting out a huge sigh. Or do we try to understand this entire episode like a puzzle and use it as an example of how Indian State approaches tax policy. I prefer to do the latter, and hence this article.
‘Or’ Means ‘And’
I’ve commented on the case in detail here and here. In this article, I intend to provide a limited overview of the controversy with an aim to highlight Indian State’s tax policy choices.
In 2019, the Orissa High Court allowed taxpayer to claim Input Tax Credit (‘ITC’) on construction of a shopping mall. In 2024-25, one of State’s arguments before the Supreme Court was that use of ‘or’ instead of ‘and’ was a legislative error. The reason for the argument, from a revenue perspective, was straightforward: it would ostensibly allow the State to block the taxpayer’s ITC claim. But the State was aware of the ‘legislative error’ since 2019, why not correct the error via a legislative amendment and bury the issue instead of making elaborate arguments before the Supreme Court? Commenting on the same the Supreme Court in its judgment observed the following:
The writ petition in which the impugned decision was rendered is a six-year-old writ petition. If it was a drafting mistake, as suggested by learned ASG, the legislature could have stepped in to correct it. However, that was not done. In such circumstances, it must be inferred that the legislature has intentionally used the expression “plant or machinery” in clause (d) as distinguished from the expression “plant and machinery”, which has been used in several places. (emphasis added) (para 43)
As is evident, the Supreme Court rejected the State’s claim of an error. If use of ‘or’ was indeed an error, there was ample time for the State to step in and rectify it. And its failure to do so, in my books, counts as lack of bona fide. For the Supreme Court it was sufficient to dismiss the entire argument and proceed solely on the basis of what was written in the statute.
What did the State achieve by not amending the law and correcting what it claimed was a ‘legislative error’? For one, if the Supreme Court had actually ruled that ‘or’ should be read as ‘and’, it would have armed the State with a decision that could have been conveniently used by it to block ITC in the future as well.
Second, if the Supreme Court refused to interpret ‘or’ to mean ‘and’, the State could have claimed that the decision did not reflect ‘legislative intent’. Both things did happen. The latter is no longer a surprise. Each time the State loses a major tax case, its response is that the judicial decision does not reflect legislative intent. And subsequently, it leads to an amendment of the provision in question. And even more often, the amendment is given retrospective effect.
Legislative Intent – Legislative Error
The Supreme Court in its above cited paragraph makes it sufficiently apparent that legislative intent must be reflected through the statute itself. If the State claims that a legislative error crept into the statute, it should have rectified it in the intervening 6 years it had to act on it.
Legislative intent thus cannot be superimposed on a statute by the State on discovering its error or mistake. That would upset the balance of power in State’s favor and would violate a cardinal rule of tax law interpretation, i.e., strict interpretation of tax statutes is necessary to determine the taxpayer’s liability.
But does that mean that legislative error can never be acknowledged by courts? Apparently so.
One, there is no telling if an error is truly an error. In Safari Retreats case, the petitioners pointed out that:
In the model GST law, which the GST Council Secretariat circulated in November 2016 for inviting suggestions and comments, the expression “plant and machinery” was used both in clauses (c) and (d) of Section 17(5). However, while enacting the law, the legislature has advisedly used the expression “plant and machinery” in clause (c) and “plant or machinery” in clause (d) of Section 17(5). Therefore, the intention of the legislature cannot be brushed aside by contending that the use of the word “or” in Section 17(5)(d) is a mistake of the legislature. (para 9)
In such circumstances, who is to know if the legislature intentionally replaced ‘and’ with ‘or’ when finalising the text of the bill or an error crept in while editing the Model law. Presumably only the State can reveal the mystery through detailed document history and accompanying notes on the provisions. But do we want to go down that rabbit hole. Forget us, I doubt the State would like that like that level of transparency in law making.
Second, it would defeat a core tenet of not just tax law but also law in general. Tax liability is as per the law that exists and not what the law was intended to be. A taxpayer has no way of knowing what the legislature ‘intended’ to enact except by interpreting the provisions as they exist. And if one argues that the legislative debates, and other pre-legislative reports would provide a clue, it is a heavy burden to impose on the taxpayer. Then not only must the taxpayer know the law but also whether the law contains an error or not. Hardly just or fair. And one would argue such a stance is also devoid of common sense.
Puzzle of Indian Tax Policy
Hidden in the steps of Safari Retreats case and its aftermath is the puzzle of Indian tax policy decisions.
One, why wait for the Supreme Court’s decision and then amend the provision retrospectively? Because beyond the immediate urgency of losing or wining a case, was a question of policy. Do we allow taxpayers to claim ITC on construction of shopping malls when they further rent it for business? While a timely amendment of ‘or’ to ‘and’ may not have answered the question with certainty, it would have provided a clear signal of proactive policy making including correcting errors. Instead, the post-decision amendment reveals a policy of amending laws as per convenience.
Two, where were the States? Since the entire dispute centred around CGST Act, 2017 we expect response from the Union, but GST is a federal levy. Why didn’t any State openly and persuasively argue for an amendment and perhaps end a long winding litigation? It was only after the Supreme Court’s judgment, that States were visible. But just about. States were on board for the GST Council’s recommendation for amendment. Or at least no State objected to the amendment. So, my impression is that either ALL States were either clueless about the litigation or all of them unanimously approve retrospective amendments to GST laws instead of proactive amendments to thwart resource consuming litigation. Maybe, this is the kind of uniformity that was aimed through GST.
