FORM VS SUBSTANCE IN GST: A PRINCIPLE REVISITED

Introduction

The transition to the Goods and Services Tax (GST) in India marked a paradigm shift in indirect taxation, striving to simplify the tax structure and enhance transparency. Yet, as with all tax laws, its implementation often walks a tightrope between procedural form and substantive reality. The doctrine of form vs substance—long known in tax jurisprudence—gains renewed importance under GST, where complex compliance requirements often threaten to override the underlying economic realities of a transaction.

Understanding the Doctrine

The form vs substance principle refers to the legal notion that the true nature of a transaction or event must prevail over its formal appearance. Courts and tax authorities apply this to distinguish between what a transaction appears to be and what it actually is, so that tax liability reflects the economic essence, not just the paperwork.

This doctrine plays a central role in:

Preventing tax evasion via artificial arrangements.

• Resolving classification disputes.
• Interpreting input tax credit eligibility.
• Handling mistakes in returns or documentation.

Applicability Under GST

1. Place of Supply and Substance of Transaction

GST hinges on supply-based taxation. The form of contract may suggest an inter-state or intra-state transaction, but the substance (actual movement of goods, billing, and delivery) determines the true tax treatment. Misclassifying supplies can lead to double taxation or denial of credit.

Case Example:

In a real-life scenario, a taxpayer billed an intra-state supply but physically moved goods across states. Authorities rightly assessed IGST, emphasizing substance over invoice form.

2. Fake Invoicing vs Genuine Supply

GST compliance involves matching of invoices. In cases of bogus invoices without actual supply, the courts have upheld that substance (no movement of goods) overrides the form (invoice exists).

Case Law:

In Aftab Traders v. State of U.P. (2023), the Allahabad High Court ruled that mere procedural errors (like mismatches in e-way bill) could not override the substantial evidence of genuine movement and delivery. This sets a precedent against mechanical application of form-based errors to deny credit or penalize assessees.

3. Denial of ITC for Technical Mistakes

One of the recurring criticisms under GST has been the denial of Input Tax Credit (ITC) due to minor procedural lapses—such as wrong GSTR-1 filing, mismatched invoice numbers, or delays in uploading data.

Courts have now started reinforcing substance over form in such cases.

Case Law: In AR Polymers v. Commissioner, the Allahabad HC observed that technical glitches or human errors in return filing should not bar substantive credit where the underlying supply and tax payment are genuine

4. Composite vs Mixed Supply

A key GST concept is distinguishing composite (one principal supply with ancillary) from mixed supply (multiple individual supplies). Here too, substance of the offering determines the tax rate—not mere packaging.

Example:

A healthcare provider offers a bundle of services (consultation, lab tests, medicines). If the dominant intention is medical care, it may be a composite supply exempt from GST, despite invoices for separate components.

Judicial Observations

Courts have increasingly emphasized pragmatism over rigidity. Some key observations:

• “Tax is on real income, not theoretical income” – SC in Vodafone Essar.
• “Substance and not the form of the transaction is decisive” – in McDowell & Co. Ltd. v. CTO (1985) remains foundational.
• In GST context, HC in M/s. Mahadev Enterprises v. State of U.P. held that genuine errors not intended to evade tax must be treated leniently.
• Policy Angle: Ease of Doing Business vs Procedural Trap

Rigid application of form over substance leads to:

• Increased litigation.
• Harassment of small taxpayers.
• Denial of rightful credit and refunds.
• Defeating the purpose of GST as a seamless tax credit system.

This contradicts the government’s vision of “faceless, frictionless tax administration”.

Conclusion: The Need for Balance

While compliance discipline is essential, GST authorities and adjudicators must embrace a more substance-oriented approach, especially in cases of:

• Bona fide errors.
• Evident tax payment.
• No revenue loss to the exchequer.

A just, fair, and purpose-driven interpretation of GST laws will not only reduce litigation but also build trust in India’s evolving tax system.

Suggested Reforms:

1. Clear CBIC circulars reiterating substance over technicality.

2. ITC should not be denied merely for filing errors if supply and tax are evident.

3. Training of officers in principled tax adjudication.

4. Decriminalization of non-fraudulent filing mistakes

Form vs Substance in GST: A Principle Revisited

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By

Jayaprakash Gopinathan

Advocate