JULY 18, 2022

By B N Gururaj, Advocate

PENALTY is a pecuniary punishment for the violation of law. It is also a deterrent against future violations by the violator. Hence, the principles of natural justice demands that the rule audialterem partem "hear the other party", apply to all cases where penalty is proposed to be imposed. There can be no exception to this rule, which is also one of the cornerstones of the Rule of Law. Before examining the lacunae in the penal provisions of the CGST Act, 2017, it is necessary to briefly survey the legislative history the mandatory penal provisions under the erstwhile indirect tax laws.

One need not go too far back to see how penalties have evolved under the indirect tax laws. It is sufficient to notice that in September 1996, Section 11AC of the Central Excise Act, 1944 came into force which prescribed penalty equal to duty in cases where duty was not paid on account of fraud, collusion, wilful misstatement, suppression of facts with intent to evade payment of duty. Section 78 of the Finance Act, 1994, as introduced initially also had a provision which provided for imposition of penalty under identical circumstances, equal to the tax evaded but not exceeding twice the tax sum.

In 2011, significant amendments were made to both Section 11AC and Section 78. Where the particulars of a case were disclosed in the records of the assessee, the penalty imposable under these two provisions was reduced to 50% of the duty/tax due. This provision was withdrawn w.e.f. 14.5.2015 by the Finance Act, 2015. Further, this amendment also provided that where the duty/tax was paid along with interest was paid within 30 days of the communication of the order, only 25% percent of the penalty would be payable, and balance 75% penalty stood waived. There was a significant amendment to Section 78 also w.e.f. 14.5.2015 under which an option was given to the taxpayer to pay the proposed tax in the show-cause notice along with applicable interest within thirty days of the service of SCN, which would reduce the assessee's penal liability to 15% of the tax due. Clearly, this was an option available to the assessee. It was not an obligation to be accepted by the assessee. Finance Act, 2015 also similarly substituted Section11AC of the CE Act and provided for 15% of the duty due as penalty along with duty and interest.

In contradistinction with the erstwhile law which had a single demand and recovery provision, CGST Act has two provisions:

1. Section 73 for cases which do not involve mens rea, and Section 74 for cases involving mens rea. Section 73(5) waives penalty where the assessee pays the tax with interest either on his own ascertainment, or based on the determination by the proper officer, before issue of SCN. This benefit is extended under Section 73(8) even to a case where the assessee pays the tax with interest within thirty days of the issue of show-cause notice. Even in adjudication under Section 73, the maximum penalty imposable is a modest 10% of the tax due.

2. Section 74(1) provides for imposition of penalty equal to the tax due. But, Section 74(5) gives the option to pay the proposed tax due along with applicable interest before the service of show-cause notice. In this case, penalty equal to only 15% of the tax due is payable. Section 74(8) also provides the option of payment of the proposed dues along with 25% penalty within 30 days of the issue of notice. Lastly, if the adjudged dues are paid within 30days of the communication of the order, the penalty payable will be reduced to 50% of the tax due. Clearly, this is also an option.

Now, let us see how these various options work in practice.

Rule 142(1A) directs the proper officer to communicate before the service of SCN, the tax, interest and penalty as ascertained by the proper officer in Form GST DRC-01A. The assessee may either pay the dues and report compliance in Part B of the Form, or contest the demand by replying in Part B. Notice the difference between the option to pay penalty given under Section 74 and rule 142(1A) under which the proper officer "quantifies" the penalty payable by the assessee even before issuing the show-cause notice. Further, Section 73 does not require payment of any penalty except after adjudication. But, Rule 142(1A) puts both Sections 73 and 74 in the same basket by directing the proper officer to specify the penalty also in Form DRC-01A.

