India follows a dual taxation structure where both the Central and State Governments levy taxes on different economic activities. Two major components of this structure are the Income Tax governed by the Income-tax Act, 1961, and the Goods and Services Tax (GST) governed by the Central Goods and Services Tax Act, 2017, among others. These two systems are distinct in their nature — Income Tax being a direct tax and GST an indirect tax. However, their interaction significantly impacts tax administration, compliance, and policy decisions.
Constitutional Basis of Income Tax and GST
Powers Under the Constitution
Before the implementation of GST, taxation powers were distributed between the Centre and the States through the Union List, State List, and Concurrent List under the Seventh Schedule of the Indian Constitution. Income tax, excluding agricultural income, fell within the Union List under Entry 82. States had exclusive powers to levy tax on sale of goods (Entry 54 of State List) and on luxury, entertainment, and entry (Entries 62, 60, and 52).
Post-GST, Articles 246A, 269A, and 279A were inserted by the 101st Constitutional Amendment Act, giving both the Centre and States concurrent powers to legislate on GST. Article 246A is a key provision, providing special power to levy GST.
Article 246A – Special Provision for GST
Article 246A empowers both Parliament and State Legislatures to make laws with respect to GST imposed on the supply of goods and services. However, the Parliament retains exclusive power to legislate on inter-state trade or commerce under the Integrated Goods and Services Tax (IGST).
Article 269A – Levy and Collection of IGST
This article mandates that IGST on inter-State supplies and imports be levied and collected by the Central Government, with apportionment between the Centre and the States as per the recommendation of the GST Council.
Article 279A – GST Council
The GST Council is a constitutional body comprising the Union Finance Minister and State Finance Ministers. It recommends tax rates, exemptions, model laws, and principles of levy and apportionment of GST. The Council plays a crucial role in ensuring coordination between different tiers of government.
Legal Interpretation of GST and Income Tax
Scope and Nature of Income Tax
Income tax is levied on income earned by individuals, HUFs, firms, companies, and other entities. It applies to real income, whether accrued or received, and is governed by the principles of accrual and receipt. Income tax includes taxation on salaries, business profits, capital gains, and other sources.
Nature of GST
GST is a consumption-based tax levied on the supply of goods and services. It is destination-based and applies at every point in the supply chain, with credit for tax paid at the previous stage (input tax credit).
Differences in Tax Base
One of the fundamental distinctions lies in the tax base. Income tax is based on net income after deductions and expenses, whereas GST is based on the transaction value or consideration for supply of goods or services.
Interaction Between Income Tax and GST
Common Transactions – Dual Compliance
Several business transactions require simultaneous compliance under both laws. For example, professional services rendered by a chartered accountant are subject to income tax on the income earned and GST on the services supplied. Similarly, rental income from commercial property may attract both GST and income tax.
Composite and Mixed Supplies vs Income Heads
Under GST, classification of supplies as composite or mixed affects the rate and applicability of tax. On the income tax side, classification under different heads such as income from house property, business income, or capital gains has distinct implications. In many cases, courts have been called upon to determine the correct head of income or classification of supply.
GST Paid as Expense in Income Tax
Businesses can claim GST paid on purchases as input tax credit (ITC), but any amount not eligible for ITC (like blocked credits under Section 17(5) of the CGST Act) becomes an expense. Such expenses may be claimed as deductions under the Income-tax Act, 1961, subject to specific conditions.
Disclosure Requirements
Taxpayers are required to disclose GST turnover in their income tax returns, and vice versa, linking data between GSTR filings and Form 26AS or AIS under income tax. Discrepancies can trigger audits and scrutiny proceedings from both departments.
Legal Conflicts and Judicial Precedents
Case Law on Taxability of Reimbursements
The issue of whether reimbursements are liable to GST and income tax has been litigated. Courts have ruled that genuine reimbursements without any markup are not liable to GST. However, under income tax, such reimbursements may still be part of gross receipts if they contribute to the earning of income.
