GST Show-Cause Notices & Registration Cancellation Rules

Securing Rights, Setting Parameters: Show-Cause Notices in GST Registration Cancellation

Summary: The cancellation of GST registration, governed by Section 29 of the CGST Act, 2017, requires adherence to natural justice principles, including issuing valid Show-Cause Notices (SCNs). A proper SCN must include clear reasons, evidence, and opportunities for the assessee to respond. Arbitrary or vague SCNs, lacking independent assessment by proper officers, violate taxpayer rights under Article 19(1)(g) of the Indian Constitution. Retrospective cancellations must specify reasons and dates to ensure fairness. Courts, in several judgments, have invalidated poorly drafted SCNs and emphasized personal hearings as mandatory. To ensure transparency, fairness, and ease of doing business, authorities must follow clear parameters while issuing SCNs.

Introduction

For a country’s economy to flourish, it is imperative for businesses to operate in the formal economic framework and adhere to all the procedural compliances. GST registrations form the backbone of this economic framework and help the businesses to avoid the cascading effect of taxes. However, in the recent times, a concerning trend which has emerged is the cancellation of GST registration of taxpayers by the authorities without adhering to the fundamental principles of natural justice. Cancellation of registration is governed by Section 29 of the Central Goods and Services Tax Act, 2017 along with Rule 21 of the Central Goods and Services Tax Rules, 2017. A proper officer can cancel a business’s registration in cases of non-compliance with GST rules or Act, non-furnishing of returns, fraudulent GST registration, non-commencement of business, etc. However, the proviso to Section 29(2) clearly lays down that:

“Provided that the proper officer shall not cancel the registration without giving the person an opportunity of being heard.”

This proviso holds immense significance as it upholds the principle of “audi alteram partem” and ensures that the taxpayer gets heard atleast once before such a drastic step. However, non-adherence to these basic principles has resulted in arbitrary cancellation of registrations and further affected the rights of the taxpayers, dragging them out of the formal economy. Under Article 19(1) (g) of the Indian Constitution, every individual has the freedom to carry on any trade, profession, business or occupation of their choice but unfortunately, such unjustified actions of the department clearly infringes upon this fundamental right.

Show-cause notices are the foundation of GST proceedings and they ensure that the assessee gets the opportunity of being heard before any adverse inference is drawn. On one hand, Show Cause Notices serve as a tool safeguarding the assessee’s rights but on the other side, vague, cryptic and unjustified Show-Cause Notices without any independent application of mind by the officer concerned can also have severe consequences, especially when the registration of assessee is at stake. Thus, cancellation of registration which is an extreme measure with far-reaching implications also requires high standards and parameters of natural justice to be followed by the revenue.

In a scenario where Show-Cause Notices have become merely a procedural formality for the revenue, it is the judiciary which has stepped in to safeguard the rights of the assessee. Taxpayers have been proactive in filing the writ petitions under Article 226 of the Indian Constitution challenging the order of cancellation passed by the proper officer. In response to this, various High Courts in our country have restored the registration of the taxpayers by declaring the Show-Cause Notices as invalid and in violation to the principles of natural justice.

Parameters for a Valid Show-Cause Notice cancelling the GST registration

1. Proper Reasons must be assigned in the Show-Cause notice for cancellation:

For a show-cause notice to be valid, it must be accompanied with proper reasons for the proposed cancellation of GST registration of the entity. It is pertinent that the officer specifies the sub-clause under which the registration is being cancelled. Assigning proper reasons for cancellation will provide an adequate opportunity to the assessee to prepare a defense and to submit a comprehensive reply to the SCN. In absence of such well-defined reasons, an assessee cannot be reasonably expected to respond as to why its registration should not be cancelled. Vague and cryptic Show-Cause notices do not provide any basis for the proposed cancellation, undermining the assessee’s right to effective defense and thus, violating the principles of natural justice. At the same time, merely mentioning the sub-section and sub-clause under which the registration is proposed to be cancelled is also not enough. For instance: A SCN passed by the officer proposing to cancel the registration of an entity by citing Section 29(2) (e), that is, registration obtained by means of fraud, willful misstatement or suppression of facts without providing any evidence or basis as to why he suspects such fraud would be considered as an invalid notice.

In the case of Indrajit Roy vs. Superintendent, Barasat (2 September 2024) where the registration of assessee was cancelled without providing any particulars of fraud, misstatement or suppression, the Calcutta High Court held that such a notice being vague and non-speaking is liable to be set-aside. Similarly, the Delhi High Court in the case of Saluja Electronics vs. Commissioner of CGST and Central Excise Delhi East Commissionerate (3 September 2024) held that the purpose of show cause notice is to enable the noticee to respond to the allegations and the absence of such reasons would warrant the restoration of assessee’s registration.

