DISCLAIMER: The contents of this blog article reflect the personal views of the authors alone and do not constitute the views of any of the authors' affiliated organizations. The contents of the blog article cannot be treated as legal advice under any circumstances.
The main author of the article is a Senior Associate at Ratan Samal & Associates and an Arbitrator at the Asia Pacific Centre for Arbitration and Mediation & the Indian Institute of Arbitration and Mediation.
This article is co-authored by Abhivardhan, Managing Partner at Indic Pacific Legal Research, Founder, VLiGTA and Chairperson & Managing Trustee at the Indian Society of Artificial Intelligence and Law.
The unified indirect tax system of India, viz., the Goods and Services Tax (GST) has entered its sixth year. Despite its insurmountable potential, several disputes continue to increasingly exist. Even though a major portion of the disputes are against adjudication of the GST Department representing a dispute against the sovereign right, power and function of the Government to levy tax or to withhold refund or grant/ deny a tax incentive, an equally significant portion of GST disputes are also pertaining to contractual rights arising out of contracts entered into between parties where the subject matter relates substantially to the shifting of burden of GST, indemnification by the defaulting party to the aggrieved party for non- payment of GST to the Government, GST reimbursement arrangements, tax-sharing arrangements, deemed export disputes and the like.
This article argues that even though a significant portion of disputes under the GST law are non- arbitrable as it pertains to disputes with the Government representing the Sovereign power to tax; contractual disputes arising between companies and other forms of entities and legal persons where the subject matter of the dispute pertains to GST are arbitrable. A clear demarcation and identification of the distinction between the two can significantly aid companies, entities and legal persons in correctly contesting their case before the appropriate forum.
Identifying Non-Arbitrable Disputes under the Goods and Services Tax Law
The GST law is a combination of multiple statutes, operating simultaneously on the respective subject matters as assigned to it, by its ‘charging mechanism’. The substratum of the GST statutes is ‘supply’ wherein tax is levied on the supply of goods or services or both goods and services. Due to the fact that the spirit of cooperative federalism is imbibed within the GST statutes, the Central Goods and Services Tax (CGST) Act, 2017 and the State Goods and Services Tax (SGST) Act, 2017 levy GST on all intra- State supplies of goods or services or both proportionately and in case a transaction takes place within a Union Territory then the CGST Act, 2017 and the Union Territory Goods and Services Tax (UTGST) Act, 2017 apply proportionately. By proportionate application, it is meant that if the rate of GST for a particular supply is 18%, then 9% CGST and 9% SGST or UTGST as the case may be, will apply. As far as inter-State supplies, imports and exports (including refunds thereof read with provisions of the CGST Act, 2017) are concerned, the Integrated Goods and Services Tax (IGST) Act, 2017 applies and there is no proportionate levy of tax since only one statute applies in such forms of supplies.
Coming to the non-arbitrable aspects, the Supreme Court of India in Vidya Drolia & Ors. v. Durga Trading Corporation & Ors., (2021) 2 SCC 1 has held that taxation is the sovereign function of the State and is therefore, non- arbitrable. This means that disputes arising out of adjudication u/s 73 or 74, denial of refund u/s 54, denial of input tax credit u/s 16, cancellation of registration u/s 29, rejection of appeals, order of anti- profiteering u/s 171 of the CGST Act, 2017 and like matters where the dispute is against the Goods and Services Tax Department or the Central Government or the respective State Government, the said form of GST dispute will be non-arbitrable. Hence, the appellate route before the quasi-judicial appellate authority followed by the Goods and Services Tax Appellate Tribunal (not yet constituted), followed by the High Court and the Supreme Court will have to be opted, unless there is violation of fundamental rights, principles of natural justice violation, the order passed is wholly without jurisdiction or if the vires of a particular provision(s) of the GST statute(s) or its respective delegated legislation in the form of rules, notifications, circulars and the like are challenged, in the event of which a Writ Petition can be filed before the High Court directly without undergoing the appellate route.
Assessing the Arbitrability of Goods and Services Tax Disputes from Contractual Arrangements
This part of the article delves into few of the most common forms of contractual arrangements which are reflected in contractual arrangements, often as a part of clauses of the respective contract.
Contractual Shifting of the Burden of GST
The contractual shifting of the burden of GST is one of the most common forms of clauses which can be seen in several contracts especially in the construction sector and in contracts with the Government and with public sector undertakings and has also been extant under the erstwhile indirect tax laws. However, it is necessary to point out that the incidence of tax under the GST statutes will not change and the legal person liable to pay tax as per the charging mechanism will have to bear the tax with a subsequent contractual right to recover the amount from the other party in case the other party had agreed under the contract to bear such tax.
