JULY 02, 2024

By Srinivas Mandalika IRS, Rtd. Principal Chief Commissioner

IT is indeed an excellent trade facilitation move on the part of the GST-Council to recommend the insertion of Section 128A in the CGST Act, 2017 (Act) to provide conditional waiver of interest and penalty, in cases of short/non-payment, for FY 2017-18 to FY 2019-20, where the show-cause notice (SCN) has been issued under Section 73 of the Act and the taxpayer pays the tax demand on or before 31.03.2025. This move certainly is intended to contain litigation on account of the genuine omission of short/non-payment of tax. The expression 'short/non-payment of tax' obviously includes the cases of inadmissible ITC, in which the penalty under Sec. 73 is attracted and the interest is liable only when such inadmissible credit was utilised for supply of the taxable goods/services/both. However, the waiver does not cover demands on account of erroneous refund.

The proposed Sec. 128A is intended to extend the said benefit of waiver of Interest and Penalty to cases where the provisions of Sec. 73 of CGSTA are attracted, but not for cases where the short/non-payment was by reason of "fraud or any wilful mis-statement or suppression of facts" (mens rea), for which the provisions of the Sec. 74 are attracted. Thus, the demands made by invoking the Sec. 74 are clearly kept out of the scope of the proposed Sec. 128A.

Currently, the sub-section (6) read with the sub-sec. (5) of the Sec. 73 of Act provides for non-imposition of penalty, if the Tax and Interest are paid up before issuing SCN, where the demand attracted the provisions of Sec 73, but not the Sec. 74, ibid.

Further, the sub-section (8) of Sec. 73 provides for non-imposition (waiver) of penalty, if the Tax demanded in the SCN as well as the Interest due thereon are paid, in to to, within 30-days for the date of issue of the show cause notice; and the proceedings are deemed to be concluded.

Thus, the proposed new Sec. 128A would provide for -

- waiver of interest involved, when the demand was under Sec. 73, if the Tax involved is paid in full, by 31.03.2025; and also

- waiver of the penalty, although the amount of the tax or the inadmissible ITC that was utilised for supply of taxable goods/services/both, is paid after 30 days from the date of issue of the SCN, but it should have been paid before 31.03.2025.

- no refund for the amounts paid towards the interest and penalty, if any, by the taxpayer, in respect of the demands raised for the period 2017-18, 2018-19 and 2019-20.

It is obvious that the said benefit of the waiver of the Interest and penalty under the proposed new Sec. 128A would be extended only for the cases where the department had already issued an SCN and the said amounts towards the Interest & penalty is/are yet to be paid by the concerned taxpayer.

For all the cases of short/non-payment of tax or the cases where the inadmissible ITC was utilised, as detected by the department through scrutiny of returns /audit/ enforcement or determined by the taxpayer on their own, but without involving mens rea, for the period 2017-18 and 2018-19, the SCNs ought to have been issued by 30.09.2023 and 31.01.2024; and such SCNs must have even been adjudicated, by 31.12.2023 and 30.04.2024, respectively.

The time limit prescribed under sub-section (2) of Section 73, for issuance of SCN for the FY: 2019-20 was extended up to 31.05.2024 as against the earlier due date of 31.12.2023; and the revised due date under Sec. 73(10) for adjudication of SCNs for 2019-20, is 31.08.2024.

The above time lines indicates that in all such cases of non-/short payment of Tax and the utilised inadmissible ITC, in the normal course, the SCNs for the FY: 2019-20 also would have been issued, if not adjudicated, by the time the proposed Sec. 128A is enacted. Hence, the taxpayers intending to avail the benefit of the new Sec. 128A (waiver of Interest and Penalty) have to discharge their liability for 2017-18 to 2019-20, as demanded or determined by the proper officer, by 31.03.2025.

So far so good and the noble intention of the proposed insertion of the new Section 128A, obviously, is to reduce the litigation in view of the fact that during the initial period of implementation of GST law, there were innumerable cases where the tax was not paid or short paid or the taxpayers had availed and utilised the ITC, which was later found to be inadmissible; but there was no evidence of mens rea, to justify application of the provisions of the Section 74 of CGSTA.