Third, why file a review after deciding to introduce the amendment? Again, it seems the Court’s stamp of approval or its views on the amendment will prevent sprouting of similar issues from the provision. In this case, though the litigation may not end because even the amendment may not prove enough as courts will still need to interpret the phrase ‘plant and machinery’. But a review seems like a circuitous way of making tax policy when there can be direct and straightforward ways. Only we prefer to be clever by half and like to prevent transparency on fundamental tax policy issues. Else, the State may be held to its word and that is not something it will enjoy.
Way Forward
The promise of no retrospective amendments to GST laws was buried long ago. And now it is dead. We can only hope for a more sane approach to tax disputes and a saner reaction to court decisions that are not in the State’s favor. Else, the familiar cycle of dispute, decision, amendment will continue till perpetuity until one fine day we feel the need to ‘simplify’ GST by removing all the Provisos and Explanations which were added via numerous reactive amendments.
When A Princess Worried About Tax on Alimony
All things in life have a tax angle, including alimony payments. In this article I elaborate on tax treatment of alimony payments under the Income Tax Act, 1961 (‘IT Act, 1961’). Upfront, these are the three takeaways from this article:
first, a lump sum payment of alimony amount is not taxable in the hands of recipient, since it is a capital receipt.
second, the monthly payment of alimony amount is taxable in the hands of recipient, since it is an income from a particular source.
third, the payer receives no tax deductions for alimony payments, even if the payments are made under a decree of court.
The law on all three above aspects was laid down by the Bombay High Court in Princess Maheshwari of Pratapgarh v Commissioner of Income Tax. This case is the focus of my article below.
Decree of Nullity Sprouts Tax Questions
(i) Decree of Nullity of Marriage
In September 1963, Princess Maheshwari Devi of Pratapgarh obtained a decree of nullity of her marriage with Maharaja of Kotah. The Bombay City Civil Court (‘civil court’) pronounced the decree of nullity under Section 25, Hindu Marriage Act, 1955. As part of the proceedings, the Princess had claimed monthly alimony and a gross sum as permanent alimony from the Maharaja. The Civil Court ordered the Maharaja to pay the Princess an amount of Rs 25,000 as permanent lump sum alimony and a sum of Rs 750 per month as monthly alimony. The Maharaja was obligated to pay the latter until her remarriage, if and when, it took place.
(ii) Two Tax Questions
I will spare you details of assessment years and focus on the broader issue: the Princess claimed tax exemption on the lump sum alimony amount as well as the monthly alimony amounts. Her claims were rejected by the Income Tax Office and Appellate Tribunal, and against the said decisions she appealed to the Bombay High Court.
The High Court had to answer two questions:
First, whether the monthly alimony of Rs 750 was income in hands of the Princess and liable to tax?
Second, whether the lump sum alimony of Rs 25,000 was income in hands of the Princess and liable to tax?
The framing of questions is crucial, from an income tax viewpoint. A receipt of money is only taxable if it constitutes ‘income’ as defined under the Income Tax Act, 1961 (‘IT Act, 1961’). Else the receipt falls outside the ambit of IT Act, 1961 though given the current and expansive definition of income, rarely if ever is a receipt of money not subjected to income tax.
Monthly Alimony is Taxable in Hands of Princess
The Bombay High Court answered the first question in favor of the Income Tax Department and held that the monthly alimony payment to the Princess constituted her income and was taxable in her hands. The arguments from both sides were as follows.
(i) Arguments
The advocate for the Princess rested her case for tax exemption of the monthly alimony on various grounds. Some of them were:
First, alimony is merely an extension of husband’s obligation to maintain his wife and Section 25, Hindu Marriage Act merely enlarges that obligation. The advocate was implying that the husband is obligated to maintain his wife, whether they continue to remain married or not.
Second, the alimony payment to the Princess did not emerge from a definite or particular source and in fact, the payment would cease on her remarriage.
Third, monthly alimony is a personal payment from her ex-husband and not a consideration for any services performed – past or future.
The counsel for the State though argued that the decree of Civil Court had created a legal right in favor of the Princess. The right to receive a monthly alimony amount had a definite source, i.e., the decree of court, and should be taxed as income in hands of the Princess.
(ii) High Court Applies the Law
The Bombay High Court scanned through the previous cases to state judicial understanding o the term ‘income’. For example, one notable case, the Privy Council had observed that income is something that is ‘coming in’ with some sort of regularity from a definite source. The High Court after scanning various other precedents, succinctly stated the judicial definition of income as:
a periodical return for labour/skill that a person receives with some regularity, and from a definite source. But an income excludes a ‘windfall’ gain.
The above definition would squarely cover a monthly alimony payment. The only point then in the Princess’s favor was her claim that the monthly alimony was not a result of application of any labour or skill on her part. But the High Court rejected this point and held that even voluntary payments can constitute income in hands of recipient if they come with regularity from a definite source. The High Court though further pointed out that the monthly alimony was paid to the Princess because of the civil court decree which was obtained by her by expending effort and labour. And the civil court decree is the source of her right to claim monthly alimony as minus the decree she would have no right to alimony. The High Court concluded:
Although it is true that it could never be said that the assessee entered into the marriage with any view to get alimony, on the other hand, it cannot be deneid that the assessee consciously obtained the decree and obtaining the decree did involve some effort on the part of the assessee. The monthly alimony being a regular and periodical return from a definite source, being the decree, must be held to be “income” within the meaning of the said term in the said Act.
The monthly alimony amount was something the Princess would receive regularly because of the decree, because of her efforts to obtain to same from the civil court and thus it would constitute her income under IT Act, 1961 and be subjected to income tax.
