Understanding Tax Demand and Recovery Procedures Under GST

The Goods and Services Tax (GST) system operates on a self-assessment model. If a taxpayer accurately assesses and remits their taxes, no issues arise. However, if there is a shortfall in tax payment or an improper use of input tax credit, GST authorities may initiate demand and recovery actions against the assessee. The provisions governing tax demand and subsequent recovery under the GST Act are consistent with earlier Service Tax and Central Excise laws. This article outlines these demand and recovery provisions, including recent updates.

Recent Updates September 9, 2024 The 54th GST Council Meeting recommended outlining new procedures through a newly added Rule 164 in the CGST Rules. These procedures concern the waiver of interest and/or penalties for tax demands under Section 73 of the CGST Act, specifically for the financial years 2017-18, 2018-19, and 2019-20. Registered taxpayers can avail this waiver if they make the required tax payments by March 31, 2025, as per Section 128A. Clarifications on the waiver process will be provided through a circular, with related provisions taking effect from November 1, 2024. July 23, 2024 In the Union Budget 2024, several amendments were proposed. Sections 73 and 74 of the CGST Act are being modified to limit their applicability to demands up to FY 2023-24. From FY 2024-25 onwards, demands will be determined by the newly inserted Section 74A, which establishes a unified time limit for issuing demand notices and orders under these sections. Furthermore, the time limit for taxpayers to benefit from reduced penalties under Sections 73 and 74, by paying the demanded tax along with interest, is being extended from 30 days to 60 days through Section 74A. A new Section 128A is being introduced in the CGST Act to offer a conditional waiver of interest and penalty for demands related to financial years 2017-18, 2018-19, and 2019-20, provided demand notices were issued under Section 73 and the taxpayer remits the full tax liability by a specified date. Additionally, Clause (i) of Section 17 of the CGST Act is being amended to restrict the blockage of input tax credit for tax paid under Section 74 for demands pertaining to FY 2023-24. These changes will come into force once notified by the CBIC.

Understanding When Tax Authorities Can Raise a GST Demand

GST is levied based on self-assessment. If the self-assessed tax is paid correctly, no issues arise. However, if there is any underpayment or incorrect utilization of input tax credit, GST authorities may initiate demand and recovery actions against the taxpayer. The GST Act's provisions for demand and recovery mirror those found in previous Service Tax and Central Excise laws. The following sections provide an overview of these provisions.

GST Demand in Cases Without Fraud (Section 73)

This provision applies when, for reasons other than fraud (i.e., without intent to evade tax), the following situations occur: - Tax remains unpaid or is underpaid. - A refund was incorrectly issued. - Input tax credit was wrongly claimed or utilized. In such instances, the proper officer (GST authorities) will issue a show-cause notice to the taxpayer, requiring payment of the outstanding amount, along with applicable interest and penalty. Circular 185/17/2022-GST, issued on December 27, 2022, clarified the procedure and timeline for tax officers to redetermine tax, interest, and penalty demands in non-fraud cases where adequate evidence of fraud is absent.

Time Limit

The proper officer must issue the show-cause notice three months before the expiry of the time limit. The maximum period for issuing the payment order is three years from the due date for filing the annual return for the relevant year.

For Other Tax Periods

After issuing the initial notice, the proper officer may serve a statement detailing any unpaid tax, incorrect refunds, or similar issues for other periods not covered in the original notice. A separate notice is not required for each tax period.

Voluntary Tax Payment

An individual may pay tax, along with interest, based on their own or the officer's calculations, before a notice or statement is issued. They must inform the officer in writing. In this scenario, the officer will not issue a notice. However, if a subsequent short payment is identified, the officer may issue a notice for the remaining amount.

No Penalty

If the taxpayer settles all dues within 60 days from the date of the notice, no penalty will be applied. All proceedings (excluding those under Section 132, related to prosecution) concerning the notice will be concluded. This will take effect once notified by the CBIC.

Penalty in Other Cases

The tax officer will review the taxpayer's submission, then calculate interest and penalty. The penalty will be 10% of the tax, subject to a minimum of Rs. 10,000. The tax officer will issue an order within three years from the due date for filing the relevant annual return. As per the 53rd GST Council meeting, the Council recommended waiving interest and penalties for demand notices issued under Section 73 of the CGST Act (applicable for fiscal years 2017-18, 2018-19, and 2019-20) in cases not involving fraud, suppression, or misstatement. This applies where the taxpayer pays the full amount specified in the notice by March 31, 2025. (A new Section 128A is expected to be notified).

This will come into force once notified by the CBIC.

Illustration for No Fraud Scenario

Mr. Gnan received a notice for a shortfall in tax paid through GSTR-3B for January 2021, resulting from an erroneous data entry in GSTR-1. He was issued a show-cause notice on January 13, 2022, regarding why he should not be taxed on the differential amount. This notice was issued within the three-month window before the three-year expiry from the annual return filing due date.

GST Demand in Cases Involving Fraud (Section 74)

This section covers tax evasion scenarios involving: - Fraud - Wilful misstatement - Suppression of facts These actions lead to: - Unpaid or underpaid tax. - Incorrect refunds. - Wrongly claimed or utilized input tax credit. In such instances, the proper officer will issue a show-cause notice to the taxpayer, demanding payment of the due amount, along with interest and penalty. The officer can issue notices under Section 74 to multiple individuals for tax underpayments or excess ITC claims due to fraud. Amendments now allow the officer to confiscate and seize goods or vehicles even after concluding proceedings against all persons liable for specific or general penalties.

