Around 200 prominent companies, including Colgate Palmolive, Domino’s Pizza, McDonald’s India, Castrol, Saint-Gobain, L’Oreal, Whirlpool, and Mastek, have found themselves at the center of a legal battle with state tax authorities over pending Value-Added Tax (VAT) from the pre-Goods and Services Tax (GST) era in India.
These companies have received notices from state tax authorities demanding approximately Rs 30,000 crore in taxes for transactions related to intellectual property rights (IPRs) from the financial years 2011 to 2015.
In response to these notices, the affected companies have initiated legal proceedings, filing petitions in various high courts and even the Supreme Court of India. Their primary argument revolves around the issue of double taxation, where they contend that they have already paid service tax on these transactions, and the imposition of VAT on IPR transfers is unjust.
The crux of the matter lies in the classification of IPRs as either “goods” or “services.” State tax authorities have treated IPRs as goods and subjected them to VAT, which is at odds with the GST regime’s specific guidelines on the taxation of IPR. Under GST, IPR transactions are subject to an 18 percent GST rate, depending on whether they are categorized as the “supply of services” or the “supply of goods.”
Several states, including Maharashtra, Uttar Pradesh, Madhya Pradesh, Tamil Nadu, and Gujarat, have issued VAT notices to the affected companies, prompting the legal dispute.
While the matter is now in the hands of the courts, legal experts have emphasized that it is not permissible to classify items as both goods and services, leading to potential double taxation.
A senior official from the Central Board of Indirect Taxes and Customs (CBIC) acknowledged the complexity of the issue and stated that the government would await guidance from the courts to resolve the matter.
This legal standoff highlights the challenges and ambiguities that can arise when tax regimes transition, such as the shift from the pre-GST VAT system to the unified GST framework in India. The outcome of these legal proceedings will have implications for the treatment of IPR transactions and the principle of avoiding double taxation in the country.