Classification Issues
In many cases, the classification of income under income tax and supply under GST can differ. For instance, compensation received for cancellation of a contract might be taxable under ‘Income from Other Sources’ under the Income-tax Act, but may or may not qualify as a supply under GST depending on its nature.
Cross-utilisation of Data for Enforcement
With data integration between departments, GST returns and income tax filings are often cross-referenced. For example, a taxpayer declaring high turnover in GST but low income in the income tax return may attract scrutiny. Several notices have been issued under Section 148 (income escaping assessment) and Section 61 (GST scrutiny) based on such mismatches.
Role of Technology in Bridging Compliance
Integration of GST and Income Tax Portals
Efforts are underway to integrate the GSTN portal with the Income Tax e-filing system to enable seamless exchange of data. The AIS (Annual Information Statement) under income tax now includes GST turnover details, which helps the Income Tax Department in detecting under-reporting of income.
Artificial Intelligence and Data Analytics
Both departments have begun using AI and analytics to detect anomalies. GST returns and income tax filings are analyzed to identify mismatches in turnover, purchase claims, and profit margins. This interconnectivity has reduced tax evasion and increased voluntary compliance.
Practical Challenges in Interplay
Compliance Burden
Small businesses face increased compliance burdens due to dual reporting and differing requirements under both statutes. While GST returns are filed monthly or quarterly, income tax requires annual returns, advance tax payments, and TDS compliances.
Disputes Over Tax Jurisdiction
There have been disputes regarding the jurisdiction of income tax and GST officers, especially in matters of composite schemes or deemed incomes. Jurisdictional overlaps sometimes lead to conflicting interpretations.
Sector-specific Complexities
Some sectors, like real estate, digital economy, and financial services, face unique challenges due to the overlap of GST and income tax provisions. For instance, the treatment of joint development agreements in real estate or intermediary services in the IT sector requires nuanced analysis under both laws.
Government Initiatives to Resolve Overlaps
Joint Coordination Between Departments
The Central Board of Direct Taxes (CBDT) and the Central Board of Indirect Taxes and Customs (CBIC) have been working together to share data and avoid duplication. Joint audits, investigations, and information-sharing protocols have been established to ensure effective enforcement.
Simplification of Procedures
The government is also attempting to simplify compliance norms for MSMEs and other taxpayers. For instance, schemes like the presumptive taxation scheme under income tax and composition scheme under GST aim to reduce compliance burdens for small businesses.
Training and Awareness
Regular training programs, capacity building, and awareness initiatives are being conducted for both tax officials and taxpayers to ensure proper understanding of the interplay between the two laws. Clarifications and FAQs are periodically issued to reduce confusion.
Introduction to Legal Conflicts Between Income Tax and GST
The Indian tax system, governed by both direct and indirect taxes, often faces legal challenges when there is an overlap between the provisions of the Income Tax Act, 1961 and the Goods and Services Tax (GST) laws. These overlaps lead to litigation, confusion in tax administration, and varied judicial interpretations. We delve into the legal nuances, judicial verdicts, and interpretational dilemmas that have surfaced in the dual application of these two laws.
Overlapping Concepts and Their Legal Fallout
1. Supply vs Income
One of the fundamental challenges arises from the definitions of “supply” under GST and “income” under the Income Tax Act. While GST is applicable on the supply of goods or services for consideration, the Income Tax Act imposes tax on income accrued or received during a financial year.
In several cases, transactions such as reimbursements, incentives, and cross-charges have led to questions about whether these qualify as taxable income or taxable supply. For instance, inter-branch reimbursements may not be treated as income under the Income Tax Act, yet under GST they might be considered supply, depending on the location and registration status of branches.
2. Composite and Mixed Supply vs Composite Contracts Under Income Tax
GST differentiates between composite supply (a bundle of supplies with one principal supply) and mixed supply (bundled independent supplies), attracting tax according to the nature of the principal supply or the highest tax rate respectively.
In contrast, the Income Tax Act often views such composite contracts as a single source of income, primarily for the purpose of characterising business income, professional fees, or income from other sources. Disputes arise when one contract is split differently under both laws, causing varied tax treatments.