Lump Sum Amount Received as Alimony: Exempt from Tax
As regards the taxability of lump sum amount of Rs 25,000 received as alimony, the Bombay High Court decided that it amounted to a capital receipt and was not taxable as income in the hands of the Princess. The High Court observed:
It is not as if the payment of Rs. 25,000 can be looked upon as a commutation of any future monthly or annual payments because there was no pre-existing right in the assessee to obtain any monthly payment at all. Nor is there anything in the decree to indicate that Rs. 25,000 were paid in commutation of any right to any periodic payment. In these circumstances, in our view, the receipt of that amount must be looked upon as a capital receipt.
Capital receipt, in income tax law, is only taxable if there is an express charging provision in income tax law to that effect. Else, not. Only revenue receipt is charged to income tax by default. Thus, the above distinction of revenue and capital receipts was in favor of the Princess. Also, because the High Court took the view that the lump sum payment did not ‘commute’ any monthly or periodical payments that the Princess would have received since she had no pre-existing right to receive the monthly alimony payment. To be clear, the lump sum alimony amount could be taxable if it ‘commutes a part of the future alimony’. However, the High Court said there was nothing in the civil court decree that indicated that the lump sum amount commuted her monthly payments. At the same time, the High Court did acknowledge that ‘beyond doubt that had the amount of Rs. 25,000 not been awarded in a lump sum under the decree to the assessee, a larger monthly sum would have been awarded to her on account of alimony.’ Thus, leaving a window ajar to tax lumpsum alimony amounts in future cases.
No Tax Deductions for Alimony Payments
The unfairness of IT Act, 1961 is that it does not allow deduction for alimony payments. Typically, husbands pay alimonies to their ex-wives. Presuming that the alimony payment is from a portion of husband’s already taxed income, such payment should ideally qualify for a deduction. It can be viewed as an expense. If not the entire amount, a deduction with an upper cap can be provided. And for monthly alimony payments anyways the wife is liable to pay income tax, so providing the husband income tax deduction on such payments may not be too harmful from a revenue perspective. Currently, the husband pays income tax on his income, pays a portion of such income as monthly alimony to his ex-wife, and the ex-wife is liable to income tax for the monthly alimony as it constitutes her income. A bountiful for the revenue, unless the spouses are smart and rich enough to agree only to a one-time alimony amount, circumventing the uneven tax consequences of IT Act, 1961.
In fact, the Bombay High Court described the above position of law as ‘unfortunate’. It heeded the legislature to pay attention to this aspect and noted:
It is clearly desirable that a suitable amendment should be considered to see that in cases where the payments of alimony are made by a husband from his income and are such that they cannot be claimed as deductions from the income of the husband, in the assessment of his income, they should not be taxed in the hands of the wife. That, however, is not for the courts but for the Legislature to consider.
The Bombay High Court made the above observations in 1982. Since the IT Act, 1961 has been amended several times to include various capital receipts within the realm of taxability. But not lump sum alimony payments categorized as capital receipts have not been made taxable. Neither have deductions on alimony payments been included. Our lawmakers seem busy ‘simplifying’ the income tax law, rather than introducing substantive and meaningful policy changes that acknowledge new social realities.
Conclusion
Neither the Income Tax Act, 1961 and unfortunately nor does the Income Tax Bill, 2025 provide a clear answer about taxability of alimony payments. Tax lawyers typically advice their clients based on above discussed judgment of the Bombay High Court. Any legislative clarity on this front seems a bit distant for now.
Regardless, I would like to conclude with a normative question:
Who SHOULD pay the tax on alimony payments?
Depending on your gender biases, views on divorce, necessity of alimony payments, your perception of divorce settlements as fair or otherwise, your answers would vary. Typically, women receive alimony payments from their ex-husbands. And people who have strong and inflexible opinions that women use family laws as ‘get rich quick’ route are likely to argue that women should foot the tax bill on both kinds of alimony payments: made via lump sum amounts and/or on monthly basis.
A tax law view would be to ask who benefits from the alimony payment? And who bears the burden? The latter should receive a deduction on the payment and the former should shoulder the tax liability. Irrespective of gender. I’m willing to go a step further and suggest that even if the alimony payment is not made because of a court order, but voluntarily as part of a valid contract, the above principles should apply. Taxability of alimony payments should not depend on whether court ordered it, or parties themselves agreed to it. IT Act, 1961 provides deductions to all kinds of voluntary contributions including to political parties, it is imperative that same principles apply to personal relationships if it ends with mutual consent – actual or perceived. We should stop hiding behind the argument that alimony payment is a personal obligation and thus does not qualify for deduction. Unless one entertains the far-fetched belief that providing such a deduction may further catalyze divorces.
Finally, and just as a matter of abundant caution I would like to add that transfer of various assets – jewelry, house, etc. – between two spouses can and do happen when they are still legally married and sometimes after the marriage has legally ended. The transfers of such assets attract different tax liabilities and warrant a separate discussion.
Tax Privacy: To Begin a Conversation …
Income tax law is based on disclosing information to the State. Personal financial information. Bank account statements, investments, salary receipts, rent paid or received, medical expenses, money transferred to spouse, expenses of children, insurance premiums, political donations, charitable contributions to name a few. Each piece of information is necessary to ascertain the exact tax liability of a taxpayer. And it is statutory duty of a taxpayer to make accurate and timely disclosures.
