GST: No Interest Recovery Without Due Process, Says Jharkhand High Court
An individual Income Tax form for the 2018 tax year is arranged for a photograph. (Photographer: Daniel Acker/Bloomberg)

GST: No Interest Recovery Without Due Process, Says Jharkhand High Court

The process of recovery of interest cannot be initiated against businesses under GST laws without a prior show cause notice and adjudication proceedings, Jharkhand High Court has held.

A two-member bench of Justice HC Mishra and Justice Deepak Roshan set aside an order issued by the GST Department to a partnership firm for recovery of interest on unpaid taxes. The court also quashed the garnishee order for attachment of the firm’s bank account as the authorities failed to follow the prescribed procedure under the Central Goods and Services Tax Act.

The judgment is based on sound principles of law that no liability—whether of tax, interest or penalty—can be fastened on a taxpayer without giving him an opportunity to present his case, Rajat Bose, partner at Shardul Amarchand Mangaldas & Co., said

Revenue authorities have initiated proceedings or even served notices for cancellation of goods and services tax registration, Bose pointed out. And taxpayers have had to to cough up the amounts even without a formal hearing, he said.

Levy of interest and penalties has been a contentious issue since the inception of the nationwide indirect tax. In several instances, courts have ordered that the authorities must use their powers to attach bank account only sparingly for recovering tax.

High Court Emphasises On Due Process

Mahadeo Construction, a partnership firm, moved the Jharkhand High Court challenging an order passed by the GST authorities directing it to pay an interest of Rs 19 lakh on account of delayed filing of monthly returns in form GSTR-3B for February and March 2018. The firm contested the allegations of delayed filing. It argued that the tax liability imposed on it was unsustainable since it was initiated without following any adjudication process.

The revenue department had countered this on grounds that interest liability is automatically triggered once there’s a delay in payment of tax. And that the partnership had failed to discharge its tax liability despite issuance of interest-recovery notices. Consequently, the department had to initiate garnishee proceedings by attaching the bank accounts.

But the high court dismissed the GST department’s arguments. CGST Act, it pointed out, requires a tax officer to serve a notice on account of “any tax not being paid or short paid”. This would include delayed payment of tax and the notice must specify the amount of recoverable interest. In short, the revenue department cannot initiate recovery proceedings without first issuing a notice for delay in payment.

The court agreed with the GST department’s stance that the liability to pay interest arises automatically. But it clarified that if this liability is disputed, the department must first initiate adjudication proceedings.

And finally, the court went a step further to conclude that even garnishee orders can only be issued if the adjudication process is completed. If the taxpayer contests the outcome of this process, then too recovery process must come to a halt, the high court said.

The high court has amply clarified the due process that the department must follow in cases where the taxpayer is disputing liability, experts pointed out.

The GST law requires assessees to pay interest on a suo-moto basis in case there is an undisputed delay in paying tax, Nangia Anderson’s Tanushree Roy told BloombergQuint. In such cases, she pointed out, no adjudication is required as the delay is admitted by the assessee. But even where the liability is disputed, the authorities have resorted to recovery without any adjudication, Roy added.

Assesses had to do multiple follow ups by way of letters, written communications or visits to the department for resolution of such interest recovery issues, which involved substantial time and effort. These issues will now be addressed as the High Court has held such recovery to be invalid.
Tanushree Roy, Director, Nangia Anderson Consulting 

Garnishee Proceedings Must Wait Too

To recover tax dues, the revenue department has the power to initiate garnishee proceedings under which third parties—which owe money to the taxpayers—are directed to retain or pay such amount in favour of the department.

Such proceedings too can be initiated only after completion of adjudication process, the high court has held. This will prevent unnecessary threats and harassment by the tax department in order to expedite recovery of tax, interest or penalties, Bose said.

The taxpayer can also challenge the outcome of the adjudication process at the High Court or Supreme Court, Dhruva Advisor’s Ritesh Kanodia pointed out. “The law already provides an appeal mechanism where an assessee can deposit certain percentage of dues and no recoveries are made till the disposal of such appeals,” he said.

In such instances too, the high court has clarified, garnishee proceedings cannot be initiated till such appeals are pending for disposal, Kanodia added.

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