3. Royalty and License Fees
Licensing of intellectual property, software, and brand names often leads to dual taxation issues. While the Income Tax Act taxes such income under “royalty” provisions, GST applies tax under the category of supply of services.
Judicial pronouncements have varied depending on whether the license is perpetual or time-bound, exclusive or non-exclusive, and whether control is retained by the licensor. In cases like Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT, the Supreme Court clarified that payments made for off-the-shelf software were not royalty under the Income Tax Act, impacting how such transactions are treated under GST.
Key Judicial Rulings – Interplay of Income Tax and GST
Supreme Court on Software Licensing
In the landmark case of Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (2021), the Supreme Court held that payments made to foreign software companies for shrink-wrapped software did not amount to royalty. This judgment had direct implications on the GST treatment of similar imports, especially when it came to reverse charge mechanisms.
Delhi High Court – Services by Directors
In cases related to remuneration paid to directors, conflicting positions under both laws were clarified. While salary to directors may not be subject to TDS under section 194J of the Income Tax Act (if they are employees), under GST, a similar payment might attract tax under the reverse charge mechanism if directors are not considered employees of the company.
The Delhi High Court and AAR rulings provided important clarity on when a director is to be treated as an employee and when as an independent service provider.
Kerala AAR – Reimbursement of Expenses
Advance Authority Rulings (AARs) under GST have repeatedly addressed the issue of reimbursement of expenses. In one case, the Kerala AAR ruled that reimbursement of employee travel expenses by the head office from branches was taxable under GST.
However, for Income Tax, such reimbursement does not usually qualify as income in the hands of the employee or the branch. This led to interpretational inconsistencies in classification and reporting under both laws.
Classification Disputes and Revenue Neutrality
Taxability of Incentives
Business incentives, cashbacks, and loyalty rewards are often contentious. Income Tax authorities may treat them as business income or perquisites, depending on the recipient and purpose. Under GST, however, they may be classified as supply of promotional services or discounts.
Legal issues often arise in sectors such as FMCG, real estate, and automobile, where manufacturers provide back-end incentives to distributors or dealers.
Revenue Neutrality as a Defence
In some litigations, taxpayers have argued that when tax liability exists under one law (either Income Tax or GST), there should be relief or exemption under the other on the grounds of revenue neutrality. However, courts have not uniformly accepted this line of reasoning.
The Supreme Court in several rulings has held that each statute must be independently interpreted, and tax liability under one law does not absolve liability under another.
Procedural Contradictions
Place of Supply vs Source of Income
GST relies on the concept of the “place of supply” to determine the applicable state and nature of tax (CGST/SGST or IGST), whereas the Income Tax Act uses “residential status” and “source of income” as fundamental determinants.
For example, services provided from India to a foreign entity may qualify as an export under GST and be zero-rated, while under Income Tax, the same income may be taxable depending on the residential status and nexus rules. This disconnect sometimes creates problems for Indian service exporters who are treated differently by both tax regimes.
Tax Deducted at Source (TDS) vs GST Withholding
TDS under the Income Tax Act aims to collect tax at the point of payment. GST, while not having a general TDS mechanism, does provide for tax deduction under Section 51 for specified government entities.
However, this leads to situations where one transaction attracts TDS under Income Tax, but is exempt from GST withholding, and vice versa. Businesses often face compliance burdens in reconciling such transactions in both returns and ledgers.
Statutory Interpretation Principles Applied by Courts
Doctrine of Harmonious Construction
To resolve conflicts, courts often apply the principle of harmonious construction, trying to read both statutes in a way that they can co-exist. This was particularly relevant in director remuneration and software royalty cases.
Substance Over Form
In several rulings, courts have applied the doctrine of substance over form to determine the real nature of a transaction.
For example, bundled transactions are dissected to examine the dominant intention behind the contract to ascertain proper tax treatment. This approach helps reduce artificial distinctions that lead to dual taxation or exemption.
Judicial Discipline and Binding Nature
Decisions of the Supreme Court and High Courts under one law are often persuasive, though not binding, under the other.
