Natural Justice in GST Laws

Natural Justice in GST Laws

GST was introduced to relieve the consumer from the burden of cascading taxes; to make the system as fool-proof as possible; to provide the taxpayers an IT-based system that would ease compliance burden, and add to the ease of doing business; and in this context, to reduce the tax official-assessee interface to the very minimal. In order to make the system a more uniform and streamlined, the Government has till date notified more than 200 forms defining their structure, so that there is no ambiguity and arbitrariness in the implementation of provisions of the law.

On one hand, where the policy makers are trying to minimize hardships of the taxpayers, on the other hand it is giving excessive powers in the hands of GST officers, thereby instilling fears of earlier Inspector-Raaj in us. With the advent and advancement in technology, where processes have become robust and faster, where data is easily available to the authorities at their fingertips with advances BI and analytical tools at their disposal, the policy makers can easily complete assessments for the taxpayers within much shorter time-span compared to earlier tax regime.

However, the policy makers have extended the time limit for adjudication proceedings. The taxpayer has to maintain its books of accounts along with all other documents and records for 72 months from the due date of filing of annual returns, which is effectively minimum of 81 months from the end of the financial year, subject to there is no extension of due date for filing of annual return. The cost of keeping all records and documents by the taxpayer is also high. In current times, when real estate prices are so high, the cost of keeping the physical documents – which occupies enormous space is too high. The documents cannot be stored in only digital form, as the GST authorities do not rely on the digital documents and insists on producing physical copies of the documents only – that too in multiple copies.

The time limit for completion of adjudication proceedings under chapter XII – Assessment and chapter XV – Demands and Recovery ranges from 36 to 60 months from the due date of filing of annual return. The powers vested in the GST officers by virtue of this Act with regard to chapter XIII – Audit and chapter XIV – Inspection, search, seizure and arrest is immense with little or no respite for the taxpayers. The Joint Commissioner or his officers can enter the premises of any taxpayer and inspect his books of accounts and all other documents. The form for authorization of inspection or search is not even provided to the taxpayer whose premises are being inspected or searched. As per Departmental FAQ (3rd Edition), only a counter sign by taxpayer is required as token of his acceptance for the purported inspection or search.

The returns or any other forms filed by the taxpayer cannot be revised or amended – irrespective of any sort of error – be it typographical error or error of omission. The policy makers, while drafting this provision, have ignored the basic human tenet – to err is human. Any rectification or modification to the returns can be done by the taxpayers only by way of adjustments in the return of subsequent months. However, where the GST officers commit any mistake in any order or any other forms, which is apparent from the face of record, it can be rectified within 6 months. Further, interest charged by the authorities for any late payment or default is charged @ 18% p.a. or 24% p.a.; however, interest provided at the time of refund is 6% p.a. which is a third of what the authorities charges or even lesser.

Furthermore, interest on refund is granted only till the date of order of refund not till the date of payment. There is generally time gap between date of order of refund and date of payment of refund by the GST authorities. However, interest is charged on delayed payment of tax till the date of filing of return i.e. indirectly till the date of payment of taxes. As payment of tax is a pre-condition for filing return, imposed on the taxpayers not by the Statute but by the GST portal, therefore interest is charged till the date of payment. This is further aggravated by the fact that interest does not cease to be levied upon payment of taxes in Electronic Cash Ledger, it will be calculated till the returns are filed. If there is time gap between date of payment and date of filing of return, then interest will be charged till the date of filing of return. This matter was also observed by the GST Council in its agenda for 31st meeting and stated – “… although the law permits part payment of tax but no such facility has been yet made available on the common portal.”

Principle of natural justice

In India, the principles of natural justice are firmly grounded in Article 14 & 21 of the Constitution. Article 14 ensures equality before law and equal protection of law to the citizen of India. Article 14 strikes at the root of arbitrariness and Article 21 guarantees right to life and liberty which is the fundamental provision to protect liberty and ensure life with dignity. Article 22 guarantees natural justice and provision of fair hearing to the arrested person. Furthermore, Articles 32, 226, and 136 provides constitutional remedies in cases violation of any of the fundamental rights including principles of natural justice.

Hon’ble Supreme Court of India in the matter of State Bank Of Patiala & Ors v. S.K. Sharma [1996 AIR 1669] has held that the object of the principles of natural justice are synonymous with the obligation to provide a fair hearing. It ensures that justice is done, that there is no failure of justice and that every person whose rights are going to be affected by the proposed action gets a fair hearing. It further held that where the order is passed without giving any opportunity of being heard, then “the order passed would undoubtedly be invalid [one may call it “void” or a nullity if one chooses to].”

Therefore, the essence of natural justice is embedded into our system by the Constitution of India and which is religiously followed by the Hon’ble Supreme Court of India in many jurisprudences. The GST Act also states in section 75 (4) that the opportunity of hearing shall be granted where any adverse decision is contemplated against the taxpayer.

However, recent developments have compelled us to re-think whether the principle of natural justice is in the thread of fabric of GST laws or is just an outer showcase giving rosy picture about it.

Blocking of credit by the Authorities

The GST authorities are suo moto blocking the input tax credit as available in the Electronic Credit Ledger of the taxpayer by providing description as ‘Blocked’. The authorities are not providing any reasons for the blocking of the ITC and are proceeding with the blockage of input tax credit unilaterally without giving the taxpayer any opportunity of hearing.


Exhibit 1: A screenshot of electronic credit ledger of a taxpayer whose ITC is blocked by the GST Authorities.

