IIT Big Data Unleashed: The Unprecedented Surge in GST Notices

Introduction

In the intricate dance between taxpayers and the tax authorities under the GST regime in India, the spotlight recently shifted to a dramatic deluge of Show Cause Notices (SCNs), akin to a wave crashing upon the shores of financial accountability, inundated businesses across the nation. These notices, like musical notes in a complex composition, demanded attention, requiring taxpayers to step into the limelight and explain the nuances of their financial performances. In September 2023, the government sent out a ton of notices to businesses, kind of like a flood of letters asking them to explain their finances & tax positions. These notices were serious and required businesses to come forward and talk. The idea of sending these notices is not new. It is a time-tested principle of natural justice (audi alteram partem meaning ‘let the other side be heard’) and that no person can be adjudged guilty without being allowed to answer charges against such person.

Now, let’s talk about why this happened in September 2023. So, basically the government introduced a new computer system (IIT Big Data) to automatically generate these notices, and they went out like a storm to businesses all over the country. It felt like the officers weren’t really paying attention and were blindly following this unique situation without looking at the actual discrepancies.

The May/Shall Dispute u/s 73 of the CGST Act, 2017

Section 73(1) devels  into the determination of taxes unpaid, short-paid, refunds erroneously received, or input tax credit wrongly availed or utilized, excluding instances of fraud or willful misstatement or suppression of facts. In such cases, the Proper Officer is mandated to issue a notice to the concerned person, prompting them to explain why they shouldn’t pay the specified amount, inclusive of interest under section 50 and a penalty as per the Act. Rule 142(1)(a) of the CGST Rules, 2017 supplements this by obliging the Proper Officer to electronically serve a summary in Form GST DRC-01 alongside the notice issued under Section 73 of the CGST Act, 2017.

A significant twist in the narrative arises with Rule 142(1A), introduced through Notification No. 49/2019 on 9th Oct 2019. This rule initially mandated that the Proper Officer must communicate tax, interest, and penalty details ascertained before serving a notice under section 73(1) or section 74(1). However, a subsequent amendment via Notification No.79/2020 dated 15th Oct 2020 replaced the word “shall” with “may.”

The crux of the matter lies in the question of whether this change renders the rule optional or maintains its mandatory nature. The ambiguity arising from the shift in language adds a layer of complexity to the compliance landscape.

The Limit

According to Section 73(2) of the CGST Act, 2017, the proper officer is mandated to issue a show cause notice (SCN) at least three months before the deadline specified in Section 73(10). As per Section 73(10), the proper officer must pass an order under subsection (9) of Section 73 within three years from the due date of filing the annual return for the relevant financial year or within three years from the date of an erroneously claimed refund, considering any representations.

It is noteworthy that the due date for filing the annual return for FY 2017-18 was extended to 5th and 7th February 2020, as outlined in Notification No. 06/2020-Central Tax. Consequently, based on the statutory provisions, the last date for issuing the order under Section 73(10) could have been 5th or 7th February 2023.

However, a subsequent development altered this timeline. Through Notification No. 13/2022-Central Tax dated 5th July 2022, the time limit for issuing the order under Section 73(10) was further extended up to 30th September 2023. This extension grants additional time for due diligence, consideration of representations, and the fair adjudication of cases related to unpaid or short-paid taxes or wrongly availed or utilized input tax credits, aligning with the principles of procedural fairness and compliance within the GST framework.

Further, CBIC, through powers conferred by Section 168A of the CGST Act, 2017, issued Notification No. 09/2023-Central Tax dated 31^st March 2023 and extended the time limit for issuance of Show Cause Notices and passing Orders under Section 73 of the CGST Act as under:

As these timelines were approaching fast department issued notices in haste, being in the final days of the extended time limit for notice issuance.

These notices are issued without proper relied-upon documents or findings being communicated to the taxpayers and appear to be based on mere auto-populated numbers which may not be reliable in most notices.

Issues

Early on, technical issues on the GST portal posed obstacles for businesses and taxpayers, leading to complications in meeting tax obligations and errors in GST returns. Despite the government’s assurance of leniency for genuine mistakes during the initial implementation, the Tax Department has initiated inquiries and issued numerous notices related to the financial year 2017-18.

These notices span various issues, including alleged shortfalls, reversals of input tax credit due to form mismatches, and output GST liability. Notably, the challenges of this tax reform journey, where each notice unfolds like a chapter in a legal thriller, exploring the complexities faced by taxpayers in the evolving GST landscape. Some of the issues are as follows:

> GSTR-9 Discrepancies:

Notices are issued based on GSTR-9 filed for FY 2017-18, overlooking corrections made in GSTR-9/9C and DRC-03 filings. The oversight in considering rectifications raises concerns about the accuracy of the notices. The annual return is always considered as a change maker return or correction adopter return where taxpayer can go and file the annual return which is different from monthly returns and pay the appropriate differential duties along with interest to avoid the future risk of litigation. Even though that additional payment being made, still the department had not looked upon that and issued the notices carrying the difference again.

> ASMT Proceedings Oversight:

In cases where ASMT 10 notices are issued, the response filed in ASMT 11 and the subsequent order in ASMT 12 are often disregarded. The lack of integration in considering filed responses and orders raises questions about procedural adherence. ASMT-12 is considered to be a closure to a particular deliberation on the issue being settled in terms of revenue as well as on the basis of submissions being made by the taxpayer, still after the issuance of such order, again notices have come in nature of non-compliance of provisions which is totally against the intention of the legislature to do so.