If income tax administration is based on State compulsorily seeking detailed financial information from taxpayers, is it even possible to expect tax privacy? Yes. In fact, one could argue it is necessary to demand tax privacy. But what would tax privacy look like? What safeguards can be reasonably demanded and expected? There are no concrete answers and if I may dare suggest, no tentative answers either. Because the conversation around tax privacy in India has not even begun.
To Begin a Conversation …
Conduct an unscientific and random survey: ask your colleagues and friends if they are comfortable sharing their income tax returns with everyone? The dominant response will be no. Tax privacy in India starts and ends with a strong disagreement to make income tax returns public. Tax privacy in India hasn’t progressed beyond the notion of income tax returns. And even in this example, privacy exists in a rudimentary shape. The disinclination to share one’s income tax return with public at large isn’t entirely rooted in privacy, but a desire to avoid unnecessary scrutiny by social media and other ‘experts’, who may find numerous inconsistencies or point at insufficient income disclosures. And there lies the risk of reassessment notices, a trigger with which the Income Tax Department isn’t unfamiliar. And if you are even mildly popular, your income tax returns will be the fodder of endless gossip. Though you may not be object if your advance tax payments are conveniently disclosed to underline your success.
The broad expectation of an Indian taxpayer seems to be that the State can access all relevant financial information, but the details contained in income tax returns should not be disclosed to the public at large without previous consent of the taxpayer, if at all. But we seem to have accepted or at least resigned to the fact that there is no concrete limit on the State’s power to secure personal financial information. How else will the State assess your income tax liability is the retort?
An accurate response is that the State does not need unfettered access to your personal financial information to ascertain your income tax liability. State needs access to your ‘relevant’ personal financial information. Ordinarily, a taxpayer makes self-assessment – with help of a tax lawyer or an accountant – and discloses the relevant financial information. The State may, at times, demand additional information on the ground of ‘insufficient disclosure’ or to verify certain expenses. And it is at the juncture of disclosure and additional disclosure where privacy needs to be a shield for taxpayer, but it is conspicuous by its absence. The concept of tax privacy as a legal concept isn’t sufficiently articulated in India, especially to mediate the exchange of information and additional information between the State and taxpayers.
Disclosing Financial Information
Privacy is in the context of tax law, especially income tax law requires specific articulation. If I disclose to the State that I received a gift of immovable property from my parents, it is to ensure that an appropriate amount of tax is paid on the gift received. Hiding the transaction may allow me to escape the tax liability, in the short term or even forever, but it would be contravention of income tax law. But what if the State secures access to the transaction between me and my parents? If I did not disclose it voluntarily, maybe I boasted about acquiring a new immovable property on social media, and the State monitoring my virtual activity suddenly swung into action.
One pertinent question here is: can the State monitor my virtual activities in the hope of finding my ‘hidden’ sources of income or does it need prior permission before monitoring my activities? Privacy centric answer would lean in favor of the latter. The answer would suggest that the State needs to have a priori justification to monitor a taxpayer’s online activity. And such surveillance can only take place for a limited time and for specific activities. For example, tracking phone calls or movement without listening to the content of phone conversations. Our income tax laws are designed to grant the State power to intrude into taxpayer’s lives and the threshold to intrude into taxpayer’s life isn’t high.
For example, let me look at some provisions that have lately generated some concern. Currently, search and seizure operations are permitted under Sec 132, IT Act, 1961 if some designated officers such as the Principal Commissioner, Chief Commissioner or Principal Chief Commissioner have ‘reason to believe’ that certain documents, articles, gold, etc. that are relevant to proceedings under the IT Act, 1961 have not produced by the taxpayer. The search and seizure operations empower officers to enter any building, vessel, aircraft, etc. and search persons, seize book, articles, etc. Section 132(9B) also empowers the officers to provisionally attach property of the taxpayer. These are extensive powers that are at times used to browbeat political opponents or journalists that the State doesn’t particularly like. Does the Income Tax Bill, 2025 go a step forward and provide additional powers to the State? Yes.
Clause 247, Income Tax Bill, 2025 largely mirrors Section 132, IT Act, 1961, except the latter also provides the officers powers to override access codes to virtual digital space and any computer system where the codes are not available. It is the digital equivalent of powers to break lock to enter a locked building where the keys to the lock are unavailable. The threshold under Income Tax Bill, 2025 remains the same as under the IT Act, 1961. The authorized officer must have a ‘reason to believe’ that some document or information contained in an electronic media is not being disclosed by the taxpayer in relation to an income or property.
Reason to believe is the subjective opinion of the officer in question and as per courts, should be based on credible material. But there must be proximate relation between the material on which opinion is formed and the final opinion. However, the courts have repeatedly stated that it is a subjective standard, and they cannot substitute the officer’s view with their view. The threshold of ‘reason to believe’ thus doesn’t provide ample safeguards against intrusion of privacy by tax officers: physical and virtual.
The broad scope of search and seizure powers under the IT Act, 1961 and now Income Tax Bill, 2025 are rightly criticized for being overbroad. But the pushback is never rooted in protection of privacy. Or if it is, privacy is only in unarticulated subtext. Once officers are authorized to conduct a search and seizure operation under Section 132, they have the power to break locks, almirahs, seize documents, and search persons thereby impinging on business freedoms, bodily autonomy, and basic right to be ‘left alone’. While the State can justify that taxation is a sovereign right and search and seizure powers are ancillary to tax administration. But the articulation of privacy rights is missing in this argument and counter argument. To what extent can the State intrude into a person’s life to secure tax collection? When can the State violate physical autonomy of a taxpayer? On what grounds? We don’t know. Not yet.
