Forceful Recovery during Search, Inspection and Investigation under the Guise of “Voluntary Payment” under the GST Act- An analysis
Instances of coercion, threats of arrest and forceful recovery of tax by officials during the time of search, inspection and investigation are often the subject of numerous writ petitions praying for a refund of the said amount. The issue is rooted in the interplay of the following provisions of the CGST Act- Section 67 empowering a tax officer not below the rank of a Joint Commissioner to authorise an officer of central tax to inspect, search and seize goods, documents or things; Section 73(5) and 74(5), allowing a person chargeable with tax to pay the amount of tax along with the interest before the service of a notice on the basis of his own ascertainment or as ascertained by the proper officer; and Section 79 providing the mode of recovery of unpaid tax. It is pertinent to note that voluntary payment before the issuance of a show cause notice under Sections 74(5) and 74(5) is mostly done through submitting Form DRC-03 on the GST Portal. As this is possible only when the taxpayer logs into the GST Portal using their own ID and Password, it seems to bear an element of voluntariness to it. However, there have been instances wherein the tax officers coerce/threaten arrest upon inspection and therefore, force the taxpayers to submit such forms.
Judicial Pronouncements
A perusal of judicial pronouncements on forceful recovery of tax during search and inspection proceedings clearly indicate that no forceful recovery can be made by tax officers, especially in the absence of notice and final determination of outstanding tax liability. For instance, it was observed in Makemytrip v. Union of India (Supreme Court, Civil Appeal Nos. 8080 of 2018) that collecting arrears of sales tax at the time of survey and search without there being a formal assessment was illegal and therefore, in the absence of a show cause notice or determination of the amount of tax arrears, any offer or statement made by the tax payer could not be said to be voluntary. In Vodafone Essar South Ltd v. Union of India, [(2009) 237 ELT 35 (Bombay)], the taxable persons deposited an amount towards the differentiable duty owing to the alleged misclassification of goods upon the threat of arrest given by officers. The Court held that the deposit could not be said to be voluntary and therefore the act of the department, including the recovery of differential duty was wholly unjustified and uncalled for. Further, in Gee Kay International v. Union of India [2008 (230) ELT 590 (P & H)], it was observed that where an investigation was pending and the final outstanding liability was not determined, the department could not retain any amount and the same had to be refunded.
However, at this juncture, it is pertinent to note that recovery of tax by officials during search and inspection and voluntary payment by the taxable entity under Section 73(5) are distinct and therefore, while these judgements may directly govern the field of recovery under Section 79, this may not be the case in voluntary payments where the petitioner furnishes Form DRC-03.
Recent Developments
Recently in the year 2021, Gujarat High Court through an interim order in the case of Bhumi Associate v. Union of India [(2021) 128 Taxxman.com 56 (Gujarat)] laid down certain guidelines to be enforced by the Central Board of Indirect Taxes and Customs. Among other directions, it clearly provided that no recovery in any mode by cheque, cash e- payment or adjustment of input tax credit should be made at the time of search/inspection proceedings under Section 67 of the Central/Gujarat Goods and services Tax Act, 2017. Further, it stated that even in a situation where the assessee comes forward to fill form DRC 03 and make a voluntary payment, the assessee should be advised to do so on the next day, after the end of search proceedings and departure of the officers. Furthermore, it also mandated the facility of filing a complaint if the assessee was forced to make such payment and strict disciplinary action against the concerned officer.
Citing the aforementioned order, the Karnataka High Court in the case of Union of India v. Bundl Technologies Pvt. Ltd. [(2022) 236 taxxmann.com 132) Karnataka] observed that where there was no evidence of admission of liability by Swiggy, (the taxable entity), where the entity had been regularly filing service returns, where no show cause notice was issued and amounts were deposited at odd hours, the payments could not be said to have been voluntary. Lastly, in Senior Intelligence Officer v. Nandhi Dhall Mills India Ltd. [(2022) 142 taxxmann.com 123 (Madras)], the petitioners accepting liability, deposited an amount of 2 crores through the DRC-03 form but subsequently retracted their statement alleging intrusive, acrimonious and malafide conduct of the authorities during search of their premises. A three judge bench of Madras High Court directed the department to issue a notice, allow the petitioners an opportunity of hearing and decide the matter on merits rather than retaining the said amount.
In 2022, the Investigation Wing of the GST Department, through Instruction No. 01/2022-23 examined the matter of deposit of the tax during course of search, inspection or investigation through furnishing Form DRC-03. However, reiterating the distinction between recovery under Section 79 and voluntary payment of tax before the issuance of a show cause notice under Section 73(5), it clarified that while there cannot be recovery during search and inspection under any circumstance, a taxpayer is not barred from voluntarily making payment upon the ascertainment of liability. However, it does take cognizance of the interest of the taxpayer and provides that taxpayers must be informed about the voluntary nature of form DRC-03 and complaints alleging coercion must be enquired into at the earliest.
Conclusion
While the instruction of 2022-23 differentiates between “recovery” and “voluntary payment”, it is pertinent to note this distinction is often blurred in the light of coercive measures and threats of arrest. In the author’s opinion, a serious doubt is cast upon the voluntariness of the payment under DRC-03 where the payment is made pursuant to a search/inspection and allegations of coercion and malafide conduct are filed by taxpayers immediately after such search/inspection. Albeit the instructions mandate the disclosure of circumstances under which DRC-03 must be filed and prescribe an enquiry into allegations of coercion, there is an increasing need for greater checks on the powers of the officers. Therefore, in such a scenario the prudent course of action would be a recognition/modification of the guidelines issued by the interim order of the Gujarat High Court at the central level by the Supreme Court and/or the Central Board of Indirect Taxes and Customs.
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