GST

A Small Note from Tax History: Entertainment Tax Dispute of Delhi Racing Club

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Introduction 

In 2012, the Delhi Racing Club (‘Racing Club’) lost a tax dispute. The Government of National Capital Territory demanded payment of entertainment tax which the Racing Club unsuccessfully resisted. At first glance, the Delhi High Court’s judgment in The Delhi Race Club Ltd v Government of NCT of Delhi & Ors (‘Delhi Racing Club case’) seems straightforward. It was a low stakes dispute involving a relatively small amount of entertainment tax. And the Delhi Racing Club case, cannot by any stretch of imagination, be called a ‘landmark’ case in Indian indirect tax jurisprudence. Nonetheless, the value of commenting on the Delhi Racing Club case can be underlined because of three observations of the Delhi High Court.   

Firstly, any payment which is related to the entertainment or is a pre-condition for entertainment can be understood be a ‘payment for admission to any entertainment’ and subjected to entertainment tax. Since local bodies are authorized to collect entertainment tax post introduction of Goods and Services Tax (‘GST’), interpretation of the above phrase has a continued relevance.  

Secondly, in Delhi Racing Club case the Delhi High Court reinforced the principle that if law requires that a certain tax shall be collected then any governmental assurance that it shall not be collected will not be binding on the state and its officers. An observation that leaves the taxpayer at the mercy of changes in the governmental attitude towards tax collection.  

Thirdly, the object of entertainment tax is human beings and not the inanimate object in reference to which the tax is levied. The latter’s presence, absence or use can trigger liability to pay an entertainment tax, but it does not mean that it is the object of entertainment tax. 

The judgment is an important reference point for understanding the taxable event for entertainment tax, and its wide scope that can extend to varied forms of payments/charges that are made in relation to an entertainment. A concept that continues to be relevant because laws under which entertainment tax is levied and collected by local bodies adopt similar expressions and phrases as used in relevant entertainment tax legislations in vogue before introduction of GST. 

Facts and Background 

The Racing Club charged entry fees from those who visited its premises to place bets on horse races or otherwise watch the races. The Racing Club became concerned with the nuisance value of mobile phones and introduced an additional entry charge for permitting carrying of mobile phones into its premises. While the Racing Club was collecting and remitting entertainment tax of 25% on the entry fees, the issue was if entertainment tax was also payable on charges levied for carrying mobile phones. 

In February 2002, the Entertainment and Betting Tax Officer under the Delhi Entertainment and Betting Tax Act, 1996 issued a notice to the Racing Club demanding payment of entertainment tax of 25% on charges collected for carrying mobile phones. The Racing Club resisted the demand of tax and argued that mobile phones were not entertainment or in any manner connected to entertainment. The Commissioner of Entertainment, Betting and Luxury Tax responded by banning the use of mobile phones in the Racing Club. Why? The argument was that use of mobile phones in the Racing Club had given birth to illegal betting and the Racing Club had not maintained proper records of mobile phones in the betting ring. The ban caused immediate concern to the Racing Club as it would prove bothersome to its members and visitors. After all, one of the core activities of visiting a horse racing club was to bet on the horse races, one of the rare legal betting activities in India.  

To circumvent that mobile phone ban, the Racing Club agreed to pay half of the entertainment tax demand on charges levied on mobile phones. And agreed to pay the remaining half in yearly instalments. The Commissioner agreed and thereafter rescinded the ban on mobile phones subject to the Racing Club paying entertainment tax on charges levied on mobile phones. 

In 2006, the Racing Club was issued another show cause notice alleging that it had been collecting charges on mobile phones usage from Financial Year 2002-03, without permission under the Delhi Entertainments and Betting Tax Act, 1996. And Racing Club was asked to reply to the notice. The Racing Club’s reply inter alia mentioned that it had already entered a settlement reading payment of entertainment tax on mobile phone charges. But the Racing Club’s reply was found unsatisfactory and a total tax demand of Rs 1,28,03,462/- was confirmed by the Commissioner. The Racing Club approached the Delhi High Court challenging the assessment orders. 

The Delhi High Court Judgment 

Section 6 of the Delhi Entertainment and Betting Tax Act, 1996 provided that there shall be levied and paid on all payments for admission to any entertainment an entertainment tax. Section 2(m)(iv), in turn, defined ‘payment for admission’ to mean:

any payment, by whatever name called, for any purpose whatsoever, connected with an entertainment, which a person is required to make in any form as a condition of attending, or continuing to attend the entertainment, either in addition to the payment, if any, for admission to the entertainment or without any such payment for admission;  

The Delhi High Court held that the above sub-clause covered payments to the Racing Club as mobile phone charges since they were connected to the entertainment of watching/betting on horse racing. The High Court added that the manner of collecting the payment, or its purpose is irrelevant if the payment is connected to the entertainment. The High Court clarified that while the taxable event was holding an entertainment, any payment connected with the entertainment attracted a levy under Section 6(1) of the Delhi Entertainment and Betting Tax Act, 1996. And concluded that: 

The only condition is that the payment should be connected with the entertainment, which is the horse races in the present case. The further condition is that the payment should be one which a person is required to make as a condition of attending the entertainment. This condition is satisfied in the case of persons who wish to carry their mobile phones inside the race club. If they want to attend the races carrying a mobile phone with them, they are obliged to make the payment for the entry of mobile phones. (para 19)    

The connection between mobile phones and horse racing – the main entertainment – was obvious and proximate. And on this point, the Delhi High Court was correct in including mobile phones charges within the scope of ‘payment for admission’. This is especially since mobile phones were vital to place and track bets on the horse races.  

The second crucial question the Delhi High Court had to address was if the entertainment tax was being levied on an inanimate object. In State of Karnataka v Driven Enterprises entertainment tax was levied on admission of cars into drive-in cinemas. Driven Enterprises had argued before the Supreme Court that a tax cannot be levied on inanimate objects. But the Supreme Court rejected the argument and held that entertainment tax was not levied on cars but on persons who were entertained, who took their cars inside the theatres, and enjoyed the movie while sitting in their cars. Drawing an analogy, the Delhi High Court in Delhi Racing Club case held that the entertainment tax was not on mobile phones but on persons who insisted on carrying their phones inside the Racing Club and were entertained from horse racing. 

Finally, Racing Club challenged the demand for payment of entertainment tax by arguing that it had previously settled the issue with the Commissioner. The Delhi High Court rejected the Racing Club’s argument by relying on M/S Mathra Prashad and Sons v State of Punjab and held that where a law requires that a certain tax is to be collected it cannot be given up. Any governmental assurance that it will not collect the tax is not binding on the government. Thus, the government retains the discretion to collect or not to collect the tax putting the taxpayer in jeopardy. The government can, as in the Delhi Racing Club case, settle the dispute or agree to collect a certain quantum of tax but later go back on its word and decide to collect a higher amount of tax. If the law permits the government to collect the tax, the government retains the authority to collect it as per its convenience. And any agreements to the contrary with the taxpayer do not bind it. While one can argue that promissory estoppel should apply to the government, but the jurisprudence is clearly in favor of the state and its ability to withdraw any tax concessions in public interest. Even if it prejudices the taxpayer in question.    

Betting, Taxes, and Present      

Delhi Racing Club case was not a rare instance where taxation, betting, and entertainment coalesced and resulted in a significant burden for the taxpayer, i.e., the Racing Club. And since entertainment tax is an indirect tax, by extension members and visitors to the Delhi Racing Club were also affected. The current taxation regime relating to betting and entertainment is bifurcated into two separate taxes – GST as well as entertainment tax. Betting is remit of the former and the entire betting sector has been effectively paralyzeddue to onerous tax rates under GST. 

Entertainment tax is now a de facto tax on admissions to events such as sporting events, broadcasting services, and for public exhibition of cinematographic films. And is collected by local bodies. Thus, the Delhi High Court’s interpretation of ‘payment for admission’ remains relevant even under the current entertainment tax regime. Since all entertainment tax laws still use the same phrase to delineate their scope and identify the taxable event. 

However, to conclude, and to place the tax controversy in the larger context: recreational clubs including racing clubs such as the Delhi Racing Club have other legal troubles to encounter for now, onerous taxes and high tax rates form only a small piece of their ongoing existential fights.   

No GST on Corporate Guarantees: The Bombay High Court Misses a Beat

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A Division Bench of the Bombay High Court (‘High Court’) in M/S. DP Jain & Co Infrastructure Private Limited v Union of India (‘DP Jain case’) ruled that corporate guarantee, not accompanied by consideration, cannot be subjected to GST. And set aside the Revenue’s show cause notice issued to M/S DP Jain. The High Court’s primary reason was that M/S DP Jain had not received any money for providing corporate guarantee and in the absence of a consideration there cannot be a valid case for levying GST. The High Court relied on Supreme Court’s decision in Commissioner of CGST & Central Excise v Edelweiss Financial Services Ltd (‘Edelweiss Financial Services case’) wherein the Supreme Court had ruled that issuance of corporate guarantees without consideration was not a taxable service. 

The High Court in relying on Edelweiss Financial Services case overlooked three crucial points: first, that the Edelweiss Financial Services case was decided in the context of service tax; second, that under the Central Goods and Services Act, 2017 (‘CGST Act, 2017’) certain supplies between related persons, even if without consideration, are taxable. Third, while the High Court – in its judgment – reproduces two of the Central Board of Indirect Taxes Circulars (‘CBIC Circulars’) relating to corporate guarantee, it does not examine them adequately. The Revenue invoked the CBIC Circulars to fortify its tax demand. However, the High Court did not give the CBIC Circulars or relevant provisions of the CGST Act, 2017 proper attention. I conclude that while the High Court’s judgment alleviates tax liability of M/S DP Jain, its reasoning does not withstand a considered scrutiny. And the judgment should be overturned in appeal.   

Brief Facts and Arguments  

M/S DP Jain was engaged in the business of construction of national and state highways through its various affiliated and subsidiary companies. Between 2020-2022, M/S DP Jain executed three corporate guarantees for the purpose of securing loans of its subsidiary companies. In each of the three deeds of corporate guarantees it was clearly stated that M/S DP Jain had not received and shall not receive any security, fee, commission or any other consideration from the borrower for providing a guarantee. Further, the legal charges incurred by M/S DP Jain for extending the corporate guarantees were shown in its account’s ledger.

