OCTOBER 23, 2019

By Shailesh Sheth, Advocate & Founder, SPS LEGAL

e. AMENDMENTS to Rule 142 - Pre-notice consultation or coercion?

S.73 and S.74 of the CGST Act, 2017 provide for the issue of the show cause notice by a proper officer within a specified period and in the manner laid down therein in case of non-payment/short payment of tax or erroneous refund of tax or wrong availment or utilization of input tax credit (ITC). Different periods of limitation are provided for issue of the notice under these provisions depending upon whether such non-payment of tax etc. is due to willful misstatement or suppression of facts or fraud with an intent to evade payment of tax or not.

Rule 142 of the CGST Rules lays down the procedure and prescribes the Forms for the purpose of communication of summary of the show cause notice or the Statement of Demand, as the case may be, issued, inter alia, under S.73 or S.74 of the Act as well as for furnishing of the reply to the notice and the communication of the summary of the Order passed on the notice. For the benefit of the readers, the details of the Forms prescribed are briefly summarized below:

Amendments to Rule 142:

Rule 142 has now been amended so as to impart statutory recognition to the concept of 'pre-notice consultation' being administratively followed till now. A new sub-rule (1A) has been inserted in Rule 142 so as to provide that the proper officer shall, before service of notice under S.73(1) or 74(1) of the Act to the person chargeable with tax, interest and penalty, as the case may be, communicate the details of any tax, interest and penalty ascertained by the said officer, in Part A of Form GST DRC-01A.

Sub-rule (2) of Rule 142 has been amended so as to allow the person concerned to make the payment of tax, interest, penalty or any other amount due under the law, whether on his own ascertainment or as communicated by the proper officer under sub-rule (1A).

A new sub-rule (2A) has been inserted in Rule 142 providing for the filing of the submissions by the person concerned in Part-B of Form GST DRC-01A where he has made the partial payment of the amount communicated to him or where he desires to file any submissions against the proposed liability.

A new Form GST DRC-01A with Part-A &B has been inserted in the CGST Rules, 2017.

Pre-notice Consultation -A farcical exercise…!

Readers may recall that the concept of 'Pre-notice consultation' was introduced by the Board through administrative instructions in 2015 by Instruction F. No. 1080/09/DLA/MISC/15 dated 21 st December, 2015. The Board probably felt that before large taxpayers were visited with show cause notices, there should be a consultation process. The Board, accordingly, mandated such pre-notice consultation process where demands were above Rs. 50 lakhs, except for preventive offence related demands.

The above directives were reiterated by the Board in its Master Circular No. 1053/02/2017-CX (F. No. 96/1/2017-CX.1) dated 10th March, 2017 . The relevant para 5.0 of Part-I titled 'Show Cause Notice' of the Circular is reproduced below for ease of reference:

"5.0 Consultation with the noticee before issue of Show Cause Notice: 

Board has made pre show cause notice consultation by the Principal Commissioner/ Commissioner prior to issue of show cause notice in cases involving demands of duty above Rs. 50 lakhs (except for preventive/ offence related SCN's) mandatory vide instruction issued from F No. 1080/09/DLA/MISC/15 dated 21st December 2015. Such consultation shall be done by the adjudicating authority with the assessee concerned. This is an important step towards trade facilitation and promoting voluntary compliance and to reduce the necessity of issuing show cause notice ."

[Emphasis provided]

The aforesaid administrative instructions have now become part of the Statute under GST regime as a consequence of the above amendments to Rule 142 of the CGST Rules, 2017.

The question, however, here is whether such pre-notice consultation has served its avowed objective? Isn't it a fact that the process is carried out by the authorities in a routine and mechanical manner? Has the Board undertaken any internal survey to find out in how many cases where such pre-notice consultation has been undertaken, the competent authority being satisfied with the submissions of the Assessee, has closed the proceedings and not proceeded with the issue of show cause notice?

The worst part here is the clever use by the authority of the submissions advanced by the Assessee during such pre-notice consultation process while ultimately issuing the show cause notice (a foregone conclusion, in any case …!). The so-called pre-notice consultation advice or intimation generally has all the attributes of a show cause notice like narration of the relevant facts, nature of allegations, basis of allegations and the quantified demand. The unsuspecting assessee responds to such communication in good faith placing all his submissions on record, fervently hoping that the authority would see reason and the futility of the issue of a show cause notice and would not condemn him to avoidable litigation. Alas! such hopes of the assessee rarely, if ever, come true! The authority, now fully aware of the assessees' defense, would systematically demolish or negate it in the show cause notice ultimately served upon the hapless assessee! Such a show cause notice reads almost like an adjudication order! The assessee, having already made all submissions earlier, then will be at his wits' end in defending himself against the show cause notice. A very strange 'trade facilitation measure' indeed!

Pre-notice consultation process under GST - A fait accompli..?