The Authorities are blocking the input tax credit available to the taxpayer without giving them an opportunity of fair hearing and denying the principle of natural justice. Furthermore, there is no mechanism present in the GST portal to raise any objection for such blocking of input tax credit. Only the name of the officer is provided (in the above case screenshot, there was no name but an 8-digit number) alongwith his designation. Therefore, the taxpayer is left with no option but to contact the officer, thus necessitating avoidable face-to-face interaction with the GST officer. This shakes the very foundation of establishing GST – no face-to-face official-assessee interaction.

Accepting though denying, such action by the Authorities is justifiable, apart from Rule 86A [inserted w.e.f. 26.12.2019] which allows the GST Commissioner to restrict usage of input tax credit in case of fake invoices or input tax credit from/to non-existent dealers – no other provisions in GST laws calls for blocking of input tax credit. However, with powers vested upon the GST officers, they are blocking credit for other reasons like blocking of credit on account of claiming input tax credit after the due date of filing of return for September following the end of financial year to which such input tax credit pertains. This is gross misuse of powers by the GST officers and against the provisions of the law.

Levy of interest and initiation of recovery proceedings

Section 50 deals with interest on delayed payment of tax by the taxpayer states that every person who is liable to pay tax, but fails to pay the same or any part thereof within the period prescribed shall, on his own, pay interest at such rate not exceeding 18% for the period for which the tax or any part thereof remains unpaid. It clearly mandates the taxpayer to pay the interest on his own for the period for which the tax or any part thereof remains unpaid. The liability to pay interest is evidently fastened on the taxpayer and the same has to be discharged on his own. This was held by Hon’ble Madras High Court in the matter of The Assistant Commissioner of CGST & Central Excise and others v. Daejung Moparts Pvt. Ltd. and ors [2019] 74 GST 691 (Madras) and reaffirmed by Hon’ble Jharkhand High Court in the matter of Mahadeo Construction Co. v. Union of India [[2020] 116 262 (Jharkhand)].

The GST authorities are, however, demanding interest on the basis of a notice, which is not in any prescribed format notified by CBIC and directing the taxpayer to pay the interest within a period of seven days failing which the bank account may be attached – as a measure of recovery of tax, without giving any opportunity of hearing even if the demand of interest is contested by the taxpayer.

The GST authorities are imposing interest and initiating the recovery proceeding without giving any opportunity to the taxpayer and without initiation of adjudication proceedings – which are against the principles of natural justice. It was held in the matter of Mahadeo Construction Co. that though the liability of interest is automatic, but the same is required to be adjudicated in the event a taxpayer disputes the computation or very leviability of interest thereof, by initiation of adjudication proceedings. Till such adjudication is completed by the GST officer, the amount of interest cannot be termed as an amount payable under the Act or the Rules. Thus, without initiation of any adjudication proceedings, no recovery proceeding can be initiated for recovery of the interest amount.

The adjudication proceedings under section 73 and 74 of the Act provides for opportunity of hearing to the taxpayer. The taxpayer may furnish his reply electronically in Form GST DRC – 06 against the show cause notice issued to him. Further, he may also opt for personal hearing through this form and present the matter appropriately.

Thus, for levying any interest upon the taxpayer, GST authorities should adjudicate the matter as per the Act and may initiate penalty proceedings only after completion of adjudication proceedings – giving the opportunity of hearing to the taxpayer and following the principle of natural justice.

High pitched assessments

No appeals can be preferred by the taxpayer before any appellate authority under GST laws unless he deposits an amount equal to 10% of the disputed demand with the Government. The Act does not provide for any relaxation even if the taxpayer faces any financial hardships or operational crisis. In earlier tax regime, powers were vested with the Commissioner to waive the pre-payment of deposit for filing an appeal after considering the merits of the case. Therefore, in earlier regime, the taxpayer could prefer an appeal after application to the Commissioner. But there are no such relaxations under GST laws and the taxpayer is either forced to pay the amount or not prefer the appeal at all.

In recent times, it is seen that the GST officers are resorting to high pitched assessments which disables the taxpayer to file an appeal against such assessment due to non-payment of initial deposit of an amount equal to 10% of the disputed dues. The payment of 10% of disputed dues is like a condition precedent for filing an appeal in GST laws. This is an infringement of right to justice to the taxpayer. The justice is proposed to be served to the taxpayer at a cost which might threaten the existence of his business.

For instance, a registered person is the wholesaler of goods having taxable turnover of Rs 1.0 cr. He operates at a margin of 6-7%. An assessment is done for his business and a demand tax along with interest and penalty of Rs. 1.5 cr is raised upon him. In this case, in order to prefer an appeal, the taxpayer has to pay Rs. 15.0 lakhs (assuming that entire demand is disputed) or else face recovery proceedings which may lead to sale of his assets and closure of business.

This is the infringement of the right of the taxpayer to right to justice and constitutional remedies as provided by the Constitution of India provided to every citizen of India through Articles 32 to 35. Imposing any limit or condition precedent on the way to seek justice is unprecedented in any law and uncalled for.

Therefore, the GST authorities need to consider the principle of natural justice while passing or framing any order under the Act. Principle of natural justice is embedded in the fabric of the nation in every law and it must be honoured and respected. The GST authorities must provide adequate opportunities to the taxpayer before framing any order against him which may have adverse impact upon him or his business. By doing so, the GST authorities will win the confidence of the taxpayers and promote Ease of doing Business in the country – which is widely promoted by the Government of India.

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