> Incomplete ASMT Proceedings:

Notices are issued even when ASMT-10 notices receive replies in ASMT-11, but the proceedings are not concluded (ASMT-12 order pending). The issuance of notices without acknowledging ongoing proceedings under Section 61 of the CGST Act raises procedural concerns. The matters which are already in progress have been ignored and fresh starting of the proceeding have been initiated, duplicating the efforts at both the ends to suffer at the paucity of time which businesses usually face and complain about.

> DRC-01 Challenges:

DRC-01 notices, issued under Section 17(5) of CGST/SGST, exhibit shortcomings by not considering specific exclusions outlined in Section 17(5). Notices based solely on HSN codes in GSTR-2A, irrespective of taxpayer credit actions and irrespective of the nature of business of the taxpayer, highlight a lack of nuanced understanding. The ad hoc nature of reversals as canvased in the notices which are without at legal parameters in place, bringing on the nature of levy absenting the reason behind such reversal requirement, creates an atmosphere of distrust amongst the trade community, also the rules pertaining to reversals under Rule 42 & 43 seems weird and without any legal backing.

> GSTR 3B vs. Table 8A of GSTR 9 Discrepancies:

Notices are consistently issued based on differences in ITC between GSTR 3B and Table 8A GSTR 9, disregarding the unavailability and inapplicability of GSTR 2A for FY 2017-18. Ignoring the conditions stipulated in Section 16(2) during this period raises concerns about the accuracy and fairness of the notices. The mechanism the match the credit as reflected by the vendor has come w.e.f 9^th October 2019, still the government expects the taxpayer to match the same thing even for financial year 2017-18 without having that option available with the taxpayer, which shows the sheer intent of the government for wrong method & approach of collection of taxes.

> No proper Officer:

The notices which are being issued on the last dates of ending in a month which has put restrictions on the authority to generate fresh notice, have categorically been accepted by authorities to be generated and served by the system which has been developed by software companies. The board has vide various circulars – Circular 03/03/2017-GST dated 05th July 2017 & Circular 31/05/2018-GST dated 09th February 2018 which gives power to proper officers to issue notices under section 73 and 74 of the Act along with some monetary limits set out, which seems to be missing here, where notices are issued by system technology and has not been designated as proper officer.

> Mode of delivery of Notices:

The notices which are issued to the taxpayers, has always raised a controversy as to whether they are required to regularly visit the common portal to check whether they have been issued the notice or not, or whether it should get communicated with the media which is in place in terms of electronic media or physical delivery or publication media. It becomes very crucial to see various high court rulings in favor of revenue, claiming uploading of notice on portal, is equivalent to serving the show cause notice, while other high courts, held in against.

 Guidelines

Instruction No. CCT/0707/10/2023 dated 11-10-2023 issued in Gujarat, which is directed to drop the proceedings in the case which are mentioned above. So, we can expect that suitable arrangements be made to prioritize the disposal of the few categories of cases as explained above by dropping the demand if the above-stated defects/ weaknesses are found as highlighted above.

> If an audit has been conducted and the software issues a notice, it will be dismissed. Similarly, if proceedings under section 61 have been completed and the software generates a notice for the same matters, it is necessary to discard the notice concerning the scrutinized matters.

> In cases where proceedings under section 70 (summons) had been done and if a notice covering the same matters is issued, it must be dropped to the extent of those matters.

> Similarly, if proceedings under section 74 have been completed or are pending, and a notice is issued covering the same subject matter, the notice shall be dropped to the extent of those matters.

> In situations where DRC-03 or DRC-07 has already been processed, and a notice covering the same subject matter is issued, the notice should be dropped to the extent of those matters.

> If invoices have not been issued for the supply of goods or services, and proceedings under section 122 have been carried out, any notice issued for the same cases will be dropped. Notices based on HSN/SAC of blocked credits should be subject to officer verification, and if the person is legitimately doing business in such HSN/SAC, the notice in such cases will be dropped.

Furthermore, before issuing the show-cause notices, the proper officer should properly examine the case or discrepancy and then accordingly should act. Now, the show cause notices issued are purely based on digits, and the relevant provisions that are contravened by the noticee are not mentioned.

Conclusion

Furthermore, the plea is made for the exercise of the extensive powers vested in the proper officer under various sections of the GST framework, such as the scrutiny of returns (section 61) and audit (sections 65 and 66). This proactive engagement could potentially obviate the need for direct issuance of show cause notices, promoting a more streamlined and collaborative resolution process. Such an approach aligns with the overarching goal of fostering a business-friendly environment and minimizing adversarial interactions between taxpayers and tax authorities. As we move forward, a balanced and nuanced application of statutory provisions will contribute to the overall effectiveness and fairness of the GST compliance framework.

In conclusion, the impending deadline of 31.12.2023 for the issuance of show cause notices of FY 2018-19 under section 73 of the CGST Act necessitates a proactive and judicious approach. It is hoped that due consideration will be given to addressing the concerns raised, leading to a reduction in potential litigation.

Views expressed are strictly personal and cannot be considered as a legal opinion in case of any query. For feedback or queries email us [email protected].