Implications of Unauthorised Collection of Tax & Non Payment of Tax Collected under Section 32 & 76 of CGST Act

Section 32 of CGST ACT prohibit to persons to collect unauthorised  collection of tax . Section 76 mandates  that every persons  should pay  any amount collected  by person as tax to the the Government forthwith . In this article we will discuss the implications of non payment of unauthorised collection of tax  and non payment of of the amount collected representing the tax under gst act.

Implications of Unauthorised Collection of Tax & Non Payment of Tax Collected under Section 32 & 76 of CGST Act

1. Prohibition of Unauthorised Collection of Tax -Section 32 of CGST Act, 2017

32. (1) A person who is not a registered person shall not collect in respect of any supply of goods or services or both any amount by way of tax under this Act.

(2) No registered person shall collect tax except in accordance with the provisions of this Act or the rules made thereunder.

2. Unauthorised Collection of Tax by Unregistered Person

If  person  who is not registered under gst act,  and supplied goods or services to the recipient, then he  is not permitted to collect tax on such supplies. As per provisions of the act only registered persons are permitted to collect tax on supplies. Where, such unregistered person has collected tax in contravention of said section , he is liable to pay tax along with interest u/s 50 immediately ,in view of provision of section 76 of the CGST act. Non payment of such amount is  offence under section u/s 122 and liable for penalty .

3. Excess Collection of Tax by Registered Person

Every registered person is liable to pay tax on all  taxable supplies of goods or services made by him to the recipients as per provisions of the act and rules . Similarly, he is allowed to collect tax from the recipients on such supplies. However, he should collect tax at applicable notified rate keeping in view provisions of law . He is not permitted to collect tax or any amount representing tax  at higher rate or on exempted supplies. Registered persons paying tax under composition scheme  u/s 10 also prohibited to collect tax on supplies. Thus , every registered person should collect tax or any amount representing tax  in accordance with provisions of act and rules made thereunder. However, if any registered person collect  excess tax or amount representing tax or illegal tax in contravention of section 32 of the act , he is required to pay it fothwith to the  Government. If no such tax has been  paid, proper officer will initiate proceeding under section 76 of the act and will recover tax ,interest and penalty. It is pertinent to note that under section 122 of the act failure to pay amount collected as tax within three months from date on which such payment become due is an offence and such taxable person is liable for penalty.

4. Section 76 of CGST Act- Tax Collected but Not Paid to Government

76. (1) Notwithstanding anything to the contrary contained in any order or direction of any Appellate Authority or Appellate Tribunal or court or in any other provisions of this Act or the rules made thereunder or any other law for the time being in force, every person who has collected from any other person any amount as representing the tax under this Act, and has not paid the said amount to the Government, shall forthwith pay the said amount to the Government, irrespective of whether the supplies in respect of which such amount was collected are taxable or not.

(2) Where any amount is required to be paid to the Government under sub-section (1), and which has not been so paid, the proper officer may serve on the person liable to pay such amount a notice requiring him to show cause as to why the said amount as specified in the notice, should not be paid by him to the Government and why a penalty equivalent to the amount specified in the notice should not be imposed on him under the provisions of this Act.

(3) The proper officer shall, after considering the representation, if any, made by the person on whom the notice is served under sub-section (2), determine the amount due from such person and thereupon such person shall pay the amount so determined.

(4) The person referred to in sub-section (1) shall in addition to paying the amount referred to in sub-section (1) or sub-section (3) also be liable to pay interest thereon at the rate specified under section 50 from the date such amount was collected by him to the date such amount is paid by him to the Government.

(5) An opportunity of hearing shall be granted where a request is received in writing from the person to whom the notice was issued to show cause.

(6) The proper officer shall issue an order within one year from the date of issue of the notice.

(7) Where the issuance of order is stayed by an order of the court or Appellate Tribunal, the period of such stay shall be excluded in computing the period of one year.

(8) The proper officer, in his order, shall set out the relevant facts and the basis of his decision.

(9) The amount paid to the Government under sub-section (1) or sub-section (3) shall be adjusted against the tax payable, if any, by the person in relation to the supplies referred to in sub-section (1).

(10) Where any surplus is left after the adjustment under sub-section (9), the amount of such surplus shall either be credited to the Fund or refunded to the person who has borne the incidence of such amount.