The Revenue sent show cause notice to M/S DP Jain alleging that providing corporate guarantees was a taxable service under CGST Act, 2017. The Revenue inter alia relied on the CBIC Circular issued on 23 October 2023 which clearly mentioned that a holding company providing corporate guarantee to its subsidiary company for sanction of credit facilities to the latter – even if made without consideration – will be treated as supply of services. The value of such services was to be determined as per Rule 28(c) or Rule 28(2), CGST Rules, 2017 depending on the date on which the corporate guarantee was executed. While M/S DP Jain claimed that activity of providing corporate guarantee is not supply of goods and the Revenue has not examining relevant legal provisions of the CGST Act, 2017. M/S DP Jain alleged that the Revenue by ‘its own assumption’ has declared that providing corporate guarantee is a taxable supply of service. Also, M/S DP Jain argued that the notification of CBIC Circulars and Rule 28(2) be set aside for being ultra vires to the CGST Act, 2017.   

Bombay High Court Misses a Beat 

The High Court held that it is evident that M/S DP Jain is not in the business of providing corporate guarantee on a regular basis. And the three corporate guarantees were extended only to secure the loan of its subsidiary companies. The aim of corporate guarantees was to safeguard the financial health of its associate companies and provide them financial support. And M/S DP Jain does not extend corporate guarantees to its customers but only provides in-house support to its companies. The High Court though helpfully clarified that the Revenue is not making the case that the M/S DP Jain was in the business of extending corporate guarantees on a regular basis. However, the High Court did not agree with the Revenue’s contention that corporate guarantees extended without consideration can be subjected to GST. And the value of services can be determined as per Rule 28(c), CGST Rules, 2017.           

The High Court cited Edelweiss Financial Services case which involved a similar issue. But overlooked that the case was decided under Finance Act, 1994 and involved levy of service tax. The issue in Edelweiss Financial Services case was whether extension of corporate guarantee without consideration amounted to banking and other financial service and was a taxable service. The Supreme Court endorsed the Commissioner’s and the CESAT findings which held that the entity extending corporate guarantee must receive either a monetary or a non-monetary consideration. And that there must be real provider of service in question for a service to constitute a taxable service. The Supreme Court added that consideration is a ‘recompense’ for the contractual undertaking that authorizes levy of service tax and that: 

The above would suggest that this was a case where the assessee had not received any consideration while providing corporate guarantee to its group companies. No effort was made on behalf of the Revenue to assail the above finding or to demonstrate that issuance of corporate guarantee to group companies without consideration would be a taxable service. (para 7)     

The Supreme Court in Edelweiss Financial Services case was right in insisting on presence of consideration and a real provider of service. So how and why did the High Court miss a beat in adjudicating the DP Jain case? 

To begin with, the High Court did not even underline that the Edelweiss Financial Services case was adjudicated under the Finance Act, 1994 in relation to service tax. While the DP Jain case involved determining the levy of GST. And it is not a distinction without a difference as the relevant provisions of both legislations are different and scope of taxability is different. For example, Schedule I of the CGST Act, 2017 enlists activities that are to be treated as supply even if made without consideration. And Entry 2, Schedule I includes supply of goods or service made between related or distinct persons in the course or furtherance of business. Thus, Schedule I read with Section 7 certainly leads to the conclusion that providing corporate guarantees to subsidiary companies even without consideration amounts to supply. 

Equally, the CBIC Circular issued in October 2023 explicitly covers the exact situation of a holding company providing corporate guarantee to a related company and mentions that: 

Hence the activity of providing corporate guarantee by a holding company to the bank/financial institutions for securing credit facilities for its subsidiary company, even when made without any consideration, is also to be treated as a supply of service by holding company to the subsidiary company, being a related person, as per provisions of Schedule I of CGST Act. (para 2)

Prima facie the CBIC Circular is not ultra vires CGST Act, 2017. The High Court failed to properly scrutinize validity of the CBIC Circular or its contents. The para cited above clearly establishes that the corporate guarantees in question were subjected to GST. Only way to treat them beyond the scope of GST was to hold the Circular to be ultra vires. Instead, the High Court cited Edelweiss Financial Services case which did not apply provisions of the CGST Act, 2017.   

We can argue that if extending corporate guarantees should be subjected to GST since it is a commonplace intra-group transaction and not a provision for service. But that is a policy issue and subject of a separate debate. In so far the law as it currently exists, Section 7 of the CGST Act, 2017 with Schedule I is clear that supply includes transactions between related persons, even if without consideration. However, the High Court’s narrow focus on Section 7 and Edelweiss Financial Services case did not permit it to consider that some supplies, even if without consideration, can be subjected to GST. And in this respect the provisions of CGST Act, 2017 may differ from Finance Act, 1994.  

Finally, Rule 28(c) provided for valuation of all corporate guarantees and was applicable for all such transactions before 26 October 2023. CBIC Circular issued in July 2024 clarified that Rule 28(2) was applicable from 26 October 2023 onwards. The Revenue insisted on levying GST on 1% of the amount guaranteed as per Rule 28(c) while M/S DP Jain challenged the validity of Rule 28(2). Since the High Court held that providing a corporate guarantee was not a supply of service, the question of value of supply was rendered moot. But the High Court nonetheless refused accept M/S DP Jains’ plea that Rule 28(2) is ultra vires CGST Act, 2017. The High Court relied on the familiar doctrine of wide latitude to the legislature in taxation statutes and correctly rejected the challenge to Rule 28(2).        

Conclusion

The High Court’s verdict in DP Jain case is an example of the bench putting on blinders and focusing on only one aspect of the issue. The lack of consideration in the transaction and one Supreme Court decision was enough to seal the fate of Revenue’s tax demand. All other aspects were duly cited but there was no meaningful engagement. For example, the judgment cites the relevant CBIC Circulars, ingredients of supply under Section 7, and Schedule I without meaningfully analyzing their scope and impact. Given the paucity of analysis in DP Jain case, the High Court’s verdict is unlikely to be – and ideally should not be – the last word on the issue. Levy of GST on corporate guarantees have been the subject of uncertainty and discomfort amongst taxpayers. And the policy of subjecting them to GST is questionable. DP Jain case adds another layer of contestation by deciding in favor of the taxpayer but by using weak and inchoate reasoning. It is worth noting that the judgments pronounced in service tax regime are not alien to GST, and I’ve made an argument elsewhere that service law jurisprudence can usefully inform the GST jurisprudence. But it requires nuanced appreciation of the distinct legal provisions of both legal regimes and not a blind reliance on judicial precedents without examining the underlying provisions. 

Not Tolerating an ‘Absurd’ GST Demand

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On 30 April 2026, a Division Bench of the Bombay High Court (‘High Court’) in Tata Sons Private Ltd v Union of India through the Ministry of Finance (‘Tata Sons case’) set aside a ‘patently perverse’ Goods and Services Tax (‘GST’) demand. But, before we get to the perversity, basic facts of the case. 

Facts 

NTT Docomo Inc (‘Docomo’), a Japanese company, invested in the shares of Tata Teleservices Limited (‘TTSL’) along with Tata Sons Private Limited (‘Tata’). As per the Shareholder Agreement, if TTSL failed to satisfy the ‘Second Key Performance Indicators’ then Tata was obligated to find a buyer for Docomo’s shares at the ‘sale price’. Tata was unable to comply with its obligation leading to disputes with Docomo. The disputes were referred to arbitration proceedings and culminated in an arbitral award wherein Tata was liable to pay damages to Docomo. Initially, Tata resisted discharging its liability and Docomo filed enforcement proceedings before various courts in the US, UK, and India. In India, before the Delhi High Court the award was held to be enforceable as a deemed decree of the Delhi High Court.

During enforcement proceedings before the Delhi High Court, Tata expressed its willingness to pay amounts under the arbitral award. Tata and Docomo placed on record consent terms before the Delhi High Court and accordingly prayed for disposal of the enforcement petition filed by Docomo. The Delhi High Court accepted the consent terms as per the settled law wherein parties to execution proceedings can enter a settlement.

One para of the consent terms proved to be foundation of the Revenue’s case. Para 7 of the consent terms stated that Docomo shall keep in suspension all enforcement proceedings instituted by it against Tata and ultimately withdraw them subject to compliance by Tata of its obligations. Docomo also agreed to not initiate any further proceedings in relation to shareholder agreement or the arbitral award during the suspension period. 

The Revenue’s arguments can be divided into two sub-parts: 

Firstly, that Docomo by agreeing to suspend and later withdraw enforcement proceedings against Tata has agreed to an obligation of refraining from an act. What act was it refraining from? The act of continuing with proceedings initiated against Tata in relating to execution proceedings. 

Secondly, Docomo has tolerated breach of Shareholder Agreement by Tata as the latter failed to find buyers for its shareholding in TTSL. 

Relevant Legal Provision 

The Revenue first attempted to levy service tax and eventually after introduction of GST, made a demand under the Central Goods and Services Act, 2017(CGST Act, 2017). Section 7 of the CGST Act, 2017 read with Schedule II, Entry 5(e) states that supply of services shall include: 

agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; 

The above clause has been directly borrowed from Section 66E(e), Finance Act, 1994 wherein service tax was levied in similar situations.  

The Revenue demanded that Tata should pay Integrated Goods and Service Tax (‘IGST’) on a reverse charge basis. Tata had received services from Docomo, based outside India.  And the services were that Docomo refrained from continuing its enforcement proceedings against Tata and tolerated the breach of contract. Tata, of course, denied that it had received any service much less a taxable service. And challenged the Revenue’s demand via a writ petition before the High Court arguing lack of legal and jurisdictional basis and a perverse appreciation of facts. 

Before we get into the case. The premise of levying GST on toleration of an act or refraining from an act is that if a consideration is received by a person for not indulging in an act, then it should amount to supply of services. The obligation to tolerate or refrain must be in a separate contract where such toleration or restraint is the aim and purpose of the contract. In the absence of such an independent obligation it is tough, if not impossible to prove a supply and thus a supply of services.  

CBIC Circular 

In Tata Sons case, one of the hurdles in making the GST demand successfully was the Central Board of Indirect Taxes own circular dated 3rd August 2022. The CBIC, through this circular, clarified what amounted to ‘tolerating an act’ and whether GST can be levied on liquidated damages. Two relevant portions of the circular were germane to this dispute.  

