NOVEMBER 18, 2024

By Vishwanath K, Partner, Akshi Narula, Principal Associate and Neha N D, Senior Associate, Lakshmikumaran & Sridharan, Attorneys

Introduction

BASED on the recommendations of the GST Council made in its 53rd meeting, Section 128A has been inserted into the Central Goods and Services Tax Act, 2017 ('CGST Act'), effective from 01.11.2024 providing for a conditional waiver of interest, penalty, or both, relating to demands under Section 73 of the CGST Act for the Financial Years (FY) 2017-18, 2018-19, and 2019-20 ('Waiver Period'), subject to certain conditions. A corresponding Rule 164 has also been inserted into the Central Goods and Services Rules, 2017 ('CGST Rules'), prescribing procedures related to the waiver.

Notices or statements under Section 73 and orders (including appellate/revisional orders) under Section 73, Section 107 and Section 108 of the CGST Act including notice under Section 74 redetermined as notice or order, as the case maybe, under Section 73 as per Section 75(2) are eligible for the conditional waiver, subject to fulfilment of other requirements prescribed under Section 128A read with Rule 164 of the CGST Act.

The date on or before which the full payment of tax demanded in the notices or statements or orders needs to be made by the taxpayer in order to avail the benefit of waiver has been notified vide Notification No. 21/2024-Central tax dated 08.10.2024:

a. 31.03.2025 is the date on or before which the full payment of tax demanded in the notices or statements, or orders needs to be made by the taxpayer in order to avail the benefit of waiver.

b. For cases where a notice has been issued under Section 74(1), and an order is passed or required to be passed by the proper officer in pursuance of the direction of the Appellate Authority or Appellate Tribunal or a court in accordance with Section 75(2), the said notice or order shall be considered to be a notice or order under Section 73, is 6 months from the date of issuance of such order by the proper officer re-determining the tax under Section 73.

Upon the introduction of the conditional waiver, taxpayers raised various doubts and concerns regarding its implementation. In response, the Central Board of Indirect Taxes and Customs ('CBIC' or 'the Board') issued Circular No. 238/32/2024-GST on 15.10.2024 ('Circular No. 238'), providing widespread clarifications.

Despite these clarifications, certain obscurities remain unresolved. This article discusses some unresolved obscurities and potential legal disputes that may arise.

Non-insertion of corresponding Section 128A and Rule 164 in State Acts and Rules.

Vide Section 146 of the Finance (No. 2) Act, 2024, dated 16.08.2024, Section 128A has been inserted into the CGST Act. Notification No. 17/2024-Central Tax, dated 27.09.2024, brought Section 128A into effect from 01.11.2024.

However, there has been no corresponding insertion of Section 128A and Rule 164 in the State GST Acts and Rules. This raises questions about whether the conditional waiver applies only to notices, statements, or orders issued by Central Jurisdictional Officers and not by State Officers. Additionally, it raises the issue of whether the conditional waiver is limited to IGST and CGST demands, excluding SGST demands.

The lack of a corresponding insertion of Section 128A and Rule 164 in the State GST Acts and Rules means that taxpayers dealing with State Jurisdictional Officers cannot take advantage of the waiver. This discrepancy could lead to confusion and potential legal challenges.

It is crucial to address this lacuna in the State Acts. Aligning the State laws with the Central law by inserting corresponding Section 128A would provide uniformity and clarity, thereby avoiding unnecessary legal disputes and ensuring that all taxpayers can benefit equally from the conditional waiver without any ambiguity.

Condition to pay the entire demands in a notice, statement, or order to avail the benefit of waiver.

Section 128A(1) mandates the payment of the entire tax demands as per the notice or the statement or order to avail the benefit of the waiver. Rule 164 (3) and (4), and Circular No. 238 inter-alia specifies that the entire tax amount in a notice, statement, or order, including the amount of tax demand pertaining to an erroneous refund, if any, and also on account of demand pertaining to periods other than the Waiver Period, must be paid. Additionally, any amount of interest and penalty payable on account of demands pertaining to periods other than the Waiver Period must be paid to avail the benefit of the waiver; otherwise, the waiver under Section 128A becomes void.

