1.01 Introduction
The GST Law is a very young piece of legislation, but in these four years, it has evolved itself into a more mature law. Though there are many unresolved issues and controversies confronting it, but it is expected that sooner or later they shall be resolved to suit the greater interests of revenue. One such issue or controversy is the recent amendment of Rule 21A(2) of the CGST Rules, 2017 wherein the requirement to afford “a reasonable opportunity of being heard” was omitted. This has led to a plethora of Show Cause Notices (SCNs) being issued to Registered Persons (RPs) and simultaneous suspension of registrations without giving any opportunity to the RP to present his case. Immediately on suspension of a registration, the entire business comes to a standstill and the RP gets panicstricken even though he may not be at a fault and the issue might get resolved by a single explanation from his side, but the suspension causes an abrupt halt in his business at least for some days. Thus, in this article we shall discuss the various provisions surrounding this provision and its possible mitigating factors.
1.02 Objective
The present article shall discuss and analyse the following issues:
a) Whether suspension post amendment of Rule 21A(2) vide Notification No. 94/2020- Central Tax dated 22nd December, 2020, the Proper Officer has got the absolute powers and that no checks and balances exist to safeguard the constitutional rights of the RP under Article 14 and 19(1)(g)?
b) Whether the principles of natural justice still apply in case of suo-moto suspension of registration post amendment of Rule 21A(2) as stated above?
1.03 Legal Provisions
Suspension provisions were first introduced by The Central Goods and Services Tax (Amendment) Act, 2018 wherein the provisions were included in Second Proviso to Section 29(1) and Section 29(2) of the CGST Act, 2017.As per these provisions, the Proper Officer[1] may cancel a registration in any of the prescribed conditions and pending the cancellation proceedings, may suspend the registration for such period and in such manner as may be prescribed.
Thus, from the above it is clear that suspension of registration may be done in such manner as may be prescribed i.e. vide Rule 21A[2] of the CGST Rules, 2017.
1.03.1 Conditions For Suspension of Registration [Rule 21A(2)]
Rule 21A(2) prescribes the following conditions for suspension of registration:
i) The Proper Officer should have reasons to believe.
ii) The registration of the RP should have been liable to be cancelled u/s 21 or 29 of CGST Act, 2017.
iii) In case of a reason to believe, it is the prerogative of the Proper Officer to consider suspension and thus it is not mandatory.
iv) Proceedings u/s 22 for cancellation of registration should also be initiated simultaneously.
Sub-Rule (2) of Rule 21A contained the mandatory requirement of “affording the said person a reasonable opportunity of being heard” before suspending any registration under the said provisions. However, the CBIC vide Notification No. 94/2020- Central Tax dated 22nd December, 2020 deleted the above provision from the principal rule.
Thus, after this amendment there was no requirement on the part of a Proper Officer to issue a Show Cause Notice or give the RP an opportunity of being heard before suspending his registration.
1.03.2Special Situations for Suspension [Rule 21A(2A)[3]]
On comparison of the following by the Proper Officer
> GSTR 3B with GSTR 1 or
> GSTR 2A or
Such other analysis as may be carried out on the recommendations of the Council
show that there are significant differences or anomalies indicating contravention of the provisions of the Act or the rules made thereunder, leading to cancellation of registration of the said person, his registration shall be suspended. The said person shall be intimated in FORM GST REG-31, electronically, on the common portal, or by sending a communication to his e-mail address provided at the time of registration or as amended from time to time, highlighting the said differences and anomalies and asking him to explain, within a period of thirty days, as to why his registration should not be cancelled.