The circular states that obligation to tolerate an act or refrain from an act is nothing but a contractual arrangement and:

A contract to do something or to abstain from doing something cannot be said to have taken place unless there are two parties, one of which expressly or impliedly agrees to do or abstain from doing something and the other agrees to pay consideration to the first party for doing or abstaining from such an act. (para 6)

And, in respect of liquidated damages, the circular clarified that they are paid only to compensate for injury, loss or damage suffered by the aggrieved party. And:

… there is no agreement, express or implied, by the aggrieved party receiving the liquidated damages, to refrain from or tolerate an act or to do anything for the party paying the liquidated damages, in such cases liquidated damages are mere a flow of money from the party who causes breach of the contract to the party who suffers loss or damage due to such breach. Such payments do not constitute consideration for a supply and are not taxable. (para 7.1.4)

Thus, an independent contract for restraining from or tolerating an act is a necessity. And at least in so far as liquidated damages are concerned the CBIC’s position was clear and straightforward: it is a mere flow of money for compensating injury and cannot be equated to consideration. The High Court in Tata Sons case reasoned that a similar logic applies to unliquidated damages as well. The other question that the High Court had to engage with was: whether consent terms between Tata and Docomo wherein latter refrained from pursuing legal proceedings amounted to an independent contract? The High Court held that in the absence of any consideration ‘we are at a loss to understand’ how a settlement of an arbitral award amounts to import of services by Tata.         

Bombay High Court Dismisses the Revenue’s Claim       

To begin with, the High Court referred to Schedule II, Entry 5(e) and noted that for the provision to be applicable existence of an independent agreement is necessary. An agreement wherein parties bind themselves to refrain from an act, or to tolerate an act, or to do an act involving consideration. 

The High Court clarified that recovering amounts for breach of contract form part of a legal scheme integral to the arbitral process. And any settlement between parties during execution is ‘integral to’ or ‘intricately connected’ to the decree or the arbitral award itself. And cannot be construed to be an independent agreement de hors the decree. Proceedings for recovery of damages as per the arbitral award amount draw their color from the arbitral award itself. And thus, Docomo agreeing to not pursue collateral proceedings for full satisfaction of the amount due under arbitral award cannot be considered as supply of services. Since it was within the parameters of and an extension of the arbitral award itself. Why? 

The Bombay High Court relied on various overlapping parameters. Let me delineate them into four:  

Firstly, the High Court held that Section 7 defines ‘scope of supply’ and ‘consideration’ is an essential element of supply. Notably, the High Court added that Schedule II, Entry 5(e) cannot be interpreted in a manner that it extends beyond the principal provision, i.e., Section 7. The High Court correctly concluded that there is no independent agreement involving any consideration between Tata and Docomo. No consideration was promised by Tata. Para 7 of the consent terms cannot be construed to say that it brings into existence an independent agreement between Tata and Docomo. 

Secondly, the High Court said that Docomo did not agree to something different or an independent obligation which was beyond the arbitral award. And its obligation to suspend and withdraw enforcement proceedings cannot be categorized as an independent obligation amounting to supply of service under Section 7 read with Schedule II, Entry 5(e). Docomo agreeing not to proceed with enforcement proceedings was a logical consequence of the arbitral award itself and not an independent obligation.     

Thirdly, the High Court clarified that the position adopted by the Revenue regarding liquidated damages would necessarily apply to unliquidated damages. The only difference between the two kind of damages was that in case of former it is agreed on between the parties while in the latter it is awarded by the court. Irrespective, legal character of the payment of damages is nothing but flow of money from a party which causes breach of contract to the party which suffers loss or damage. And CBIC’s own circular of 2022 takes the same position that payment of liquidated damages is flow of money. 

Fourthly, the High Court clarified that when damages were awarded by an arbitral tribunal to Docomo it was not because of any different obligation on part of Tata. Docomo became entitled to such compensation, only on being determined and awarded by the arbitral tribunal. And until the arbitral tribunal’s determination no liability there was no liability on Tata to pay damages. There was no amount ipso facto due from Tata to Docomo. And the liability to pay damages only came into existence by the arbitral award. Thus, there was no scope for the Revenue to read any independent contract between parties where reciprocal obligations de hors the arbitral proceedings were created.      

In effect, the Revenue termed Docomo’s attempt to secure damages awarded to it under an arbitral award as a supply of services. Why? Because as per its settlement with Tata it agreed to halt and suspend enforcement proceedings if the damages were paid.  

Absurdity of Revenue’s Demand  

The Bombay High Court, at various points in the judgment, questioned rationale of the Revenue’s approach. The Revenue’s approach was termed as ‘absurd’, ‘wholly without jurisdiction’, ‘patently perverse’, having ‘no basis whatsoever in law, looked from any angle.’ (paras 67-70) 

The reason the Revenue’s demand seemed – and let me add another adjective – outlandish was because it misinterpreted three core aspects: (a) the consent terms were viewed as an independent agreement and not an extension of arbitral proceedings; (b) Docomo agreeing to suspend and withdraw enforcement proceedings was termed as refraining from an act even if there was no additional consideration agreed upon for such a restraint; (c) Docomo receiving damages was interpreted as if it was tolerating Tata’s breach of Shareholder Agreement. Docomo tolerating Tata’s breach of contract would make sense if Docomo did not initiate arbitration proceedings or did not receive damages. By initiating arbitration, receiving an arbitral award in its favor, and filing for enforcement proceedings Docomo was evidencing that it is not ready to tolerate breach of a contract. And should receive compensation for injury and loss caused by the breach of contract.

Also, as the High Court pointed out, if such settlement terms are accepted as a supply of services under GST, then settlement of every money decree where parties are before the Court and agree to a course of action purely under the decree would be regarded as a supply of service. If no independent obligation is agreed upon under the settlement, no additional consideration is agreed upon, then treating it as supply of service would to creating a situation not wholly recognized by the relevant provisions of the CGST Act, 2017.     

One core reason for the Revenue’s ‘absurd’ demand was summed up by the High Court in following terms: 

It appears to us that as merely the award amounts are large amounts, the impugned action without application of mind to the law and the facts, has been resorted. Such action has no basis whatsoever in law, looked from any angle. (para 69)

In more ways than one, the High Court’s above observations sum up the Revenue’s motivation and underlying reason for its tax demand. The arbitration resulted in damages more than 8,000 crores and the Revenue demanded more than Rs 1,500 crores in GST. Hunger for tax, especially a huge amount, can catalyze a need to test the limits of tax law provisions and their interpretation. The Revenue though came up against a division bench of the High Court that did not, and for good reason, agree to adopt an absurd interpretation of law.   

Money Displaces Skill-Chance Distinction: Examining Taxation and Regulatory Approaches to Online Gaming

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The Central Goods and Services Tax Act, 2017 (‘CGST Act, 2017’) and The Promotion and Regulation of Online Gaming Act, 2025 (‘OGA, 2025’) use money as the criteria to differentiate between various kinds of online gaming. In both legislations online gaming is the omnibus category while online money gaming is its sub-category characterized by players depositing monetary stakes. Section 2(80A), CGST Act, 2017 states that online gaming means a game offered on the internet or an electronic network and includes online money gaming. Section 2(80B), in turn, defines online money gaming as online gaming in which players deposit money in the expectation of winning a monetary prize whether the outcome is based on skill, chance or both. The OGA, 2025 also adopts similar definitions for online gaming and online money gaming in Section 2(f) and 2(g) respectively. And prohibits any person from offering online money games. While other forms of online gaming – where monetary stakes aren’t involved – are permissible.  

Both the CGST Act, 2017 and the OGA, 2025 are a marked departure from most previous legislative interventions on gambling in one significant aspect: they render the distinction between games of skill (‘gaming’) and games of chance (‘gambling’) as irrelevant qua online games. Instead, they use money as the differentiating factor between online gaming and online gambling. The OGA, 2025 gives central place to ‘nature of the electronic medium’ and is premised on online games being a sui generis category incomparable to physical or in-person games. Preamble of the OGA, 2025 mentions propensity for addiction to online money games, their manipulative design, and addictive algorithms as reasons for prohibiting them. The CGST Act, 2017 also dispenses with the skill-chance distinction. The Revenue’s view as evidenced by its arguments in Gameskraft Technologies Private Limited v DGGSTI (‘Gamekraft case’), is that use of monetary stakes by players in an online game per se amounts to gambling. And online gaming providers’ insistence on monetary deposit by players as a pre-condition for playing instead of assessing players’ skills implies that online money gaming is gambling. 

This article examines the Parliament’s use of money instead of the skill-chance criteria for online games from two perspectives: taxation and regulatory. And concludes that apart from subjecting online money gaming to an onerous tax there is little merit in equating it to gambling under the CGST Act, 2017. While the OGA, 2025 treats all online money games alike to effectuate an immediate and blanket prohibition. But the prohibition raises novel constitutional questions. For example, as per the doctrine of res extra commercium gambling is not protected under Article 19(1)(g) of the Constitution. Though gaming enjoys the said protection. But scope of the doctrine of res extra commercium was determined in the context where skill-chance criteria was used to distinguish gaming from gambling. Now, if money is used to differentiate online gaming from online gambling, does it, by default, expand the doctrine of res extra commercium? There is no clear answer. The article concludes that despite the Union of India’s claims to the contrary, both the above legislative interventions, independently and cumulatively, are aimed at throttling the online gaming sector. Going forward, reconciling skill-chance criteria with the yardstick of money in online games may be more appropriate instead of viewing both as binary options. But adopting such an approach will require reorienting the legislative aims towards regulating the online gaming sector and not paralyzing it.    

Skill-Chance Distinction in GST Gives Way to an Onerous Tax 

Before 2023, the CGST Act, 2017 recognized that gaming was distinct from gambling. And the distinction was visible in definition and applicable tax rates. Section 2(52) of the CGST Act, 2017 read with Entry 6 in Schedule II of the CGST Act, 2017 included actionable claims in the definition of goods. And, subjected only three actionable claims – lottery, betting and gambling – to GST. Online gaming was included in Section 2(17)(vii), The Integrated Goods and Services Tax Act, 2017 (‘IGST Act, 2017’) under the broader category of ‘online information and database access or retrieval services’ (‘OIDAR’). The GST rates for gambling and gaming were – before 2023 – 28% and 18% respectively. And while online gambling as an explicit category did not exist one could argue that it was subsumed under gambling.

The terms lottery, gambling and gaming have specific meanings under gambling law jurisprudence. And their use in the CGST Act, 2017 implied that the Parliament wished to import the same meaning in GST. However, in Gameskraft case, the Revenue insisted that online money gaming – even it involved skill – is gambling and departed from previously understood meaning of gambling. The Revenue’s view was not founded on online games being distinct from physical games but on its overemphasis on the use of money in online money gaming and its reinterpretation of the jurisprudence on skill-chance distinction.

