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TMI BlogISSUANCE OF SHOW CAUSE NOTICES UNDER SECTION 74 OF GST ACT, 2017 IS UNSUSTAINABLE WHEN GSTR-7 IS DULY FILED BY THE SERVICE RECIPIENTS ON THE GST PORTALX X X X Extracts X X X X X X X X Extracts X X X X ..... ISSUANCE OF SHOW CAUSE NOTICES UNDER SECTION 74 OF GST ACT, 2017 IS UNSUSTAINABLE WHEN GSTR-7 IS DULY FILED BY THE SERVICE RECIPIENTS ON THE GST PORTAL X X X X Extracts X X X X X X X X Extracts X X X X ..... This article explains why such proceedings are not legally sustainable when GSTR-7 has been duly filed by the recipients of Goods/Services. TDS Provisions are stipulated under Section 51 of the CGST Act -: Section 51 mandates specified recipients to deduct tax at 2% (1% CGST + 1% SGST) on payments exceeding Rs.2.5 lakhs made to suppliers of taxable goods or services. The amount so deducted is deposited with the government and reflected in the supplier's (Tax Payer's) electronic cash ledger. These are available for verification and can be verified by the authorities. Further the deductor (Recipient of Goods/Services) is required to furnish details of the TDS deduction in Form GSTR-7. This return captures the amount deducted and deposited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against each supplier's GSTIN, and a certificate is auto-generated for the supplier. As per Rule 87(6) of the CGST Rules, the TDS amount deducted is reflected in the supplier's electronic cash ledger, allowing them to utilize the amount towards tax liability. When the details of taxable amounts are provided by the recipient of Goods/Services, it is common knowledge that there is no suppression of facts as far as such transactions are concerned. Case being so, it appears issuing Show Cause Notices under Section 74 of CGST Act, 2017 appears to be illegal and non-sustainable. Grounds for Challenging the Notices issued under Section 74 of the Act: Once tax has been deducted and deposited by the recipients through GSTR-7 and if there is shor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t payment of tax on part of the supplier the authorities are aware about such lapses of nonpayment/ short payment on the part of the supplier of Goods/services. The government has already received the part of amount due and the balance payable is accordingly exhibited in GSTN. It is no more resintegra that the mere non-payment of tax does not automatically constitute "suppression of facts" with an intent to evade tax. For authorities to invoke the extended period of limitation under tax laws, there must be clear evidence of deliberate and willful suppression aimed at evading tax liability. In PUSHPAM PHARMACEUTICALS COMPANY VERSUS COLLECTOR OF C. EX., BOMBAY - 1995 (3) TMI 100 - SUPREME COURT. The Supreme Court held that "suppressio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of facts" must be deliberate and with the intent to evade payment of duty. Extended period of 5 years not applicable just for any omission of assessee unless it is deliberate to escape from payment of duty. Expression "Suppression of facts" in proviso to Section 11A(1) of Central Excise Act, 1944 to be interpreted strictly because it has been used in company of such strong words as fraud, collusion or wilful default. When the facts are known to both the parties the omission by one to do what he might have done and not that he must have done does not render it suppression of fact. These words were repeated by the Apex Court in ANAND NISHIKAWA CO. LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, MEERUT - 2005 (9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) TMI 331 - SUPREME COURT The Court emphasized that suppression implies a deliberate act to withhold information to evade duty. Simply failing to disclose information, without intent, does not amount to suppression. In Re: Continental Foundation Joint Venture Holding v. Commissioner of Central Excise, Chandigarh-I, the Apex Court clarified that suppression means failure to disclose full information with the intent to evade payment of duty. When facts are known to both parties, omission by one does not constitute suppression. The above said decisions of the Apex Court in Indirect Tax cases are precedents to be followed by the Jurisdictional Tax authorities. It appears worth quoting from the book- "The Tools of Argument" by Joel P. Trachtman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , professor at Fletcher School of Law and Diplomacy at Tufts University-quote- An argument in which the advocate's desired outcome is consistent with past action is remarkably persuasive for a number of reasons. The reference to precedent has intrinsic appeal, in so far as consistency is a good reason for inconsistency, is beneficial in order to promote predictability and to avoid the effects of bias.Consistency pre-empts challenges arguing that the decision seems to be based on the rule of men, not the Rule of Law. Consistency also helps to economize on decision-making resources." unquote The above precedent rulings establish that for the extended period of limitation to be invoked under the tax laws, there must be: A deliberate ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of suppression or misstatement with an intent to evade tax liability. Mere non-payment or failure to disclose, without intent, does not meet the threshold. In summary, Indian courts have consistently held that mere non-payment of tax, without deliberate suppression or intent to evade, is insufficient to invoke the extended period of limitation. Tax authorities must provide clear evidence of intentional evasion to justify such actions. In the instant case the transactions are fully disclosed in the public tax system via GSTR-7 and the supplier's cash ledger. The tax authorities can easily verify these details, leaving no room for suppression or concealment for making a demand after expiry of limitation period prescribed unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Section 73. Absence of Fraudulent Intent: Section 74 applies only when tax is not paid due to fraud, wilful misstatement, or suppression of facts. When GSTR-7 is filed and tax is deposited, the basic conditions for invoking Section 74 are not met. Such cases, if at all disputable, should be handled under Section 73, which applies to cases without fraudulent intent. In era before GST, there were umpteen number of cases decided by Apex Court and other appellate authorities setting aside the demand due to limitation by holding that mere nonpayment of tax is not suppression of facts or an act to invoke extended period of limitation. Since the law relating to Section 74 is in parimetria to Section 11 A (4) of Central Excise Act, 1944 and pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viso to Section 73(1) of Finance Act, 1994 relating to Service Tax the above precedents are applicable to cases under GST Act also. Though judicial precedents on this specific issue are still evolving, principles of natural justice, proportionality, and correct application of tax provisions indicate that invoking penal sections like 74 in such clear-cut, transparent cases is excessive and arbitrary. Conclusion Issuing show cause notices under Section 74 of the CGST Act in cases where TDS has been correctly deducted and reported in GSTR-7 reflects a misapplication of the law. Not only does it burden honest taxpayers, but it also undermines the credibility of the compliance framework. Tax authorities must exercise caution and ensure that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he serious implications of Section 74 are reserved only for cases involving actual fraud or evasion - not routine transactions already recorded in the GST system.
It is meaningless to invoke Section 74 of the Act when the Recipient of Goods/Services pay applicable Tax and declare the taxable value and issue Notices, confirmation by the original authority and by the First Appellate authority. The actual test is before the Tribunal/High Courts and the Apex Court.
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By
Jayaprakash Gopinathan,
Advocate X X X X Extracts X X X X X X X X Extracts X X X X
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