Thus, in these cases, the law mandates the Proper Officer to suspend the registration of the RP if he is convinced of any such contravention. However, the point to ponder upon is whether an analysis of the above statements/ returns is possible without seeking explanation from the RP is an issue which has to be considered. Let us discuss some scenarios and understand the need for providing an opportunity of being heard:
1.03.2.1 Scenario 1: Difference in output reported as per GSTR 1 and GSTR 3B, wherein output reported in GSTR 3B is substantially less:
It might happen that total output tax reported in GSTR 1 is Rs. 100.00 lakhs and that in GSTR 3B is Rs. 65.00 lakhs. However, the RP has subsequently paid the difference with interest vide DRC-03 or paid the same in subsequent returns in terms of Circular No. 26/26/2017-GST dated 29-12-2017. Thus, though differences exist in returns, the liability is paid off.
However, on a plain reading of the returns/ statements, the Proper Officer may believe that there has been a contravention of the law and suspend his registration.
1.03.2.2 Scenario 2: Higher ITC claimed in Table 4A, but reversed in Table 4B:
The Proper Officer may get a Red Flag Report wherein only figures reported in Table 4A of GSTR 3B may be mentioned and its subsequent reversal in Table 4B may not be available in the report. In such cases, if proper investigation is not done by the Proper Officer, he/ she may form an opinion that ITC has been excess availed and that there is a contravention of the law leading to cancellation of registration.
Likewise, there might be many other similar issues in the practical scenario and in many cases it may be difficult for the Proper Officer to arrive at a proper conclusion. Further, under the GST regime, data analytics form a major part of the investigation structure. It has its own set of limitations and a blind reliance on the data analytics solely without any application of mind may amount to not having a reason to believe. However, if he/ she gives the RP an opportunity of being heard, an objective conclusion may be arrived at and in such cases, the suspension will be done only in eligible cases.
1.04 Impact of Suspension of Registration [Rule 21A)(3)/(3A)[4]]
The RP shall not make any taxable supply during the period of suspension and shall not be required to furnish any return under section 39. The expression “shall not make any taxable supply” shall mean that the registered person shall not issue a tax invoice and, accordingly, not charge tax on supplies made by him during the period of suspension.
1.05 Reason to Believe
‘Reason to Believe’ is comprised of two words:
i) Reason
Cambridge Dictionary defines Reason as “the cause of an event or situation or something that provides an excuse or explanation”[5]. Thus, reason means having a valid justification of an act.
ii) Believe
Cambridge Dictionary defines Believe as “To think that something is true, correct or real”[6].
Thus, ‘Reason to Believe’ implies that both reason and belief should be present in a particular situation and thus any individual having reason to believe must have a valid and reliable justification for any action and the individual must actually believe that the event has or shall occur.
1.05.1 Judicial Precedence on Reason to Believe
1) The Hon’ble Gujarat High Court in the case of Vimal Yashwantgiri Goswami vs State of Gujarat [2020 (10) TR 3448] held that the word “reason” means cause or justification and the word “believe” means to accept as true or to have faith in it. Thus, there must be a justification and belief is the result of the mental exercise based on information received. The words “reason to believe’ contemplate an objective determination based on intelligence, care and deliberation involving judicial review as distinguished from a purely subjective consideration.
2) The Hon’ble Gujarat High Court in the case of M/s Cotton Industries vs Union of India[2019 (7) TMI 471]held that reason to believe in terms of section 67 of the CGST Act, 2017 shall be the belief that an honest and reasonable person shall hold based upon the relevant materials and circumstances. The Hon’ble Court further held that the statutory requirement of reasonable belief, rooted in the information in possession of Proper Officer under the Act, is to safeguard the citizen from vexatious proceedings. ‘Belief’ is a mental operation of accepting a fact as true, so, without any fact, no belief can be formed. It held that the Court can examine the materials to find out whether an honest and reasonable person can base his reasonable belief upon such materials although the sufficiency of the reasons for the belief cannot be investigated by the Court.
3) The Hon’ble Allahabad High Court in Rimjhim Ispat Limited vs State of U.P. And 3 Others vs State of U.P. and 3 Others and 4 Others and 2 Others [2019 (3) TMI 916] observed that the ‘reasons to believe’ should exist and should be based on reasonable material and should not be fanciful or arbitrary. It also held that court cannot go into the sufficiency of the reasons, however the same has to be recorded.