In Gameskraft case, the Revenue claimed that online money gaming is gambling because an online gaming provider mandates deposit of monetary stakes by players who then play with the expectation of winning a bigger prize money. The Revenue’s view can be understood through the example of rummy. In the context of in-person rummy, the Supreme Court in State of Andhra Pradesh v K Satyanarayana & Ors (‘Satyanarayana case’) held that rummy is a game of skill since building rummy requires memorizing of cards and how to hold or discard cards. But the Revenue resisted applying the above reasoning to online rummy. The Revenue cited online gaming providers necessitating deposit of monetary stakes by players before permitting them to play online rummy. Compulsory stakes made online rummy distinct from physical rummy. The latter, the Revenue claimed, can be played with or without such stakes. In Satyanarayana case, the Supreme Court held that gaming for a monetary prize does not transform it to gambling. A view that aligns with the pre-dominant test laid down in State of Bombay v R.M.D. Chamarbaugwala (RMDC-I case). In RMDC-I case, the Supreme Court held if chance overpowers the skill of players and to a substantial degree influences result of a game then the game is gambling. Else it is gaming. The test is to determine if skill chance dominates skill or otherwise. The Revenue further claimed that the deposit of monetary stakes by players amounted to placing a bet on an uncertain outcome since players did not know result of the game. In both gaming and gambling the outcome is uncertain when stakes are placed by players at the beginning of or during a game. But the only relevant inquiry is whether it is skill or chance that pre-dominantly influences outcome of the game. And not that players deposited or did not deposit a monetary stake.

The Revenue, in Gameskraft case, also argued that the gambling nature of online money gaming was evident from online gaming providers charging a higher platform fee if the players increased their monetary stakes. In this respect, the ratio of Satyanarayana case states that only if the club earns extraordinary profits that an argument of gambling can sustain. But an extra charge by a club for providing facilities or to recoup expenses is insufficient to make the claim that a club facilitates gambling. Thus, merely charging a platform fee does not making an online gaming provider a facilitator of gambling. And, if an online gaming provider charges proportionately higher platform fee if players deposit higher monetary stakes, it is arguably operating within the boundaries of Satyanarayana case. Admittedly, though, there is no clear criteria to separate ordinary profits from extraordinary profits. Anyhow, the Revenue collapsed all the above nuances and insisted that mere presence of money in a game and an online gaming provider charging a platform fee transforms online money gaming into gambling.       

Another implied reason for the Revenue’s stance was that online gaming providers were taking advantage of tax arbitrage and offering online gambling but disguising it as online gaming to pay a lower GST rate of 18% instead of 28%. A prudent approach to address this alleged tax avoidance would have been to use the skill-chance criteria to verify the nature of online games. For example, the Punjab & Haryana High Court in Shri Varun Gumber v UT of Chandigarh & Orsused the skill-chance distinction to hold that online fantasy games are gaming and not gambling. The Bombay High Court adopted a similar approach in Gurdeep Singh Sachar v Union of India to clarify the applicable GST tax rate for online fantasy games. Additionally, in Gameskraft case, the Karnataka High Court held that online rummy was gaming by relying on the skill-chance distinction. There is no fatal flaw in applying the skill-chance distinction to online games. But since the skill-chance distinction is rooted in physical or in-person games, tailoring it to online games may require making additional inquiries. Possibly a case-to-case assessment as to whether adaptation of a game to an online medium alters its skill-chance balance to change its nature from gaming to gambling. The bias of algorithms, certification of dice, possible use of bots or fake online accounts are some relevant factors to consider in determining the nature and integrity of online games. While an exclusive reliance on money as a criterion to categorize online games is a broadbrush approach towards online gaming that saves such additional, but prudent, inquiries.     

The Karnataka High Court in Gameskraft case rejected the Revenue’s stance. But the Revenue instead of reconsidering and moderating its tax demands catalyzed amendments to the CGST Act, 2017 and IGST Act, 2017 that reinforced its position on online gaming. The CGST (Amendment) Act, 2023 inserted the definitions of online gaming and online money gaming referred above. Simultaneously, Section 2(102A) of the CGST Act, 2017 read with Entry 6 in Schedule II of the CGST Act, 2017 included online money gaming within the scope of specified actionable claims and subjected it to GST.  

An equally pertinent change was the GST Council’s recommendation that for online money gaming the measure of tax be changed to turnover basis. Various states in the GST Council justified the use of turnover basis instead of Gross Gaming Revenue (‘GGR’) by arguing that it was difficult to compute the latter. To exemplify the quantum of change caused by changing measure of tax from GGR to turnover: suppose two players stake Rs 50 each to play online rummy and the online gaming provider deducts a platform fee of Rs 10 with the remaining Rs 90 being monetary prize to be transferred to the winning player. Use of GGR as measure of tax will imply that GST is calculated on Rs 10, the platform fee charged by the online gaming provider. While use of turnover basis will imply that GST is calculated on Rs 100. Assuming a rate of 28%, the GST burden on one such transaction increased from Rs 2.8 to Rs 28. A ten-fold increase in tax liability. 

The amendments in GST laws made in 2023 created an onerous tax liability for online gaming providers. And in doing so, GST departed from its nature as a value-added tax by choosing turnover as measure of tax instead of the value generated by an online gaming provider. To compare, in banking transactions or securities transactions, GST is computed only on service fee charged by banking intermediaries or stockbrokers. And not on face value of the transaction. Online gaming providers were singled out to bear a disproportionately heavy tax burden. The onerous nature of changes is further compounded by the Revenue’s insistence that the amendments to GST laws in 2023 will be implemented retrospectively. Finally, alongside the amendments to GST laws, the obligation of deducting 30% tax at source on net winnings in online games was introduced in 2023 under Section 194BA of the Income Tax Act, 1961. The amendments to GST laws and the Income Tax Act, 1961 interlock to reveal that online money gaming is subjected to an exceptionally onerous tax liability. The Revenue has cited various reasons to support the above changes: online gaming providers were indulging in tax evasion, tax arbitrage and lack of legal clarity on taxability. But all the above reasons disguise that GST laws were amended in 2023 to throttle the online gaming sector. 

Understanding Blanket Prohibition on use of Money in Online Gaming  

The OGA, 2025 bans online money gaming while permits other forms of online gaming. The distinction between the two games is like the CGST Act, 2017. The OGA, 2025 is the most prominent legislative intervention in regulating online gaming, though various states have previously tried to outlaw online gaming without much success. Constitutional concerns on the OGA, 2025 are manifold including the Union’s legislative competence since ‘betting and gambling’ is a subject in Entry 34 of List II of the Seventh Schedule. But a focus on the OGA, 2025 adopting money as the criteria to permit or prohibit online games and treating skill-chance criteria as irrelevant reveals its own set of challenges.  

In RMDC-I case, the Supreme Court invoked the doctrine of res extra commercium to hold that gambling does not enjoy the protection of Article 19(1)(g) of the Constitution. Only gaming can claim such a protection. This position of law has allowed the states to impose outright bans or onerous conditions on gambling without satisfying the requirement of reasonableness. While any restrictions on gaming can be tested on the touchstone of reasonableness under Article 19(2) of the Constitution. But when the OGA, 2025 unifies gaming and gambling under a single category of online money gaming, the applicability of res extra commercium raises novel questions. Can the Union persuasively argue that the doctrine of res extra commercium, by default, applies to online money gaming? The Supreme Court propounded the doctrine of res extra commercium in the context of physical games that were distinguished by adopting the skill-chance criteria. If the Parliament, under the OGA, 2025, adopts an alternate criteria like money to distinguish online gaming from online gambling the scope of doctrine and its applicability to online games should ideally be re-examined. One way for the Union to successfully claim that the scope of the doctrine of res extra commercium is different – and more expansive for online games – will be to establish that online medium is incomparable to physical games. An onerous and unprecedented task.  

The comparable point of reference for the OGA, 2025 is a handful of state legislations – such as those enacted by Karnataka and Tamil Nadu – wherein blanket bans on online games were sought to be imposed. And writ petitions challenging their constitutionality succeeded inter alia because states could not discharge the burden that gaming transforms into gambling merely because games are played online. Or that mere use of money is sufficient to convert gaming into gambling. For example, in Junglee Games Pvt Ltd v State of Tamil Nadu the Madras High Court refused to acknowledge that ‘medium based regulation’ is permissible. The Madras High Court conceded that online games are incomparable to physical games. But, at no point, did it abandon the skill-chance criteria to examine the online gaming-online gambling distinction. The State of Tamil Nadu was required to discharge two related burdens: first, gaming transformed into gambling merely because it was played online; second, that use of monetary stakes by players converted gaming into gambling. Latter required establishing that it is monetary stakes and not skills of players that influence outcomes of games. And former required examining each game along with the terms and conditions imposed by online gaming providers. Inability of the state to discharge these burdens resulted in the Madras High Court holding that a blanket ban on online games is unconstitutional. The Karnataka and Kerala High Courts have adopted similar approaches in striking down blanket bans on online gaming.    

The only judicial approval to online money games being subject to more onerous restrictions was in Play Games 24×7 Limited v State of Tamil Nadu. But this case was in the context of additional restrictions on online money games and not their outright prohibition. State of Tamil Nadu under the Tamil Nadu Prohibition of Online Gaming and Regulation of Online Games Act, 2022 promulgated the Tamil Nadu Online Gaming Authority (Real Money Games) Regulations, 2025 (‘RMG Regulations’). Regulation 4(viii) of the RMG Regulations mandated that ‘blank hours’ shall be implemented for real money games from 12 midnight to 5 am. Petitioners challenged the validity of Regulation 4(viii) on various grounds including selective targeting of online money games. Petitioners claimed discrimination by arguing that online movie platforms such as Netflix were not subjected to similar blank hours. The Madras High Court mentioned few characteristics of online money games that in its view made them incomparable to other online platforms. 

The Madras High Court noted that entertainment platforms such as Netflix require a monthly fee as opposed to repeated requirement of deposit of monetary stakes in online money games. And neither can online money games be compared to free online games. Also, there is novelty in online poker and online rummy which until recently were played exclusively in person and where ‘reading the opponent’ was an essential part of the game. Whereas in an online poker or online rummy a person may not know their opponent lending online money gaming a distinct characteristic. Referring to the above distinct characteristics of online money games the High Court approved blank hours that were mandated only for online money games. 

The relatively narrow prohibition in terms of time and the High Court’s willingness to examine online money games with some level of detail provides a good starting point for framing reasonable restrictions instead of blanket bans on such games. But such an approach is worth pursuing only if the legislative aim is to regulate, while the OGA, 2025 demonstrates that the Parliament has preferred to prohibit online money games en masse instead of adopting a nuanced regulatory framework. 