Disclosing Additional Information
Privacy in the context of income tax law further suffers due to powers of the State to demand additional information under certain circumstances. Search and seizure operation is ideally conducted if the officer believes that the taxpayer has not voluntarily disclosed the information demanded by the State. But sometimes the additional information that is demanded from the taxpayer may put privacy in jeopardy. The additional information is usually sought when the income tax return of a taxpayer is selected for scrutiny or audit. In such cases, the officers demand additional information. For example, if I claim that I paid an ‘X’ amount as medical expenses for myself, then the State can question the validity of the claim. Or the amount. Disclosing additional information may risk disclosing my private medical information to the State. While the State may claim that not disclosing the entirety of medical expenses and the exact disease may jeopardize taxpayer’s claim for medical expenses and tax deduction. Where should we draw the line? Not sure, but the question is worth asking for now.
Carrying the Conversation Forward
There are three distinct strands of tax privacy that I wish to articulate in this preliminary article on tax privacy. I hope to delve deeper into each of these strands in the future, but the summation on each of these aspects of tax privacy is as follows.
To begin with, if a taxpayer consents to sharing personal financial information with the State, then it is not unreasonable to expect tax privacy. To begin with, State should only seek relevant information that is proximate to the purpose of ascertaining tax liability. It is unreasonable to assume that the State has a carte blanche to demand any financial information.
Equally, it is a valid expectation that the State shall only use the said information for purpose of computing and assessing tax liability. The ‘purpose limitation’ test as data protection law informs us. Privacy in this context is breached if the State uses the information for a purpose other than tax.
Finally, I wish to underline the once the State has secured certain information, keeping the information secure is also State obligation. However, this is only one aspect of privacy, and in fact, more an element of confidentiality and less of privacy. And yet we tend to focus unduly on the State not disclosing our income tax returns to the public, instead of questioning scope of its power to demand and collect information in the first place.
Powers of Arrest under CGST Act, 2017 and Customs Act, 1962: Constitutionality and their Scope
The Supreme Court in a recent judgment upheld the constitutionality of arrest-related provisions contained in Customs Act, 1962 and CGST Act, 2017. The Court also elaborated on the scope of arrest powers under CGST Act, 2017 and safeguards applicable to an arrestee. The judgment reiterates some well-established principles and clarifies the law on a few uncertain issues. In this article, I examine the judgment in 3 parts: first, the import of Om Prakash judgment and Court’s opinion on arrest powers under Customs Act ,1962; second, the issue of constitutionality of arrest-related provisions contained in CGST Act, 2017, and third, the scope and contours of arrest-related powers under GST laws along with a comment on Justice Bela Trivedi’s concurring opinion and its possible implication.
Part I: Om Prakash Judgment and Customs Act, 1962
Om Prakash Judgment
In Om Prakash judgment, the Supreme Court heard two matters relating to Customs Act, 1962 and Central Excise Act, 1944. The issue in both matters was that all offences under both the statutes are non-cognizable, but are they bailable? The Court held that while the offences were non-cognizable, they were bailable. The Court referred to relevant provisions of the CrPC, 1973 and statutes in question to support its conclusion. For example, the Court referred to Section 9A, Central Excise Act, 1944 and held that the legislative intent is recovery of dues and not punish individuals who contravene the statutory provisions. And the scheme of CrPC also suggests that even non-cognizable offences are bailable, unless specifically provided.
The Supreme Court in Om Prakash judgment also clarified that even though customs and excise officers had been conferred with powers of arrest, their powers were not beyond that of a police officer. And for non-cognizable offences, the officers under both statutes had to seek warrant from the Magistrate under Sec 41, CrPC, 1973.
Amendments to Customs Act, 1962
Section 104, Customs Act, 1962 was amended in 2012, 2013, and 2019 to modify and to some extent circumvent the application of Om Prakash judgment. Supreme Court’s insistence on tax officers seeking Magistrate’s permission before making an arrest was sought both – acknowledged and modified via amendments to the Customs Act, 1962. To begin with, Customs Act, 1962 bifurcated offences into two clear categories: cognizable and non-cognizable and the amended provisions clearly specified which offences were bailable or non-bailable. These amendments which were the subject of challenge in the impugned case.
The Supreme Court rejected the challenge and held that petitioner’s reliance on Om Prakash judgment was incorrect. But were the pre-conditions for arrest in Customs Act, 1962 sufficient to safeguard liberty? Were there sufficient safeguards against arbitrary arrest to protect the constitutional guaranteed liberties?
The Supreme Court clarified that the safeguards contained in Sections 41-A, 41-D, 50A, and 55A of CrPC shall be applicable to arrests made by customs officers under the Customs Act, 1962. The arrestee would have to informed about grounds of arrest, the arresting officer should be clearly identifiable through a badge being some of the protections available to an arrestee. Court added that mandating that said safeguards of CrPC shall apply to arrests by customs officers ‘do not in any way fall foul of or repudiate the provisions of the Customs Act. They complement the provisions of the Customs Act and in a way ensure better regulation, ensuring due compliance with the statutory conditions of making an arrest.’ (para 29)
The Supreme Court further added that safeguards provided in Customs Act, 1962 were in itself also adequate to protect life and liberty of the persons who could be arrested under the statute. The Supreme Court noted that the threshold of ‘reason to believe’ was higher than the ‘mere suspicion’ threshold provided under Section 41, CrPC. And that the categorisation of offences under the Customs Act, 1962 wherein clear monetary thresholds were prescribed for non-cognizable and non-bailable offences enjoined the arresting officers to specifically state that the statutory thresholds for arrest have been satisfied.
