The corporate boards in the recent weeks are feeling nervous where no goods and services tax (GST) demand of any substantial sum has been received by the company!
GST demand is an affirmation that an entity is carrying on a bona fide business, that it is not a zombie or a fake, like, getting a spam call on the phone when there is a doubt if the network is fine!
This article is not a technical analysis of any legal issue or a dissection of the provisions of law. It is more to highlight the fact that this law, which is neither a relic of the Raj, nor enacted in the high noon of Nehruvian socialism, but the latest among the major economic initiatives within the past decade, seems to challenge all the set notions of how a tax law is intended to operate!
A pertinent example would be that of the insurance industry which apparently has been receiving demand notices of such amounts that the solvency margins may be under threat should any part of the amount become actually payable!
The reason to pick this industry is because this is possibly the tightest regulated among all businesses, inasmuch as no activity of any sort is possible without a concurrent scrutiny of the sectoral regulator.
Based on what is reported in the press, the issue causing the GST notices to land in dozens is that the companies, both in life and non-life business, have been over-stepping the limits on the commission payment and using the ruse of ‘other services’ to disburse the extra commission.
Certainly, this is a violation of the regulatory limits and the insurance regulatory and development authority of India (IRDAI) should deal with the matter. How on earth would the GST office deny credit for the actual tax paid in respect of these transactions holding the view that the transactions are dubious and no services received?
To a layman this sounds idiotic, to keep within the bounds of politeness and not use the language that has come to prevail in the discussions in the Oval office in recent days!
If the extra amount pertains to the disguised commission, it ipso facto represents a service availed. Where is the locus for a GST officer to decide if such a service is an authorised one or not?
Anyway, the pundits on the subject may get upset with a novice trespassing what scores of senior tax lawyers and their counterparts on the other side may battle out for some dozen years before finality comes!
An interesting titbit is that in one of the insurance companies, HDFC Life, the company first received a demand for Rs942.18 crore towards tax for the period 1 July 2017 to 31 March 2022 and a penalty of Rs942.31 crore on 2 February 2025. It received a corrigendum order dated 5 February 2025, amending the penalty amount to Rs2,422.97 crore!
Insurance companies, especially in the life business, hold almost the entire money for the benefit of the policyholders and the portion not pertaining to the policyholders (shareholders) is generally quite limited. Should these extravagant demands made after a lapse of many years materialise for any reason the impact would be directly felt on the policyholders’ interest.
Is there a case for the policyholders to play the affected party and raise a wider public interest litigation directly at the highest court?
While watching bemusedly the tax torture under the GST from the sidelines, the experience of soiling one’s hands, almost right up to the armpits, in the early years of the 1980s in both central excise and sales tax across many states in the country, kindle the curiosity to compare!
Central excise was dreaded in those days and was the main reason why the term ‘inspector raj’ emerged!
It was perhaps the only law where the inspector of any government department actually resided on the factory premises, and was fed and pampered. Yet the company would pay money to the government, of course, officially, for the services provided!
To some extent, the self-removal procedures did away with the resident officer. Still, there may not pass a single evening when, on some pretext or the other, either the inspector or his proxy would not pay a visit!
The system, in retrospect, appears superior to the GST which has subsumed its progenitor.
Irrespective of whether a product required physical supervision for clearance, no removal was possible without a classification list and a price list approved by the officer.
In other words, the government upfront confirmed or challenged the basis of payment of the excise duty. Therefore, the debate of how much tax to pay started even before the goods moved out.
The kind of shocks and surprises that GST orders passed after the lapse of a few years, existed, but rarely, in the old regime.
Once the basis was approved, the government could, but alter, only, prospectively. There would be cases of disputes where the government may allege non-disclosure of full facts, but in the scheme of how the system worked with monthly returns having to be assessed on an ongoing basis, there is always enough safety valve for the taxpayer to defend.
The sales tax regime, till about the early 2000s, was actually much simpler with no concept of any tax credit. It was mostly single point.
The system of tax credit that VAT and GST provide has actually led to a plethora of disputes with no proven economic benefit as commonly believed that a transparent commodity tax system would ensue.
An aspect that is missed in the discussion is that, after the advent of GST, the value of the tax dispute has materially increased. This is due to the GST rates being 18% or more in most cases.