Thus, a careful analysis of the above judicial precedents in the context of GST Law, it is evident that Reason to Believe casts a greater responsibility on the Proper Officer to act fairly and not in an arbitrary manner and that his actions should be supported by tangible facts and records.
1.06 Constitutional Provisions on Natural Justice
1.06.01 Article 14
Article 14 of the Constitution of India, 1949 reads as under:
“14. Equality before law
The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India Prohibition of discrimination on grounds of religion, race, caste, sex or place of birth.”
Thus, Article 14 declares that every person shall be treated equal before the law and shall enjoy equal protection of the laws.
1.06.02 Court Rulings on Article 14
i) The Hon’ble Supreme Court of India in The State of West Bengal vs Anwar All Sarkarhabib, 1952 AIR 75, held that equality before the law or the equal protection of laws does not mean identity or abstract symmetry of treatment. It further held that distinctions have to be made for different classes and groups of persons and a rational or reasonable classification is permitted.
ii) The Apex Court in Maneka Gandhi v UOI, (1978) 1 SCC 248, held that Article 14 counters arbitrariness in State action and ensures fairness and equality of treatment. The principle of reasonableness is an essential element of equality or non-arbitrariness.
1.06.03 Court Rulings on Principles of Natural Justice
i) In S.N. Mukherjee vs Union of India, [1990 AIR 1984],the Supreme Court of India held that the requirement that reasons be recorded should govern the decisions of an administrative authority exercising quasi-judicial functions irrespective of the fact whether the decision is subject to appeal, revision or judicial review. The reasons should be clear and explicit so as to indicate that the authority has given due consideration to the points in controversy. The Court held that the need for recording of reasons is greater in a case where the order is passed at the original stage.
ii) In L. Trehan And Ors. Etc vs Union Of India And Ors. Etc, [1989 AIR 568], the Hon’ble Apex Court held that opportunity of being heard is meaningless once the decision has been taken.
iii) The Apex Court in B. Gautam vs Union of India & Ors, [(1993) 1 SCC78], held that even if the decision is to be taken in a tight time frame, the principles of natural justice should be complied with even in such situations.
iv) In M/s Dharampal Satyapal Ltd vs Dy.Commr.Of Cen.Exc.& Ors, [(2015) 8 SCC 519],The Supreme Court of India held that the principles of natural justice are very flexible principles and that they cannot be applied in any straight-jacket formula. It depends upon the kind of functions performed and to the extent to which a person is likely to be affected and thus certain exceptions to the aforesaid principles have been invoked under certain circumstances.
v) The Gauhati High Court in Assam Company India Ltd. And Anr vs The Union of India And 2 Ors [(2019) 213 COMP CAS 420 (GAUHATI)] held that before implicating the company as a shell company, proper opportunity of being heard should have been given to the petitioner.
vi) In The State of Uttar Pradesh vs Sudhir Kumar Singh [(2020) SCC Online SC 847], Supreme Court of India held that natural justice is a flexible tool in the hands of the judiciary to remedy injustice in fit cases and that mere breach of the principle does not conclude any prejudice.