For instance, the SC ruling in the software royalty case influenced subsequent rulings under GST even though it was decided under Income Tax. AARs and appellate rulings under GST have occasionally deviated, resulting in continuing uncertainty.
Case Studies and Illustrative Scenarios
Case Study 1: Software Sale to Indian Customers
An Indian company imports software from a foreign supplier and resells it to domestic clients. While it pays GST on the resale, the Income Tax department may consider the payment to the foreign company as royalty and impose withholding tax. The conflict arises on classification and compliance, leading to double litigation.
Case Study 2: Employer-Employee Transactions
Reimbursements made by employers to employees for telephone or travel expenses may not be taxable under Income Tax if incurred wholly for official purposes. However, GST authorities may question the availability of Input Tax Credit on such supplies or even seek to tax reimbursements if documentation is incomplete.
Case Study 3: Cross-Border Services
A company provides design services to a client abroad. The payment received qualifies as export of services under GST and is zero-rated. However, under Income Tax, based on the client’s control and contract terms, the income may be attributed to a permanent establishment and taxed in India.
Impact on Tax Planning and Litigation Strategy
Structuring of Contracts
Taxpayers increasingly need to draft contracts considering both income tax and GST implications.
Clear demarcation of services, goods, consideration components, and responsibilities can help avoid interpretational disputes. For instance, royalty clauses should be examined from the lens of both laws to avoid litigation.
Advance Rulings and Expert Opinions
Advance Rulings under both Income Tax and GST can be used strategically to obtain clarity. However, since AARs are binding only on the applicant and the concerned jurisdiction, businesses may still face challenges across states and assessments.
Need for Simultaneous Compliance Teams
With GST being transaction-specific and Income Tax being entity-specific, the need for coordination between the two compliance verticals has become critical. Businesses now require cross-functional expertise to avoid misreporting, mismatches, or penalties.
Introduction to Sectoral Challenges in Dual Taxation
The co-existence of the Income Tax regime and the Goods and Services Tax (GST) framework has ushered in new compliance challenges across multiple sectors in India. While the broad principles of income tax and GST apply uniformly, certain industries experience unique issues owing to the nature of their operations.
From healthcare to securities trading and the treatment of business transfers via slump sale, understanding the sector-specific interplay between these two taxation systems is essential for ensuring legal compliance and minimizing litigation.
Healthcare Sector: Income Tax Exemptions vs GST Applicability
Income Tax Treatment in the Healthcare Sector
Under the Income Tax Act, healthcare services generally enjoy exemptions under Section 10(23C) and Section 11 if provided by charitable institutions. Private hospitals and diagnostic labs, on the other hand, are subject to income tax on their profits. Tax planning in this sector often revolves around the classification of income as business income or charitable receipts, eligibility for depreciation on medical equipment, and treatment of grants or donations.
GST Implications for Medical Services
Medical services provided by clinical establishments, doctors, or paramedics are exempt under GST Notification No. 12/2017-Central Tax (Rate). However, ambiguity arises in areas such as cosmetic surgery, wellness packages, or bundled services involving both exempt and taxable supplies. For example, if a hospital provides a package that includes surgery (exempt) along with room rent and pharmacy services (taxable), careful bifurcation is needed to determine GST liability.
Interplay Issues and Judicial Trends
The divergence in treatment can lead to situations where a transaction exempt under GST is taxable under income tax. For instance, grants received for CSR activities in a hospital might not be subject to GST but may be considered income under income tax. Case laws have also questioned whether doctors operating under hospital panels are employees or independent contractors, affecting both TDS applicability and GST on professional services.
Real Estate Sector: Valuation and Timing Mismatches
Income Taxation in Real Estate
Income from real estate may be taxed under multiple heads such as income from house property, capital gains, or business income, depending on the nature of the asset and transaction. Timing of recognition and valuation of income (based on stamp duty value under Section 50C or 43CA) are key factors influencing taxability.
GST on Construction and Sale of Property
GST is applicable on under-construction property but not on completed properties where the completion certificate has been issued. Developers paying GST on inputs and services used in construction can claim input tax credit, but this is subject to conditions such as non-availment of the abatement under the old composition schemes.