As readers are aware, litigation is yet to start in earnest under GST. At present, audits are done by the GST Audit Commissionerate (in the case of CGST) and by the Deputy Commissioners whose sole responsibility is to conduct audit (under the State GST). Typically, these audit reports given to the assessee after completion of the audit, faithfully denote inter alia, the records provided by the assessee. Under each Audit Observation, after recording the facts and figures and after rejecting the explanations offered by the assessee, the audit report quantifies the dues payable by the assessee. Typically, the format of quantification looks as under:

Thus, thanks to Rule 142(1A) and eager beaver tax officers, penalty is routinely shown in the audit report as something to be paid mandatorily, like interest on tax. In my work-a-day experience, I have come across many audit reports which routinely quantify penalty in this manner. There are instances where an assessee pays up tax with interest in order to give quietus to the matter. Instead, they get phone calls and letters from the GST department demanding payment of penalty. This also shows that the audit officers or even the jurisdictional officers who communicate either through DRC-01A or by way of letters simply ignore Section 73 which prescribes no voluntary payment of penalty. If one were to read the audit reports, one gets the impression that every assessee who has been audited has recklessly indulged in suppression of facts and evaded payment of tax.

The implicit assumption is that anything detected during the audits is a case for Section 74. The audit reports don't even bother to record that the ingredients of mens rea prescribed in Section 74(1) are present in a given case. Since the auditors enter their finding of audit, based on the records of the assessees audited by them, there is evidently no room for alleging suppression of facts etc., or intent to evade payment of duty. Besides, the GST officers have access to every transaction of the assessee through the GST Portal. Thus, under GST, the scope for alleging mens rea and invoking longer period of limitation is limited. Failure of a tax officer to notice transactions is not same as suppression of facts by the assessee.

In my opinion, the amendment to the penal provisions of the CE Act and the Finance Act, 1994 made in 2011 is itself obnoxious. It introduced a perverse legal principle of voluntarily paying penalty. This provision obliterated the distinction between a bonafide error and a reckless or careless or deliberate violation of law. Past experience has shown that wherever anappeal involved an issue around the interpretation of law, or an issue of classification, the appellate Tribunal would routinely set aside the penalty even if the demand and interest liability were upheld.

Imposition of penalty should be the subject matter of adjudication proceeding. The SCN must make out a case for proposing the imposition of penalty. The assessee must have an opportunity of contesting the penal liability, both by way of reply to notice and in the course of personal hearing. Thereafter, the adjudicating authority has to evaluate the material before him and decide, with reasons, to impose penalty. The amendments made to the erstwhile indirect tax laws, which have been borrowed by the CGST Act make a mockery of the principles governing the adjudicating proceeding, hallowed by time and sanctified by judicial decisions.

The larger question to be addressed is, whether penal provisions should be invoked at all for the first couple of years of GST regime. At least, until the end of first year utter chaos reigned supreme. The government kept on amending the rules and notifications almost on weekly basis. Even the tax professionals found it a herculean task to keep track of changes in the law. Helplines set up were quite useless. Most often, there would be no response to emails sent. Over telephone, the person at the other end rarely understood the issue narrated by the assessee. The cranky behaviour of the GST Portal aggravated the problems. Under the circumstances, are the GST officers justified in invoking penal provisions in respect of issues arising out of audits? The least that can be done is to treat all the demand and recovery cases for the first five years as cases arising under Section 73, and not under Section 74. I recall that in Karnataka, when VAT was introduced in 2005, the State government took a conscious decision not to penalise the assessees for the errors detected in the first year.

It would seem that under the GST regime, penalty is treated as an item of Revenue, which the government is entitled to. It suits the both the Central and the State governments, which have boundless appetite for money. Regrettably, the Trade Bodies who ought to represent the interests of the taxpayers before the Government have not concerned themselves with this vital issue. So far, they have been content to agitate issues relating to refund of unutilised credit, seek concessions and exemptions. This apathy of the Trade and Industry has emboldened the governments and the GST officers to presumptuously quantify penalties without the due process of law.

[The views expressed are strictly personal.]