Kriti Mehta & Aanishq Nair
Revisiting Section 129 CGST: Curbing Administrative Overreach With Constitutional Rethink Through 126
INTRODUCTION
The Central Goods and Services Tax Act, 2017 (“CGST Act”) was enacted primarily to curb tax evasion and ensure a smooth flow of revenue by implementing a unified national tax regime. The principle of proportionality is profoundly rooted in Indian tax jurisprudence. Which mandates that administrative action must have a reasonable and rational nexus with the nature and gravity of the offence. However, there exists a departure from the principle in the pragmatic application of Section 129. It was codified to prevent tax evasion whilst in transit. Nevertheless, the sweeping scope of the non-obstante clause, in practice, enabled revenue authorities to invoke it for trifling procedural infraction. Such an approach by administrative authorities departs from the legislative intent, casts doubt regarding proportionality and the legality of the administrative action under the CGST framework.
Sections 73 and 74 of the statute provide a distinct mechanism to deal with non-payment of taxes. While the latter attracts only the situations where there exists wilful disobedience to pay taxes, the former is applicable when the tax is unpaid or not paid sufficiently. Sections 129 and 130, on the other hand, are the provision which deal with special measures that allow the administrative authorities to confiscate property during the handling of the goods in transit. The blog addresses the issue of excessive use of the power of the tax authorities by examining the judicial construction of Section 129 vis-à-vis Sections 73 and 74, followed by the reasons for liberal interpretation of the non-obstante clause. The blog also recommends amendments to the statute and the need for clear administrative guidelines by the appropriate authorities to restore the principle of proportionality in the tax enforcement mechanism.
EXPLANATION OF SECTION 129
After underscoring the abuse of process by the revenue authorities routinely under sections 129 and 130 of the CGST Act. Let’s delve into the judicial decision pertaining to the above-mentioned section. In recent times, judicial pronouncements have noted an exasperating pattern of revenue authorities initiating proceedings even in minor documentary errors like excess stock, without establishing the intention of the parties to evade the tax. There has been a persistent judicial attempt to preserve the mens rea threshold implicit in section 129. Recently, the Allahabad High Court in M/S. Hindustan Herbal Cosmetics Vs State Of U.P. And 2 Others dealt with the question of applicability of Section 129 CGST. The pith of the judgment reiterated that mere typographical errors cannot be a ground to initiate proceedings under Section 129 CGST.
Similarly, the court in S/S Banaras Industries V. Union of India found that the proceedings against the petitioner were initiated but not under the appropriate section, i.e, section 73 and 74, rather under section 129 CGST, which provides unfettered power to the taxing authorities to impose a penalty. The judicial decision becomes imperative as it underscores the jurisdictional boundary between procedural irregularities and fraudulent acts, which prevents the authorities from circumventing the procedural safeguards. The court in S/s Dinesh Kumar Pradeep Kumar Vs. Additional Commissioner, Grade – 2 & Another, held that if there is excess stock found, then the proceedings must be initiated under sections 73 and 74 and not under sections 129 and 130 of the Act, as, intention to evade tax is a sine qua non to initiate proceedings in 129 CGST. The judgments reinforce the principle that discretionary power must not be used mechanically by the authorities. Thus, reaffirming that the statutory hierarchy of provisions cannot be subverted to justify administrative expediency.
ANALYSIS
Despite judicial censure, the authorities have continued to impose inordinate penalties for violations. The same is witnessed by the division bench in M/s Gobind Tobacco Manufacturing Company & Another Vs. State of U.P. & Others), which quashed the penalty that was levied on the petitioners under section 129. Additionally, a cost was levied on the revenue authorities for abuse of their power. The court affirmed that penalties imposed must be proportionate to the violation. The authorities take the security amount or impose a 50% penalty of the tax already paid, when there was no intention of the petitioner to evade the tax, which leads to gross misuse of the power of revenue authorities under this section.
There has also been an attempt by the legislature to curb this gross misuse of power vested in the hands of revenue authorities. The legislature, through circular No. 41/15/2018-GST dated 13.04.2018 and 49/23/2018-GST dated 21.06.2018, has tried to restrict the scope of discretion of the taxing authorities. Where the legislature has said that the quantum of penalty to be levied under Section 130 has to be read with Section 122 of the Act. Despite repeated judicial interventions and clarifications by the legislature in the form of circulars, there is persistent misuse, which suggests a structural issue within the enforcement mechanism. To curb the unfettered power of the authoritative revenue, the author suggests that section 129 must be read with section 126 of the CGST Act, as it lays down the fundamental principles while determining the liability.