Dual Taxation Concerns
There is often a mismatch between the point of taxation under income tax (based on accrual or receipt) and GST (based on supply). Developers have raised concerns about double taxation on advances received, especially where a project is delayed and income tax is payable even before GST liability arises. Valuation inconsistencies between income tax’s stamp duty provisions and actual sale consideration for GST further complicate reporting and reconciliation.
Information Technology Sector: Cross-Border Transactions and Services
Income Tax Rules for IT and ITeS Companies
In the IT sector, income is generally classified as business income and taxed under the regular provisions or the presumptive scheme under Section 44ADA for professionals. For international IT service providers, transfer pricing, and place of effective management (POEM) rules often come into play. Software companies offering SAAS (Software as a Service) or cloud-based services also deal with Equalisation Levy (Section 165A).
GST on Software and Digital Services
Digital services, whether imported or exported, face complex GST treatment. Software can be categorized as either goods or services depending on its form (off-the-shelf or customized). While exports are zero-rated under GST, imported digital services are subject to reverse charge if supplied by a foreign service provider to an Indian recipient.
Sector-Specific Frictions
Problems arise when the same payment is subject to TDS under income tax and reverse charge under GST, particularly in cross-border deals. Another major issue is classification: downloadable software may be taxed differently under GST (as a service) while being treated as capital expenditure under income tax, leading to difficulties in harmonizing accounting and compliance.
Financial Services Sector: Compliance Complexity in Dual Regimes
Income Tax Implications for Banks and NBFCs
Financial institutions have to deal with provisions like TDS under Sections 194A, 194H, and 194I, transfer pricing on inter-branch and international transactions, and special provisions for bad debts under Section 36(1)(viia). Moreover, they are subject to stringent reporting under Form 61A and annual information statements.
GST on Financial and Banking Services
Financial services attract 18 percent GST on fee-based income such as processing fees, account maintenance, or locker charges. However, interest on loans and advances is exempt. The challenge lies in splitting income streams for accurate reporting, especially where bundled services are offered.
Points of Conflict
A major compliance burden arises in reconciling interest income (exempt under GST but taxable under income tax) and fee income (taxable under both regimes). Banks also face complex issues when dealing with branch transfers across states, which may be exempt under income tax but taxable under GST as deemed supply.
Securities Market: Capital Gains and GST Exclusions
Income Tax on Share Transactions
Securities trading gives rise to either business income or capital gains, depending on the frequency and intention of transactions. Long-term capital gains on listed securities are taxed under Section 112A, while short-term capital gains fall under Section 111A. Traders are subject to audit provisions under Section 44AB if turnover exceeds thresholds.
GST Position on Securities
Transactions in securities are excluded from the scope of GST under Section 2(52) of the CGST Act. However, associated services like broking, demat account maintenance, and research services are taxable. GST is also applicable on transaction charges levied by stock exchanges.
Compliance Divergences
While gains from securities may be exempt under GST, service charges associated with them attract tax, leading to dual compliance. Traders often struggle with differentiating revenue from trading and income from services, especially when both appear in the same books. Brokerages face issues in reversing input tax credit on exempt securities trading activity.
Education Sector: Exemptions vs Taxability of Ancillary Services
Income Tax Rules for Educational Institutions
Educational institutions not for profit may claim exemption under Sections 10(23C) and 11, subject to compliance with investment and application rules. However, commercial coaching centers and institutions not registered as charitable trusts are fully taxable.
GST on Educational Services
Core education services provided by schools and universities are exempt from GST. Yet, commercial coaching, vocational training, and ancillary services such as transport, canteen, or extracurricular activities may attract GST.
Dual Reporting Challenges
Institutions availing exemptions under income tax may still have to register and pay GST on non-core services, creating compliance difficulties. For example, a school may not pay income tax on fees but may need to pay GST on transportation or uniform sales. Reconciliation of these two streams is often tedious.