Conclusion   

Change of applicable GST rates on online money gaming only partially captures the change effectuated in 2023. The change in measure of tax for online money gaming wherein tax is calculated on turnover basis instead of GGR reveals the true effect of tax increase. It converts GST into an onerous tax for online money gaming and subjects it to a tax burden but spares banking or securities transaction intermediaries. The OGA, 2025 is unambiguous that online money games are prohibited. The validity of such a prohibition will be decided in due course, but for now online money gaming is illegal. Even if the constitutional challenge to the OGA, 2025 succeeds then the tight GST noose will ensure that their survival is difficult if not impossible. Both the regulatory and taxation policies have converged to scuttle online money gaming. Only if the taxation and regulatory policy towards online money gaming shifts, or receives a judicial pushback, can a more prudent approach of synchronizing the skill-chance distinction with the monetary element lead us towards a more permissive taxation and regulatory framework. Currently, the taxation and regulatory approaches operate in tandem and aim the opposite: scuttling online money gaming.    

Health and National Security Cess: Some Context

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The Lok Sabha on 5th December 2025, passed the Health Security se National Security Cess Bill, 2025. The Health se National Security Cess (‘Health and National Security Cess’) is an unusual marriage of public health and national security. And an example that when the State is determined for revenue, even tax law is not alien to creativity. 

In the first part of this article, I examine the Union of India’s previous conceptualization – but inability to operationalize – a standalone National Defence Fund. Instead, six years after mooting the idea of a National Defence Fund, the Union seems to have adopted the relatively easy way of levying another cess for funding national security related expenses. In the second part of this article, I address the public health component. I state that income taxpayers currently pay a Health and Education Cess. The introduction of Health and National Security Cess means we have two ‘partial cesses’ for public health. Public health is crucial – and underfunded – to necessitate additional money via two cesses, but not crucial enough to deserve its own dedicated cess. Ironically, we still won’t know how much money from both cesses is will be specifically spent on public health. 

I conclude that while both national security and public health are crucial, the need for a cess apart from the general budgetary allocation requires a stronger – and better articulated – jusitifcation. Merely saying that the State needs additional revenue is not sufficient. Union and even States increasingly prefer cesses because they offer an easy route to raise additional money without adequate accountability. Successive Finance Commissions have recommended reduction in cesses on grounds of their misuse and lack of transparency. But the Indian tax policy landscape stubbornly moves in the opposite direction. 

I. Introduction 

Preamble of the Health Security se National Security Cess Bill, 2025 (‘Bill’) states that resources need to be augmented for meeting expenses on national security and for public health. The Health and National Security Cess has been termed as a ‘special excise cess’. Clause 3 of the Bill imposes tax liability on any person who owns, possesses, or controls or undertakes a process by which specified goods are manufactured. And Schedule I of the Bill lists pan masala as the specified good. Though the Union of India is empowered to notify ‘any other goods’ as specified goods under the Bill. Clearly the Health and National Security Cess can be extended to other ‘demerit’ goods to further augment revenue collection. Why do we need this cess? Augmenting of revenues is a standard reason and can be used for any tax and doesn’t fully explain the imposition and levy of Health and National Security Cess. The proximate reasons for the Health and National Security Cess are two-fold: 

One, as the finance minister explained in the Rajya Sabha, until September 2025 the levy of GST Compensation Cess ensured that de-merit goods such as tobacco and pan masala were subjected to a high tax rate of approximately 88%. With the rationalization of GST rates, the highest tax rate is now 40%, and GST Compensation Cess has been phased out. The Health and National Security Cess aims to preserve the previous revenue stream from demerit goods such as pan masala without disturbing the new three-tier GST rate structure.   

Second – and this is specifically for national security – the Union has been unable to operationalise a standalone Defence Fund. The idea of a Defence Fund was mooted by the Union six years ago. The Union in July 2019, amended the Terms of Reference of the 15th Finance Commission (‘Commission’) to specifically require the Commission to examine a separate mechanism for funding defence and internal security. The Commission was required to examine if a standalone Defence Fund should be set up and how it should be operationalized. The Commission in its final report – submitted in October 2021 – recommended establishment of the Defence Fund and also provided detailed and specific targets for a five-year period. But the Union did not take any concrete steps. Eventually, in December 2025 the Union has instead adopted the familiar path of levying a cess, i.e., the Health and National Security Cess.   

II. Defence and Internal Security

a. A ‘Defence Fund’ Conceptualized    

The Terms of Reference (ToR) of the 15th Finance Commission required it to examine whether a separate mechanism for funding of defence and internal security ought to be setup and how to operationalize the fund. The above clause was added in ToR via an amendment. And the request was also unprecedented since no previous Finance Commission had been tasked with a similar obligation. The immediate concern from States was that the Union may reduce funds available in the common divisible pool by earmarking a portion of States’ funds towards the ‘Defence Fund’. Various States made similar representations to the Commission arguing that they were not opposed to a Defence Fund if it does not shrink the common divisible pool. 

The Union – primarily through the Ministry of Defence and Ministry of Home Affairs – made a strong case for a Defence Fund before the Commission. Both Ministries made similar arguments, i.e., the budgetary allocations were insufficient to meet their capital expense needs for defence and internal security. And a Defence Fund will partially meet the shortfall.  

The Commission examined the issue in detail and recommended that the Union setup a dedicated, non-lapsable fund called Modernisation Fund for Defence and Internal Security (MFDIS). The Ministry of Defence was to retain exclusive rights over the MFDIS and Ministry of Home Affairs could only utilize a part amount for internal security. The Commission identified four specific sources for incremental funding and even provided annual targets to the Union of India. A screenshot from the Finance Commission’s report below shows it ambitious plan to earmark funds for defence and internal security. 

If the Commission’s recommendations were followed in totality, then in the past five years the fund would have accumulated more than two lakh crore rupees. While the amount may seem optimistic, we didn’t witness even an effort by the Union in meeting the Commission’s target. There was no public dissent from the Commission’s recommendations or a disagreement about its estimation or mention by the Union about the feasibility of a Defence Fund as understood by the Commission.

b. Defence Fund ‘Abandoned’, Cess Operational    

We have no publicly available information whether the concept of Defence Fund has been permanently abandoned. Or Defence Fund as envisaged by the Commission was not agreeable to the Union. We do have a curious situation where the entire idea of a standalone Defence Fund mooted by the Union seems to have been abandoned by it with no explanation. The Commission not only endorsed the idea of a Defence Fund but also provided a roadmap for operationalizing it. But the Union seems to have moved on. And instead, in December 2025, the Union has chosen to levy a Health and National Security Cess to meet defence needs. And the cess name indicates, it is a half measure towards defence needs. All funds raised through the Health and National Security Cess will not be exclusive to defence; a portion will be earmarked towards internal security needs and another portion towards public health. In what proportion will the funds of Health and National Security Cess be divided between defence, internal security, and public health is unknown. And probably will be for life.   

II. Public Health

Under Seventh Schedule of the Constitution, public health has been included in the State List. But income tax is the Union’s domain. The Constitution is silent if the Union can collect cess on a subject listed in the State List. The ‘constitutional silence’ on legislative competence on cess has allowed the Union to collect Health and Education Cess over and above the income tax. And the same leeway will probably extend to the Health and National Security Cess.   

a. Health and Education Cess 

Under the Income Tax Act, 1961 a ‘Health and Education Cess’ is levied and collected on 4% of income tax payable by an assessee. It is a compulsory levy on all income taxpayers. Again, how much of the money collected under this cess is allocated to health and education respectively remains unknown. From 2004 to 2018, income taxpayers paid an Education Cess which was levied at 2% and was later increased to 3% of income tax. In 2018, Education Cess was renamed to Health and Education and the rate was increased to 4% of total income tax. The Finance Minister estimated an additional Rs 11,000 crores annually because of the increase in cess rate. But the Finance Minister didn’t specify if the additional amount would be allocated to public health or education or generally the proportion in which the amount will be split between the two. Are we to presume that the additional 1% of the money collected under the Health and Education Cess is allocated to public health? Or is the money now equally divided between public health and education? We don’t have any clarity.    

b. Another Health Cess 

Despite there being a Health and Education Cess, the Union has chosen to levy the Health and National Securiy Cess. A relevant question is: if there is an already existing health cess, why levy another one? Is the money collected under the pre-existing Health and Education Cess insufficient for public health expenses? If yes, why not levy a dedicated public health cess? And what is the justification of coupling public health with national security? National security encompasses both defence and internal security. It won’t be unreasonable to presume that national security will claim lion’s share of the funds collected under the Health and National Security Cess. And since public health is not the Union’s domain, it is difficult to hold it accountable for utilization of funds for public health. At the same time, it is evident that the Union considers public health important to warrant two ‘partial cesses’. But not enough for public health to deserve a dedicated cess. Two half measures don’t make a full one. 

Conclusion 

The 15th Finance Commission in its report noted that the Ministry of Defence receives the maximum budget allocation amongst all the Union’s ministries. And yet, the Ministry of Defence argued before the Commission that a separate non-lapsable Defence Fund was necessary to meet increasing need for capital expenses. The Ministry of Home Affairs had also advocated for the Defence Fund since its budgetary allocations were termed as insufficient. And yet for four years – since the Commission provided a roadmap – we haven’t seen any concrete action to make the Defence Fund a reality. Instead, after six years of mooting the idea of Defence Fund and even receiving endorsement from the Commission the Union has decided to levy a cess to partially fund national security expenses. Levying a cess is convenient for the Union as it has to provide no estimate of fund collection, transparency is limited, and there is no clear roadmap of expenses and their allocation. And reliance on yet another cess reveals that national security rhetoric is easier but substantive measures on national security – even on the revenue side – require long, consistent groundwork.     

Finally, a general word on cesses. Cesses are a trick on the Constitution. The legal limits on powers to levy cess – of both the Union and States – are hazy. Supreme Court in a few instances has clarified the power to levy cesses in specific contexts, but broader issues remain unresolved and, in some instances, even unknown. It is the legal uncertainty on cesses that allows States to collect a ‘cow cess’ from purchasers of alcohol. It is the same legal uncertainty that allows the Union to levy cess on public health, a State subject. And the same uncertainty allows the Union to levy multiple cesses without appropriate accountability. Despite repeated recommendations from successive Finance Commissions, Comptroller and Auditor General of India, and even some States to reduce the no. of cesses the tax policy landscape in India stubbornly moves in the opposite direction.    