Time Limit

For fraud cases, the proper officer must issue the notice six months before the expiry of the time limit. The maximum time limit for the order is five years from the due date for filing the annual return for the relevant year.

For Other Tax Periods

Following the issuance of the initial notice, the proper officer may provide a statement detailing any unpaid tax, incorrect refunds, or similar issues for other periods not covered by the notice. A separate notice is not required for each tax period.

Voluntary Tax Payment

If an individual pays the tax, along with interest and a 15% penalty, based on their own or the officer's calculations before the notice or statement is issued, and informs the officer in writing, no notice will be issued. However, if the officer later identifies a short payment, a notice may be issued for the balance amount. If the taxpayer settles all dues and a 25% penalty within 60 days from the date of the notice, all proceedings (excluding those under Section 132, related to prosecution) concerning the notice will be concluded. This will come into force once notified by the CBIC.

Issue of Order

The tax officer will consider the taxpayer's representation, then calculate interest and penalty, and issue an order. This order must be issued within five years from the due date for filing the relevant annual return. For incorrect refunds, the order must be issued within five years from the date of the erroneous refund. If the taxpayer pays all dues and a 50% penalty within 30 days from the date of the order, all proceedings (including prosecution) related to the notice will be closed.

This will come into force once notified by the CBIC.

Illustration for a Fraud Scenario

Mrs. Disha Patil received a notice regarding a shortfall in tax paid via GSTR-3B for July 23, 2019, due to fake input tax credit claims identified by tax authorities. She was issued a show-cause notice on April 13, 2021, questioning why she should not be liable for tax on the differential amount. This notice was issued within the six-month window before the five-year expiry from the annual return filing due date, which was March 31, 2021, for FY 2019-20.

General Provisions for Tax Determination (Section 75)

• If a Tribunal or Court order has stayed the service of a notice or the issuance of an order, the stay period will not count towards the three-year and five-year time limits.
• If an Appellate Authority, Tribunal, or Court determines that fraud charges are not sustainable (i.e., it is not a fraud case), the previously issued notice will be considered as issued under Section 73 (non-fraud case). The tax officer will then recalculate the tax accordingly.
• CGST Circular 185/2022, issued on December 27, 2022, clarifies the timeline and method for redetermining tax dues.
• If a Tribunal or Court directs that an order must be passed, it will be issued within two years from the date of such direction. This means within two years from the date the Appellate Authority, Tribunal, or Court communicates the direction, as clarified by the Circular.
• The officer will redetermine the interest, penalty, or tax demand as follows:
  • In non-fraud cases, if a Show Cause Notice (SCN) was issued within 2 years and 9 months from the GSTR-9 due date for the specific financial year, then only the tax shortfall or unpaid amount, or input tax credit wrongly availed or utilized, along with interest and penalty, as per Section 73 of the CGST Act for those financial years, can be re-computed. Similarly, the amount of tax liability for an erroneous refund, including interest and penalty, can be re-computed only if the SCN was issued within 2 years and 9 months from the date of the erroneous refund.
  • If the SCN is issued after the aforementioned time limit, the proceedings must be terminated.
  • In fraud cases, if an SCN was issued within 2 years and 9 months from the GSTR-9 due date for the particular financial year, the entire demand in such notice represents the re-computed amount.
  • In fraud cases, if an SCN was issued for multiple years but after the expiry of the time limit, the re-determination of the amount under Section 73 will apply only to the financial year for which the SCN was issued before the time limit expired.
• Taxpayers will be granted an opportunity for a personal hearing if they request it in writing or if a penalty or any adverse decision is proposed against them.
• The proper officer may adjourn a personal hearing if the person provides sufficient written justification. However, adjournments are limited to a maximum of three times.
• The total amount of tax, interest, and penalty demanded in the order will not exceed the amount specified in the notice. All demands must be based solely on the grounds specified in the notice.
• The Appellate Authority, Tribunal, or Court has the power to modify the tax amount determined by the officer.
• Interest on unpaid or underpaid tax must be settled, regardless of whether it is explicitly stated in the order.
• If an order is not issued within three or five years, it is presumed that the adjudication proceedings are complete, and no further order will be issued. For pending cases where the decision was unfavorable to revenue, an appeal may be filed with a higher authority. In such situations, the period between the date of the original decision (aggrieved order) and the date of the higher authority's appeal decision will be excluded from the three-year or five-year period.
• Recovery provisions for unpaid or underpaid tax and interest apply independently of demand provisions.
• Penalty under Section 122 is not applicable in these cases. Once a penalty is imposed under Sections 73 or 74, no other penalties under GST sections apply. However, charges for offenses under Section 132, leading to prosecution, will not be dropped. This applies to cases (fraud or non-fraud) where: - Tax is unpaid or underpaid. - Refunds were incorrectly calculated. - Input tax credit was wrongly claimed or utilized. Only penalties under Sections 73 and 74 will apply. Other penalties under Section 122 will not apply in these three types of cases. Nevertheless, prosecution charges for offenses under Section 132 will remain.

Applicability of Interest on GST Demands

For tax short paid or under-assessed liability, the interest charged is 18% per annum. This interest rate also applies when input tax credit is merely availed but not utilized. However, if input tax credit is both availed and utilized in excess of what is available, the interest charged is 24% per annum, as per Section 50 of the CGST Act.