The Union expected better tax revenues with the introduction of GST. The States though were divided on this, with some of them expecting better revenues whereas the others expecting a fall due to the consumption-based accrual of revenue. However, with the introduction of GST, the revenues were not very encouraging and many reasons could be attributed to this, both controllable and inevitable reasons. The inevitable reasons could be the economic condition, pandemic situation, etc. The Government has always been trying to take necessary steps to tackle the shortfall in the collection of tax (GST). Some of the apparent and controllable reasons noted were:
- Non-filing of returns by taxpayers,
- Bill trading / Fake invoicing,
- Availing of credit without the Government receiving the taxes,
- Refunding credit without the Government receiving the taxes.
So, the Government is now focusing at plugging these gaps by using technology and haywire insertion of provisions in the law.
One such change has been brought about in the provisions relating to cancellation of registration by the department officer suo moto. It is a tool (in addition to other provisions like blocking of e-way bill generation, etc.) which is used extensively in those cases where the returns were not filed for more than 6 months. This has made many assesses to file their returns. This was possible considering the provision under section 29(2)(b) & (c) of the CGST Act, 2017 i.e. cancellation of registration on non-filing for a certain period.
However, w.e.f. 22.12.2020, the department has been given additional reasons to go ahead and cancel registration, as below:
- Availing input tax credit in violation of the provisions of section 16 of the Act or the rules made thereunder; or
- Furnishing the details of outward supplies in FORM GSTR-1 for one or more tax periods in excess of the outward supplies declared in Form GSTR-3B for the said tax periods; or
- Violation of the provision of rule 86B.
These have been added to rule 21 of the CGST Rules, 2017, in order to address the controllable reasons for lower collection of taxes mentioned above.
Issues
Let us look at the issues and challenges in each of the conditions mentioned above.
Availing credit as per section 16
The above mentioned first condition of complying with the provisions of section 16 is very wide. Some of the conditions that require attention are:
- Tax charged on the supply should be paid using cash or using admissible ITC.
- Compliance with rule 36(4) – assuming that the department is under the presumption that its rule making power for this provision is flowing from section 16(1). This is a tool which the department may want to use to compel the taxpayers to avail credit strictly as per GSTR-1 filed by the suppliers.
Thereby, if an assessee avails credit in respect of which the supplier has not paid the taxes, his registration would be liable for cancellation. This is a condition which the supplier can never know in the normal course of his business for the following reasons:
- Mere information regarding GSTR-3B having been filed would not mean that the supplier has paid all his tax liabilities since, presently there is no linkage between GSTR-1 and GSTR-3B and the supplier can pay an amount lesser than the liability disclosed in GSTR-1.
- Suppliers would not share details regarding the numbers, etc. disclosed in their returns for the recipient to verify any mismatch between GSTR1 and GSTR3B.
- Whether a supplier has used admissible credit or not cannot be identified at all as it is a matter of interpretation and compliance. Further, in case the supplier’s supplier has not complied with section 16 then the credit in the hands of our supplier again could be questioned. Would it mean that credit inadmissibility in one hand would lead to inadmissibility in the hands of the taxpayers in the entire chain! May not be the intention.
- Obtaining a declaration from the supplier in this regard may also not be considered as compliance with the above.
In such cases, the recipient can take the following stand:
- Non-compliance at the supplier’s side (i.e. if he has not paid the tax or if paid if the credit he has used to pay the tax is inadmissible) cannot lead to consequences in the hands of the recipient when he is acting bona fide - M/s. Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur Vs. The State of Maharashtra & ORS 2012-TIOL-370-HC-MUM-VAT & Arise India Limited vs. Commissioner of Trade and Taxes, Delhi - 2018-TIOL-11-SC-VAT
- Ascertaining whether tax for the supply made to the recipient has actually been paid is a condition impossible to comply as explained above. It is a known principle that the law does not compel a person to do something which he cannot possibly perform as the legal maxim goes: lex non-cogit ad impossibilia, as was held in the case of Indian Seamless Steel & Alloys Ltd Vs UOI, 2003 (156) ELT 945 (Bom.)
