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Double taxation effect of GST provisions on supply of inter-state services challenged in Delhi High

A writ petition has been filed at the Delhi High Court contending that ambiguous interpretation of certain provisions of the Central Goods and Services Tax (CGST) and the Integrated Goods and Services Tax (IGST) Acts of 2017 has enabled double taxation as regards supply of inter-state services.

The petitioner, D Pauls Travels and Tours Ltd., is a travel agency with national presence.

The matter came up last week before a division bench comprising of Justice S Muralidhar and Justice Prathiba M Singh. The petitioner is being represented by Senior Advocate Anup J Bhambani, Advocates Rajat Arora, Jaypreet Singh and Avinesh Singh.

The petitioner has contended that the provisions of the aforementioned Acts, read together, can be interpreted so as to impose SGST and CGST in addition to IGST on the travel agency, if it offers to book a service for its customer in other States. For instance, if the petitioner were to book a hotel in Goa for its customer in Delhi, in addition to the levy of IGST, the law also allows the Hotel in Goa to charge an independent CGST and SGST.

At the same time, the petitioner is prevented from claiming input tax credit under Section 16 of the CGST Act as regards the SGST paid thus. This is because, as per the current law, the benefit of input tax credit for SGST charged (under the CGST Act) in a State cannot be claimed by an entity registered in a different State. In order to be registered within the state, the entity will have to have a place of business within the State.

In other words, the petitioner is paying tax a second time round on the same transaction, instead of being able to avail input tax credit for the tax paid once by the hotel situate in a different State. The petitioner contends that such requirement defeats the very purpose of an integrated tax regime as contemplated under the new GST regime i.e. to do away with the cascading effect of the erstwhile tax system.

In order to claim the benefit of input tax credit for SGST paid and avoid this form of double taxation, the petitioner offering inter-state supply of services would be forced to have a place of business in each State and Union Territory. As a consequence, the petitioner points out that travel agencies have begun opening offices indiscriminately in various states, even if only in name in order to circumvent these tax provisions.

It is the petitioner’s case that the registration requirement as defined above has a discriminatory effect that has no basis in intelligible differentia or any rational nexus to the object of the new taxation regime. Further, lack of government clarification as to whether SGST or IGST provisions will apply to such transactions has contributed to continuing losses to the petitioner, as various stake holders are left free to interpret the provisions as they will.

On these grounds, it has been contended the effect of the tax provisions have been contrary to Articles 14 and 19(1) (g). Further, it has allowed unjust enrichment for the state and lead to a substantial reduction in the profit margin for the petitioner. In this context, an interpretation or clarification to resolve the anomaly should come from the High Court or from Goods and Services Tax council, named second respondent, under directions of the Court.

The petitioner have prayed that it be recognised, via court direction or government clarification, that entities like itself are entitled:

  • to charge their customers tax under the IGST Act and not under the CGST Act;

  • to full input tax credit under IGST Act in relation to the services supplied in another State or Union Territory, without the requirement of being a “registered person” in every such State or Union Territory

The court has issued notice to the respondents. Advocate Sanjeev Narula has accepted notice on behalf of the first Respondent, Union of India. The matter will be taken up next on September 18.

The same Bench had also issued notice in another challenge relating to IGST – regarding provisions requiring a bank guarantee to be furnished for claiming refund of tax.

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