Recovery proceedings under Section 78 of GST Act – Indiscriminate application thereof – Need for clarification /amendment
Introduction: Section 78 of the CGST/SGST Act outlines the procedure for the recovery of tax dues, providing a time frame for payment. However, the vague proviso has led to indiscriminate application by tax authorities, causing confusion and hardship for taxpayers. This article examines the ambiguities in the provision and the urgent need for clarification or amendment to safeguard taxpayer rights and prevent misuse.
1. Section 78 of the CGST/SGST Act prescribes the procedure to be followed for recovery of any amount payable by a tax payer. Section 78 of CGST Act is reproduced hereunder for ready reference.
Section 78. Initiation of recovery proceedings.-
Any amount payable by a taxable person in pursuance of an order passed under this Act shall be paid by such person within a period of three months from the date of service of such order failing which recovery proceedings shall be initiated:
Provided that where the proper officer considers it expedient in the interest of revenue, he may, for reasons to be recorded in writing, require the said taxable person to make such payment within such period less than a period of three months as may be specified by him.
2. The first para is very clear and says that any amount payable by a tax payer consequent to an order passed under the Act shall be paid within three months from the date of service of the order. The time limit provided is in line with the time allowed for appeal i.e., three (3) months.
3. However, the proviso to the Section is totally vague and amenable to different interpretations by the department. The proviso says that the proper officer, in the interest of revenue may for the reasons to be recorded in writing require the tax payer to make payment in less than three (3) months.
4. What is interest of revenue is not clear. For departmental officers recovery is in the interest of revenue, once the order is passed. The provision has been rampantly and blindly used, without any basis.
5. In many cases, assessment orders are served, mentioning therein that dues are to be paid within fifteen (15) days or thirty (30) days. No reasons are recorded therein, for compelling the tax payer to make payment even before expiry of statutory time limit for filing appeal.
6. As is the experience of the trade and industry with the department, it is obvious the department do not record any reasons for initiation of recovery in less than three months period, in the assessment files.
7. It is also not clear from the provision whether the reasons recorded are to be communicated to the tax payer or not. It is in the interest of principles of natural justice that whenever an adverse decision is taken against a tax payer, same should be communicated to him. The proviso is silent on this aspect. Further, whether opportunity of hearing is to be granted to the tax payer to present his case, in case he is served with a notice or intimation regarding initiation of recovery proceedings in less than three months’ time.
8. The proviso suffers from serious drafting ills and therefore needs to modified/amended comprehensively, to save the interest of tax payers and to stop the tax terrorism going on in various States. Drafting of proviso that severely affect the tax payers in a very causal and open ended manner, results in severe mis-carriage of justice. In many States, recovery is initiated without any notice to the tax payer and attaching the bank accounts straight away, assuming jurisdiction as per the proviso to Section 78.
9. Many of the tax payers are forced to approach the High Courts against the attachment of bank accounts. It is also surprising to note that the advocates on the side of revenue argue that the action was taken as per the proviso to Section 78.
10. It is painful to see the way the tax administration is handled in the Country. Without any mistake on their side, the tax payers are being forced to approach High Courts, which involve considerable amount of time, energy and expenses. It is very clear that the administration has no empathy towards tax payers who are genuine and paying huge taxes to the department, which in turn helps in building the Nation.
11. There should be clear cut guidelines as to the procedure to be followed by the departmental authorities while invoking the proviso to Section 78. It should not be invoked in a casual manner for each and every order. It should be invoked in very rare cases where the tax payer is suspected to be a fly-by-night operator or financially bankrupt etc. Even in such cases also, proper notice should be issued and after personal hearing order should be passed, indicating the circumstances that forced the department to initiate the recovery proceedings in less than three (3) months. This procedure is necessary, in the interest of justice, since the department is taking away the statutory right given by the Act to the tax payer, to file appeal within three months from the date of receipt of the order. When the statute provides for automatic stay on payment of 10% of the disputed tax demand, initiation of recovery proceedings for full amount of disputed demand, is obviously putting the tax payer to maximum hardship. Therefore, the procedure of issuing notice, personal hearing thereon and reasoned order would only meet the ends of justice.
12. Few of the cases that came up on the subject before the High Courts are discussed hereunder for ready reference of the readers/tax payers.