Regardless of the fact that the 'pre-notice consultation process' has not been effective in curtailing litigation, the Board has now imbibed the concept in the Statute i.e. the CGST Rules, 2017.

The amended Rule 142 now mandates the issue of a communication in Part A of Form GST DRC-01A by the proper officer, before service of the show cause notice to a person under S.73 or S.74, containing the details of tax, interest and penalty as ascertained by him.

A careful look at Part A of Form GST DRC-01A would reveal that it also requires the proper officer to state 'the grounds' for the 'tax ascertained as being payable by the taxpayer'. The matter doesn't end here. The prescribed intimation then provides for an issue of a 'trade-friendly advisory' in the following words:

"You are hereby advised to pay the amount of tax, as ascertained above along with the amount of applicable interest in full by …………., failing which show cause notice will be issued under section 73(1).

You are hereby advised to pay the amount of tax as ascertained along with the amount of applicable interest and penalty under Section 74(5) by …………., failing which show cause notice will be issued under Section 74(1)."

[Emphasis provided]

Is this consultation or coercion? How can the threat of issue of show cause notice be used as a hanging sword against the taxpayer? Isn't it also evident that such so-called pre-notice intimation has all the attributes of a 'show cause notice'? Is this proper and valid?

What is also ironical is the complete disregard of the rule of 'audi alteram partem' in the whole process! Neither the amended provisions nor the Form GST DRC-01A provides for the grant of any hearing to the taxpayer during such pre-notice consultation process! The taxpayer shall, if he doesn't agree to the charge conveyed to him, shall make his submissions, if he so desires, in Part-B of Form GST DRC-01A and then hope for the best!

A question also arises here as to whether the taxpayer is obliged to make detailed submissions in case he doesn't agree to the allegations and the demand conveyed to him through Form GST DRC-01A ? In the author's view, a taxpayer is under no obligation to do so and he may prefer to await the show cause notice and make his defense submissions at appropriate stage rather than pre-disclosing his defense!

Lastly, it may be noted that unlike the erstwhile instructions, the present amendments requiring the issue of pre-notice intimation are not confined to any particular types of cases nor is any monetary limit is prescribed for it. Thus, in all types of cases where show cause notices are contemplated by the proper officer, such pre-notice communication in Form GST DRC-01A shall now be mandatory.

Such initiatives to check litigation may be laudable but will hardly yield any result. The roots of the evil of litigation are too deep and widespread and unless a combative and comprehensive action is mounted against it, any such initiatives may prove to be merely cosmetic and superficial!

Form GST DRC-01 - Is it a show cause notice?

Yet one more aspect needs specific mention here. S.73 and S.74 of the Act require the issue of a show cause notice by the proper officer in the specified circumstances, but do not provide for the issue of such notice in any particular Form. On the other hand, sub-rule (1) of Rule 142 of the CGST Rules, 2017 provides for the serving, along with the notice issued, inter alia, under S.73 or S.74, a summary thereof electronically in Form GST DRC-01 . This is clear from the language of sub-rule (1) of Rule 142 and from the perusal of Form GST DRC-01.

It is, therefore, evident that Form GST DRC-01 itself is not nor can it be considered a 'show cause notice' contemplated under S.73 or S.74 of the Act. It seeks to apprise the taxpayer only of the gist of the allegations presumably with a view to enable him to furnish his reply, electronically, in Form GST DRC-06. However, a formal and detailed show cause notice as contemplated in law must be issued by the proper officer. It is possible that departmental officers and even taxpayers as well as tax professionals mistakenly treat Form GST DRC-01 as a formal 'show cause notice' which would not be correct. One has to bear in mind that a specific time limit is provided under S.73 and S.74 for the issue of show cause notice and such time limit has to be reckoned with reference to the 'date of the service of a show cause notice' and not the 'date of service, electronically, of the summary of show cause notice in Form GST DRC-01'.

The Board would do well to dispel any doubts and misunderstanding in this regard by issuing suitable clarifications.

It is also unfortunate, of course, that having already replied to the pre-notice consultation intimation, the assessee would now have to reply to the summary of the show cause notice and to the show cause notice itself. Where is the need to have such multiple farcical stages in reaching the same foregone conclusion (namely, the confirmation of a demand "ascertained" by the proper officer at the pre-notice consultation stage itself) ?? How do the above provisions in any manner "facilitate" the trade? They merely render the entire adjudication process more drawn out and cumbersome, from the viewpoints of the Department and assessee alike! One is again led to the inevitable conclusion, having closely studied the various provisions of the Statute and amendments thereto over the last over two years that, rather than simplifying and making the law more "assessee-friendly" as they purport to do, these provisions and the amendments thereto merely make life increasingly difficult for the already long-suffering assessee! Furthermore, the inevitable outcome of enactment of such provisions can only be more avoidable challenges and more litigation.

[To be continued…]

[The views expressed are strictly personal.]

See Part I & Part II