FY 2024-25 for GST: A Year of SCNs, Audits and Compliance Hurdles

The financial year 2024-25 has been one of the most strenuous and challenging years for businesses across various sectors, primarily due to the unprecedented volume of Show Cause Notices (SCNs) and tax audit proceedings related to past financial years.

The retrospective scrutiny of transactions from FY 2017-18, 2018-19, and 2019-20 placed an enormous compliance burden on taxpayers, forcing them to divert substantial resources towards responding to tax authorities, gathering documentation, and engaging in prolonged legal battles.

The impact of these retrospective demands was far-reaching, affecting business liquidity, financial planning, and operational efficiency. Many businesses found themselves grappling with uncertainty and ambiguity in GST assessments, as tax authorities relied on system-generated discrepancies rather than a thorough examination of actual transactions.

Retrospective Demands: A Major Compliance Challenge

Throughout FY 2024-25, taxpayers faced a wave of retrospective tax demands, leading to significant stress on compliance teams. The primary reasons behind these demands included:

Mismatch Between Returns and System-Generated Data

• GSTR-1 vs. GSTR-3B Variances: Discrepancies in reported outward supplies led to alleged short payments of tax.
• GSTR-2A vs. GSTR-3B ITC Mismatches: Automated system reports flagged differences in ITC claims, even in cases where tax had been correctly paid.

Non-Issuance of Speaking Orders

• Tax authorities confirmed demands without issuing reasoned speaking orders, violating the principles of natural justice.
• In many cases, no proper hearing was conducted, and SCNs were mechanically converted into demand orders.

Delayed SCNs and Extension of Limitation Periods

• Due to administrative delays, SCNs were issued at the last moment, giving taxpayers minimal time to respond effectively.
• Many SCNs were issued without proper jurisdictional review, leading to erroneous tax demands.

Reclassification of Transactions

• Tax authorities retrospectively reclassified goods/services, resulting in additional tax demands and disputes over applicable GST rates.
• Long-settled transactions were reopened without any valid basis, leading to avoidable litigation.

Amidst these challenges, the Central Board of Indirect Taxes and Customs (CBIC) has admitted that a significant portion of tax demands stemmed from reporting errors in GST returns, rather than actual tax evasion or fraud. However, despite this acknowledgment, tax authorities continued to confirm demands blindly, often without issuing speaking orders or adhering to the principles of natural justice.

Audit Proceedings Adding to Compliance Burden

In addition to SCNs, many businesses faced intensive departmental audits for these financial years. Authorities conducted rigorous scrutiny of:

• ITC claims and their reconciliation with purchase records.
• Turnover and tax payments reported in different returns.
• Differences between financial statements and GST returns.
• Allegations of tax evasion under Section 74, leading to additional penalties.

However, in most cases, these demands were purely reporting errors, which could have been rectified with simple clarifications rather than full-fledged tax demands. Despite this, adjudicating authorities confirmed demands arbitrarily, often without allowing taxpayers to present their case.

Violation of Natural Justice and Lack of Speaking Orders

One of the most concerning aspects of FY 2024-25 was the blatant disregard for the principles of natural justice in GST adjudication. In numerous cases:

• SCNs were issued based on automated system-generated reports, without proper verification.
• No opportunity for personal hearings was provided before confirming demands.
• Speaking orders were not issued, making it difficult for taxpayers to understand the basis of tax demands.
• Authorities ignored explanations submitted by taxpayers and confirmed demands without considering factual discrepancies.

This lack of due process and transparency has led to a surge in appeals before the First Appellate Authorities and GST Tribunals.

Amnesty Scheme: A relief that led to confusion

To provide relief to taxpayers, the Government introduced an Amnesty Scheme for waiving interest and penalties on demands issued under Section 73 for tax periods July 2017 to March 2020. However, the scheme itself became a source of confusion due to last-minute amendments and lack of clarity.

Key Issues with the Amnesty Scheme:

1. Complexity in Understanding the Scheme:

• • Many taxpayers found it difficult to determine if they were eligible under the scheme.
  • The lack of clear guidelines led to different interpretations among professionals.

2. Last-Minute Rule Amendments:

• • The Government amended Rule 164 at the very end of the scheme period, leading to more uncertainty.
  • This amendment introduced additional conditions, making it harder to decide whether to opt for the scheme.

3. Dilemma: Opt for the scheme or continue appeal?

• • Taxpayers had to choose between waiving interest/penalty and withdrawing appeals or continuing litigation.
  • The scheme did not allow partial withdrawals for specific tax periods, creating further compliance challenges.

4. Technical Challenges in Availing the Scheme:

• • The GST portal lacked proper options for partial appeal withdrawals, forcing taxpayers into an all-or-nothing situation.
  • Several users faced system glitches while making payments under DRC-03.

A New Dawn: Expectations for a Smoother Tax Regime in FY 2025-26

As we step into FY 2025-26, businesses across India are hopeful for a more predictable, transparent, and efficient tax regime—one that is free from excessive litigation, retrospective tax demands, and procedural bottlenecks. The past financial years have been fraught with compliance challenges, with taxpayers battling Show Cause Notices (SCNs), retrospective tax assessments, audits, and procedural complexities. However, there is optimism that the upcoming year will bring policy reforms and administrative improvements that will foster ease of doing business and restore confidence in the tax system.