The conditional waiver was supposed to provide relief to taxpayers, but it comes at a significant cost. Taxpayers must forgo their right to defend against demand for periods outside the Waiver Period and disputed refund claims. This issue becomes particularly problematic when a single notice, or statement, order includes demands for multiple periods including the Waiver Period. In such cases, taxpayers are forced to pay the entire demand, including amounts for periods not covered by the waiver, just to benefit from the Waiver Period.

The condition requiring the payment of tax, interest, and penalty for periods other than the Waiver Period, including the tax demand pertaining to an erroneous refund, undermines the benefit of the waiver. By mandating such payments, taxpayers are deprived of their fundamental right to contest these demands. This situation raises questions about the constitutionality of the conditional waiver.

This requirement can lead to substantial hardship for taxpayers, as they may be compelled to pay amounts, they believe are unjust or incorrect without the opportunity to challenge them. The conditional waiver, therefore, imposes an unfair burden on taxpayers. Hence, there is a need for the law maker to re-consider this requirement.

Restoration of the original appeal upon rejection of the application for a conditional waiver.

As per the provisions of Section 128(A), the conditional waiver is not applicable in respect of cases where an appeal or writ petition filed by the taxpayer is pending before Appellate Authority or Appellate Tribunal or a court, as the case may be, and has not been withdrawn on or before 31.03.2025.

On a plain reading of the provisions of Section 128(A), it is understood that one of the main conditions to apply for a waiver is not to file an appeal against the orders mentioned under Section 128A(1)(b) or (c), or to withdraw such an appeal filed before applying for conditional waiver.

It is pertinent to note that Rule 164(15), read with Circular No. 238, allows for the restoration of the original appeal, if any, filed against the orders mentioned under Section 128A(1)(b) or (c), if the application for a conditional waiver is rejected and the taxpayer provides an undertaking electronically that they do not intend to contest such rejection.

Questions can arise in cases where no original appeal against the orders mentioned under Section 128A(1)(b) or (c) was filed by the taxpayer, as they intended to avail the benefit of a waiver. In case their application gets rejected and the time limit under Section 107 and Section 112 to file an appeal against the orders also expires, they will be left with no legal remedy considering that the statutory time limit for filing appeal would have expired and power to condone not legally available. This may compel taxpayers to pay the entire demand without having a legal right to defend their matter.

To avoid such a situation, taxpayers as an abundant caution will necessarily have to file an appeal against the orders mentioned under Section 128A(1)(b) or (c) first, and thereafter withdraw such an appeal to apply for a conditional waiver. This may prolong the procedure for the taxpayer as well as the officer concerned.

Pre-deposit requirement

As per Section 107(6) and Section 112(8) of the CGST Act, a pre-deposit has to be paid before filing an appeal before the appellate authority or appellate tribunal, as the case maybe. It is important to bring to the reader's attention that there is no mechanism prescribed to adjust the pre-deposit paid for the appeal with the tax demand payable at the time of applying for a conditional waiver. Hence, a refund of the pre-deposit has to be filed upon withdrawal of the appeal, leading to additional procedural compliance for taxpayers.

Furthermore, the law is silent about pre-deposit requirements when the original appeal is restored upon rejection of a conditional waiver to the taxpayer. Additionally, will the taxpayer be able to get a refund of the tax demand paid at the time of filing for the conditional waiver due to the said rejection, or can that amount be adjusted as a pre-deposit for the restoration of the original appeal?

Hence, the above-discussed lacuna related to the time limit for filing an appeal against the orders mentioned under Section 128A(1)(b) or (c) when a conditional waiver is rejected, and the lack of a mechanism to adjust the pre-deposit paid/payable for the appeal with the tax demand payable/paid at the time of applying for a conditional waiver, needs to be addressed by the Board for hassle-free implementation of Section 128A.

Conclusion

During the 53rd GST Council meeting, it was specified by the Council that, considering the difficulties faced by taxpayers during the initial years of GST implementation, waiving interest and penalties for demand notices issued under Section 73 has been recommended.

The objective of the conditional waiver is to ease the business of taxpayers by acknowledging the difficulties they faced during the initial period of GST and to reduce the burden of litigation. However, the practical challenges in availing this benefit can sometimes undermine its effectiveness. It is crucial for the Board to streamline the process and simplify the conditions to ensure that the waiver serves its intended purpose effectively.

[The views expressed are strictly personal.]