Slump Sale Transactions: Mixed Tax Implications
Income Tax Treatment
A slump sale is the transfer of an undertaking for a lump-sum consideration without assigning individual values to assets and liabilities. It is taxed under Section 50B as capital gains, with special computation mechanisms for net worth.
GST Applicability on Business Transfers
GST law provides exemptions for the transfer of a business as a going concern (entry no. 2 of Notification No. 12/2017). However, interpretation issues arise around whether a transaction qualifies as a going concern, particularly when it includes assets like immovable property.
Classification and Disputes
Dual implications occur when a slump sale is considered a capital asset transfer under income tax but GST authorities deny exemption by treating it as a supply of individual assets. Judicial precedents stress on documentation and intent to support going concern treatment. The timing of transfer, valuation of consideration, and apportionment of liabilities are critical to ensure alignment across both regimes.
Emerging Industries and New Business Models
E-Commerce and Aggregators
E-commerce entities face TDS under income tax (Section 194-O) and TCS under GST (Section 52). This leads to multiple deductions from the same transaction, affecting working capital. Additionally, digital platforms providing intermediary services have to determine their taxability based on their role (agent or principal).
Cryptocurrency and Digital Assets
With digital assets being taxed at 30 percent under income tax (Section 115BBH), clarity is still evolving regarding their GST treatment. Some interpret them as actionable claims or intangible goods. This uncertainty leads to compliance dilemmas where traders or exchanges operate in the absence of uniform policy.
Freelancers and Gig Economy
Freelancers offering services online may qualify under presumptive income tax schemes, but if their turnover exceeds GST thresholds, they are liable to pay GST. Non-resident clients create complications in export classification and zero-rating.
Compliance Strategies
Across sectors, businesses need to:
- Maintain parallel accounting systems for income tax and GST
- Align invoicing with both regimes’ requirements
- Identify transactions subject to dual compliance
- Monitor threshold applicability for exemptions and deductions
- Document sector-specific facts and intents clearly for audit readiness
Conclusion
The convergence of Income Tax and Goods and Services Tax represents a complex yet crucial facet of India’s tax ecosystem. Both systems, while independently governed by distinct laws, often intersect in ways that necessitate thorough compliance, accurate reporting, and legal clarity. From constitutional allocation of taxing powers to the nuances of transactions involving composite supply, cross-border services, and digital economy, the interface between these tax domains calls for a multidisciplinary understanding of accounting, law, and regulatory frameworks.
Entities engaged in diverse business models face the challenge of adhering to dual obligations — one under the Income-tax Act, 1961 and the other under the CGST Act, 2017. The implications are far-reaching, from audit procedures to transfer pricing assessments, from TDS obligations on cross-border services to GST liability on free or barter transactions. The interaction also extends to sector-specific grey areas such as healthcare, stock markets, education, and slump sale transactions, where both Income Tax and GST may apply concurrently but differently.
Moreover, the reconciliation of data between the GST portal and income tax filings is no longer a formality, it is a fundamental aspect of compliance that authorities scrutinise. Discrepancies can trigger investigations, penalties, and disallowance of credits or expenses. Therefore, internal controls and robust reporting systems have become essential for businesses, especially those engaged in e-commerce, import-export, services, and sectors prone to litigation.
Judicial interpretations and advance rulings continue to evolve the understanding of how the two laws apply together. While certain conflicts remain unresolved, such as those involving double taxation or taxability of reimbursements, the tax administration has taken steps to harmonise systems, facilitate data sharing, and reduce compliance burdens.
In the coming years, the interplay between Income Tax and GST will likely become more streamlined as technology integration deepens, reporting systems become more unified, and legal jurisprudence matures. Until then, businesses and tax professionals must proactively adapt to the dynamic landscape, maintain accurate documentation, and seek legal clarity where needed to mitigate the risk of non-compliance and litigation.
Understanding this interplay is no longer optional, it’s essential for financial planning, corporate structuring, and ensuring tax efficiency in a rapidly transforming regulatory environment. The ultimate goal remains the same: achieving transparency, consistency, and fairness in the tax system for both the taxpayer and the state.