Finally, the Supreme Court read into Section 104, Customs Act, 1962 the requirement of informing the accused of grounds of arrest as it was in consonance with the mandate of Article 22 of the Constitution. The Supreme Court exhorted the officers to follow the mandate and guidelines laid down in Arvind Kejriwal casewhere it had specified parameters of a legal arrest in the context of Sec 19, PMLA, 2002.
While dismissing the challenge to constitutionality of arrest-related provisions of Customs Act, 1962 the Supreme Court cautioned and underlined the need to prevent frustration of statutory and constitutional rights of the arrestee.
Overall, the Supreme Court was of the view that pre-conditions for arrest specified in Customs Act, 1962 were not constitutional and safeguarded the liberties of an arrestee while obligating the custom officers to clearly specify that the conditions for arrest were satisfied. The Court also clarified that various safeguards prescribed in CrPC, 1973 were available to an arrestee during arrests made under Customs Act, 1962.
Part II: Constitutionality of Arrest-Related Provisions in CGST Act, 2017
Article 246A Has a Broad Scope
The constitutionality of arrest-related provisions contained in CGST Act, 2017 was previously upheld by the Delhi High Court in Dhruv Krishan Maggu case, as I mentioned elsewhere. The Supreme Court in impugned case also upheld the constitutionality of provisions. The arguments against constitutionality of arrest-related provisions in CGST Act, 2017 were similar in the impugned case as they were before the Delhi High Court. The petitioner’s challenge was two-fold: first, Parliament can enact arrest related provisions only for subject matters contained in List I; second, powers relating to arrest, summon, etc. are not incidental to power to levy GST and thus arrest-related provisions cannot be enacted under Article 246A of the Constitution.
The Supreme Court’s rejection of petitioner’s argument on constitutionality was in the following words:
The Parliament, under Article 246-A of the Constitution, has the power to make laws regarding GST and, as a necessary corollary, enact provisions against tax evasion. Article 246-A of the Constitution is a comprehensive provision and the doctrine of pith and substance applies. The impugned provisions lay down the power to summon and arrest, powers necessary for the effective levy and collection of GST. (para 75)
Supreme Court relied on the doctrine of liberal interpretation of legislative entries, wherein courts have noted that the entries need to be interpreted liberally to include legislative powers on matters that are incidental and ancillary to the subject contained in legislative entry. Relying on above, the Supreme Court concluded that:
Thus, a penalty or prosecution mechanism for the levy and collection of GST, and for checking its evasion, is a permissible exercise of legislative power. The GST Acts, in pith and substance, pertain to Article 246-A of the Constitution and the powers to summon, arrest and prosecute are ancillary and incidental to the power to levy and collect goods and services tax. In view of the aforesaid, the vires challenge to Sections 69 and 70 of the GST Acts must fail and is accordingly rejected. (para 75)
The Supreme Court has correctly interpreted Article 246A in the impugned case. The Court liberally interpreted the scope of Article 246A in a previous case as well. The Court’s observations in the impugned case align with its previous interpretation wherein the Court has been clear that Article 246A needs to be interpreted liberally – akin to legislative entries – and include in its sweep legislative powers not merely to levy GST but ancillary powers relating to administration and ensuring compliance with GST laws.
The nature of Article 246A is such that it needs to be interpreted akin to a legislative entry since there is no specific GST-related legislative entry in the Constitution. The power to enact GST laws and bifurcation of powers in relation to GST are both contained in Article 246A itself investing the provision with the unique character of a legislative entry as well as source of legislative power in relation to GST.
Part III: Scope and Contours of Arrest Powers under CGST Act, 2017
Reason to Believe and Judicial Review
The Supreme Court referred to the relevant provisions of GST laws to note that there is clear distinction between cognizable and non-cognizable offences under the GST laws. And bailable and non-bailable offences have also been bifurcated indicating the legislature’s cognizance of Om Prakash’s judgment. Further, the nature of offence is linked to the quantum of tax evaded. While the threshold to trigger arrest under CGST Act, 2017 is the Commissioner’s ‘reason to believe’ that an offence has been committed. In this respect, the Court emphasized that the Commissioner should refer to the material forming the basis of his finding regarding commission of the offence. And that an arrest cannot be made to investigate if an offence has been committed. The Supreme Court also pronounced a general caution about the need to exercise arrest powers judiciously.
Another riddle of arrest that the Supreme Court tried to resolve was: whether a taxpayer can be arrested prior to completion of assessment? An assessment order quantifies the tax evasion or input tax credit wrongly availed. And since under CGST Act, 2017 the classification of whether an offence is cognizable or otherwise is typically dependent on the quantum of tax evaded, this is a crucial question. And there is merit in stating that the assessment order should precede an arrest since only then can the nature of offence by truly established. In MakeMyTrip case – decided under Finance Act, 1994, the Delhi High Court had mentioned that an arrest without an assessment order is akin to putting the horse before a cart. And in my view, in the absence of an assessment order, the Revenue’s allegation about the quantum of tax evaded is merely that: an allegation. And there is a tendency to inflate the amount of tax evaded in the absence of an assessment order. And an inflated amount tends to discourage courts from granting bail immediately and can even change the nature of an offence.
However, the Supreme Court in the impugned case noted that it cannot lay down a ‘general and broad proposition’ that arrest powers cannot be exercised before issuance of assessment orders. (para 59) There may be cases, the Supreme Court noted where the Commissioner can state with a certain degree of certainty that an offence has been committed and in such cases arrest can be effectuated without completion of an assessment order.
