GST litigation: Why the latest wave of cases and what are the defence strategies

Goods and Services Tax (GST) is a relatively new piece of legislation and, in over seven years since its implementation, significant litigation has arisen across various issues. This is primarily due to the fact that the law on many crucial aspects remains unsettled, and divergent interpretations exist across different jurisdictions. Consequently, under GST, taxpayers have consistently approached the High Courts by filing writ petitions seeking relief against demands confirmed by the GST department or the investigating authorities.


Aside from routine issues such as classification, valuation, refund claims, and violations of the principles of natural justice by the GST authorities, the most common area of dispute under GST relates to the denial of input tax credit (ITC) due to reasons such as cancellation of the supplier’s registration or non-compliance by the supplier. Since compliance with GST law by the supplier is beyond the control of the recipient taxpayer availing ITC, denial of ITC on such grounds has been widely contested.

It is pertinent to mention that many high courts have granted relief to recipient taxpayers in such cases. The Calcutta High Court, in the case of Suncraft Energy Pvt Ltd, held that ITC cannot be denied to a bona fide recipient of goods or services in cases of default by the supplier.

There are also frequent disputes before the courts relating to denial of ITC in cases of retrospective cancellation of the supplier’s registration, or discrepancies between GSTR-2A and GSTR-3B returns, among others. Such issues are relatively minor and ought to be resolved at the Tribunal level. However, the non-operational status of the Tribunal has led to increased litigation before higher judicial forums. Another significant issue pertains to blocked credit on goods and services procured for the construction of immovable property.

In the case of Safari Retreats, the Supreme Court held that a building could be considered a “plant” if it plays an important role in business activities, such as renting or leasing, and that ITC may accordingly be availed. The Court further held that a functionality test must be applied on a case-by-case basis to determine the nexus between ITC on goods and services procured and outward supplies. However, the Government subsequently amended the GST law with retrospective effect to negate this eligibility, once again unsettling a position previously clarified by the Supreme Court.

Another recurring source of dispute is the interpretation of taxability of transactions. It has been observed that under the GST regime, the department has confirmed substantial demands, prompting taxpayers to seek relief through the courts. One such issue relates to the levy of GST on salaries paid to foreign nationals working for Indian entities. GST authorities, drawing from the Supreme Court’s decision in Northern Operating System, have issued widespread orders demanding GST on such salaries, often without applying the tests outlined by the Apex Court to determine whether the foreign national actually qualifies as a “seconded employee”.

The GST regime has also seen disputes escalate rapidly to the High Courts and the Supreme Court, particularly in cases where investigative authorities have raised enormous tax demands. A notable example is the taxability of online gaming. What began as a classification dispute has since evolved into a valuation dispute due to subsequent amendments in GST and income tax laws. The core of this dispute centres around the interpretation of the term "actionable claims", the distinction between games of skill and games of chance, and the taxable value on which GST should be levied.

The online gaming industry maintains that GST at 18% is applicable only on platform service charges, treating the activity as a game of skill. However, following the GST Council’s recommendations and changes to the valuation rules effective October 2023, GST authorities have treated the entire transaction as ‘betting and gambling’, liable to a higher GST rate of 28%. Authorities have also demanded GST on the entire amount collected from customers since the inception of GST, resulting in retrospective tax demands amounting to thousands of crores. This scenario has raised serious concerns about the operational sustainability of the online gaming industry. The Supreme Court is scheduled to hear the matter again on 5th May 2025.

Another long-standing dispute, carried over from the erstwhile tax regime, involves the levy of tax on royalties paid for mining leases. Taxpayers have argued that royalties constitute a tax paid for the enjoyment of mineral rights and represent compensation paid to the Government for the loss of minerals. In the India Cements case, the Supreme Court held that royalty is a tax and, as such, tax cannot be levied on tax. However, in a more recent decision in Mineral Development Authority of India, the Supreme Court held that royalty is not a tax but rather a consideration for the loss of minerals incurred by the Government in parting with its exclusive rights. These divergent rulings have left the issue unresolved.

To avoid litigation, taxpayers should strategise effectively, conduct regular compliance checks, and maintain accurate and comprehensive records. Submitting documents such as invoices, purchase orders, e-way bills, agreements, and document trails is essential for resolving routine issues. Furthermore, taxpayers must stay updated on legislative amendments and compliance requirements to proactively adapt their business practices and minimise the risk of future disputes. On matters of interpretation—such as taxability on corporate guarantees, cross-charging, and classification—decisions must be made with a clear understanding of the associated risks.

A fair and transparent resolution process, executed in a time-bound manner, is essential to provide the clarity and stability needed for resolving procedural and interpretational disputes. In this context, a robust alternative dispute resolution (ADR) mechanism specifically addressing classification, valuation, and ITC eligibility would greatly aid in resolving conflicts efficiently. Mediation, conciliation, and arbitration are faster and more cost-effective alternatives to litigation. The appropriateness of ADR in GST matters depends on the complexity, urgency, and cost considerations of the issue at hand.

Given the increasing volume of litigation under GST, it is imperative to adopt a balanced approach to mitigate disputes and streamline tax administration. While taxpayers must ensure compliance, maintain documentation, and stay informed of legislative changes, the Government must also prioritise the development of effective dispute resolution mechanisms.

The operationalisation of the GST Appellate Tribunal will be a major step forward in addressing these concerns. However, the development of a proactive ADR framework is equally essential. Ultimately, fostering a transparent and predictable tax environment will reduce litigation and promote economic stability—benefiting both taxpayers and the authorities.