SEPTEMBER 04, 2024

By Mr M G Kodandaram, IRS, Assistant Director (Retd), ADVOCATE and CONSULTANT

Adjudication Mechanism in GST

THE implementation of trust-based GST, centered around self-assessment and self-compliance, has brought its own set of challenges. A key area that demands attention is simplifying the path of a fair adjudication process in cases of litigation and disputes with the taxpayers under the GST regime.

Adjudication in the context of GST refers to the legal process in which tax authorities propose to redetermine a taxpayer's liabilities through a reasoned order, ensuring adherence to the principles of natural justice. This process becomes generally necessary in cases of disputes or disagreements regarding the correct amount of tax payable, the applicability of exemptions, failure to pay the correct tax, incorrect claims of input tax credits, erroneous refunds claimed, or other compliance issues under GST provisions.

The adjudication process begins with the tax authorities issuing a SCN to the taxpayer. This notice details the alleged non-compliance or tax shortfall and asks the taxpayer to provide an explanation within a specified period. The SCN must clearly state the grounds on which it is issued and provide sufficient details to allow the taxpayer to respond effectively. Upon receiving the SCN, the taxpayer is required to submit a written reply, explaining their position and providing evidence to support their claims. After reviewing the taxpayer's reply, the adjudicating authority has to mandatorily offer a personal hearing, where the taxpayer or their representative can present their case. Based on the SCN, the taxpayer's reply and any additional evidence presented during the personal hearing, the adjudicating authority issues a final order. If the taxpayer's explanation is found not legally acceptable to the satisfaction to the adjudicating authority concerned, after due process, he proceeds to issue a speaking order, specifying the amount of tax due, along with any penalties or interest. However, the taxpayers have the right to appeal against this order if they are aggrieved of any illegality in the process of redetermination.

Stages in the Adjudication Process

The adjudication process, integral to tax administration, requires not only the correct application of laws but also a meticulous reflection of these applications in notices and orders. However, the frequent occurrence of hurried and poorly drafted notices and orders has led to numerous instances where appellate forums and Hon'ble High Courts have set aside such documents, resulting in significant losses in terms of effort, time, and revenue.

A well-drafted GST order goes beyond being a mere legal document; it serves as a communication tool that articulates the reasoning behind the proper officer's decision. Clarity in language, structure, and reasoning within the order is essential for the taxpayer to grasp the basis of the decision, thereby building trust in the tax administration. Transparency in both the process and the order itself ensures that all relevant facts, legal provisions, and arguments from both sides are thoroughly considered and addressed.

The GST laws provide the legal framework within which tax administration operates. Adherence to these provisions is non-negotiable in the drafting of GST orders. Any deviation or omission can lead to the order being challenged on legal grounds, thereby undermining the authority of the tax administration. Proper officers must ensure that their orders are firmly rooted in the law, with every decision and penalty justified by specific provisions within the Acts and Rules. This not only strengthens the legal standing of the order but also enhances its credibility in the eyes of taxpayers and judicial bodies.

The consequences of poorly drafted GST notices and orders are significant. Documents that lack clarity, transparency, or legal rigour are more prone to being contested by taxpayers, resulting in extended litigation. Circular No. 8/2024, issued by the Tamil Nadu Commercial Taxes Department on August 29, 2024, provides guidelines for adjudication proceedings and represents a valuable approach that should be adopted nationally to create a simplified and uniform adjudication system. When orders are frequently overturned by appellate forums and courts due to drafting deficiencies, it leads to wasted efforts by tax authorities and delays in revenue collection. Moreover, the recurrent annulment of orders harms the reputation of the tax administration and undermines public confidence in its fairness and efficiency.

Although the GST adjudication process is intended to resolve disputes fairly and efficiently, various challenges have arisen in practice. Adjudicating authorities in different States occasionally issue conflicting rulings on similar issues. Despite GST being a national tax, these authorities often interpret the same provisions in divergent ways. This inconsistency leads to uncertainty and confusion for taxpayers, who may encounter different outcomes for the same issue based on the jurisdiction where their case is adjudicated. The personal hearings, if handled in a physical environment can be cost and time consuming to all stake holders, with significant delays in the issuance of orders and the resolution of disputes. The lack of specialized training and expertise in GST law can further result in incorrect or inconsistent decisions, leading to further disputes and appeals. GST being a pan-India tax, it is expected that the adjudication process would be uniform across the country.