1.06.04Article 19(1)(g)
Article 19(1)(g) and 19(1)(g)(6) of the Constitution of India, 1949 reads as under:
(1) All citizens shall have the right
(g) to practise any profession, or to carry on any occupation, trade or business
(6) Nothing in sub clause (g) of the said clause shall affect the operation of any existing law in so far as it imposes, or prevent the State from making any law imposing, in the interests of the general public, reasonable restrictions on the exercise of the right conferred by the said sub clause, and, in particular, nothing in the said sub clause shall affect the operation of any existing law in so far as it relates to, or prevent the State from making any law relating to,
(i) the professional or technical qualifications necessary for practising any profession or carrying on any occupation, trade or business, or
(ii) the carrying on by the State, or by a corporation owned or controlled by the State, of any trade, business, industry or service, whether to the exclusion, complete or partial, of citizens or otherwise
1.06.05 Court Rulings on Article 19(1)(g):
i) In Krishnan Kakkantn vs Government Of Kerala And Ors [(1997) 9 SCC 495], the Supreme Court of India held that reasonableness of restriction is to be decided in an objective manner and the interests of general public and not from the standpoint of the interests of the persons upon whom the restriction are imposed or upon abstract consideration A restriction cannot be said to be unreasonable merely because in a given case, it operates harshly and even if the persons affected be petty traders (AIR 1958 SC 73- Hanif Versus State of Bihar). In determining the infringement of the right guaranteed under Article 19(1), the nature of right alleged to have been infringed, the underlying purpose of the restriction imposed, the extent and urgency of the evil sought to be remedied thereby, the disproportion of the imposition, the prevailing conditions at the time, enter into judicial verdict (AIR 1981 SC 673 Laxmi ) versus State of U.P.; AIR 1968 SC 1323 Treveli Versus State of Gujarat and Herekchand vs. Union of India. India. AIR 1970 SC 1453).
ii) In M/s. Amazonite Steel Pvt. Ltd. & Anr., M/s. Corandum Impex Pvt. Ltd. & Anr., M/s. Cuprite Marketing Pvt. Ltd. & Anr. Versus Union of India & Ors. [2020 (3) TMI 1179], the Hon’ble Calcutta High Court held that arbitrariness in decision making lead to violation of the petitioners’ rights for carrying on business under Article 19(1) of the Constitution of India and under Article 300A of the Constitution of India wherein the petitioners have been deprived of their property without authority of law.
A conjoint reading of Articles 14 and 19(1)(g) and after analysing the various observations of the Hon’ble Courts on various occasions, it is amply clear that the principles of natural justice or the right to opportunity of being heard though must be followed by the executive to the extent possible, but it cannot be absolute and without any checks. The executive shall have to comply with the test of Public Interest and impose reasonable restrictions.
1.07 Conclusion
Thus, from the above discussion it is apparent that it is the duty of the Proper Officer to do a proper due diligence of the facts of the case and correlate the data with other corroborative evidence before taking any coercive steps. If even after analysis of the above points, the Proper Officer has reasons to believe that there has been some suppression of facts, a show cause notice to the effect under appropriate section of the Act should be sent. However, if he feels that if the registration of the RP is kept active, it may prejudice the interests of revenue, suspension of registration should be done by him. But if the assessee is cooperative, this step should not be normally taken.
Thus, we come to the following conclusion:
> Suspension is not a rule, but an exception.
> Reason to believe should normally be backed by sufficient enquiry.
> As far as possible, opportunity of being heard should be given even if not mandated by the law since in the opinion of the author, opportunity of being heard is not a benefit or concession, but a right and hence mandatory, subject to reasonable restrictions.
> Suspension should be a measure of last resort when all other options are exhausted and that the interests of revenue shall be affected detrimentally if not suspended.
Thus, though Rule 21A of the CGST Rules, 2017 give unfettered powers to the Proper Officer to suspend any registration, the same is with wider duties on his/ her part, without which the entire process may get vitiated and may cause irreplaceable damage to the business prospects and long-term market reputation of the RP.
[1] ‘Proper officer’ as per CGST Act shall be in terms of Circular No. 3/3/2017-GST dt. 5.7.2017
[2]Inserted vide Notification No. 03/2019 – Central Tax dated 29th January, 2019
[3] Inserted vide Not. No. 94/2020 – CT Dt. 22.12.2020
[4]Inserted vide Notf no. 49/2019-CT dt. 09.10.2019
[5] Source: https://dictionary.cambridge.org/dictionary/english/reason. Accessed on 31-07-2021.
[6] Source: https://dictionary.cambridge.org/dictionary/english/believe. Accessed 31-07-2021
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Disclaimer: The above expressed views are purely the personal views of the author. The possibility of other views on the subject matter cannot be ruled out. So, the readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting on the basis of the above write up. The author is not responsible in any manner.
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