Think Tank


While there is little doubt that India’s GST regime has brought benefits, there are continuing challenges around implementation and compliance. These relate to e-invoicing, input tax credit, treatment of free samples and other such nitty-gritties. In the last five years, there have been some 830 modifications to the GST rules, and over 200 circulars have been issued. This makes it extremely challenging to keep track of changes. The government has proven responsive in terms of finding solutions and providing the necessary support to industry. However, a large number of legal/interpretational issues are unresolved, including the lack of a GST Appellate Tribunal, which makes it hard to resolve disputes without litigating. At a recent session of the India CFO Forum, Sandeep Chilana, Managing Partner at Chilana and Chilana Law Offices, reviewed the current GST regime and the top GST-related challenges facing CFOs today.

Treatment of services provided by HQs remains contentious

Noteworthy AAR rulings…

…that have created space for further disputes


One major interpretational issue concerns services provided by ‘distinct persons.’ The provision of services or goods by a distinct person is to be treated as a ‘supply’. This has spurred a fair amount of litigation. For example, if a head office provides services such as HR, Finance, etc to the company’s branches, it may potentially be interpreted as ‘supply of services,’ which would attract GST. Invoices would then need to be generated and GST charged accordingly. A 2019 draft circular confirmed this to be the case but the final circular was never released. Some companies sought advance rulings on the matter:

  • Columbia Asia Hospital obtained an AAR ruling stating all activities performed by employees of the corporate office, such as accounting and administrative services, must be treated as ‘supply’.
  • An AAR issued to Cummins India stated that human resources that are located in its head office, and which facilitate the operational requirements of branch offices/units by way of procuring common input services on their behalf, do provide a service. Therefore, the allocation and recovery of any amount, including salary costs, from the branch/units will be subject to GST.

These rulings have, however, created scope for further disputes. Firstly, salary is paid to employees in relation to employment, which is neither a supply nor a service, and thus should not attract GST. Secondly, a healthcare company like Columbia Asia Hospital is exempt from GST. Charging GST on salary will therefore lead to a double-whammy, since such payments will not be eligible for input credit. This would not, ideally, have been the intent of the law.

Many companies have taken a position against these rulings, considering them to be an incorrect interpretation of the law. In their view, senior executives, including CFOs, CHROs and CTOs, provide services to the company rather than to specific branches of the company. However, as a result of these two rulings, the IT Department has begun to scrutinise past returns – particularly those filed by liquor companies – more aggressively, raising questions on their ‘non-compliance’ with regard to making cross charges.

The rationale behind cross charges is that the GST is a destination-based consumption tax, implying that goods and services should be taxed at the place where they are consumed, and not where they originate. However, at some point, this will lead to conflict between the Centre and the states over whom the ITC belongs to. For example, an organisation that makes payments for software services might claim credit for these payments at the head-office level, even though the software actually gets ‘consumed’ at the branch level. Cross charges are meant to prevent states from losing out on their fair share of tax revenues in such instances. The government’s contention is that the total cost of all employees should be added to all vendor payments made from a particular location. A further 10% should be added to this amount, and the total treated as the taxable value. A handful of companies have already received notices to this effect, but the issue is expected to escalate as the deadline for issuing notices for the concerned period approaches.

Computing interest payable on deposits…

…depends on when proceedings under Section 74 are deemed to have begun


Section 34(3) of the GST Act holds that, whenever an entity finds that the tax amount charged or taxable value declared in an invoice is less than the correct amounts, they must raise a debit note to collect that tax. However, Rule 53(3) provides that any invoice or debit note issued in pursuance of any tax payable in accordance with Sections 74, 129 or 130 shall prominently contain the words ‘input tax credit not admissible.’ Section 75 (i) clarifies that any tax that is paid in pursuance to proceeding under section 74 is a non-creditable tax. Further, Section 50 provides that interest on tax shall be payable on a gross rather than a net basis, if the tax is paid pursuant to any tax under section 74 or after commencement of proceedings under Sections 73 or 74. The interest due on such debit notes will depend on whether tax is paid before or after proceedings begin under Section 74.

However, there is some dispute as to when, precisely, such proceedings are deemed to have ‘started.’ Today, most such issues arise where either the DGGI, the jurisdiction inspector or the superintendent carries out an inspection under Section 67, reviewing returns and other documents to identify ‘short payments.’ Section 34(3) clearly states that revenue has to be raised via a debit note, but is credit meant to be restricted at this stage, where the officer has arrived for an inspection? There is some dispute as to whether proceedings under Section 74 are considered to have ‘started,’ especially given that Section 74 requires intimation of the show-cause notice or the issuance of DRC-01A. Going by the rules, any amount paid before this point cannot be used in pursuance of proceeding under Section 74. This implies that if the superintendent asks for a deposit under DARC-03, the recipient must decide whether to utilise the scheme provided under Section 34(3) and make the amount creditable.