Here again, the Supreme Court stated that the CBIC’s guidelines on arrest will act as a safeguard alongwith its previous observations on arrest by custom officers, which will also apply to arrest under GST laws.
The issue is that CBIC issued the guidelines on arrest in 2022, and yet the Supreme Court noted that there have been instances of officers forcing tax payments and arresting taxpayers. And though the arrests led to recovery of revenue, the element of coercion in tax payments cannot be overlooked. If the coercive element during arrest was present even despite the guidelines, then perhaps an even stronger pushback is needed against arbitrary and excessive use of arrest powers. While the Supreme Court has done well in stating that various safeguards will apply to arrests such as those enlisted in various provisions of CrPC and requirements of warrants from Magistrates in non-cognizable offences, even the numerous safeguards, at times, don’t seem enough to protect taxpayers.
Justice Bela M. Trivedi’s Concurring Opinion
Justice Bela M. Trivedi’s concurring opinion prima facie dilutes safeguards provided to taxpayers. The Revenue is likely to use her words to argue against any judicial interference and deny bail to accused. Justice Trivedi clearly noted that when legality of arrests under legislations such as GST are challenged, the courts must be extremely loath in exercising their power of judicial review. The courts must confine themselves to examine if the constitutional and statutory safeguards were met and not examine the adequacy of material on which the Commissioner formed a ‘reason to believe’ nor examine accuracy of facts.
Justice Trivedi was emphatic that adequacy of material will not be subject to judicial review since an arrest may ordinarily happen at initial stages of an investigation. The phrase ‘reason to believe’, she observed, implies that the Commissioner has formed a prima facie opinion that the offence has been committed. Sufficiency or adequacy of material leading to formation of such belief will not be subject to judicial review at nascent stage of inquiry. The reason, as per Justice Trivedi was that ‘casual and frequent’ interference by courts could embolden the accused and frustrate the objects of special legislations such as GST laws. Limited judicial review powers for powers exercised on ‘reason to believe’ is a recurring theme in the jurisprudence on this standard. Reason to believe is a standard prescribed under IT Act, 1961 as well and courts have clear about not scrutinizing the material which forms the basis of the officer’s belief.
However, some of Justice Trivedi’s observations seem at odds with the lead opinion which requires written statements about Commissioner’s belief, reference to material on basis of which the Commissioner forms the ‘reason to believe’ that lead to arrest. The majority opinion is also clear about power of judicial review in case of payment of tax under threat of arrest, power of courts to provide bail even if no FIR is filed, among other safeguards. Though in the leading opinion there is no clear opinion about scope of judicial review at preliminary or later stages of investigation.
One possible manner to reconcile Justice Trivedi’s concurring opinion with the lead opinion is that her observations about narrow judicial review are only for preliminary stages of investigation. And that courts can exercise wider powers of judicial review at later stages of investigation. And that her view is only limited to ensuring that once the statutory safeguards have been met, courts should not stand in the way of officers to complete their inquiries and investigations else aims of the special laws such as GST may not be met. But her views are likely to be interpreted in multiple manners and the Revenue will certainly prefer her stance in matters relating to bail, not just at the initial stage of investigation but during the entire investigative process.
Conclusion
In the impugned case, the Supreme Court has advanced the jurisprudence on arrests under tax laws to some extent. But the observations are not in the context of any facts but in a case involving constitutional challenge. Thus, numerous safeguards that the Court has noted will apply to arrests made by customs officers or under GST Acts will be tested in future. Courts will have to ascertain if the arrests were made after fulfilment of the various safeguards, whether taxes were paid under threats of arrests, and other likely abuse of powers. The crucial test will be how and if to grant bail including anticipatory bail in matters where FIR is not registered.
Finally, ‘reason to believe’ is admittedly a subjective standard. It is the opinion of an officer based on the material that comes to their notice. And courts while may examine the material, cannot replace their own subjective view with that of the officer. The test in such cases is if a reasonable person will arrive at the same conclusion based on the material as arrived at by the Commissioner. Thus, ‘reason to believe’ as a standard per se, limits scope of judicial review and confers immense discretion to the Commissioner to exercise powers of arrest. The jurisprudence on this issue – both under the IT Act, 1961 and GST laws – is evidently uneven due to the subjective nature of standard. And courts have not been able to form a clear and unambiguous stance on the scope of judicial review with respect to the ‘reason to believe’ standard. And this unevenness and relatively weak protection afforded to taxpayers is likely to continue in the future as well despite the Supreme Court’s lofty observations in the impugned case.
Long Wait for GSTATs: July 2017 … and Counting.
GSTATs have been envisaged as the first appellate forum under GST laws. And yet, 7.5 years since implementation of GST, not a single GSTAT is functioning. Reason? Many. Some are easy to identify, others are tough to understand. Nonetheless, here is a small story of the ill-fated GSTATs since the implementation of GST laws in July 2017.
Provision is Declared Unconstitutional
CGST Act, 2017, as originally enacted, provided that the no. of technical members in GSTATs would exceed the no. of judicial members. Both the Union and States wanted to ensure their representation on GSTATs via technical members which led to each GSTAT accommodating at least 2 technical members, i.e., technical member (Centre) and technical member (State). But CGST Act, 2017 provided for only one judicial member on the Bench of GSTAT. The Madras High Court ruled that the strength of technical members in tribunals cannot exceed that of judicial members, as per the law laid down by the Supreme Court. The relevant provision – Section 109(9) as originally enacted – was struck down as unconstitutional. There was a simultaneous challenge on the ground of Article 14 wherein the petitioners argued that under CGST Act, 2017 advocates were not eligible to become members of GSTATs and it violated their fundamental right to equality. The High Court refused to accept this plea and requested the Union to reconsider the ineligibility of advocates. Making advocates ineligible to become members of GSTAT is rather strange since a similar disqualification does not exist for ITATs under the IT Act, 1961.