13. In the case of SITA PANDEY VS. STAT OF BIHAR [(2023 10 Centax 95 (Pat.)], department has initiated recovery of disputed dues, immediately after the appeal is decided against the tax payer, by sending notices to the bank for attachment of the bank account and recovery of the disputed dues, snatching away the statutory right of the tax payer to file appeal within three months from the date of receipt of the appeal. The High Court deprecated the functioning of the officer, stating that the officer has acted in complete derogation of the statutory provisions and established principles of law and levied costs on the officer for an amount of Rs.5,000/p. Hon ‘ble High Court of Bihar has formulated the guidelines to be followed in case of recovery proceedings, as under –
| (1) | There shall be no recovery of tax within the time-limit for filing an appeal and when a stay application is filed in a properly instituted appeal, before the stay application is disposed of by the Appellate Authority; |
| (2) | Even when the stay application in the appeal is disposed of, the recovery shall be initiated only after a reasonable period so as to enable the assessee to move a higher forum; |
| (3) | However, in cases where the Assessing Officer has reason to believe that the assessee may defeat the demand or that it is expedient in the interest of Revenue, as is provided under the proviso to Section 78, there can be a recovery but with notice to the assessee, which notice shows the reasons for initiating it and specifies the lesser time within which the assessee is directed to satisfy the dues; |
| (4) | Though a bank account could be attached; before withdrawing the amount, reasonable prior notice should be furnished to the assessee to enable the assessee to make a representation or seek recourse to a remedy in law; |
| (5) | We also remind the Tax Authorities, as was done in the UTI Mutual Fund (supra) that the ‘authorities under the tax enactment shall not act as a mere tax gatherer but act as a quasi-judicial authority vested with the public duty of protecting the interest of the Revenue while at the same time balancing the need to mitigate the hardship to the assessee’ (sic-UTI Mutual Fund). |
14. But, unfortunately, the State GST officers are not bothered about the directions of the High Courts also. Tax payers are forced to approach the High Courts and get the relief on case to case basis.
15. In the case of Purulia Metal Casting Pvt. Ltd. Vs. Asst. Commissioner of State Tax, Purulia Charge [(2022) 1 Centax 293 (Cal.)], the departmental officer has recovered the disputed dues by debiting the same to Electronic Credit Ledger of the tax payer within 49 days. The High Court held that the authorities has recovered the demand in clear violation of the provision of Section 78 of the Act. The High Court ordered for refund of the amount recovered illegally. But, who will bear the cost of agony, legal expenses, time consumed and business lost in the process. Levying heavy costs on the officers, for flagrant violation of the clear provisions, is only the solution to the problem and act as a deterrent. Otherwise, the agony of the tax payers will continue.
16. In another case of Penna Cement Industries Ltd. V. State of Andhra Pradesh [(2024) 15 Centax 248 (A.P.)] also department has initiated the recovery proceedings before expiration of three (3) months time period provided for filing the appeal. The High Court held at Para 11 of the judgement as under-
We are of the considered view that in view of Section 78 of the Act the petitioner has three months time, which has not yet expired, for making payment under the impugned order, may be in Sl.No.1 or/and Sl.No.2. Consequently, the impugned notice could not be issued or even if it has been issued, it cannot be implemented within the statutory period to make payment.
17. The tax payers are put to maximum hardship due to loosely drafted proviso to Section 78. Therefore, the proviso can be deleted as it is misused, resulting in wastage time, energy and huge money of the tax payers and burdening the courts with avoidable litigation. If the department feels that the provision is required to force the evaders to make payment on the spot, the proviso should be drafted unambiguously indicating that the proviso cannot be invoked against the tax payers who have filed returns for the last six months and paid the taxes as per returns.
18. While it is imperative that the evaders should be dealt with iron hand, since the evasion worked out to be 10% of total tax payment as per the department’s statistics, honest tax payers should not be harassed by invoking the provisions crossing all the boundaries.
19. It is requested that suitable amendments are carried out to proviso to Section 78 bringing in the essential criteria to be fulfilled, for invocation of the same, if it cannot be deleted altogether. Suitable instructions to the field formations are to be issued by CBIC and all the State GST departments are advised to follow the same in letter and spirit.
Author Bio
Very Nice Article Thank You SIr