2. Independent application of mind by the proper officer:

In many recent cases, it has been observed that the officers have initiated the process of cancellation of registration solely on the basis of directions issued by other authorities like the Anti-Evasion department. Ideally, in such cases, the issuance of show cause notice should be preceded by an independent investigation by the proper officer verifying the allegations and only after the same, the officer should decide whether such cancellation should be effected or not. However, in practice, the officers blindly rely on the directions issued by the Anti-Evasion department and cancel the GST registration of the entities. In most of these cases, the assessees are not even aware about the ongoing investigation and are ill-equipped to reply to the show cause notices. However, the Delhi High Court has now held in the case of S.M. Trading Co. vs. Assistant Commissioner of Central Goods and Services Tax, East Delhi (3 September 2024) that any cancellation order passed on the directions of Anti-Evasion Branch without the independent satisfaction of the proper officer and without providing any particulars in the Show-Cause notice would be invalid and is liable to be quashed. A similar stand has also been taken by the Hon’ble Court in the case of Kritika Agarwal vs. Union of India (18 July 2023).

3. Retrospective Cancellation of registration

Retrospective cancellation of GST registration has become a contentious issue between the taxpayers and the revenue as it may lead to the reversal of Input Tax Credit (ITC) which has been availed during the given period. For such cancellation order to be valid, the following parameters must be fulfilled:

(a) Mentioning the date of retrospective cancellation: The date from which retrospective cancellation is to take effect must also be mentioned in the Show Cause notice, thereby, allowing the assessee to contest the same while filing the reply. In the case of Aditya Polymers vs. Commissioner of Delhi Goods and Services Tax and another (28 March 2023), the show cause notice which was issued to the petitioner did not mention that the registration was proposed to be cancelled retrospectively. Thus, the Delhi High Court held that the petitioner had no opportunity to even object to the retrospective cancellation and therefore, the same was invalid.

(b) Provision of specific reasons: It is imperative for the proper officer to assign reasons as to why retrospective cancellation of registration was necessary. Although the officer has the discretion to cancel the registration retrospectively but the discretion must be exercised based on objective criteria as was also held in the case of Pratima Tyagi v. Commissioner of GST and others (13 December 2023). For instance, while the GST registration of an assessee may be cancelled due to non-filing of returns for six months, the proper officer must also provide a justification for the necessity of making the cancellation retrospective.

In a landmark judgment of Delhi High Court in the case of Riddhi Siddhi Enterprises vs. Commissioner of Goods and Services Tax, W.P.(C) 8061/2024 decided on 25 September 2024, it has been unequivocally held that registration cannot be cancelled with retrospective effect mechanically and reasons need to be assigned for the same. However, it is important to note that in absence of reasons for retrospective cancellation, the courts have not entirely quashed the order but instead held that cancellation would come into effect from the date of issuance of SCN.

4. Personal Hearing must be given in the show cause notice

It is a fundamental principle of natural justice that every assessee must be given an opportunity of being heard before passing any order for the cancellation of registration. This includes giving a date for personal hearing and also giving an opportunity to the assessee to submit a reply within seven days of such notice. It is only after thorough consideration of the reply furnished by the assessee that an order should be issued. However, such consideration should not be considered as a mere formality. In many instances, the order for cancellation passed by the officer includes vague statements such as ‘Reply furnished by assessee found to be inadequate,’ without addressing the substance of the reply or offering sufficient reasons for deeming it inadequate. Such practices erode confidence in the procedural fairness of the process.

In the case of Vsv Info (P.) Ltd.  vs. Assistant Commissioner, State Tax, W.P. (C) 7592/2024 decided on 27 March 2024, the registration of the assessee was cancelled without granting an opportunity of personal hearing or considering the reply of the assessee. The impugned cancellation order was set aside by the Andhra Pradesh High Court as it was in violation of the proviso to Section 29(2).

Conclusion

The significance of Show-Cause notices in the GST regime cannot be overstated. A well-drafted show cause notice which provides clear and proper reasons for cancellation while also giving the assessee an opportunity of being heard can go a long way in protecting assessee’s rights. Conversely, a vague show cause notice can have adverse consequences for the assessee. Although, the assessees have the option of invoking the writ jurisdiction of the High Courts in cases of arbitrary cancellations, however, the same has proved to be a long and tedious process. To address these challenges, it is imperative for the revenue authorities to adhere to certain parameters and standards as also enumerated in this article when issuing SCNs. Such standards and guidelines would foster uniformity, enhance transparency, and ensure fairness in the process. Ultimately, this approach would safeguard the rights of taxpayers and contribute significantly to fostering an economy that truly supports ease of doing business.