Centralized Adjudication Authority and System

To address the problems associated with the current ineffective dispute resolution system and to promote a more transparent and efficient adjudication process, the following guidelines are recommended.

(i) Creating a centralized system to ensure consistency in dispute resolution across various jurisdictions can help minimize inconsistencies in rulings. Additionally, aligning adjudication proceedings with a faceless assessment scheme, similar to those used in customs and income tax, could further enhance taxpayer confidence in the adjudication process.

(ii) A significant challenge in adjudicating GST demands is the insufficient expertise and training of adjudicating officers. The lack of a dedicated cadre of GST adjudicating officers with comprehensive knowledge of the law undermines the quality of the adjudication process. This shortfall often leads to unjust demands and increases the volume of appeals and litigation. Establishing a specialized unit with officers possessing the necessary legal knowledge and skills would greatly contribute to creating a transparent and fair resolution mechanism.

(iii) The lack of a centralized body to ensure uniform interpretation and application of GST law nationwide aggravates this issue. In this context, the recent CBIC Instruction No. 03/2024-GST, dated August 14, 2024, offers important guidelines for managing audit matters, with a focus on promoting consistency and reducing litigation in CGST audits. These guidelines could serve as a foundation for establishing a uniform adjudication mechanism. (Refer to "Revamping GST Audits: From Inefficiency to Effectiveness" by the author, August 21, 2024.)

(iv) Enhancing adjudication infrastructure, including the digitalization of processes, can significantly reduce delays and improve efficiency. The faceless adjudication process can be further optimized through the following reforms:

(a) Electronic Filing: Taxpayers should submit all necessary documents, responses, and applications electronically via the dedicated common online portal.

(b) Digital Communication: All interactions between taxpayers and tax authorities, including notices, replies, and queries, should be conducted through the online system, eliminating the need for physical visits and paper-based submissions.

(c) Random Allocation: Cases should be randomly assigned to tax officers across different locations, ensuring that the officer handling the case has no prior knowledge of the taxpayer, thereby reducing biases and minimizing corruption.

(d) Anonymity: The identities of both the officers and the taxpayers should be kept confidential from each other for much of the process.

(e) System-Driven Processes: The online system should automate key workflows, such as sending reminders, tracking deadlines, and generating reports, to minimize manual errors and ensure a consistent and streamlined process.

(f) Use of Analytics: Advanced data analytics and algorithms should be employed to evaluate submissions, identify discrepancies, and flag potential issues for further scrutiny.

(g) Online Hearings: Hearings that are otherwise requested in writing specifying valid reasons, must be conducted via video conferencing and through written submissions on the portal. This allows taxpayers to present their case and submit additional evidence without requiring physical meetings. The CBIC initially mandated personal hearings to be conducted via video conferencing, as outlined in Instruction No. 390/Misc/3/2019-JC dated August 21, 2020. However, this mandate was diluted with revised instructions issued on July 28, 2022, making it optional. To address this, there is a need to make suitable CGST/SGST Rules governing the mandatory conduct of personal hearings and the procedures to be followed. Physical personal hearings should only be granted with prior approval from a senior officer after reviewing the taxpayer's written request.

(h) Speaking Orders: After reviewing all submissions, the tax officer should issue a "speaking order" through the online system, explaining the rationale behind the decision and any tax demand.

(i) Appeal Process: If the taxpayer disagrees with the adjudication order, they can file an appeal electronically. This appeal should also be managed through the faceless system, maintaining the same level of anonymity and digital workflow.

(j) Review and Resolution: The appeal should be reviewed by a different set of officers or an appellate body, who may uphold, modify, or overturn the original order.

Benefits of Faceless Adjudication

The benefits of this proposed system are as follows:

- By reducing human intervention, the faceless process minimizes opportunities for favouritism or corruption, ensuring a more transparent adjudication environment.

- The integration of technology streamlines the adjudication process, resulting in faster resolutions and more efficient handling and management of cases.

- Automated processes and system-driven decisions help maintain uniformity and consistency in rulings, ensuring that similar cases are treated uniformly.

- The faceless system fosters greater trust in the tax administration by making the process more objective and less susceptible to manipulation.

Faceless adjudication in GST will usher a significant advancement in modernizing tax administration. By leveraging technology to eliminate physical interactions, this approach not only enhances transparency but also boosts efficiency and consistency in resolving tax disputes. Ultimately, faceless adjudication aims to create a more fair and trustworthy system, thereby increasing taxpayer confidence and improving the overall effectiveness of the tax administration process.

[The views expressed are strictly personal.]