FEBRUARY 05, 2020

By Jigar Doshi, Executive Director, Bhadresh Vyas, Director and Aditya Nadkarni, Manager, SKP Group (Nexdigm)

IT's been over two and a half years since the country witnessed the most historic structural reform viz. the Goods and Services Tax. While the jury is not still out on whether it is a "Good and Simple Tax" as was envisioned by the Government at the time of its inception, the same is indeed a 'maturing tax' with more than 60 lakh new taxpayers being added, total of 40 crore returns having been filed, 800 crore invoices being uploaded and 105 crore e-way bills having been generated. Yet, the last two years have seen revenue leakages and the Govt's efforts to crackdown on GST scams involving thousands of crores worth of revenue across various parts of the country. These rackets primarily involved bogus firms and dealers issuing fake invoices without actual supply of goods and/or services, enabling businesses to claim wrongful input tax credit (ITC) there against. Some of the probes have also led to arrests in those cases.

As per recent media reports,the Centre and States have joined hands to formulate a nine-point strategy to streamline GST and to boost the overall revenue collection which has been below expectations.This includes linking of foreign exchange remittances with IGST refund for risky and new exporters, investigation of fraudulent ITC cases by the I-T Dept., a single bank account for foreign remittance receipt and refund disbursement, besides others.

One of the measures that the Govt. has devise din Union Budget 2020 is to extend the scope of the penal provisions under the GST law to any person who 'retains the benefit of a fraudulent transaction' and 'at whose instance such transaction is conducted'.

Fraudulent transaction would entail -

(a)  Supply of goods and/or services without issuing any invoice or against incorrect or false invoice;

(b)   Issuance of any invoice or bill without supply of goods and/or services in violation of the provisions of GST law;

(c)  Taking or utilization of ITC without actual receipt of goods and/or services either fully or partially, in contravention of the provisions of GST law; and

(d)  Taking or distributing ITC in contravention of the provisions of GST law, i.e. without registering as an Input Service Distributor.

Similarly, the provision for criminal punishment has been extended to cases involving fraudulent availment of ITC without invoice or bill. Furthermore, the beneficiary of such transactions has been made liable to criminal punishment.

At first brush, it seems that the amendment intends to rectify a lacuna in the law which made provision for criminal punishment applicable only to cases where there is wrongful availment of ITC against an invoice issued in violation of GST law; however, a closer look into the same would reveal some ambiguity in the scope thereof.

Since the beneficiary of a fraudulent transaction has been made liable to penalty and criminal punishment, question arises as to how far in a supply chain would the GST authorities go, for the recipient of supply is now included within the scope of liable persons. For instance, 'A' supplies without invoice to 'B' who claims ITC thereon and in turn, supplies to 'C' under a bona fide transaction. In such case, question arises as to whether the GST authorities can make 'C' liable to penalty and criminal punishment, for he could be considered to have retained the benefit, albeit indirectly, of a fraudulent transaction that he may not be even aware of.

Moreover, it would prove difficult to ascertain the person at 'whose instance' the fraudulent transaction has been conducted. We cannot rule out the possibility of GST officers going overboard, in a zeal to collect taxes,and targeting the business honchos as well as tax practitioners/consultants, both at the supplier's and the recipient's end!

Under the GST law, a restriction is already in place in respect of availment of ITC wherein the recipient can avail only 110% of eligible ITC appearing in GSTR-2A. However, the constitutional validity of the same is currently under challenge before the Courts of law. Powers are also granted to the GST officer to block credit where he has 'reasons to believe' that ITC has been availed fraudulently or is ineligible; as well as to make arrests where he has 'reasons to believe' that a person has committed an offence. Here, reference can be made to various judicial precedents where it has been reiterated that the expression "reasons to believe" is not a subjective satisfaction on the part of the assessing officer; the belief has to be in good faith and must have a rational connection with the issue involved.

In such circumstances, tightening the noose further at the recipient's end seems arbitrary and unreasonable, and may be prone to further litigation before the High Courts in days to come.

We may recall that under the erstwhile service tax regime, penalty extending upto one lakh rupees was made applicable to any director, manager, secretary or other officer of a company which evaded payment of service tax; or issued bill or invoice or challan without provision of taxable service; or availed and utilized credit of taxes or duty without actual receipt of taxable service or excisable goods; or failed to pay any amount collected as service tax to the credit of Central Govt. within six months from the date on which such payment became due.

Similarly, criminal punishments were constrained to persons knowingly evading service tax payment; or availing and utilizing credit of taxes or duty without actual receipt of taxable service or excisable goods; or maintaining false books of accounts or failing to supply requisite information; or failing to pay collected tax amount to Govt. exchequer within six months from payment due date.

Thus, it can be seen that the aforesaid penalty and criminal punishment provisions under service tax regime were different than those under GST law. However, they did come under severe criticism by the Apex Court, especially the exercise of powers of arrest, in the case of MakeMyTrip.com - 2019-TIOL-65-SC-ST .The Hon'ble Supreme Court bench had threatened to slap costs on the Dept. for not following the procedure prescribed,while remarking, "Even if the law were to not provide any safeguards, these would have to be read into the law" .

Given the above, the new measures proposed in Union Budget 2020 would only add to the burden on recipient of supply for such person would be required to check the authenticity of the invoice or bill received by him before availing ITC. Further, we may see a spurt in Dept. communications to businesses seeking to impose penalty for wrongful ITC availment/distribution.

It, therefore, would be imperative for the Government to clarify the scope of the aforesaid amendments, so as to ensure that the powers are used judiciously by the field officers.

(The views expressed are strictly personal.)