Recovery Proceedings under CGST Act, 2017: Expedient to interests of revenue

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The Constitution of India, 1950 gave a wide power under Article 265 that no tax shall be levied or collected except the authority of law. The taxation system in India has broadly divided into two categories i.e., Direct Tax and Indirect Tax. Since the tax is payable on self assessment basis, it is possible that the taxable person may not have correctly paid the tax or may not have paid the tax at all. And it is also possible that the taxable person might have claimed refund of tax or Input Tax credit.

The Constitution of India, 1950 gave a wide power under Article 265 that no tax shall be levied or collected except the authority of law. The taxation system in India has broadly divided into two categories i.e., Direct Tax and Indirect Tax. Since the tax is payable on self assessment basis, it is possible that the taxable person may not have correctly paid the tax or may not have paid the tax at all. And it is also possible that the taxable person might have claimed refund of tax or Input Tax credit.

In Such cases, the department of Indirect Tax has the power to issue a Show Cause Notice and adjudicate the demand. In normal cases, such order is required to be passed within three years from the due date of filing return. However, if the non-payment was on account of fraud, wilful mis-statement or suppression of facts to evade tax, the order can be passed within five years from the due date of filing return. Thus, this paper highlights the Pre-adjudication procedure which says that the registered person has to furnish the details of inward supplies in form GSTR-2A under Section 38 of the CGST Act, 2017.

If there are any discrepancies then the department issues a Pre communication notice under rule 142(1A), but after October 15th 2020, the department has made it discretionary to issue pre-communication notice, so now the tax department is directly issuing the Show cause notice under Section 73 or under Section 74, which is the starting point of Adjudication proceedings. This paper has clearly highlighted the every step of adjudication proceedings right from initiation of recovery proceedings to the modes of recovery of tax including penalty and with interest. Finally, this paper concludes with the topic of provisional attachment of bank account by the department only to protect the revenue of government. Thus, this paper considers the draconian law even in the modern GST paper and analyses the critical aspects of it.

Key Words: Recover of Tax, CGST, Modes of recovery

SYNOPSIS

INTRODUCTION:

In the case of Dabur India Ltd V State of UP[1] the hon'ble supreme court observed that "Government, central or State, cannot be permitted to play dirty games with the citizens of this country to coerce them in making payments which the citizen were not legally to make. If any money is due to Government, the Government should take appropriate steps, but it should not take extra-legal steps or adopt the course of maneuvering".  Thus, this paper highlights the mdes of recovery of CGST.

LITERATURE REVIEW:

1. An article written by Dr Sanjiv Agarwal with the title "Modes of Recovery under GST Law" published by Tax Management India in July 5th 2023 has played a major role in understanding the modes of recovery of CGST, but Mr Sanjiv has mentioned any pre-adjudication procedure, thus the author of this paper has explained the proper pre-adjudication and initiation of recovery proceedings against the default tax payer in a comprehensive way.

2. The author has considered the commentary on CGST and its mechanism which was published on the Taxmann. The chapter "Demands and Recovery" has stood as the major foundation for understanding all the key elements in the recovery mechanism of CGST.

3. Book titiled "Bharat's Goods and Services Tax" published in EBC Reader – 4th Edition 2023 has profoundly explained the details of recovery proceedings and it has also explained the taxing structures in India and the difference between pre and post GST Era.

OBJECTIVES:

The paper aims

  • To provide a comprehensive understanding of the legal provisions and framework governing recovery proceedings under the CGST Act, 2017.
  • o analyze the various mechanisms and methods employed by tax authorities for the recovery of tax dues under CGST, including attachment of property, arrest of defaulters, and other enforcement measures.
  • To assess the rights and obligations of taxpayers involved in recovery proceedings, including their right to appeal, the opportunity to be heard, and the obligations for timely payment and compliance.
  • To identify and analyze the common challenges and disputes encountered by both tax authorities and taxpayers during recovery proceedings, including delays, disputes over dues, and legal challenges.

SCOPE OF THE STUDY:

A comprehensive analysis of the legal provisions, rules, and regulations related to recovery proceedings under the CGST Act. This would involve a detailed review of the relevant sections and their interpretation. Investigating and describing the various mechanisms employed for the recovery of tax dues, including attachment of property, garnishee orders, arrest of defaulters, and sale of assets. Examining the procedures and formalities involved in the initiation and conduct of recovery proceedings. This includes the issuance of demand notices, timelines, and the steps that must be followed

SIGNIFICANCE OF THE STUDY:

A study on recovery proceedings under the Central Goods and Services Tax (CGST) Act is of paramount significance as it provides a deep understanding of the legal framework and practical aspects of tax recovery. Such knowledge empowers both tax authorities and taxpayers, ensuring a more transparent and fair process. By shedding light on the impact of recovery proceedings, the study helps to enhance tax compliance, boost government revenue, and minimize unintended economic consequences. It also serves as a valuable resource for legal practitioners, businesses, policymakers, and academics, fostering better decision-making, informed policy reforms, and a more efficient tax administration system. Ultimately, this research contributes to improved tax governance, economic stability, and public confidence in the tax system.

RESEARCH METHODOLOGY : The author has used purely the doctrinal method of research with explanatory and exploratory type of research. The author has considered many primary and secondary sources for understanding the concept better.

Introduction

The Constitution is the grund norm of all the laws. It has the supreme power to collimate all the legislations. The levy and collection of taxes has drawn its power from the Indian Constitution. It is the age-old tradition which acts as a basis for the state functioning. The overall progress and the development of the state rely upon the collection of tax[2]. The public finance has a pivotal role in the ancient Indian political thinking and they also provide many ways, means and methods of collection of revenue. Article 265[3] states that no tax shall be levied or collected except the authority of law. Article 266 introduces consolidated funds and public accounts of India and the states. Article 268 gives the detailed explanation on the duties levied by the union but are collected and appropriated by States. With the advent of 101st Constitutional amendment in 2016, the article 269A was inserted which imposes tax on the goods and services on the law made by parliament with the recommendation of GST Council. There are many entries in the three lists of 7th schedule which states on which item the state or the Center has the power to collect tax.

The Taxation system in India is broadly divided into two categories. Direct tax and Indirect Tax. The services were not taxable until 1994. Where the Tax Reforms Committee headed by Dr Raja J. Chellaiah recommended levy of Tax on selected services. Later in 1994, service tax was imposed on 3 services that is Telephone, Insurance and Stock Brokers Services. In 2003, the 88th Constitutional amendment inserted Entry 92C and Article 268A which says service tax levied by union and collected and appropriated by the union and the states. Before 1st July 2017 the Indirect Tax consists of Excise Tax, Service Tax, Customs Act, Vat and other octroi taxes as well. But on the introduction of Goods and Services Act, 2017 all the prevailed acts were subsumed into one act. GST was introduced only to relieve the consumer from the burden of cascading taxes and make the system as much possible as streamlined and uniform.

> PRE ADJUDICATION PROCEDURE

To understand the impact of recovery proceedings, this paper gives a brief idea of pre-adjudication procedure. It starts with the stage of Returns, discussed in Chapter IX of Central Goods and Services Tax, 2017 (herewithin CGST Act,2017). There are 13 types of returns stated in the Act. Initially, the registered person has to furnish the monthly details of outward supplies electronically in the Form GSTR -1 according to Section 37 read with Rule 59 of CGST Rules, 2017. The Registered person has to furnish the details of inward supplies in form GSTR-2A under Sec. 38[4] read with rule 60. Now, under Section 39 read with rule 61, the registered person has to furnish the details of returns of both outward and inward supplies, electronically in the Form GSTR-3B. Now, the furnished returns will be scrutinized by the scrutiny officer under section  61. If he finds any discrepancies such as the difference between the GSTR-1 and GSTR-3B then, the scrutiny officer has to intimate to the registered person with the Form GST ASMT-10 with giving proper time to respond. The registered person has to reply under form GST ASMT-11 within the specified time. If the reply is satisfactory then the proper scrutiny officer will issue a satisfied Order in Form GST ASMT-12. If the registered person has not replied within time or the given reply is not satisfactory then the proper officer will take action for the determination of tax and other dues under Section 73 and Sec. 74.

> PRE COMMUNICATION NOTICE

Before issuing the show-cause notice under Section 73 or Section 74, there is a stage called Pre-communication notice to the registered person. Rule 142(1A) says that the proper officer may before the issue of show cause notice under se. 73(1) or Sec. 74(1) communicate details of tax, interest and penalty in Part-A of Form GST DRC 01A. It is the discretion of the proper officer to send pre-communication notice only after 15.10.2020. Before this date, the proper officer has to mandatorily send the pre-communication notice as the wordings include "shall". The assessee has given the two option after the proper officer sends the notice under r.142 that the assessee can make partial payment or make submissions against proposed liability in Part B of Form GST DRC – 01A.

This concept was introduced to promote voluntary compliance and to reduce the litigation. However, the wider discretionary power given later on to officers has deviated from the intention. The recent case of Tanishka International Vs. State of UP[5], it was observed that the pre-communication notice has not served, thus any subsequent reminders will not cure inherent defect in proceedings initiated against petitioner.

Also in the case of Ravi Enterprises Vs Commissioner of Central Taxes[6], the court reiterated the same notion. The factual matrix was the Pre-communication notice and the Show cause notice were uploaded simultaneously without giving the reasonable time to the assessee to respond. Thus it denies the valuable right of filing its response to aforementioned pre-communication notice. This has led to the violation of the principles of natural justice and court has directed to quash the Order.

> ADJUDICATORY PROCEEDINGS

The adjudication starts with the issue of Show cause notice. The show Cause can be issued to the assess under section 73(1) and Section 74(1). When the assess has not paid the tax, short paid, erroneously refunded or Input Tax Credit has wrongly availed or utilized then the officer will issue a Show-cause notice under Sec. 73(1) asking the assessee as to why he has not to pay the determined amount. There is a period of 3 months is given to the assessee to appeal this SCN or pay the determined amount. If the assessee has paid the mount within 30 days then the proceedings would be deemed to be closed. If he has not paid within 30 days then the officer issue an demand Order adding 10% penalty to the determined tax amount. If the tax payer has not responded within the 3 months of issuance of a demand Order then the officer has the authority to initiate the recovery proceedings. Under section 73, the demand Order shall be issued within 3 years from date of returns payable and the show-cause notice shall be issued before 3 months of issuance of Demand Order.

Before the issuance of the Show Cause Notice, the officer finds that the assessee has voluntarily not disclosed the amount of tax has to pay, or the officer finds any fraud, wil-ful misstatement, suppression of fats to evade tax then there would be serious consequences as the officer issues the Show-Cause notice under section 74(1). Where the assessee pays the amount within 30 days, still he has to pay with 25% penalty or he pays within 30 days of issuance of demand Order then he has to pay with 50% of penalty amount.  If paid late on then with 100% of penalty amount. If not paid within 3 months then the officer will proceed to initiate the recovery proceedings under sec. 78. The demand Order shall be issued within 5 years from date of returns payable and the show-cause notice shall be issued before 6 months of issuance of Demand Order. If no show cause notice has issued within the said period then it is deemed that the proceedings has closed.

> INITIATION OF REOVERY PROCEDDINGS – Sec. 78

The bare language of the main provision says "Any amount payable by a taxable person in pursuance of an Order passed under this Act shall be paid by such person within a period of three months from the date of service of such Order failing which recovery proceedings shall be initiated". The Proviso of this section is debatable and will discuss elaborately later on. The Appeal period mentioned under section 107(1) is 3 months as a fair opportunity is given to the assessee to file any appeal against any Order passed under this Act. If the assessee has a reasonable and sufficient cause then the Act itself has granted one more month of grace period under Sec. 107(4).

It is important to know the consequences after the recovery proceedings have been initiated.

> MODES OF RECOVERY:

Section 79 deals with the Modes of Recovery.

Section 79(1)(a) Deduction out of any money owed to defaulter.

→ "Some money which is being owed by the Government to defaulter should exist;

→ Any amount payable can be deducted out of the said amount due to defaulter;

→ Deduction can be done by the proper officer himself or he may authorize any other specified officer to do so.

→ The proper officer shall specify the amount so deducted in form GST DRC- 09 as prescribed under Rule 143 of CGST Rules, 2017"[7].

b) Detention and selling of the goods belonging to defaulter – Sec 79(1)(b).

→ "Goods which are under the control of the proper officer or other specified officer should exist.

→ Goods should belong to the person who is liable to pay any amount.

→ Goods may be detained and sold by the proper officer or such other specified officer as authorized by the proper officer".

→ The amount payable by defaulter shall be recovered out of the realization.

→ In terms of Rule 144 of CGST Rules, 2017[8], "the goods should be sold through a process of auction including e-auction, for which a notice should be issued in FORM GST DRC-10 indicating the goods to be sold and the purpose of sale. If the goods are perishable or hazardous in nature or the expenses of storing them is likely to exceed the value of such goods, then proper officer may sell them before 15 days.

→ Proper officer has to issue a notice to the successful bidder in FORM GST DRC-11 requiring him to make the payment within a period of fifteen days from the date of auction. On payment of the full bid amount, the possession of the said goods shall be transferred to the successful bidder and a certificate in FORM GST DRC-12 shall be issued".

→ In case the defaulter pays the amount under recovery, including any expenses incurred on process of recovery, before the issue of notice issued in FORM GST DRC-10 (Notice of Auction) then the proper officer shall cancel the process of auction and release the goods.

(c) Recovery from other persons who owes money to defaulter – Section 79(1)(c)

"This is also known as Garnishee Proceedings. This will apply where any other person –

  • has to pay money to the defaulter;
  • is likely to pay money to the defaulter;
  • holds money for or on account of the defaulter;
  • may subsequently hold money for or on account of the defaulter.

The Proper officer may issue notice in writing in Form GST DRC-13 to such other person to pay to the credit of the Government forthwith upon the money becoming due or being held, or at or within the time specified in the notice not being before the money becomes due or is held.

The following amounts shall be directed to be paid in the notice–

  • Where the amount due/held by such other person is more than amount due by the defaulter – to the extent of amount due by the defaulter;
  • Where the amount due/held by such other person is equal to or less than amount due by defaulter – whole of money due/held.

Such other persons to whom such notice is issued is bound to comply with such notice. In cases where such notice is issued to a post office, banking company or an insurer, they are required to comply with the same without insisting on production of any passbook, deposit receipt, policy or any other document for the purpose of any entry, endorsement or the like, though that might be the normal practice. If such person to whom such notice is issued, fails to comply with the notice, he shall be treated as defaulter to the extent of the amount mentioned in the notice and all other consequences under the law shall follow".

"Where the third person makes the payment of the amount specified in the notice in FORM GST DRC-13, then the proper officer is required to issue a certificate in FORM GST DRC-14 to the third person clearly indicating the details of the liability so discharged. Such notice may be amended or revoked or time may be extended for making any payment. The payment made by such other person in accordance with the notice issued, shall be deemed to have made the payment on behalf of such defaulter and the amount credited to the government shall be deemed to constitute the discharge of liability of such defaulter to the extent of the payment made. As a result, no civil suit or other proceedings could be filed or initiated by the defaulter on the notice, who has complied with this provision".

"If such person makes the payment to defaulter instead of crediting the amount to the government, then such other person shall be personally liable to the Government to the extent of the amount due by the defaulter or amount discharged to the defaulter whichever is lower. Such person shall not be personally liable, if he is able to prove to the proper officer issuing the notice that money demanded or any part thereof was not due to the person in default or at the time of service of the notice he did not hold any money for or on account of the person in default, money was not demanded from him; or any part of the money demanded is not likely to become due to such other person or any part of the money will not likely be held for or on account of such person".

(d) From detention of any movable or immovable property

A proper officer in accordance with the Rule 147 of the CGST Rules framed for this purpose, may on authorisation by competent authority, interalia, do the following:

  • prepare a list of movable and immovable property belonging to the defaulter,
  • estimate their value as per the prevalent market price and
  • issue attachment order or distrain and a notice for sale in FORM GST DRC-16 prohibiting any transaction with regard to such movable and immovable property as may be required for the recovery of the amount due.
  • Such property attached or distrained shall be sold through auction, including e-auction, for which a notice shall be issued in FORM GST DRC- 17 clearly indicating the property to be sold and the purpose of sale.

"Such detention of any movable or immovable property belonging to defaulter will be done till the amount payable is paid. If any part of the amount payable or cost of distress or keeping the property is not paid within 30 days from such distress, the proper officer may sell the property and with the proceeds he may adjust towards: amount payable; or costs including the cost of sale remaining unpaid. After such adjustment, the remaining surplus, if any, shall be returned to the defaulter".

(e) Recovery of dues with help of District Collector (DC)

The Proper officer may prepare a certificate signed by him specifying the amount due from the defaulter. Such certificate will be sent to the District Collector of the District in FORM GST DRC-18 in where the defaulter owns any property; or resides; or carries on his business. The District Collector on receipt of such certificate shall proceed to recover from such defaulter the amount specified in the certificate as if such amount is arrears of land revenue.

(f) Recovery of dues with help of Magistrate:

This provision has overriding effect over Code of Criminal Procedure,1973 (CrPC).In this case, the proper officer may file an application to the appropriate Magistrate. The Magistrate to whom application is filed in the FORM GST DRC- 19, shall proceed to recover from the defaulter the amount specified in the application as if it is fine imposed by such Magistrate.

(g) Recovery of dues by execution of decree:

Rule 146 of CGST Rules, 2017 provides for recovery through execution of decree. Amount should be payable to the defaulter in the form of an execution of decree of civil court for

i. Payment of money,

ii. Sale in enforcement

The amount can also be recovered by the Proper officer by sending request to court in writing or by attaching the decree to be executed or by attaching the net proceeds for settlement of amount recoverable to be credited to Government account.

(h) Recovery of dues from company under liquidation:

Rule 160 of CGST Rules, 2017 provides for recovery of dues from company in liquidation as follows:

The amount to be recovered should be from company under liquidation as per section 88 of CGST Act, 2017. Commissioner to notify the liquidator for any amount due

> Recovery of penalty from sale (Rule 144A) :

Rule 144A has been inserted w.e.f. 01.01.2022 vide Notification No. 40/2021-CT dated 20.12.2021 to provide for manner of recovery of penalty by sale of goods or conveyance detained or seized by the tax authorities while in transit. This rule stipulates that in the event of owner of goods or transporter of goods failing to pay the amount of penalty levied under section 129(1) of CGST Act, 2017 within 15 days of the communication of the order, the proper officer shall effect sale or disposal of the goods or conveyance detained or seized after preparing an inventory of the sale and determining the estimated market value of the subject goods or conveyance.

It may be noted that section 129[9] is an "over-riding provision providing for detention, seizure and release of goods and conveyance in transit. It further provides for levy of penalty but only after issuing a notice of seven days and providing opportunity of being heard. The goods shall be released only after payment of penalty. These goods shall be disposed off through a process of auction including e-auction. Rule 144A provides the manner of auction, timelines for billing, declaration of successful bidder, payment of bid amount and transfer of ownership to the successful bidder. Rule 144 A does not apply in respect of perishable goods and goods of hazardous nature"[10].

> Provisional attachment to protect revenue in certain cases:

Where, after the initiation of any proceeding under Chapter XII [Audit by tax autho-rities and special audit – sections 65 and 66), Chapter XIV (Inspection, Search, Seizure and arrest – sections 67 to 72) or Chapter XV (Demands and recovery – sections 73 to 84), the Commissioner is of the opinion that for the purpose of protecting the interest of the Government revenue it is necessary so to do, he may, by order in writing, attach provisionally, any property, including bank account, belonging to the taxable person or any person specified in section 122(1A) of CGST Act [person who is retaining benefit of specified transaction and at whose instance the transaction is conducted – transactions relating to bogus invoices and bogus ITC], in such manner as may be prescribed -section 83(1) of CGST Act substituted vide Section 115 of Finance Act, 2021 w.e.f. 1-1- 2022.

Thus, property of following can be provisionally attached –

(a) person who is availing bogus Input Tax Credit

(b) Person to whom SCN has been issued under section 73 or 74, or recovery proceedings under section 79 have been commenced

(c) Audit, search, seizure or arrest is under progress.

Section 83(2) of CGST Act states that the Provisional attachment can continue upto one year from date of order and ceases to operate on expiry of one year and it has been stated by hon'ble courts in many cases viz., vimal yashwantgiri goswami vs state of gujarat[11].

Powers of provisional attachment should be used carefully as powers are drastic – In Radha Krishan Industries v. State of Himachal Pradesh[12], it was observed that "power to order a provisional attachment of property of taxable person including a bank account is draconian in nature. Exercise of power for ordering a provisional attachment must be preceded by formation of an opinion by Commissioner that it is necessary so to do for purpose of protecting interest of government revenue".

Under provisions of rule 159(5), person whose property is attached is entitled to dual procedural safeguards –

(a) An entitlement to submit objections on ground that property was or is not liable to attachment; and

(b) An opportunity of being heard.

In the case of  Valerius Industries v. UOI [13], it was stated that "the powers of provisional attachment are drastic and should be exercised only if there is sufficient material on record that assessee is about to dispose of his property with a view to thwarting ultimate collection of demand. Provisional attachment should not be equated with attachment of property in the course of recovery proceedings".

In the case of Usha Industries V Dy. Commissioner[14], it was clearly stated that "once the final order is passed under section 74(9) of CGST Act, proceedings under provisional attachment order shall come to an end".

CONCLUSION:

In conclusion, this research paper has delved into the intricate realm of recovery proceedings under the Central Goods and Services Tax (CGST) Act, 2017, to provide a comprehensive understanding of its legal framework, practical implications, and broader significance. The study has elucidated the multifaceted nature of recovery mechanisms, procedural intricacies, and the rights and obligations of both taxpayers and tax authorities. It has highlighted the importance of effective recovery proceedings in bolstering tax compliance, revenue collection, and economic stability. Furthermore, the analysis of judicial precedents, international comparisons, and potential technological advancements underscores the need for continuous evolution in the tax recovery landscape. The study's findings and recommendations serve as a valuable guidepost for policymakers, legal practitioners, businesses, and academics, fostering an environment of transparency, fairness, and confidence in the tax system. As the tax landscape continues to evolve, this research paper provides a foundation upon which to build more efficient, just, and effective recovery proceedings under the CGST Act, thus contributing to the broader goals of good governance and fiscal responsibility.

[1] Dabur India Ltd V State of UP AIR 1990 SC 1814

[2] Sanjeev Kumar Sharma, "Taxation and Revenue collection in Ancient India: Refelections on Mahabharata, Manusmriti, Arthasastra and Shukranitisar", Cambridge Scholars Publihing, 2016, Lady Stephenson Library.

[3]

[4] The Central Goods and Services Tax, 2017, § 38.

[5] Tanishka International Vs. State of UP 2023 148 taxmann.com 3345 allahabad HC

[6] Ravi Enterprises Vs Commissioner of Central Taxes  2023 148 taxmann.com 5 uttarakhand HC

[7] The Central Goods and Services Tax, 2017, R. 143.

[8] The Central Goods and Services Tax, 2017, R 144.

[9] The Central Goods and Services Tax, 2017, § 129.

[10] Id

[11] vimal yashwantgiri goswami vs state of gujarat  (2022) 91 GST 431

[12] Radha Krishan Industries v. State of Himachal Pradesh  [2021] 6 SCC 771

[13] Valerius Industries v. UOI (2019) 109 taxmann.com 218 (Guj HC)

[14] Usha Industries V Dy. Commissioner  (2021) 88 GST 646