In Applause of a Repeal: Place of Supply for Intermediary Services

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The Goods and Services Tax Council (‘GST Council’) in its 56th meeting took multiple decisions and made a series of recommendations. The headline, of course, was dominated by the change in tax rates of various goods. An equal, or to my mind, a more substantive reform was the recommendation for omission of Section 13(8)(b) of the Integrated Goods and Services Tax Act of 2017 (‘IGST Act of 2017’).  

Section 13 of the IGST Act of 2017 prescribes place of supply rules where location of supplier or location of recipient is outside India. Section 13(2) lays down the general rule and states that the place of supply for the above-mentioned services shall be location of recipient of services. Section 13(8)(b) incorporates a deeming fiction – at variance with the general rule – and states that the place of supply for intermediary services shall be the location of supplier of services. Section 13(8)(b) proved be an interpretive challenge producing a split judgment by the Bombay High Court and subsequently an opinion by a third judge to resolve the interpretive disagreement. And yet, no clear resolution seemed to be in sight. I’ve previously commented both judicial opinions here and here.  

In this article, I briefly explain the provision, the interpretive challenge it presented, and the resulting position of law that proved to be unimplementable. I argue that  interpretive approach adopted by the third judge – of the Bombay High Court –  in upholding constitutional validity of Section 13(8)(b) of the IGST Act of 2017 was not incorrect. But, it resulted in a legal position that resembled a riddle wrapped inside an enigma. I conclude that the impending omission of Section 13(8)(b) of the IGST Act of 2017 is a step in the right direction. It will provide much needed clarity for GST liabilities of intermediary services. And the omission aligns with a core feature of GST – a destination-based tax. Finally, the omission reduces an unnecessary complexity in IGST Act of 2017. While one of the Revenue Department’s arguments was that Section 13(8)(b) was introduced for purpose of collecting additional revenue; removing it introduces more simplicity which may prove to be a more meaningful reform of GST in the long run. 

‘Exceptional’ Nature of Section 13(8), IGST Act of 2017  

Section 13(2) of the IGST Act of 2017 lays down the default rule to determine place of supply for services where location of either supplier or recipient is outside India. The location of recipient of services is the default place of supply as per Section 13(2). Section 13(8) contains exceptions to the above rule. Section 13(8)(b) states that for intermediaries, the place of supply shall be the location of supplier of services. Thus, if an intermediary with a registered office in Bombay supplies intermediary services to a recipient located outside India, the place of supply shall be Bombay. But wouldn’t a supply of intermediary services to a recipient outside India amount to export of services and thus outside the net of GST? Ideally, yes. But the deeming fiction under Section 13(8)(b) was introduced precisely to levy tax on export of intermediary services by deeming it to be a domestic service. This was just the first level of complication. 

Section 8(2) of the IGST Act of 2017 states that:

.. supply of services where the location of the supplier and the place of supply of services are in the same State or same Union territory shall be treated as intra-State supply:

In the above example, the location of supplier and place of supply is Bombay, State of Maharashtra. And as per the mandate of Section 8(2) of the IGST Act of 2017, the supply shall be treated as an intra-State supply. What is the implication of the latter?  

Under GST laws, an intra-State supply is subjected to Central Goods and Services Tax (‘CGST’) + State Goods and Services Tax (‘SGST’). The latter is collected by the State if the place of supply is its jurisdiction. In the above example, the SGST component would be levied and collected by the State of Maharashtra under its State-level GST law. Now, we enter the next level of complication. 

Article 286(1)(b) of the Constitution states that no law of a State shall impose, or authorize the imposition of, a tax on the supply of goods or of services or both, where such supply takes place in the course of the export of the goods or services or both out of the territory of India. 

The embargo placed by Article 286(1)(b) in this context meant that States cannot levy SGST on intermediary services. Why? Because the intermediary services provided by a supplier from India to a recipient outside India are export of services. Section 13(8)(b) via deeming fiction, shifted the place of supply of export of services and deemed it to be a domestic transaction. But a statute cannot incorporate a deeming fiction that empowers State to levy tax beyond the constitutional boundary marked by Article 286(1)(b) of the Constitution. 

The deeming fiction contained in Section 13(8)(b) of the IGST Act of 2017 was the subject of a constitutional challenge. And the resulting judicial opinions did not make the legal position any better.  

A Split Judgment of the Bombay High Court 

In Dharmendra M. Jani v Union of India, the Bombay High Court delivered a split judgment. Justice Ujjal Bhuyan held that Section 13(8)(b) of the IGST Act of 2017 violated Article 286(1)(b) of the Constitution and was unconstitutional. He noted the extra-territorial effect being attempted via Section 13(8)(b) of the IGST Act of 2017 ran counter to a fundamental principle of GST, i.e., it is a destination-based consumption tax. Justice Abhay Ahuja though disagreed and – by applying a convoluted logic – held that Section 8(2) of the IGST Act of 2017 is inapplicable to the transaction of an intermediary providing services to a recipient located abroad. He also stated that the Parliament has the power to determine place of supply for inter-State supplies under Article 246A read with Article 269A of the Constitution. And thus, upheld that vires of Section 13(8)(b) of the IGST Act of 2017 by conveniently ignoring Article 286 of the Constitution.  

The obvious result of this interpretive disagreement was a stalemate. 

Opinion of Justice G.S. Kulkarni: An ‘Unimplementable’ Legal Position  

In view of the split judgment of the Division Bench, the proceedings of case were referred to Justice G.S. Kulkarni. And he issued a peculiar opinion in Dharmendra M. Jani v Union of India. Though to be fair to him, the peculiarity emerged largely from the deeming fiction contained in Section 13(8)(b) of the IGST Act of 2017. He was tasked with unravelling a knot that could have no simple or elegant result. 

Justice Kulkarni accepted that an intermediary service provided by a taxpayer located in India to a recipient located in a foreign jurisdiction amounted to export of services as defined under Section 2(6) of the IGST Act of 2017. And that by virtue of Section 8(2) of the IGST Act of 2017 an export service was deemed to be an intra-State supply of service. But since an intra-State supply is subjected to tax under the CGST Act of 2017 and relevant State GST Act of 2017; Justice Kulkarni added that reading Section 13(8)(b) of the with Section 8(2) amounted to reading a provision of the IGST Act of 2017 into other GST statutes. He observed: 

… that the fiction which is created by Section 13(8)(b) would be required to be confined only to the provisions of IGST Act, as there is no scope for the fiction travelling beyond the provisions of IGST Act to the CGST and the MGST Acts, as neither the Constitution would permit taxing of an export of service under the said enactments nor these legislations would accept taxing such transaction.  

Justice Kulkarni was clear in one crucial respect: the domain of IGST Act of 2017 was separate – inter-State supplies. CGST Act of 2017 and State-level GST laws also operated in their own respective domains – intra-State supplies. In the absence of a specific incorporation of provision of one statute in another – ideally introduced by the legislature expressly – the provisions of the IGST Act of 2017 cannot by a process of interpretation be applied to other GST statutes.

Based on his above reasoning and understanding of the legislative landscape in GST, Justice Kulkarni concluded that operation of Section 13(8)(b) of the IGST Act of 2017 was to be confined only to the IGST Act of 2017. But he refused to term the provision as unconstitutional. Justice Kulkarni, by upholding the vires of Section 13(8)(b) of the IGST Act of 2017, resolved the stalemate caused by the split judgment. However, it presented the challenge of implementing his opinion. How to confine Section 13(8)(b) of the IGST Act of 2017 only to the IGST Act of 2017?  

If the fiction of Section 13(8)(b) was to be confined only to the IGST Act of 2017, it would mean intermediary services exported to other countries could only be subjected to IGST. But IGST is levied only on inter-State supplies. Or imports which are deemed to be inter-State supplies. So, would Justice Kulkarni’s opinion mean that the Union would now levy IGST on export of intermediary services? Such a levy would be diametrically opposite to the underlying policy of levying IGST only on inter-State supplies or imports. Also, wouldn’t levying IGST defeat the fiction contained in Section 8(2) of the IGST Act of 2017? As per Section 8(2) if place of supply and location of supplier are in the same State, the supply is an intra-State supply. But States cannot levy SGST on such supplies by virtue of the opinion of Justice Kulkarni. So, would the net result be that an export of service that is treated as an intra-State supply will be subjected to IGST? If yes, it would not only challenge but practically defeat all fundamental principles that inform the design of GST. One way out of this puzzle would have been to amend the relevant provisions of CGST Act of 2017, and relevant State-level GST laws and specifically incorporate Section 8(2) and Section 13(8)(b) of the IGST Act of 2017 in such legislations. It would address the issue highlighted by Justice Kulkarni but would perhaps risk make the provision even more complex. It is unknown if the option to amend the provisions was seriously considered by the GST Council. 

Irrespective, Justice Kulkarni while did not hold Section 13(8)(b) of the IGST Act of 2017 to be unconstitutional; his peculiar – and internally consistent logic – resulted in making the provision unimplementable. At the very least an appropriate amendment to the relevant provisions was needed to levy tax under the deeming fiction contained in Section 13(8)(b). 

GST Council Recommends Repeal of Section 13(8)(b) of the IGST Act of 2017 

In the face of such a challenge, the GST Council perhaps thought that a repeal of the provision is the best option. But what we don’t know – at least for now – is the precise reason why repeal of Section 13(8)(b) of the IGST Act of 2017 was recommended by the GST Council. Was it truly because the provision has become ‘implementable’? Or is it because an alternate and ‘implementable’ provision to levy tax on cross-border intermediary services is in the works? If one vital reason for incorporation of Section 13(8)(b) of the IGST Act of 2017 was to collect additional tax, is that reason abandoned for good? I guess we will have to wait until at least the minutes of the 56th meeting of the GST Council are made public.          

Section13(8)(b) of the IGST Act of 2017: Repeal Recommended in December 2017 

We currently do not know the reasons why the GST Council recommended repeal of Section 13(8)(b) of the IGST Act of 2017. However, we do know that a suggestion for repeal was made previously but was not adhered to by the Union and States. In December 2017, a report of the Department Related Parliamentary Standing Committee on Commerce was laid before the Rajya Sabha. The 139th Report titled ‘Impact of Goods and Services Tax (GST) on Exports’ made various recommendations for changes to GST from the perspective of promoting exports. One of the recommendations in the Report specifically stated: 

The Government may also cause amendment to section 13(8) of the IGST Act to exclude ‘intermediary’ services and make it subject to the default section 13(2) so that the benefit of export of services would be available. (para 15.3)

The Committee reasoned that since GST was a destination-based tax, the place of supply should as per the default rule under Section 13(2), i.e., location of the recipient of services. And the amendment to Section 13(8) of the IGST Act of 2017 would ensure that the intermediary services provided from India to foreign recipients are treated as exports and receive an exemption from the levy of IGST. 