Under GST, it is the supplier of goods or services or both, as the case maybe, who has to pay the tax under the forward charge mechanism. A few exceptions exist where the recipient of goods or services or both, as the case may be, has been made liable to pay tax under the reverse charge mechanism. For example, if in a transaction where the recipient was supposed to pay GST under the reverse charge mechanism has entered into a contract with its supplier that it is the supplier who will have to bear the GST, then in such circumstances, while filing of the monthly returns in FORM-GSTR-3B, the recipient will have to pay the tax amount under reverse charge mechanism and it will not be open for the recipient to insist recovery from the supplier due to the contract. However, after such payment is made by the recipient, the recipient of the supply would be entitled to recover from the supplier in pursuance of the contractual arrangement between them which foists GST liability on the supplier. In the absence of such contractual arrangement, the recipient would have paid the tax without any further rights for recovering the amount from the supplier, but it is only due to the contractual arrangements for shifting the burden of tax, does the recipient have the right to recover the GST amount from its supplier.
In the presence of an arbitration clause in a contract where shifting of burden of taxes have been agreed upon, a dispute between the recipient who is foisted liability under the reverse charge mechanism by the respective GST statute with the Government would be non-arbitrable since it would be a right in rem and also representing the sovereign right of the Government to levy and collect tax from the recipient as per the charging mechanism under GST whereas the subsequent dispute between the recipient and the supplier wherein the supplier had agreed to the shifting of burden of tax would be an arbitrable dispute being a right in personam which arises out of a contract.
Similarly, in a transaction where GST is to be paid by the supplier under the forward charge mechanism and a contractual arrangement exists between the supplier and the recipient that the supplier will bear the entire GST amount, the recipient can choose to deduct GST and disentitle the supplier from collecting the tax amount from the recipient, resulting in the supplier paying the taxes from its own pockets instead of collecting it from the recipient as would have been the scenario under normal circumstances. Similar to the aforesaid, a dispute between the supplier and the recipient in respect of the deduction of GST amount from the payment would be a right in personam and arbitrable as per the arbitration agreement envisaged in the contract.
The Supreme Court of India in Rashtriya Ispat Nigam Limited v. M/s Dewan Chand Ram Saran, (2012) 5 SCC 306 set aside the judgment of the Bombay High Court which had interfered with an Arbitral Award interpreting a clause of the contract which was pertaining to the shifting of burden of Service Tax. In this case, the parties had entered into a contract wherein the contractor who was the service provider was to bear the entire Service Tax amount. In the absence of the contract, the service provider would collect such tax from the service recipient and pay it to the Government Treasury. However, due to the contractual shifting of burden, the service recipient in the instant case deducted the Service Tax component from the payment of consideration. This resulted in the service provider invoking Arbitration against the service recipient wherein the Arbitrator held that as per the contractual terms between the parties the service recipient was correct in deducting the payments of Service Tax as the burden was on the service provider to bear Service Tax. Upon challenge before the Bombay High Court, the Arbitral Award was interfered and set-aside and upon further appeals to the Supreme Court, the Supreme Court held that the Arbitrator had interpreted the contract correctly and the Bombay High Court’s interference with the Arbitral Award was unjustified.
The Delhi High Court in Spectrum Power Generation Limited v. Gail (India) Limited, (2022) SCC OnLine Del 4262 was faced with a dispute arising out of a Gas Sale Agreement wherein the petitioner company had invoked arbitration after failed attempts of conciliation and had filed a petition u/s 11(6) of the Arbitration and Conciliation Act, 1996 before the Delhi High Court for the appointment of an Arbitrator. The respondent company’s argument was that the dispute was non-arbitrable since it was pertaining to a dispute of contractual shift of burden of GST and Value Added Tax (VAT) on gas. However, the Delhi High Court held that such disputes were arbitrable and allowed the petition, resulting in the appointment of an Arbitrator by the Delhi High Court u/s 11(6) of the Arbitration and Conciliation Act, 1996.
The Bombay High Court in Angerlehner Structural and Civil Engineering Company v. Municipal Corporation of Greater Bombay, (2022) 103 GSTR 336 in an Arbitration Execution Application was also faced with the question as to whether there was contractual shifting of burden of taxes between the parties. The Court held that no such contractual arrangement existed between the parties and the withholding of GST by the recipient was unjustified and accordingly, the recipient was directed to pay the GST amount to the supplier with interest who in turn would deposit it in the Government Treasury.
Therefore, the legal principle which emerge from the aforesaid judgments and discussions is that contractual arrangements for shifting the burden of tax are valid forms of contract and in case of any dispute in respect of the same, such disputes are arbitrable as per the arbitration agreement in the contract.
Reimbursement and Tax-Sharing Arrangements
Parties may even enter into contractual arrangements pertaining to reimbursement of GST and may also enter into GST sharing arrangements and similar to the scenario for contractual shifting of burden of taxes, the legal person chargeable to tax as per the charging mechanism will have to pay GST and in case of a dispute pertaining to contractual clauses of reimbursement of GST and tax-sharing arrangements, arbitration can be invoked as those would be arbitrable disputes.
The Delhi High Court in Indian Railway Catering & Tourism Corporation (IRCTC) Ltd. v. Deepak & Co., (2022) 104 GSTR 475, inter alia, upheld the Award passed by the Arbitrator which granted reimbursement of GST with interest. Although the reasoning of the Arbitrator was upheld on the basis of contractual interpretation, the judgment is also indicative of the fact that reimbursement of GST would be an arbitrable dispute as a contractual right in personam.
