Tax Planning in GST – Part 1

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Tax planning involves the analysis of the GST law and development of judicial ruling and the financial situation or plan from a?tax?perspective. The purpose of?tax planning?is to ensure?tax?efficiency. Through?tax planning, all elements of the financial plan work together in the most?tax-efficient manner possible. Tax planning is the most effective method to reduce the tax burden legally within four corners of the law. The possibility of difference in interpretation and subsequent dispute needs to be considered.

Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.”

-House of Lords(IRC vs Duke of Webminister)

We have broken up this article into 5 parts to make it easily readable/ digestible to the readers/ practitioners.

We start with understanding the objectives of tax planning and therefore its importance and advantages. Further, the importance of drafting and examine the planning possible by relying on the Constitution of India which provide several safeguards which are not known and further not used to defend those matters which within the GST Law has no defence. ??

Objective of tax planning

Objective of tax planning could be as under:

a.?????? Reduction in overall tax liability on the business,

b.?????? Ensuring timely compliances to avoid unnecessary penalty and fees,

c.?????? Ensuring claim of benefits (credits and refunds),

d.?????? Minimization of the litigation,

e.?????? Growth in the business,

f.??????? Productive investments,

g.?????? Growth in the economy,

h.?????? Stability of the business.

The business would then examine the various tax planning alternatives available. It may select the best alternative after proper examination and confirmation by experts. However, care should be taken to avoid disputes while planning to optimize taxes within the four corners of the law; if disputes are inevitable, the probable results from tax planning should be favourable after considering the costs and procedures of the disputes. At times it may take time.

Illustration is the Tax credit on steel and cement used in the construction of malls/ rented commercial premises. Many clients of ours were advised that this credit SHOULD BEAVAILABLE even though the GST provision under section 17 barred it.

Clients who availed credit faced litigation but then for 7 years they saved on the interest cost in business (if we consider 15% average) of around 20% of the yearly cost of steel & cement which went directly to their bottom line.

The clients who availed and reversed or did not avail reserving the right to avail vide a letter of protest credit due to departmental objections from 2017 till date a period of 7 years can now avail the credit – this would be 140% of 1 years steel and cement cost now. Maybe with a bit of litigation.

1.????? Relevance of drafting of agreements and contracts

The drafting of various agreements, contracts, work orders and purchase orders to capture the facts of the transaction could play an important role in optimizing tax and costs.

A two-judge bench the Supreme Court considered the interpretation of a power purchase agreement between the parties, held that a contract should generally be read as per its express terms.

Further agreements should reflect the actual nature of the transaction. It is a settled law that “substance over form” should be considered under the taxation.

Legal documents, where not drafted properly may lead to creating an extra load on the business entities by way of litigation costs, additional taxes, interest and penalties.

2.????? Constitution of india

The Constitution of India is the Supreme law of India and no Act, Rule, Notification or Circular can be issued, which is inconsistent with what is laid down in the Constitution. When there are no or limited possibilities in the GST Act and Rules then the Constitution may provide some remedies for a problem. We examine a few such possibilities as under:

(1) Fundamental Rights

Article 13 of the Constitution provides that the laws which are inconsistent with or in derogation of fundamental rights of a person are void (Not valid). It should not have a direct impact on the rights.

(2) Equality before law

Article 14 offers the principle of “Equality before law”. It provides equal protection to all persons in the sense that there can be no differential treatment unless there is a rationale for the differentiation and it is not arbitrary. The taxpayers being grouped together for applicability or exemption should have an intelligent reason and fulfilling the object of the Act.

Illustration: Exemption for Temples applicable for Churches, Masjid etc.; Capitation fee for admission to students same as normal fees.

(3) Right to freedom

Article 19 confers every person “right to freedom”. The restriction should be reasonable, in public interest considering the larger social interest. The arbitrary discretion vested with the administrative authority which is not properly controlled may be unreasonable.

Every person has a right to information of any public act under the Right to Information Act, 2005.

Illustration: Information of list of refunds applied for and granted by the GST authorities could be called by any person from the concerned authorities.

Everyone is free to move throughout India. For instance, there is no GST on Non AC contract carriages. Everyone is free to carry out a profession, trade or business anywhere in India.

(4) Protection in respect of offenses

Article 20 safeguards a person while providing protection in respect of offenses. It says that a person is liable for punishment only if the alleged violation of law was in force at the time of the offense being done. A person should not be punished for any act which is considered as an offence with retrospective effect after committing the act. It also says that no person shall be prosecuted and punished for the same offense more than once.

(5) Protection of life and personal liberty

Article 21 provide for protection of life and personal liberty. It says that no person shall be deprived of his life except in accordance with the procedure established by law. Sealing, seizure, arrest cannot be done on mere suspicion.

Illustration: This has been used in case of seizure of trucks for minor errors in the e-way bill and confiscation of goods and vehicle without any “reasons to believe”.

(6) Right of freedom of religion

Article 25 provides everyone the right of freedom of religion. It provides freedom of conscience and free profession and practice and propagation of religion. There is no GST on religious practices of any religion. Article 27 further states that there is no tax on such activities including activities for advancement of the faith.

Illustration: Therefore, there no GST on sale of pooja samagries.

(7) No tax shall be levied or collected except by authority of law

Article 265 provides that no tax shall be levied or collected except by authority of law. Any fee is a payment for a specific benefit and if it is a source of revenue would become a tax. Fee should have a quid pro quo and be linked to cost. Double taxation within the same tax law may not be there. Tax can be levied only through the Act and not by way of rule or explanation. Unjust enrichment is when one collects a refund from Government that he was not liable to pay and at the earlier point of time or later collects from the customer.

Illustration: Circulars in the guise of clarification- cannot extend the law and seek to collect tax are not valid in law. ?

(8) A person may not be deprived of property save by authority of law

Article 300A provides that a person may not be deprived of property save by authority of law. The attachment of assets, obligations, money in bank, rental etc. by way of garnishee order can only be done by following the due process set out in law for this purpose.

Illustration: ITC credit or bank account freezing which some Commissionerate’s ?in our country regularly do.

This article is adapted from the tax planning chapter from our book- Practical Guide to GST in Textile Industry (2024 edition slated for release next month.). Feedback at [email protected] or [email protected]