(11) The person who has borne the incidence of the amount, may apply for the refund of the same in accordance with the provisions of section 54. Tax collected but not paid to Government.

5. Scope of Section 76 of CGST Act

Section 76 of the act speaks about tax collected but not paid to Government. It is provided that every person who has collected any amount representing the tax, and not paid to the Government, shall pay said amount immediately, irrespective of whether supply is taxable or not. Detailed procedure has been prescribed to pass order and to recover such amount. It is provided in subsection 10 and 11 that where any surplus ( excess collection of tax /illegal collection of tax ) is left after adjustment, amount of such surplus shall be credited to Consumer Welfare Fund established u/s 57 or refunded to the person who has born the incidence of such amount and such person may apply for the refund of the same under section 54 of the act.

Under existing law , especially under state vat act , there was provision for forfeiture of excess or illegal  collection of tax by registered dealers or unauthorised collection of tax by unregistered dealer and accordingly mechanism was provided to recover such amount or to refund the same to persons from whom was such amount recovered. Though, word forfeiture is absent in the section 76 ,  it is in the nature of forfeiture of unauthorised collection any amount representing tax. Moreover, it covered the cases where tax has been collected and not paid to the Government . Generally , chances of such cases are rare, because such unpaid taxes would  recovered by initiating proceeding under other provisions of the act and by passing orders under section like 54 ,61, 62, 63 and 73 & 74 of the GST act within three year / five year. However , after five year  no order could be  passed under section 74  and unable to recover such  unpaid  amount collected as tax, as barred by limitation. In such cases this section will play important role as no time limit is prescribed to issue notice and to intitate proceeding. Thus, it appears that section is inserted with dual intention , to forfeit unauthorised collection of tax and to recover tax collected but not paid.gst

These are following few example  where this section is applicable.

a) unregistered person has collected tax on supplies made to consumers and did not paid such amount to the Government.

b) registered person has supplied goods to unregistered persons (B to C ) and collected tax at higher rate than applicable rate and neither refunded to the recipient nor paid amount of excess collection of tax to the Government

c) registered person has supplied exempted goods and collected tax and neither refunded to recipient nor paid to the Government .

d) registered person person who is paying tax at composition rate under section 10 collected tax on supplies from consumers and neither refunded same to the consumer nor paid to the Government.

e) registered person supplied goods to registered recipient , who is not claiming ITC on inward supplies and collected tax @12 % thereon paid to the Government . However ,after Advance ruling in his own case tax is exigible @ 5 % and without refunding excess collection of tax to the recipient filed application for refund of excess payment of

6. Issue of Show Cause Notice Under Section 76(2) of CGST Act

 Every person who has collected any amount as tax is required to pay such amount immediately to the Government , irrespective of  whether such supply is taxable or not . However ,  if no such amount found paid by person  , then proper officer may issue show cause notice to the person giving details of amount collected  along with summary in  FORM-GST-DRC 01  directing  him to show cause as why said amount should not be recovered from him and as to why penalty equivalent to the said amount should not be imposed on him .  After receipt of notice ,  if person has disputes on certain grounds and do not agree with notice or partly agree  may submit representation in form FORM-GST-DRC-06  . He may  also request in writing for giving opportunity of hearing and proper should grant such opportunity of hearing before passing any order .There is no time limit prescribed to issue notice .

7. Passing of Order Under Section 76(3) of CGST Act

After receipt of representation  from the person to whom  notice  is served  and after giving an opportunity  of hearing  where request is received in writing,  proper Officer  should consider representation and points raised in hearing and  determine amount  due and pass order u/ 76 (3 ) of the act. He is required to  issue summary of order in  FORM-GST-DRC-07. It is clearly provided in section 76 (8) that  proper officer should pass speaking order by stating relevant fact and the basis for the decision.  This order is appealllble  . If  such person is aggrieved by order he may file appeal u/s 107 to the prescribed Appellate authority.

8. Liability to Pay Interest

Section 76 (3) provides where person has not paid amount within prescribed time, he is liable to pay interest in addition to such amount  and penalty, under section 50 of the act from the date of such amount collected to the date of payment.