Reducing Litigation and Retrospective Tax Complexities

One of the most pressing concerns for businesses in recent years has been the exponential rise in tax litigation, often triggered by automated system-generated tax demands, mismatches in GST returns, and retrospective tax assessments. Going forward, the tax administration must focus on:

Curtailing Unnecessary SCNs and Arbitrary Tax Demands

• The large-scale issuance of SCNs in FY 2024-25, especially for FY 2017-18, 2018-19, and 2019-20, created immense compliance burdens.
• Many of these SCNs were issued based on technical mismatches in GST returns rather than actual tax evasion.
• In FY 2025-26, the focus should be on substance over form, ensuring that only genuine tax evasion cases are pursued instead of penalizing businesses for clerical or procedural errors.

Mandatory Issuance of Speaking Orders

• The lack of detailed reasoning in tax orders has led to an increase in appeals before appellate authorities and tribunals.
• The absence of properly justified orders forces taxpayers to engage in prolonged litigation, consuming valuable resources.
• A policy mandating speaking orders with clear reasoning would improve transparency and significantly reduce unnecessary litigation.

Timely Resolution of Disputes and Pending Appeals

• Thousands of appeals remain stuck at the first appellate level, leading to financial uncertainty and cash flow issues for businesses.
• Expediting dispute resolution through simplified procedures, digital hearings, and increased manpower in appellate bodies would improve taxpayer confidence.
• The proposed GST Appellate Tribunal (GSTAT) must be set up at the earliest to reduce litigation pendency.

Strengthening ITC Reconciliation and GST Compliance

Input Tax Credit (ITC) remains one of the most contentious areas of GST compliance. Many of the SCNs issued in FY 2024-25 were based on ITC mismatches between GSTR-3B and GSTR-2A/2B, resulting in denial of ITC claims and tax demands on businesses.

Automation and AI-Based ITC Matching

• The GST portal should enhance its ITC reconciliation mechanism to prevent erroneous mismatches and incorrect tax demands.
• AI-driven data validation should be introduced to identify and correct ITC discrepancies proactively, reducing unnecessary tax disputes.

Clarifications on ITC Eligibility and Reversals

• Businesses have faced ambiguity in claiming ITC on transactions such as capital goods, exempt supplies, and mixed-use services.
• The government must issue clear guidelines and circulars on ITC eligibility to minimize disputes and provide businesses with certainty.

Eliminating ITC Blockage and Refund Delays

• Many businesses, especially exporters and service providers, have suffered from delays in ITC refunds, affecting their working capital.
• The GST system should prioritize faster ITC refunds and introduce a real-time tracking system for refund applications.

Simplifying GST Procedures to Enhance Ease of Doing Business

India’s ranking in Ease of Doing Business (EoDB) has improved significantly in recent years, but tax compliance complexities remain a significant hurdle. To create a business-friendly tax regime, the government should focus on:

Reducing the Frequency of Return Filings

• Small and medium businesses struggle with the burden of monthly GST filings, even when they have minimal transactions.
• Introducing quarterly return filing for all businesses below ₹5 crores turnover (with monthly tax payment) would ease compliance pressure.

Extending the Amnesty Scheme with Clarity

• The amnesty scheme introduced in FY 2024-25 for waiver of interest and penalty was highly confusing due to last-minute amendments needs to extend  to the Covid period.
• In FY 2025-26, a well-structured and clearly defined amnesty scheme should be introduced to allow businesses to settle past disputes without ambiguity.

• One of the biggest challenges faced by taxpayers in FY 2024-25 was the all-or-nothing approach in appeal withdrawals under the amnesty scheme.

• A mechanism should be introduced to allow partial withdrawal of appeals for specific issues and tax periods, enabling businesses to opt for relief selectively.

Leveraging Technology for Transparent and Efficient Tax Administration

The next phase of GST reform must focus on leveraging technology to minimize manual intervention, reduce human errors, and improve transparency.

• Implement AI-driven analytics to detect genuine tax evasion while filtering out harmless procedural discrepancies.

• Enabling fully digital appeal hearings with automatic case tracking to reduce pendency and improve efficiency.

Looking Ahead: A Vision for a Taxpayer-Friendly GST System

• The vision for FY 2025-26 should be a taxpayer-centric GST system where compliance is simplified, tax administration is transparent, and disputes are minimized.
• Timely clarifications on ambiguous GST provisions to prevent misinterpretations and litigation. Clear
• SOPs for issuing SCNs and adjudicating disputes to ensure uniformity across tax jurisdictions
• Reducing the compliance burden on small businesses by simplifying return filing and tax reconciliation.
• Making tax administration more responsive and efficient by leveraging technology and automation.

Before parting.

As businesses step into the new financial year, there is cautious optimism that the government will take proactive steps to streamline GST compliance, reduce litigation, and promote a fair and transparent tax ecosystem. A collaborative approach between taxpayers and the government is the key to achieving a truly seamless and business-friendly tax regime.