To restrain the unbridled exercise of administrative discretion, the blog contends that principles laid down in section 126 must be the guiding light while fastening the liability of the tax evader. The legislative framework of the CGST Act mandates that “only substantive contraventions evidencing an intention to evade tax”, not trifling or minor procedural irregularities. The logical sequitur to the above proposition is that application of section 129, read with section 126 curb abuse of discretion of taxing authorities, while at the same time warranting the application of detention and penalty provisions in case of minor and unintentional procedural lapses.
The blog argues that the term “contravention” as appeared in Section 129 must be interpreted restrictively to incorporate breaches of only severe character which show wilful disobedience. The application of Section 129 must be warranted in circumstances where there are minor procedural lapses, for instance, where goods are tendered by valid tax invoices substantiating payment of tax dues, and there exists a trivial lack of procedure, such as expired e-way bills or clerical documentation errors; such instances must fall beyond the intended scope of Section 129.
The Delhi High Court in Kamal Envirotech Pvt. Ltd. v. Commissioner of GST And Anr. was held that minor procedural lapses, where tax has been duly paid and no intention to evade tax can be inferred, cannot justify the imposition of the onerous 200 percent penalty under Section 129(1)(a). The court further observed that Section 126(2) expressly provides that penalties must be determined based on the specific facts and circumstances of each case and be proportionate to the gravity of the contravention. This reinforces the interpretive principle that penal provisions, such as the power to detain, seize, and impose penalties, must be construed harmoniously with moderating provisions like Section 126 and should not be enforced automatically or mechanically.
Section 129 obliges the non-obstante clause not to be interpreted as superseding all the other provisions of the law or the rule of moderation, restraint, and proportionality as inculcated in Section 126 of the CGST Act. The Delhi High Court in the aforementioned judgment has said that the two provisions should be read in harmony, with legislative object and purpose with which they were formulated. The Court noted that the penalties should be commensurate with the seriousness of the violation and are not automatically applied because of minor breaches in the procedures or transit. Likewise, in Synergy Fertichem Pvt. Ltd. v. State of Gujarat, the Gujarat High Court had concluded that both Sections 129 and 130 were mutually exclusive and independent, and they should not be applied mechanically. Hence, substantiating the flexibility of the non-obstante clause of Section 129.
In the aforementioned judgment, the Delhi High Court extensively analysed the Supreme Court precedents on the basis of which they asserted that a penalty cannot be imposed on a technical or trivial violation of the provisions of the CGST Act or a breach that is based on a bona fide belief. Penalty, being quasi-criminal in nature, can only be imposed where the assessee has acted deliberately in defiance of the law, with contumacious or dishonest conduct, or in conscious disregard of its obligations. Therefore, lapses devoid of mens rea or fraudulent intent do not meet the threshold for penal liability.
Constitutional Prism: Articles 14 and 19(1)(g)
The unfettered power of revenue authorities is also in contravention of established constitutional principles. Application of Article 129 of the CGST Act to any minor procedural lapses, without establishing intent to evade tax, contravenes the doctrine of reasonable classification, in Article 14 of the Constitution. Traders who have already paid their taxes are exposed to the same penal measure as deliberate defaulters, which is arbitrariness and unfair treatment. The arbitrary detention and seizure constitute unjustifiable restrictions on the freedom of trade and occupation safeguarded under Article 19(1)(g) of the Constitution. In Maneka Gandhi v. Union of India, the Supreme Court stated that arbitrary State action violates both equality and liberty and that Articles 14, 19, and 21 of the Constitution go hand in hand as harmonious constitutional guarantees. The rule of reasonableness should flow throughout the administration process, particularly where essential liberties are involved, to prevent the imposition of disproportionate or mechanically applied punishments.
CONCLUSION
The persistent judicial concern over the capricious application of Section 129 of the act by the taxing authorities underscores the need to reconcile the principle of proportionality with the institutional and bureaucratic implementation. The erratic approach adopted by the revenue authorities to fasten the liability without requisite consideration of mens rea brushes away the established principle of law laid down by the court and legislature under section 126. Therefore, the author suggests either the need for amendment in the statute or guidelines by the administrative authorities through delegated legislation to curb the excessive abuse of power by the revenue authorities. The courts must adopt a liberal approach while deciding the cases related to such matters due to the reasons mentioned above. Such an initiative will curb the excessive abuse of power of the taxing authorities while fastening the liability under sections 129 and 130 of the statute. Additionally, it will also save the sections from the vice or arbitrariness, therefore reinforcing the principle of reasonableness and proportionality in the statute.
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