Further, assuming that non-compliance with the provision under rule 36(4) is also covered u/s 16, it is to be noted that presently this rule is under challenge in various High Courts. Inserting a provision which could enable the department to cancel the registration on non-compliance with this kind of provision could lead to a lot of unwanted confusion and litigation.
However, in its tweets (https://twitter.com/cbic_india/status/1341966014943137792?s=20), the CBIC in an attempt to clear the myths regarding the amendments made vide the said notification, has tried to bring out a fact (No. 3) that there is a precise targeting of fraudsters which is being done and after doing a comprehensive analysis, usage of advanced tools, etc., only high risk entities are selected for the cancellation/suspension of registration.
The above, if followed in spirit will ensure that, in genuine cases the recipient is not put to hardship. Though, we know that the department does not really go with the intention/context of the introduction/amendment of any provision but goes merely by the text of it. Due to this we have seen many instances where the bank accounts have been frozen, credits have been blocked, etc. even in genuine cases leading to hardship to honest taxpayers as well. Considering the history, huge inconvenience could be expected to be caused to the taxpayers in carrying on business unless the CBIC issues clear instructions to its officers regarding the situations when they can proceed for cancellation of registration.
Disclosure of figures in GSTR-1 and GSTR-3B
The requirement of disclosure of the figures in GSTR-1 and 3B without any discrepancy is something which is quite not possible. To err is human and to expect that all returns/statements would be filed error free, appears to be harsh and unreasonable. Further, the said provision has not mentioned any situations for differences or threshold of difference which will be tolerated, thereby making life of the taxpayers miserable. Added to this is that the difference in one tax period is also sufficient to invoke the provision for cancellation and does not give any guidance to the officer to look at the cumulative difference over the period.
There could be various genuine reasons for the differences:
- Clerical error in GSTR-1 / GSTR3B,
- Missing to disclose any credit note/debit note in GSTR-1,
- Short payment of tax in GSTR3B due to shortage of funds. The law prescribes the interest rate for such late payment, thereby indicating that cancellation is not the solution in genuine cases,
- Payment of taxes in GSTR3B relating to short payment during any of the earlier tax periods, etc.
In this regard also the CBIC vide its twitter handle (https://twitter.com/cbic_india/status/1341966014943137792?s=20) tried to bring out a fact (No. 2) that any clerical errors in the returns will not lead to cancellation of registration. Only fraudulent cases with significant discrepancies having high risk factors with an aim to tackle the fake invoice frauds will be considered for this provision.
However, not bringing this in any way in the text of the provision can lead to misuse and a lot of hardship for the genuine taxpayers too. In the case of e-way bills provision, it was seen that in many cases, even a small clerical error in the documents has led the field officers to demand payment of tax with full penalty irrespective of the fact that there is no tax evasion. We have seen so many High Court judgements in this regard and similar can be expected in case of any discrepancy between GSTR1 and GSTR3B, unless there is any clarification or instruction which is issued to the officers.
Violation of rule 86B
This rule is effective from 1st Jan ’21, which requires assesses having value of taxable supply (other than exempt and zero rated) in a month exceeding Rs. 50 lakhs, to pay at least 1% of his output tax using cash. Example, in case such taxpayer has a liability of Rs. 100, at least Rs. 1 has be paid from the electronic cash ledger. The following are exceptions to this requirement:
- The assessee or its proprietor or karta or the managing director or any of its two partners, whole-time Directors, Members of Managing Committee of Associations or Board of Trustees, as the case may be, have paid more than Rs. 1 lakh as income tax in each of the last two financial years for which the time limit to file return of income under section 139 (1) of the said Act has expired, or
- Refund received in the preceding financial year on account of unutilised input tax credit (on account of exports) is more than Rs. one lakh,
- Refund received in the preceding financial year on account of unutilised input tax credit (on account of inverted duty structure) is more than Rs. one lakh,
- The condition of payment of 1% of output tax liability through the electronic cash ledger has been complied with on a cumulative basis, up to the said month in the current financial year, or
- The assessee is – (i) Government Department; or (ii) a Public Sector Undertaking; or (iii)a local authority; or (iv)a statutory body.
Further, the Commissioner or an officer authorised by him in this behalf may remove the said restriction after such verifications and such safeguards as he may deem fit.