Earlier, the dispute would be either in excise law or under sales tax and seldom did both surface on the same transaction. The rate aggregation that has happened under GST has resulted in every dispute a combined dispute of excise and sales tax, if one sees it with the lens of the past!
The main reason that triggered this article is not what is detailed before which was not planned. It is the announcement that Piramal Enterprises Ltd made on Friday about a GST bombshell that fell on it!
The above is the relevant portion of the disclosure which comes up for discussion in the rest of the article.
In the course of FY20-21, Piramal Enterprise, a listed entity, transferred its interests in the pharma business to its wholly-owned subsidiary.
As per the information provided to the shareholders for their approval, the transfer of the business was executed in three parts.
All the facilities and the business carried on in India were transferred under an agreement for a sum of Rs2,150 crore. The sum total of the items was categorised as a ‘business undertaking’.
The second limb was the transfer of the holding company’s interest in the shares of certain overseas companies carrying on the pharma business. The consideration was Rs2,152 crore.
The sub-part to the share transfer is the sale of the 10% stake in a company. The consideration of Rs185 crore was settled by allotting the subsidiary’s share to the parent.
The details of the items that constituted the overall disposal of the pharma business can be appreciated with the help of the note in the 31 March 2021 financials of the company.
Two questions arise. The basic issue is whether the transaction is the sale of a business as a going concern, lock, stock and barrel. In such an event, it should not be subject to tax, as specifically exempted under the law.
Based on the information that is contained in the resolution, which permitted the company to dispose the undertaking and the details listed above, there appears to be little doubt.
To ask the second question requires little knowledge of the law. GST can arise only on goods or services. In the above transaction, there are items that are goods and items that are not.
For instance, the shares sold have no basis to attract GST. The list of assets includes many factories being immoveable properties. GST cannot apply to such.
The tax has been computed on the entire consideration of Rs4,487 crore, making no exclusion for the value attributable to such items. Interest and penalty is also computed on this exaggerated figure.
The arbitrariness in the assessment is inescapable. If a company of Piramal’s size and stature can suffer this fate, imagine what millions of small businesses go through!
The board at that relevant time is the who-is-who of the country! A board of this pedigree is bound to have looked at all possible implications in a transaction of such a magnitude.
It would be a major embarrassment to an eminent board to receive a demand notice with a levy of penalty as well.
How is the mechanical levy of penalty justified when all the information is disclosed and in the public domain - is an irksome question for any board.
Another is the interest levy that exceeds the tax. If a taxpayer has filed the relevant tax return and the authorities take their own time to assess the case, does the delay of the tax department to complete the task justify levying interest on the taxpayer?
The demand once raised will trigger all consequences like the pre-deposit of some part of the tax; disclosing the amount under contingent liability, a debate with the auditor should some provision be necessary, etc.
All these have financial and credit rating implications, with the consequent implications on the share price. The small investors who buy and sell are affected more than the promoters and the institutions who are more long-term.
Given the way the GST is being administered on the ground, there is enough reason to apprehend inconsistent and unpredictable orders even in clear cases.
Internationally, the concept of tax insurance is in vogue to protect parties to a transaction where tax uncertainties prevail.
In the context of GST, uncertainty seems to be woven into the law! It is time for the insurance industry in India to come up with a GST insurance. Each one of the insurance companies would be the first to try out the product!
There is a need to have an independent team of economists assess if the GST has better revenue buoyancy than the taxes it replaced. There is a great deal of euphoria over the monthly collections. How much is due to better efficiency of the format and the administration, and how much is due to the inflation and the price rise that accompanied GST implementation is the moot point.
GST has made a major dent in fiscal federalism. There is also no concrete evidence that the system of tax credits has benefited the customers with lower prices or greater transparency in the charging of the taxes.
If the real estate industry is any example, the system is quite opaque and multiple taxes like the stamp duty and GST apply on the same transaction, at least in some states.
If, in its implementation, those who worked under the central excise feel that the inspector was a better mate to break bread with, then but for the lawyers for whom it is ‘open sesame’, isn’t there a good case to revisit what has been put in place?
(Ranganathan V is a CA and CS. He has over 44 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