Indemnification of the Recipient by the Supplier for Default in Payment of GST by the Supplier
There is an upsurge in disputes pertaining to input tax credit under GST arising because of the fact that the supplier is not paying tax to the Government Treasury. In the normal chain of transactions, the recipient of goods or service (purchaser) pays the consideration amount as well as the amount of GST charged in the tax invoice raised by the supplier (seller) and the supplier is liable to pay such GST collected from the recipient to the Government Treasury. However, in many cases it is being seen that the supplier, despite having collected tax from the recipient is not depositing it in the Government Treasury resulting in recovery action being taken against the supplier as well as the recipient. Even after having discharged its obligations, the recipient is faced with difficulties due to the inaction of the supplier resulting in the ineligibility of the input tax credit for the recipient in pursuance of Section 16(2)(c) of the CGST Act, 2017. This of course, does not apply to instances where the supplier and the recipient are acting in collusion to defraud the Government but applies in cases where the recipient was under the bona fide belief that its supplier is a genuine dealer and despite the consideration and the GST amount having been paid in full and in time by the recipient to the supplier, the supplier does not deposit GST in the Government Treasury.
Parties may choose to incorporate clauses in their contract pertaining to their respective transactions where contingent to the recipient purchaser facing any difficulties from the GST Department due to non- payment of GST in the Government Treasury by the supplier, the recipient will be entitled to be indemnified for the demand created against the recipient by the GST Department. Under normal circumstances, even after paying the GST amount in full to the supplier for depositing in the Government Treasury, due to the inaction or the non- compliance by the supplier, the recipient is saddled with having to reverse input tax credit along with interest at the rate of 24% u/s 50(3) of the CGST Act, 2017 and with penalty u/s 122 r.w.s. 73 or 74 of the CGST Act, 2017 as the case may be. This is why having a contingent contractual clause for indemnity can aid the recipient in being indemnified of the input tax credit reversal, interest and penalty amount suffered by it due to the inaction and non- compliance by the supplier to deposit tax to the Government Treasury. It is noteworthy that since the dispute in this respect would be regarding indemnification arising out of a contingent contract between parties to the contract, such a dispute would be arbitrable.
Certain supplies under GST have been treated as deemed exports. When a supplier makes a supply of goods to a recipient registered with an Export Promotion Council or a Commodity Board recognized by the Department of Commerce including Export Oriented Units, such supplies would be treated as deemed exports even though such goods do not leave the territory of India. Additionally, for being treated as deemed exports under GST, the goods must also be exported by the recipient registered with an Export Promotion Council or a Commodity Board recognized by the Department of Commerce including Export Oriented Units to export such goods to a place outside the territory of India within 90 days of issuance of the tax invoice by the supplier, the tax invoice issued must contain the GSTIN of the supplier, the shipping bill or the bill of export must contain the tax invoice number, the recipient must transport the goods directly from the port, inland container depot, airport, land customs station or a registered warehouse from where the goods shall be directly exported and copies of shipping bill or bill of export, export manifest, tax invoice and export report must be provided to the supplier as well as the jurisdictional officer.
The benefit of a transaction being treated as a deemed export under GST is that the supplier has to pay tax at a concessional rate of tax after collecting such concessional tax amount from the recipient. The benefit of such concessional rate of tax is provided to deemed export supplies since the transaction is being made in the course and furtherance of export that ultimately results in the generation of valuable foreign currency and therefore, no taxes must be exported in the entire chain of export.
Coming to the arbitrability perspective, since there are insurmountable conditions to be fulfilled by the recipient, in case of non-compliance by the recipient of any of the conditions, it is the supplier that faces action from the GST Department wherein tax at the full rate is demanded along with interest and penalty. This is capable of causing significant difficulties for the suppliers in deemed export transactions. In case of scenarios where the recipient does not export the goods within 90 days of issuance of tax invoice by the supplier and in case of non-compliance with the conditions of the export related documents being submitted by the recipient to its jurisdictional officer, in the presence of a contractual arrangement mandating the aforesaid requirements, the supplier would be entitled to invoke arbitration alleging breach of the contractual clauses. This would enable the supplier to recover the tax at the full rate along with interest and penalty paid by it against the demand created by the GST Department due to the non- fulfilment of conditions of deemed export by the recipient of such goods.
There are manifold possibilities of disputes arising out of contractual arrangements pertaining to GST and only the most common forms of disputes arising between parties in this respect have been discussed in the present article. It is evident from the aforesaid discussions that the presence of contractual arrangements under GST are arbitrable in case of disputes or differences arising out of such contractual clauses and that arbitrating such disputes would significantly assist parties in avoiding payment of the tax, interest and penalty liabilities from their own pockets due to the default of the other party in the transaction as the aggrieved party will be able to invoke Arbitration for recovering the said amounts from the defaulting party.