The first aspect to be noted is that this provision can be challenged on the ground of being ultra vires because there is no power given to make any such rule as per section 49 or any other provision, more so when the sub section 4 under section 49 provides that:
The amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act or under the Integrated Goods and Services Tax Act in such manner and subject to such conditions and within such time as may be prescribed.
The above shows that only manner, condition and time can be prescribed for utilization of the credit and there can be no restriction on its utilization. Hence, the said rule is ultra vires.
Under the earlier law there was a provision under section 37 (2)(xiiia) of the Central Excise Act, 1944 which provided for rule making power for withdrawal of facilities or imposition of restrictions (including restrictions on utilisation of CENVAT credit) on manufacturer or exporter or suspension of registration of dealer, for dealing with evasion of duty or misuse of CENVAT credit. However, before insertion of this provision, any rule restricting utilisation of credit was held ultra vires.
It was also held in many cases that this kind of restriction can be imposed, though in the case of Hiren Aluminium Ltd. Versus Union Of India 2009 (234) E.L.T. 578 (Bom.) strictures were imposed on department recommending arbitrary credit restriction for three months and no reason given for restraining petitioner from utilising Cenvat credit for six months. This compared with the instant case of rule 86B, shows that the said rule creates hardship for genuine taxpayers because this provision is being applied for all without examining if there is any detriment to Revenue. Further, there is no requirement or responsibility set on any officer to provide any reason for this kind of restriction but very conveniently for all assesses the utilization is restricted.
Another shortcoming of this provision could be that any person falling under the exceptions mentioned in rule 86B (say he has received refund of ITC > Rs. 1 lakh in the previous year), even though utilizing credit in a case which is detrimental to Revenue, there is no provision to stop such utilisation by the department. Whereas the genuine taxpayer not falling under those exceptions is restricted from using the credit. It is high time that the amendments to the GST laws are first examined at greater depth before actual implementation.
The following could be some cases where genuine taxpayers would be faced with hardships on implementation of the above rule:
- The assessee is into a business which is seasonal, and the initial months of the FY are off-season.
- The assessee has applied for refund relating to preceeding FY but has not received as the order in this regard is under appeal or for any other reasons.
- In case of multi-location branch, compliance at PAN level could be possible. Compliance at each of the registrations, every tax period may be difficult.
- Start-ups with losses in the initial years.
One percent, in some cases would be a ridiculously huge number and is more pinching in case of existing accumulated credit, leading to working capital issues. Further, giving discretion to the Commissioner or any authorised officer with power to remove this restriction is not the best way to operate in this age of faceless assessments under other laws. On the other hand, the rule should be made in such a way that the department officer can restrict the utilisation in case of detriment to Revenue as was under the earlier laws.
Provision under rule 21 better handled
Even if the Government felt it necessary to introduce the situations vide notification 94/2020 ibid for handling the revenue loss / leakage, instead of giving the officers the power to cancel the registration, at the most they should have been given the power to suspend registration after giving an opportunity of being heard. This is for the reason that once registration is suspended the assessee would neither be able to make any taxable supplies nor would be able to get any refund during the period of suspension (rule 21A). This would cause hardship to genuine taxpayers which could be fatal to their business and is thereby in violation of Article 19(1)(g) of the Constitution.
Another aspect to be noted is that mere difference between GSTR1 and GSTR3B or a genuine taxpayer not being able to comply with any of the provisions of section 16 or non-compliance with rule 86B, should not lead to cancellation of registration on the principle that the punishment should be commensurate with the offence committed, as was held in the case of Falcon Air Cargo & Travel (P) Ltd. Versus CCE, New Delhi 2002 (141) E.L.T. 284 (Tri. - Del.) and many other cases. Suspension of registration and taking away the right of the assessee to carry on business are extreme steps for these kind of non-compliances.
Before parting, one point to be noted is that in criminal law, Blackstone's ratio (also known as the Blackstone ratio or Blackstone's formulation) is applied, which is the idea that: It is better that ten guilty persons escape than that one innocent suffer.
This article was published in the March 2021 edition of The Chamber’s Journal. For any queries/feedback write to [email protected].