9. Time Limit to Pass Order U/s. 76(3) of CGST Act

It is significant to note that no time limit has been prescribed in this section  for issue of notice . It is independant  section and hence time limit prescribed in the section 73/74 is not applicable to this section. However, as per section 76 (6) proper office should pass order within one from the date of issue of notice . If such order is not passed within said period order can not be passed being barred by limitation. Thus, time limit is only applicable for passing of order after issue of notice and no time limit  prescribed to issue notice.

10. Adjustment of Amount Paid

An amount paid to the Government after initiating proceeding u/s 76 shall be adjusted against tax payable if any by the person in relation to impugned supplies. If amount paid is in respect of supplies on which tax collected legitimately, then it would be adjusted toward such tax liability. Where, after adjustment of amount as above, if any surplus is left it shall be either be credited to consumer welfare fund or refunded to the person who has borne the incidence of such amount.

11. Refund of Amount to The Recipient

As per provision of the act , supplier person is permissible to collect tax from the recipient person . However , he has to collect tax at  applicable notified rate. In case wrongly tax had collected at higher rate  such excess amount required to be refunded  to the recipient within prescribed time and if not refunded  it should be paid to the Government immediately , otherwise it will result in an unjust benefit to him.  It is provided in section 76 (10 ) & (11) of the act that such amount shall be refunded to the person who has borne the incidence of such amount. Such person may  file an application for refund under section 54 of the act  within two year from the date of payment of such amount. If recipient person came to know that order under section 76 passed  regarding forfeiture of excess collection   then  only he may file application for refund of such amount . It appears that there is no provision in the act and rule to intimate to concerned  person. Unless any  such intimation  received from Proper Officer concerned  person may not be in position to claim refund within prescribed time. Under Maharashtra Value Added Tax act 2002  there was such provision to send intimation to the person from whom such excess amount was recovered and on that basis  he may claim refund . Under GST tax system Government has always protected interest of the consumers and made such provisions in the act. In order to protect interest of consumer ,it would be appropriate to introduce mechanism to intimate the person from whom such excess or illegal tax has recovered by supplier  after passing of order u/s 76 of the act.

12. Concept of Unjust Enrichment

CBIC has explained doctrine of unjust enrichment and clarified this issue in Final FAQ Question no 95 and 96, which is reproduced here under.

Q 95. What is unjust enrichment. Does the concept apply in GST?

The Hon’ble Supreme Court in the case of Sahakari Khand Udyog Mandal Ltd. v/s Commissioner of Central Excise & Customs as reported in 2005 (181) ELT 328 S.C. has defined ‘unjust enrichment’ as under:

(a) ‘Unjust enrichment’ means retention of a benefit by a person that is unjust or inequitable. ‘Unjust enrichment’ occurs when a person retains money or benefits which in justice, equity and good conscience, belong to someone else. (b) That no person can be allowed to enrich inequitably at the expense of another. A right of recovery under the doctrine of ‘unjust enrichment’ arises where retention of a benefit is considered contrary to justice or against equity The concept is inbuilt in Section 54(5) read with 54(8) of the CGST Act, 2017. Every claim of refund sanctioned will be credited to the Consumer Welfare Fund in terms of section 348 54(5) of CGST Act, 2017. It will, instead of being credited to the fund, be paid to the claimant in situations mentioned in Section 54(8). Thus, the principle will not apply to refund claims arising on account of zero rated supply, refund of accumulated ITC on account of zero rated supply and inverted rate structure, where wrong tax is paid (IGST instead of C+SGST & vice versa), where tax has been paid on advances but no supply is made and no invoice has been issued. These are cases where the principle of unjust enrichment is not applicable and the proper officer need not satisfy himself whether the incidence of tax has been passed on to any other person in such cases. In all other cases, refund will be sanctioned to the claimant only if the claimant demonstrates that the incidence of tax has not been passed on to any other person.

13. Conclusion

Registered person and unregistered person both are prohibited to collect unauthorised tax in contravention of  provision of  section 32 of the act  in respect of supplies effected by him . Every person who has collected tax on supplies is required to pay the same as per provisions of the law . Section 76 has been provided to forfeit excess / illegal collection of tax and to recover amount representing tax from person  who has collected  but not paid . It is independent section  and no time limit has been prescribed to initiate proceeding.

 M M  Kanadje  Ex. Joint Commissioner of State Tax

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May 2021