It is pertinent to mention that, in reality, there are several cases, particularly, the cases detected by the field officers during the scrutiny of Returns or conducting the Audit, where the taxpayer had already paid the tax involved (Non-/short paid GST or the inadmissible ITC-utilised), for the period 2017-18, 2018-19 and 2019-20, but had not paid the interest and the SCN was not issued by the department within the normal period. There are also cases where the tax was paid by the taxpayer on their own volition, but not the interest thereon and the SCN was not issued by the department within the normal period, under the Sec.73.

The cases of voluntarily payment of Tax, but without the interest, also include the cases where the goods were exported under LUT/Bond, for reasons like the export was made after the prescribed period of 90 days and the post facto extension is yet to be received or on account of the non-receipt of the export proceeds within the prescribed period. It is not far from truth that some cases of this category were projected as voluntary payment of tax by the taxpayer, as there is nothing on record to show that the relevant payment was on account of the coercive acts of the field officers, as in case of most of the payments consequent to scrutiny/Audit or during investigation.

Many cases detected by Audit or during the scrutiny of returns or the cases of voluntary payments by the taxpayer on his own, where the tax amount alone was paid, but not the interest involved, were referred to the concerned Range/ Division/ sub-ordinate field formation to pursue the recovery of the interest involved, as if the interest was a recoverable arrear, without issuing SCN under Sec. 73, particularly when there was no evidence for invoking the Sec. 74.

All such cases, pertaining to 2017-18 to 2019-20, where the tax amount alone was paid but not the interest involved; that the SCN was not issued within the normal period under Sec. 73; and there is no evidence to invoke the provisions of the Section 74 of the Act, also deserve the benefit of waiver of the Interest (Penalty could be imposed only if SCN was issued within the prescribed period; and the tax and interest involved are not paid within 30 days). It is apparent that the benefit of waiver of interest in such cases under the proposed Section 128A would not be available for this sort of cases, as the said waiver is in respect of the cases where, at least, a SCN was issued. In fact, such cases are equally deserving, if not more, for the benefit of the waiver of interest, as the taxpayer had discharged the liability towards the Tax, voluntarily or on being persuaded by the department, without issuing the SCN.

As the main objective of the Sec. 128A is to avoid unnecessary litigation, with regard to huge number of cases involving short/non-payment of tax or in respect of the cases of availment of the inadmissible ITC which was utilised by the Taxpayer, without any mens rea, it is opined that the said objective could truly be met by extending the benefit of waiver of the Interest (penalty would not be relevant) for such cases where the amount involved was already paid and the SCN was not issued for appropriation of the Tax paid and to recover the Interest due from the date on which the tax was due, till the date of payment of the Tax, for the cases in which there is no evidence to prove the existence of the ingredients (fraud or any wilful mis-statement or suppression of facts) required to invoke the provisions of the Section 74 of the Act.

It is learnt that there are several cases involving short/non-payment of the Tax or the inadmissible ITC-utilised, for the period 2017-18, 2018-19 and 2019-20, where the SCN was not issued within the normal period under the Section 73 of the Act, the SCNs are now being contemplated or already issued, without adequate evidence to prove the existence of the ingredients viz: fraud/wilful misstatement/suppression of facts, for invoking the Sec. 74, either due to the fact that the issue was noticed after the expiry of the normal period prescribed or the SCN was not issued within the normal period under Sec. 73 of the Act.

In fact, there has been a mis-conception among the officers in the field that once the tax involved, in any case where the larger period cannot be invoked under Sec. 74, is paid in full before issuing SCN, interest can be recovered under Sec. 79 of the Act, in terms of the Sec. 75(12), inasmuch as Sec. 73 of the Act does not speak about the Interest at all, unlike the Sec. 11A of the Central Excise Act, 1944 (CEA) [which was also made applicable to the Service Tax, in terms of the Sec 83 of the Finance Act, 1994]. It may be noted that there was an express provision in the sub-sec. (15) of the Section 11A of CEA, which envisaged that "the provisions of sub-sections (1) to (14) shall apply, mutatis mutandis, to the recovery of interest where interest payable has not been paid or part paid or erroneously refunded".

But, there is no provision in the GST law, akin to the Sec. 11A(15) of the CEA, warranting issue of a demand notice and comply with the procedure for recovery of the Interest amount, short/not-paid, as required for the recovery of the tax amount, when the amount to be recovered is 'interest' alone, while the Tax involved was already paid in full. But it is important to note that the sub-section (9) of Section 75 of the GST Act, envisages that the "the interest on the Tax not paid or short paid shall be payable whether or not specified in the order determining the tax liability".

