Section 78 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) empowers the tax authority to initiate recovery proceedings against the taxpayer pursuant to an order passed under this act. This article seeks to examine Section 78 of the CGST Act in detail, exploring its implications and interpretation through relevant case laws.
1. The taxpayer is required to pay the tax liability along with interest and penalty if any, within 3 months from the date of service of demand order. If the taxpayer fails to pay such tax liability along with interest and penalty if any, within the above-mentioned period, the tax authority has power to initiate recovery proceedings as per Section 78 of the CGST Act.
2. As per the proviso to Section 78 of the CGST Act, the period of 3 months can be reduced by the proper officer for reasons to be recorded in writing, in the interest of revenue. However, “in the interest of revenue” is not defined or explained, hence, it becomes highly subjective.
3. As per Central Board of Indirect Taxes and Customs (‘CBIC’) Circular No. 3/3/2017-GST dated 5-7-2017, only the Principal Commissioner/Commissioner of Central Tax has been designated as the proper officer authorized to reduce the 3-month period.
4. If the return remains unfurnished as per Section 39 of the CGST Act within the statutory period of 30 days from the issuance of an order in FORM ASMT-13 under Section 62 of the CGST Act, then the proper officer may initiate proceedings under Section 78 and recovery under Section 79 of the CGST Act, following the standard operating procedure issued by the CBIC for non-filers of returns, as per Circular No. 129/47/2019 – GST CBEC-20/06/04/2019-GST dated 24/12/2019.
5. Please note that the time limit to file an appeal before the appellate authority and Honorable Tribunal is 3 months (without considering the condonation of delay) which is in line with above said provision.
6. If the tax authority initiates the recovery proceedings before the expiration of 3 months, it is considered unlawful and not sustainable in the eyes of the law. Below are certain cases that have come up before the Honorable High Courts on the above said provision:
- The High Court of Andhra Pradesh in the case of Penna Cement Industries Ltd. v. State of Andhra Pradesh (2024) 15 Centax 248 (A.P.) held that recovery proceedings can be initiated only if amount is not paid within a period of 3 months from the date of service of order.
- In the case of Cargotec India Private Limited vs The Assistant Commissioner (ST), Manali Assessment Circle, Chennai (2024-vil-396-mad) held that the proper officer should have documented in writing the reason for expediting the recovery before the expiry of the prescribed 3-months in the interest of revenue. Since the respondents have failed to satisfactorily explain the recourse to the proviso to Section 78 of the CGST Act, accordingly, the respondent was directed to refund the recovered amount or recredit it to the taxpayer’s Electronic Cash Ledger or Electronic Credit Ledger.
- Similar view was taken by the Honorable Calcutta High Court in the case of Purulia Metal Casting Pvt. Ltd. Vs. Asst. Commissioner of State Tax, Purulia Charge ((2022) 1 Centax 293 (Cal.)) wherein it was held that the impugned action of recovery of the demand by debiting from its electronic credit ledger by the tax authority is a violation of Section 78 of the WBGST Act, 2017. Further, directed the tax authority to refund the money which had been collected in excess.
- In the case of Sita Pandey Versus the State of Bihar (2023 (9) Tmi 272 – Patna High Court) held that tax authority acted in complete derogation of the statutory provisions and established principles of law and issued the following guidelines in respect of recoveries are concerned:
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 v. ITO [2012] 19 taxmann.com 250/206 Taxman 341/345 ITR 71 (Bom) 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).
Conclusion:
Understanding Section 78 of the CGST Act is crucial for taxpayers and tax authorities to ensure compliance and uphold judicial integrity in recovery proceedings. If the taxpayer intends to file an appeal against the demand order after expiration of 3 months, it would be advisable to inform the Jurisdictional officer in writing to refrain from initiating any recovery proceedings.
Suitable instructions are to be issued to the field formations by the CBIC and all State GST departments, directing proper officer not to take any coercive action against the taxpayer before the expiration of 3 months from the date of service of the demand order.
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