Credit can be denied if there are discrepancies in GSTR filings

Various writs have been filed against this provision

A new provision in the 2022 Finance Act


Rule 36(4)
In October 2019, the government inserted Rule 36(4) into the regulations. This states that if Form 2B does not contain invoice details on the basis of which one intends to claim credit, then credit will not be available. In other words, if there is any discrepancy between GSTR-3B and GSTR-2B, credit may be declined, depending on the extent of the mismatch. Initially, credit was to be granted if the mismatch amounted to 20% or less of the value, falling to 10% in 2020 and then 5% in 2021.

In the last 18 months, various writs have been filed against Rule 36(4), holding it to be both unconstitutional and lacking a statutory mandate. Section 16 of the GST Act mandates no such restrictions. In fact, it requires only four conditions to be satisfied for ITC to be availed, namely that:

1.  The recipient has received the tax invoice.

2.  The recipient has received the goods and/or services

3.  The supplier has paid tax to the Central government.

4.  The recipient has furnished tax returns.

Further to this, Section 16 of CGST Act was amended in the 2021 Finance Act with the intent of curbing ITC mismatches between GSTR-2A and GSTR-3B. Simultaneously, Rule 36(4) was substituted, restricting ITC only in cases where GSTR-1A has been filed by the supplier and communicated to the recipient via GSTR-2B. The government’s intent was to take action against habitual non-compliers: entities that raise invoices on the basis of which other entities claim credit, while failing to deposit the tax themselves. This is a relatively minor issue, but in trying to weed it out, the Centre has complicated the law for industry at large.

Plainly, the government did not envision scenarios where there will always be a mismatch between forms 2B and 3B. This might happen, for example, when an invoice is issued on the last day of the month but the goods have not yet been dispatched and will only be received the next month. Such transactions will be recorded on form 2B, but credit cannot be availed on it because the Section 16 clauses have not been met. There may be other genuine cases of mismatch, such as when cash-flow issues cause a delay in reporting of a few days. The constitutional validity of the concerned section has been challenged. Regarding mismatches between 2B and 3B, there is a principal legal issue involved here: Should the buyer be punished for the mistakes of the seller, especially if it is a genuine buyer purchasing from a genuine seller? Having paid for the goods as well as the tax, is it the buyer’s responsibility to ensure compliance by the seller?

Section 16(2) (BA)

In addition to the above sections, the government has inserted Section 16(2) (BA) vide the 2022 Finance Act. This will further complicate the issue by setting yet another condition for availing ITC.  Provisions under Section 38(2)(b) of the CGST Act define scenarios where credit can be restricted. Some of the listed scenarios are legitimate, such as where the supplier is deemed to be ‘risky.’ However, here too, while the intent is to address a genuine concern, it raises possible scenarios where large chunks of credit get blocked, such as when a business starts dealing with a new vendor, who subsequently raises red flags and gets identified as a ‘risk supplier.’

Complications with regard to ‘composite supply’


Another significant, unresolved issue concerns composite/mixed supplies. Over time, industry has taken the position that it is acceptable for an invoice to separately shows different items/types of supply. However, this position is now being challenged by the Department. In some industries, demands worth close to Rs 1,000 crores have been raised on ‘composite supplies’ for invoices that show just three different goods, despite the fact that these goods have been listed separately, and that this is also reflected in the company’s filings with the government. Many organisations are left with no choice but to go back to their books and check if they can possibly spot issues around composite supply, which appears to be the next item on the government’s radar.



For the CFO, the significance of day-to-day ‘Finance’ work is diminishing relative to new demands around business leadership. Apart from a basic technical/accounting background, the key skills and competencies today’s CFO must possess rest on four fundamental pillars: leadership, operations, controls and strategy. Sumendra Jain, CFO (India & Asia Pacific) at SMS India, believes that for Finance leaders to be effective business partners, they must have the necessary leadership and communication skills. Additionally, to be able to offer an independent perspective, they must possess a strong understanding of the company's business model and industry. CFOs should also be able to identify opportunities for top-line growth, manage downside risks and drive profit improvement, not just through the traditional methods of cost-control, but using new methods like product line/regional profitability analysis and benchmarking against industry players. Sumendra’s 25-year-long career offers insightful lessons and learning for executives in general and CFOs in specific.