The recommendation of the Committee was based on sound logic. Section 13(8)(b) militated not only against the destination-based character of GST; it also stretched the concept of a deeming fiction too far. By treating an export of intermediary service as an intra-State supply of service, the attempt to gain more revenue created a set of complications that the Revenue Department did not anticipate. Or maybe the Revenue Department was blinded by the thirst for additional revenue.       

A Welcome Repeal 

Overall, the GST Council’s recommendation for repeal of Section 13(8)(b) is welcome – to some extent – preserves the integrity of GST as a destination-based tax. At the same time, the repeal will reduce an unnecessary complexity from the GST laws, making compliance with and comprehension of place of supply rules easier. As for potential loss of revenue. I think reduced complexity in tax laws only tends to promote business activities. If not directly and immediately, at least in an incidental manner. And reduced complexity in tax laws is always beneficial for revenue collections in the long run. Export of intermediary services, on principle, should not be within the remit of GST since it is a destination-based tax. A deviation from the basic character of GST should be based on sound justification and sounder reasons. Collection of more revenue was a less-than-ideal reason to incorporate and continue with Section 13(8)(b) of the IGST Act of 2017. A more compelling reason seems to have prevailed even if we yet don’t know the precise reason that motivated the GST Council’s recommendation.           

Time Restraint on Power of Provisional Attachment under GST 

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Introduction 

The Supreme Court in Kesari Nandan Mobile v Office of Assistant Commissioner of State Tax (‘Kesari Nandan Mobile’) held that an order of provisional attachment under Section 83 of the Central Goods and Services Act, 2017 (‘CGST Act of 2017’) cannot extend beyond one year. A plain reading of Section 83(2) of the CGST Act of 2017 reveals that every provisional attachment shall cease to have effect after expiry of one year. However, Section 83(2) doesn’t expressly prohibit renewal of an attachment order after expiry of one year.  

In Kesari Nandan Mobile, the Revenue Department after expiry of one year issued a new attachment order terming it as ‘renewal’ of the previous attachment order. The Gujarat High Court dismissed the assessee’s challenge to ‘renewal’ of the attachment order. The Gujarat High Court provided two major reasons: 

first, prima facie the assessee was engaged in supply of bogus invoices and claiming Input Tax Credit (‘ITC’) based on those invoices. In view of the assessee’s conduct, the Gujarat High Court held that the order of provisional attachment cannot be said to cause any harassment to the assessee;  

second, the Gujarat High Court added that under Section 83(2) of the CGST Act of 2017, there was no embargo to issue a new provisional attachment order after lapse of the previous attachment order. And that a provisional attachment order passed after one year was intended to safeguard the revenue’s interest and was not in breach of Section 83(2) of the CGST Act of 2017.                   

The Supreme Court set aside the Gujarat High Court’s decision by interpreting Section 83(2) in favor of the assessee. The Supreme Court referred to comparable legislations – Income Tax Act, 1961 (‘IT Act, 1961’) as well as Customs Act, 1962 and The Central Excise Act, 1944 – and noted that the authorities can renew an order of provisional attachment only when a statute expressly provides for it. But, if the statute does not expressly confer a power for extension of provisional attachment, the executive ‘cannot overreach the statute’. 

In this article, I argue that the Supreme Court in Kesari Nandan Mobile has added a welcome restraint on the Revenue Department’s power of provisional attachment by correctly interpreting Section 83(2) of the CGST Act of 2017. I further suggest that the Supreme Court in the impugned case reinforced the legal framework on provisional attachment elaborated in in M/S Radha Krishan Industries v The State of Himachal Pradesh(‘Radha Krishan Industries’). The Supreme Court in Radha Krishan Industries was categorical that the power of provisional attachment was ‘draconian in nature’ with serious consequences. And the rights of assessees against such a power were valuable safeguards that needed protection. The Supreme Court in Kesari Nandan Mobile builds on the foundation laid in Radha Krishan Industries and expressly states that provisional attachment is only a pre-emptive measure and not a recovery mechanism. 

Radha Krishan Industries on Provisional Attachment 

The Supreme Court in Radha Krishan Industries noted that the legislature was aware of the draconian nature of provisional attachment and serious consequences that emanate from it. And use of power of provisional attachment is predicated on specific statutory language used in Section 83 of the CGST Act of 2017. Interpreting Section 83(1) of the CGST Act of 2017, the Supreme Court emphasized that the Commissioner must only issue an order of provisional attachment if it is necessary to do so and not because it was practical or convenient. Necessity of protecting the interest of the revenue is the fountainhead reason that triggers the power of provisional attachment. 

Supreme Court in Radha Krishan Industries also interpreted Section 83(1) of the CGST Act of 2017 alongside Rule 159 of the CGST Rules of 2017. The latter provided detailed procedure and rights of assessee’s vis-à-vis provisional attachment. The Supreme Court specifically interpreted Rule 159(5) of the CGST Rules and held that it provided two procedural entitlements to the person whose property was attached: first, the right to file an objection on the ground that the property was not or is not liable to be attached; second, an opportunity of being heard. The Supreme Court underlined the importance of these rights and dismissed the Revenue Department’s stance that the right to file objections was not accompanied by a right to be heard.  

Finally, in Radha Krishan Industries, the Supreme Court took umbrage that a previous attachment order against the assessee was withdrawn by the Revenue Department after considering representations of the assessee; but a subsequent order of provisional attachment was passed on the same grounds. The Supreme Court observed that unless there was a change in circumstances it was not open to the Revenue Department to pass another order of provisional attachment. While this observation of the Supreme Court was not in the context of outer time limit, it laid down the law that even if a new provisional attachment order is issued within one year, the onus is on the Revenue Department to prove that there was a change in circumstances that necessitated a new order.  

It is in the backdrop of the Supreme Court’s above observations in Radha Krishan Industries on provisional attachment that we need to understand the issue of time restraint addressed in Kesari Nandan Mobile. 

Supreme Court Adds Time Restraint

In Kesari Nandan Mobile, the Supreme Court was faced with the issue of whether an order of provisional attachment can be issued after expiry of one year of issuance of the previous attachment order. The Supreme Court noted that issuance of an order of provisional attachment after one year cannot be justified on the ground that it is not prohibited under a legislative or executive instrument. The Supreme Court added three more reasons to support its conclusion that provisional attachment cannot take place after expiry of one year: 

First, the ‘complete absence of any executive instruction’ that is consistent with the legislative policy of allowing renewal of orders of provisional attachment after expiry of one year. 

Second, the Supreme Court reasoned that Section 83(2) of the CGST Act of 2017 must be interpreted in a manner that does not reduce it to a dead letter. As per the Supreme Court, conceding to the Revenue Department’s argument of allowing renewal of provisional attachment after expiry of one year would make Section 83(2) otiose. The Supreme Court – impliedly invoked Radha Krishan Industries – and held that Section 83(1) conferred a draconian power and Section 83(2) should not be interpreted to ‘confer any additional power over and above the draconian power’ upon the lapse of one year envisaged under Section 83(2).     

Third, the Supreme Court further observed that issuance of a fresh provisional attachment order on substantially the same grounds as previous one would be in disregard to the safeguard provided under Section 83(2) of the CGST Act of 2017. In Radha Krishan Industries the Supreme Court had disallowed issuance of a fresh provisional attachment order on similar grounds as the previous order. But the Supreme Court’s primary objection was that the new provisional attachment order was issued despite there being no change in facts. However, in Kesari Nandan Mobile, the Supreme Court expressed concern that issuance of new order after expiry of one year may lead to continuous issuance of provisional attachment under the garb of renewal and would be contrary to a plain reading of Section 83(2). 

The Supreme Court’s observations in Kesari Nandan Mobile are an important win for taxpayer protection, a plain reading of tax statutes, and a welcome restraint on the Revenue Department’s power. The Gujarat High Court’s decision was influenced by dishonest conduct of the taxpayer. Ideally, the taxpayer’s conduct should not intervene in plain and strict reading of the tax statutes unless the context warrants otherwise. In the impugned scenario, there was little reason for the Gujarat High Court to interpret Section 83(2) in a way that provided additional powers to the Revenue Department. Especially when the powers in question are intrusive and can cause permanent damage to the assessee’s business.  

Incongruity Between Section 83(2) and Rule 159(2)

The Supreme Court in Kesari Nandan Mobile also took note of the incongruity between Section 83(2) of the CGST Act of 2017 and Rule 159(2) of CGST Rules of 2017. The former provides that every order of provisional attachment shall cease to have effect after expiry of one year. Rule 159(2) in turn provides that an order provisional attachment shall cease to have effect only when the Commissioner issues written instructions. Thus, even after expiry of one year the provisional attachment continues unless written instructions are issued by the Commissioner. The Supreme Court noted that the incongruity had been brought to the notice of the GST Council and an amendment to Rule 159(2) was proposed. The amendment to Rule 159(2) will provide that a provisional attachment shall cease to have effect after one year or from the date of order of the Commissioner, whichever is earlier. 

But even though the proposed amendment – though approved by the GST Council – has not been effectuated, the Supreme Court held that it is important that Section 83(2) is complied with strictly. Implying that an order of provisional attachment should not extend beyond one year.     

Conclusion 

The power of provisional attachment is certainly intrusive, but at the same time necessary. The necessity stems from preventing an eventual frustration of the tax demand because the assessee has disposed of their properties. At the same time, as courts have reminded the Revenue Department: the power of provisional attachment is not a recovery measure. It is temporary until the investigation is over. And failure to complete the investigation or recover tax cannot be used as a cover to extend the duration of provisional attachment beyond the statutory mandate. And each time, the Revenue Department must be mindful of the consequences that provisional attachment entails and its disruption to assessee’s business and profession. 

Parallel Proceedings under GST: Supreme Court Misses an Opportunity

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Introduction 

Recently, the Supreme Court in M/S Armour Security (India) Ltd v Commissioner, CGST, Delhi East Commissionerate & Anr (Armour Security case) clarified scope of the terms ‘proceedings’ and ‘same subject matter’ used in Section 6(2)(b) of the Central Goods and Services Act, 2017 (CGST Act of 2017). The need to clarify the import of both phrases was necessary to ensure that taxpayers are not subjected to parallel proceedings by the Union and State GST officers on the same subject matter. 

The judgment largely succeeds in earmarking the scope of both phrases but feels like a missed opportunity. 

In this article, I suggest that Armour Security case offered the Supreme Court a chance to elucidate on the inter-relatedness of various proceedings under CGST Act of 2017. Instead, the Supreme Court focused narrowly only on Section 6(2)(b) and eschewed a broader examination of inter-dependency of various provisions of the CGST Act of 2017. I also argue that the Supreme Court’s guidelines are not a substantive contribution to the challenge of preventing parallel proceedings. GST is the first time that both the Union and States have jurisdiction over the same taxpayer base. Overlaps, frictions, and disputes in administrative actions of both entities are expected and addressing them will require time, deft adjudication, and interpretive balance. Broad guidelines for tax administration wherein courts urge respective tax authorities to ‘communicate with each other’ is a simplistic approach to a novel and complex issue.   

Scope and Aim of Section 6(2)(b), CGST Act of 2017 

Section 6 of the CGST Act of 2017 performs two crucial roles in GST administration: 

first, Section 6(1) ensures ‘cross empowerment’ wherein officers appointed under the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act are authorized to be the proper officers for the purposes of the CGST Act of 2017 as well. This ensures that appointment and orders of proper officers have effect under both the Union and State GST laws simultaneously.   

second, Section 6(2)(b) ensures a ‘single interface’ for the taxpayer by providing: 

where a proper officer under the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act has initiated any proceedings on a subject matter, no proceedings shall be initiated by the proper officer under this Act on the same subject matter. (emphasis added) 

Section 6(2)(b) serves a salutary purpose of ensuring that a taxpayer is not subjected to overlapping investigations by two different authorities and is accountable to only one authority, i.e., there is a ‘single interface’ for the taxpayer. But ensuring a single interface is not as straightforward. The Supreme Court in Armour Security case had to interpret the phrases ‘proceedings’ and ‘same subject matter’ to clarify the powers of officers and various actions that they are allowed or restrained from initiating against a taxpayer.      

Issuance of Summons is not Initiation of Proceedings 

In the impugned case, Armour Security had received a show cause notice (‘SCN’) under Section 73 of the CGST Act of 2017. The SCN raised a demand for tax, interest, and penalty for excess claim of ITC. Approximately three months later the premises of Armour Security were searched by another authority. Armour Security subsequently received summons under Section 70 of the CGST Act of 2017 requiring one of its directors to produce relevant documents. Armour Security challenged the latter on the grounds of lack of jurisdiction in view of Section 6(2)(b). 

The Supreme Court in Armour Security case clarified that issuance of summons to a taxpayer under Section 70 of the CGST Act of 2017 does not amount to initiation of proceedings. The Supreme Court endorsed the view of the Allahabad High Court in GK Trading v Union of India & Ors where it was held that Section 70 of the CGST Act of 2017 empowers a proper officer to issue a summon to obtain evidence or document in any inquiry. The High Court added that the use of the word ‘inquiry’ in Section 70 had a specific connotation and was not synonymous with use of the word “proceedings” used in Section 6(2)(b) of Uttar Pradesh GST Act (pari materia with Section 6(2)(b) of the CGST Act of 2017).  

The Supreme Court reasoned that summons do not culminate an investigation but are merely an information gathering device during an ‘inquiry’ to determine if proceedings should be initiated against the taxpayer. If and any information received consequent to summons can influence initiation of proceedings. Thus, the Supreme Court correctly held that issuance of summons does not amount to proceedings. In stating the above, the Supreme Court largely reiterated the reasoning and conclusion of the Allahabad High Court. But let’s suppose proceedings against a taxpayer are pending before the Union GST officers. During the pendency, State GST officers issue summons to the taxpayer. And the latter discover new information as part of their inquiry; information that justifies initiation of proceedings. Wouldn’t pending proceedings before the former constrain the latter from initiating proceedings against the latter? It would defeat the entire purpose of obtaining the information via summons. In such a situation, it seems the State GST officers can only transfer the information that they obtained to the Union GST officers who initiated the proceedings.   

‘Proceedings’ Galore under CGST Act of 2017 

In interpreting the scope of ‘proceedings’, the Supreme Court chose to focus only on Section 6(2)(b) of the CGST Act of 2017. The Supreme Court’s narrow lens on Section 6(2)(b) is a defensible judicial choice but has left a few issues unaddressed. I will take two examples from the CGST Act of 2017 to highlight the crucial nature of inter-relatedness of various proceedings. 

First, let me cite Section 83 of the CGST Act of 2017 which states: 

Where, after the initiation of any proceeding under Chapter XII, Chapter XIV or Chapter XV, the Commissioner is of the opinion that for the purpose of protecting the interest of the Government revenue it is necessary so to do, he may, by order in writing, attach provisionally, any property. Including bank account, belonging to the taxable person … (emphasis added)

Chapter XIV of the CGST Act of 2017 contains Section 70 which empowers a proper officer to summon any person. Chapter XII also contains Section 67 empowering a proper officer to conduct inspection, search and seizure. So, it is not unreasonable to deduce that as per Section 83(1) cited above, issuance of summons and conduct of inspection, search and seizure amounts to proceedings. Initiation of either of the two will satisfy the pre-condition of exercising the power of provisional attachment under Section 83(1). 

So, after Armour Security case, this is the position: issuance of summon under Section 70 of the CGST Act of 2017 does not amount to initiation of ‘proceedings’ under Section 6(2)(b); but as per Section 83(1), issuance of summons continues to be a ‘proceeding’. Not only is the taxpayer liable to respond to the summons, but the taxpayer becomes susceptible to provisional attachment immediately after issuance of summons. The current position of law is unlikely to be a respite for the taxpayer.  

Second, Section 66 of the CGST Act of 2017 empowers an officer not below an Assistant Commissioner to direct a special audit ‘at any stage of scrutiny, inquiry, investigation or any other proceedings before him’. Does issuance of a summon satisfy the pre-condition for a special audit under Section 66 too? Section 66 is under Chapter XIII of the CGST Act of 2017, so we can argue that proceedings under this provision does not have the same meaning as ascribed to it under Section 6(2)(b) or Section 83(1). And that the Armor Security case needs to be read narrowly. But there is no clear or definitive answer yet. 

The term ‘proceedings’ has been used in several places in different contexts throughout the CGST Act of 2017. One can argue that the context of the provision may alter the meaning of the term ‘proceeding’ and the Supreme Court’s observations in Armour Security case must be understood solely in the context of Section 6. It is a fair argument but does not set aside the possible interpretive disagreements that may arise. Not the least because of the inter-related nature of various proceedings under the CGST Act of 2017 – an issue that the Supreme Court chose to not address.      

Scope of ‘Same Subject Matter’ 

The bar against parallel proceedings under Section 6(2)(b) of the CGST Act of 2017 is only regarding ‘the same subject matter.’ The meaning of same subject matter thus acquiring a crucial role in preventing parallel proceedings. The Supreme Court in the impugned case was clear that proceedings are initiated only on issuance of SCN. And it is only in a SCN that various grounds and challenges alleged against an assessee are penned down for the first time. Based on its above observations about SCN, the Supreme Court concluded that: 

The expression “subject matter” contemplates proceedings directed towards determining the taxpayer’s liability or contravention, encompassing the alleged offence or non-compliance together with the relief or demand sought by the Revenue, as articulated in the show cause notice through its charges, grounds, and quantification of  demand. Accordingly, the bar on the “same subject matter” is attracted only where both proceedings seek to assess or recover an identical liability, or even where there is the slightest overlap in the tax liability or obligation. (para 86)

Thus, same subject matter is determined on the basis that an authority has already proceeded on an identical tax or offence and the demand or relief sought subsequently is identical. 

The Supreme Court’s delineation of what constitutes the same subject matter flows logically from its identification of issuance of SCN as the initiation of proceedings against an assessee. And it is the demand mentioned in a SCN that will be the reference point to determine if the latter set of proceedings are on the same subject matter.

There is little to dispute about the Supreme Court’s interpretation of scope and meaning of the ‘same subject matter’. But whether the above understanding will be applied appropriately – by GST officers and courts – to various fact situations will only be known in future.       

Supreme Court’s Guidelines    

The Supreme Court did not stop at interpreting the term proceedings and same subject matter. Though the interpretation would have sufficed given the issue involved in the impugned case. The Supreme Court went ahead and issued guidelines in its over eagerness to ensure that parallel proceedings against a taxpayer are avoided. The Supreme Court’s guidelines are perhaps the weakest part of Armour Security case. Mostly, because they were not needed. Additionally, the guidelines are a simplistic take on an issue that requires frequent administrative decisions and co-ordination. A task that the judiciary is not best suited to accomplish. The Supreme Court as part of its guidelines urges the tax authorities to decide inter se who should have jurisdiction over the proceedings against the taxpayer if it comes to their notice that a taxpayer is subjected to parallel proceedings. And enjoins an assessee to bring parallel proceedings to the notice of tax authorities by writing a complaint to have that effect. Equally, the Supreme Court clarified that both authorities have a right to pursue a matter until it is established that it concerns the same liability and demand. In other words, both authorities are allowed to pursue their actions until they can ascertain if they relate to the same subject matter.

Maybe – by way of abundant caution – the Supreme Court felt the need to communicate certain obvious issues to the Revenue Department. But, on balance, it seems that the guidelines are superfluous and could have been easily avoided. The Revenue Department – if it feels necessary – is better positioned to issue suitable guidelines on how to address the issue of parallel proceedings, prevent duplication of efforts, and ensure that the taxpayer is not subject to repeated and unnecessary queries on the same subject matter.  There are likely to be finer nuances of dual tax administration that the Revenue Department can appreciate as opposed to a judicial forum. And some of the issues may need time and experience to be ironed out adequately.     

Conclusion

The Armor Security case is a welcome addition to the jurisprudence on parallel proceedings. It clarifies some crucial elements regarding proceedings and subject matter. And, at the same time, provides additional guidance to the taxpayers and tax authorities on how to ensure better communication when caught in the crosshairs of multiple proceedings. While the guidelines seem superfluous, the Supreme Court’s narrow focus on Section 6(2)(b) may create a bigger uncertainty. The meaning of ‘proceedings’ used in other provisions of the CGST Act of 2017 can either be aligned with or be at variance with the Armor Security case. Either way, there is no clear answer for now.  

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