Further, the sub-sec. (12) of the Sec. 75 of the GST Act envisages that the interest payable can be recovered under Sec. 79 ibid, when such interest pertains to the self-assessed tax in accordance with the return furnished under the Sec. 39 (GSTR-3B). As the return, under GST law, can be filed only on payment of the full amount of the self-assessed tax, the recovery of the interest under Sec. 79, without issuing the SCN & adjudication process, directly by treating the same as if it were recoverable arrears, is permissible when such interest pertains to the cash component of the self-assessed tax on account of the delay in filing the returns. In all other situations, the interest could be recovered only on adjudication of the matter involving the tax not/short paid or the inadmissible ITC, that was utilised.

Hence, absence of the provision akin to the Sec. 11A(15) of the CEA, in the Sec. 73 (and the Sec. 74) of the Act, does not mean that there is no need for issuing SCN for recovery of the interest, other than the interest on the net cash component, on account of the delay in filing the return.

A harmonious reading of the provisions of the Sec. 73 and Sec. 75 of the GST Act clearly indicates that there cannot be a demand for the interest alone, unless there is a demand for the corresponding Tax amount. On the other hand, as per the Sec. 75(9), once a notice was issued for demanding the Tax amount, Interest involved shall be payable/recoverable, irrespective of the fact whether or not the Interest amount was specified in the order determining the Tax liability, on adjudication of the relevant SCN.

In fact, it is a settled issue that the interest, except the interest covered by the Sec 75(12), could be recovered only through the normal adjudication process of determining the Tax liability, in terms of the Sec. 73 or the Sec. 74, as the case may be.

Therefore, in all such cases, where the taxpayer had paid up the entire amount of the Tax involved; but did not pay the interest thereon; the SCN was not issued within the normal period and the provisions of the Sec. 74 are not applicable for want of the evidence to prove the fraud/ wilful misstatement / suppression of facts, recovery of the Interest in any case is not possible, as per law. Hence, it is felt that the Government may cover such cases in which the Tax was paid but not the interest involved and the SCN was not issued under Sec. 73, as well, within the scope of the proposed new Section 128A, mainly to prevent the officers to issue SCNs under the Sec. 74, even without the evidence to prove the fraud/ wilful misstatement / suppression of facts. On the other hand, inclusion of such cases where SCN was not issued but the Tax amount was paid, within the scope of the proposed Sec. 128A would legalise the non-recovery of the interest involved.

In case the department intends to recover the interest, by invoking Sec. 74 for such cases, where there is no evidence to establish mens rea, it would lead to avoidable litigation, in large number of cases, which is totally against the noble objective of the proposed insertion of the new Sec. 128A of the GST Act.

While the interests of the taxpayers are protected by preventing avoidable litigation, by bringing such cases where SCN was not issued, within the ambit of the Sec. 128A, it is equally important that the concerned officers are also protected/not proceeded against, for not issuing SCNs under the Sec. 73 within the prescribed normal period, as they also deserve the benefit of doubt for such lapse, under the mistaken impression that the Interest could be recovered under Sec. 79 of the Act, in view of the fact that the Sec 73 does not have an express mention of the interest for recovery and that the scope of the Sec. 75(12), was wrongly understood.

To sum up:

(i) the Sec. 128A may be made applicable to waive the Interest even in respect of the cases where the SCN was not issued under Sec. 73 [for the period 2017-18 to 2019-20] and there is no evidence for the existence of fraud/ wilful misstatement / suppression of facts, to issue SCN under Sec. 74, but the taxpayer had already paid tax involved. In such cases, Penalty would automatically stand waived, in terms of the Sec. 73(6).

(ii) the Government may issue suitable instructions to the field officers not to issue Show Cause Notices for cases as mentioned above, under Sec. 74, merely because the SCN was not or could not be issued under Sec. 73 within the normal period; and

(iii) The officers may also be extended the benefit of doubt and may not be proceeded for failure to issue SCN proposing to appropriate the tax paid in full and proposing to recover the interest under Sec. 50 of the Act, when the Tax amount alone was paid in full by the taxpayer without any SCN under the Sec. 73 of the Act, under the mistaken impression that the Interest in such cases could be recovered under the Sec 79, in terms of the Sec. 75(12) of the Act.

[The view expressed are strictly personal.]