No Appeal Against the Decision
The Union didn’t appeal against the Madras High Court’s decision. Surprising, since the Union likes to defend all its decisions including its interpretation of tax statutes until the last possible forum. Or perhaps in this instance the Union decided it was prudent to agree with the High Court’s decision. Or it wanted to use the High Court’s decision as a shield to defend the delay in operationalizing GSTATs. Irrespective, the Union’s decision to not file an appeal against the High Court’s decision meant it had to explore options to operationalize the GSTATs. During 2019-2021, the GST Council did discuss the options and feasibility of GSTATs in various States and the required no. of Benches, but the discussions didn’t prove to be immediately fruitful. One possible option of breaking the logjam was by amending the respective provision of CGST Act, 2017.
Provisions are Amended
The Finance Act, 2023 amended the provisions relating to composition of GSTATs. Below are the relevant provisions before amendment and post-amendment respectively:
Pre-Amendment
Section 109(3):
The National Bench of the Appellate Tribunal shall be situated at New Delhi which shall be presided over by the President and shall consist of one Technical Member (Centre) and one Technical Member (State).
Section 109(9):
Each State Bench and Area Benches of the Appellate Tribunal shall consist of a Judicial Member, one Technical Member (Centre) and one Technical Member (State) and the State Government may designate the seniormost Judicial Member in a State as the State President.
Post-Amendment
Section 109(3):
The Government shall, by notification, constitute a Principal Bench of the Appellate Tribunal at New Delhi which shall consist of the President, a Judicial Member, a Technical Member (Centre) and a Technical Member (State).
Section 109(4):
On request of the State, the Government may, by notification, constitute such number of State Benches at such places and with such jurisdiction, as may be recommended by the Council, which shall consist of two Judicial Members, a Technical Member (Centre) and a Technical Member (State).
In summary, the amendments via the Finance Act, 2023 have ensured that the no. of judicial members are equal to technical members, if not more. This is because the President of GSTAT is usually the senior most judicial member. The balance of judicial and technical members needed to be met on two fronts: ensuring balance of representation between the Union and States inter-se needs and the balance between judicial and technical side to avoid executive domination. Now that the initial hurdle to constitute GSTATs was officially removed via Finance Act, 2023, one would have expected speedy and decisive steps towards constitution of GSTATs. But that wasn’t the case.
Benches, Chairperson, Website … and Other Puny Steps
Since the provisions relating to GSTATs have been amended, the Union has taken multiple – but tiny – steps towards operationalizing the GSTATs. With each step, the tax community has raised its hopes for quick operationalization of GSTATs. But each step seems a step too far.
In May 2024, the Minister of Finance administered oath to the first President of GSTAT, New Delhi. Since GSTATs are not yet operational and do not hear cases, I’m not sure what the President of GSTAT does to earn his salary.
In July 2024, in another step forward, the Ministry of Finance notified various Benches of GSTATs, with the Principal Bench in New Delhi.
Recently, the tax community was rejoicing at GSTATs having a dedicated website. It is hard for me to understand the joy of having a functional website for an institution that itself isn’t functional. And the purpose of having a website is difficult to comprehend due to a recent report in January 2025, mentioning that GSTATs will take another 6 months to begin their functioning. When the formalities for appointing personnel have not completed, IT infrastructure is yet uncertain, and real estate for GSTATs has not been finalized, even 6 months seem like an ambitious target. Especially due to the track record of the Union and States on this aspect of GST.
Constitutional Courts are Impatient
Since GSTATs, ideally the first appellate forum for GST-related disputes, are not functioning, the burden has shifted to constitutional courts. High Courts and the Supreme Court end up hearing matters that typically should not have received attention beyond GSTATs. Supreme Court has recognized the effect of not having GSTATs and has recently raised the following query in one of its orders:
We would like to first know at the earliest why the Goods and Services Tax Appellate Tribunal has not been made functional till this date.
The Union is supposed to reply to the above query in three weeks, but do not expect any fireworks and new revelations.
Supreme Court’s question was prompted after it noted that the petitioner had the remedy to file an appeal under CGST Act, 2017 but had to approach the High Court via writ petition due to GSTATs not functioning. Many such cases that did not deserve or should not have been heard by High Courts and Supreme Court are currently in limbo because these constitutional courts do not have the advantage of GSTATs judgments and fact finding.
Previously, the Allahabad High Court also tried to make the Union act quickly. But, despite the High Court’s eagerness to constitute GSTATs in the State of UP, there wasn’t much headway.
Additionally, GSTATs are necessary to ensure harmony in interpretation and coherence in jurisprudence which has, for a long time, been at the mercy of AARs and AAARs. Both are intended to be interpretive bodies, not dispute resolution bodies but their several sub-par interpretations have caused tremendous confusion on various matters.
To conclude, I cannot say for sure when GSTATs will start functioning, but it is imperative that they do. And they function efficiently. A reform such as GST cannot be truly called a bold or a transformative reform until the accompanying rule of law infrastructure is operational. And GSTATs are a vital cog of that infrastructure. Until then, GST has certainly transformed the landscape of indirect tax in India. But, the promise of fair and speedy resolution of disputes remains a distant and unfulfilled promise.
