SC gives govt benefit of doubt in tax exemption cases

A constitution bench of the Supreme Court has placed the ball in the court of assessees who are seeking tax exemption on goods, the classification of which lends to ambiguity. The existing guidelines place generic labels, and assessees are given the benefit of the doubt if the item them are claiming fits into the broader contours of the definition set by the authorities.

This could potentially add to the pile of litigation and also lead to disputes if tax authorities initiate retrospective action against assessees who have dodged taxes by exploiting loopholes. The tax department processes millions of requests every year, making it difficult for officers to parse through the paperwork and investigate whether the said goods conform to the category under which exemption is claimed.

Justices Ranjan Gogoi, R Banumathi, N V Ramana, Mohan M Shantanagoudar and S Abdul Nazeer were part of the five-member bench constituted to study the dispute resolution framework in place to address ambiguities in the list of tax-free goods.

The bench ruled that exemptions should be granted by interpreting the law in the strictest sense so that revenue loss would be minimal. “The burden of proving applicability will be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification,” the bench said in an 83-page judgment.

One of the earliest cases in this regard is the case pertaining to Sun Export Corporation. In 1999, the company imported a consignment of feed grade Vitamin-E50 powder. Its promoter, Dilip Kumar, claimed a tax break by classifying the product as prawn feed. By manipulating the taxonomy of the shipment, he claimed a concessional duty of 6%, as opposed to the standard 30%.

The customs department denied the request for a tax rebate on the grounds that the shipment contained chemical ingredients, rendering it unsuitable for use as prawn or animal feed. The concessional rate was not granted.

The case has been stuck in a legal quagmire hence. An appellate fore ruled in favour of Sun Export Corporation. After this setback, the customs department approached the apex court. A two-judge bench referred it to a three-bench court, which in referred it to the constitution bench for reconsideration.

The transition to a more rigid framework for determining tax exemption could add to the red tape in getting clearance from the customs department. Under the present regime, the classification of goods for eligibility is undertaken strictly, but once a product is established as belonging to the basket of goods exempt from tax, the composition of the good is scrutinized liberally.

By reversing the earlier trend, the treasury will be bolstered by inflow of tax from goods whose status is ambiguous, as the government will be given the benefit of the doubt in such cases. This entails that even slight deviations from the set preconditions will result in rejection of the application for tax rebates.

The goods and services tax (GST) has four rate slabs, but some goods are exempt from taxation. All products are classified and listed under the Harmonised System of Nomenclature, with each good having its own HSN code. The question of ambiguous categorization arises from the loose definition of goods. For example,  HSN chapter 52 says ‘cotton’ goods will be exempt from taxation. However, in truth, only khadi yarn and Gandhi topis are tax-exempt.

For other goods, the distinction may not be so clear. By laying the onus on tax assessees to establish eligibility, the tax department will save on costs to inspect goods whose composition may require greater scrutiny.

Here is the full list of goods that are exempt from taxation: