Summary: This article examines whether a GST proper officer can refuse cancellation of registration until a taxpayer deposits an alleged input tax credit mismatch between Forms GSTR-2A or GSTR-2B and GSTR-3B. The author describes repeated rejection of applications in FORM GST REG-16 despite the absence of identified defects in the applications, adjudicated demands or opportunities of hearing. The central argument is that Section 29 of the CGST Act, 2017 governs cancellation, while Sections 73 and 74 provide separate machinery for determining disputed tax, interest and penalties. Section 29(3) expressly preserves pre-cancellation liabilities even after registration is cancelled, making continued registration unnecessary merely to protect revenue recovery. The article examines CBIC Circular No. 69/43/2018-GST, the distinction between an ITC mismatch and an enforceable demand, the taxpayer’s statutory payment and appeal rights, and the legal significance of pending show cause notices. It also discusses alleged misuse of extended limitation under Section 74, rejection orders without reasons or hearings, and the revised cancellation procedure introduced by Notification No. 05/2026-Central Tax with effect from 1 November 2026. The author concludes that a proper officer may examine whether the statutory requirements for cancellation are satisfied but cannot use cancellation proceedings as an independent mechanism to compel payment of an unadjudicated ITC demand.
Pay First, Cancel Later: Can a GST Officer Hold Back Cancellation of Registration to Recover an Alleged ITC Mismatch?
Abstract
A dealer who has closed his business applies for cancellation of registration. Instead of an order of cancellation, he receives a notice telling him to deposit the difference between the credit shown in GSTR-2A or GSTR-2B and the credit claimed in GSTR-3B, with interest. He does not pay, because no demand has been raised against him, and the application is rejected. He applies again and the same thing happens. This article examines whether the law allows a proper officer to make payment of an undetermined liability a condition for cancelling registration, and argues that it does not.
1. The Pattern
The pattern has become familiar in field formations. A proprietor files an application in FORM GST REG-16 on closure of business. The officer issues a notice in FORM GST REG-03 which points out no defect in the application at all. It refers instead to the taxpayer profile, notes a difference between the credit available in GSTR-2A or GSTR-2B and the credit availed in GSTR-3B for some earlier year, and asks the dealer to deposit the difference with interest. When the dealer replies that there is no demand against him, or does not reply because there is nothing to say about his application, an order of rejection in FORM GST REG-05 follows. Often the rejection order does not record a reason, does not refer to any hearing, and says only that the dealer did not reply to a notice, sometimes naming as that notice the reference number of the rejection order itself.
In one such matter the dealer applied three times over fifteen months. The first notice demanded the difference for 2019-20 with interest. The second, issued three days after the second application, demanded reversal of credit for 2017-18, 2018-19 and 2019-20 with interest and penalty. The third was signed about an hour and twenty minutes after the third application was filed and demanded the 2019-20 amount again, now with penalty under Section 74, on the ground that the DRC-01 was not yet finalised. No defect was pointed out in any of the three applications and no hearing was given before any of the three rejections.
2. The Statutory Scheme
Section 29(1) of the CGST Act allows a registered person to apply for cancellation where the business has been discontinued, transferred, or where he is no longer liable to be registered. Rule 20 prescribes the application in FORM GST REG-16, and the proper officer, on being satisfied, passes an order in FORM GST REG-19. The enquiry is about the application: whether the event warranting cancellation has occurred, whether the particulars are complete, and from which date cancellation should take effect.
Two provisions speak to money. Section 29(5) requires a person whose registration is cancelled to pay an amount equal to the credit on inputs held in stock, semi finished and finished goods and capital goods, or the output tax on such goods, whichever is higher. That is the only payment the statute ties to cancellation itself, and it relates to stock on hand on the date of cancellation, not to a past year’s mismatch. Section 29(3), on the other hand, provides that cancellation of registration shall not affect the liability of the person to pay tax and other dues for any period prior to cancellation, whether such liability is determined before or after the date of cancellation.
The Board read the provisions the same way in Circular No. 69/43/2018-GST dated 26.10.2018, which was issued to ensure uniformity in processing applications in FORM GST REG-16. Paragraph 5 of the Circular proceeds on the footing that cancellation of registration has no effect on the liability of the taxpayer for any acts of commission or omission committed before or after the date of cancellation. Paragraph 8 refers to the payment under Section 29(5) and reiterates that, as stated in Section 29(3), cancellation does not in any way affect the liability of the taxpayer to pay dues under the GST law, whether such dues are determined before or after cancellation.
3. What the Officer Can Examine, and What He Cannot
Once Section 29(3) keeps every past liability alive, holding back cancellation gives the revenue nothing it does not already have. The department may issue a notice under Section 73 or Section 74 after cancellation, adjudicate it, and recover the amount under Section 79, exactly as it could before. The only thing that refusal of cancellation achieves is pressure on a dealer whose business has stopped, who must keep filing returns and paying late fee for a registration he no longer needs.
The power to determine tax, interest and penalty is conferred by Sections 73 and 74, and it is exercised only after a show cause notice, a reply and a hearing, by an order under Section 73(9) or Section 74(9). Nothing in Section 29 or Rule 20 allows the proper officer, while dealing with an application for cancellation, to quantify a past liability and make its payment a condition precedent. When he does so he assumes a jurisdiction the statute has not given him. An authority that acts outside its jurisdiction acts without authority of law, and an alternative remedy is no bar to a writ against such action.
4. No Demand, No Deposit
Article 265 of the Constitution forbids the levy or collection of tax except by authority of law. A difference between GSTR-2A and GSTR-3B is not a demand. It is at best information on which a proper officer may form a view and issue a notice. Until an order is passed there is nothing payable in law, and the dealer cannot be put in default for not paying it.
Even after an order is passed, the statute gives the dealer three months to pay under Section 78, and a right of appeal under Section 107 on a pre deposit of ten percent of the disputed tax, with a deemed stay on the balance. An officer who insists on full payment of an undetermined amount as a condition for cancellation takes away both rights before the liability even exists.
Courts have also held that dues are not a ground known to Section 29 for cancellation. In W.P.(C) 12255/2024, decided on 19.09.2024, a Division Bench of the Delhi High Court observed that non payment of dues for three months is not a prescribed ground for cancelling registration. If dues cannot be a ground for the department to cancel, they can hardly be a ground for the department to refuse a cancellation that the dealer himself seeks.
5. A Pending Show Cause Notice Is Not a Reason
Sometimes the rejection is put on the footing that a show cause notice is pending or that the DRC-01 is not yet finalised. The pendency of adjudication does not touch the application at all. The adjudication can proceed and conclude after cancellation, and Section 29(3) protects whatever it yields. To keep a closed business registered until the department finishes its own proceedings is to make the dealer pay, in returns and late fee, for the department’s delay.
6. When the Show Cause Notice Gives the Game Away
In the matter referred to above, the show cause notice under Section 74 came only after the first two applications had been rejected. It recorded, in its own words, that the application for cancellation had been processed, that the returns had been checked arithmetically, that the application had been rejected with a direction to reverse the excess credit, and that the extended period was being invoked because the difference came to light after receipt of the cancellation request. The department’s own document thus established two things: that the cancellation process had been used to recover money, and that the charge of fraud or suppression rested on nothing more than arithmetic on returns already filed on the common portal.
The timing was equally telling. For 2019-20, the time for a notice under Section 73(2) had run out on 31.05.2024, even on the date for an order under Section 73(10) extended to 31.08.2024 by Notification No. 56/2023-Central Tax. When the officer asked the dealer to deposit the 2019-20 difference in July 2025, no notice under Section 73 could be issued for that year. The notice under Section 74, when it came, was issued thirteen days before the last date for such a notice for 2019-20. A demand pressed through the cancellation process, which could no longer be raised under Section 73, was then covered by invoking Section 74 at the last moment.
7. Natural Justice and Reasons
A rejection in FORM GST REG-05 is an order affecting the right to carry on, and to close, a business. It must record reasons and must follow an opportunity of hearing. An order that says the dealer did not reply to a notice, and names as that notice its own reference number and date, is not an order on the merits of anything. Where three successive applications are rejected without a defect ever being pointed out, without a hearing and without a reason, the pattern itself shows that the applications were never examined as applications.
8. The Position After 01.11.2026
By Notification No. 05/2026-Central Tax dated 26.10.2026, rule 20 has been substituted with effect from 01.11.2026, and rule 22 will be substituted from 01.04.2027. As reported, the new rule 20 places the registration under suspension while the application is pending, requires the officer to cancel or raise a query within fifteen days, deems the application approved if the officer does not act in time, and provides for automatic cancellation in certain cases where returns are filed and dues paid. The detailed wording should be read from the Gazette text, but nothing in the reported scheme gives the officer a power to determine a past liability while dealing with an application for cancellation. The query in FORM GST REG-03 remains a query about the application, and Section 29(3) remains unchanged.
9. Conclusion
The right to carry on business includes the right to close it. Section 29(3) gives the revenue complete protection after cancellation, and Sections 73 and 74 give it the machinery to determine and recover what is due. Neither needs the registration of a closed business to be held hostage. A proper officer dealing with an application for cancellation may accept it, or point out a defect in it. He cannot say, pay first and I will cancel later. That is a power the GST law does not know.
