All tax laws confer powers on the administrative authorities to issue orders, instructions or directions for the purpose of ensuring uniformity in the assessment and implementation of the Act. However generally not many issues are clarified by issuing orders or directions under such provisions. Even the clarifications issued by the department are so vague and legalistic that sometimes rather than clarifying issues they create more doubts.
Whenever the departmental authorities are faced with such contentious issues the tendency is to issue show cause notice which the adjudicating authorities, following the cardinal advice of erring in favour of revenue, decide against the taxpayers. This leads to protracted litigation and avoidable cost to the taxpayer as well as government.
Under the CGST Act, also under Section 168(1), the CBIC has been empowered to issue such orders, instructions or directions as it may deem proper for the purpose of ensuring uniformity in the implementation of the Act. Clarifying any issue related to taxability or classification under the GST regime is more challenging as it involves States as well and can be clarified only after the GST Council has given its verdict on it. Under such circumstances the credit goes to CBIC for clarifying few important issues which have been agitating the officers as well as trade for long.
The recent Circular No. 178/10/2022-GST dated August 3, 2022 is one such circular which clarifies the applicability of GST on liquidated damages, breach of contract, etc, with suitable illustrations to bring home the point that every case involving liquidated damages and compensation/damages received on breach of contract would not be liable to GST. This issue has always been a point of dispute and litigation even under the service tax law and there might still be a large number of litigations going on at different stages. This clarification would indeed be cheered by the trade as it removes long standing uncertainty on the issue.
Another important clarification which is most important in the contemporary context and discussed in greater length in this write up is with respect to applicability of appropriate provisions in fake Input Tax Credit cases where normally there is no supply of goods or services but issue of GST invoices only.
The Circular No. 171/03/2022-GST dated July 6, 2022 has examined the issue in details and categorically conveyed by way of illustration that no demand of GST under section 73/74 of the CGST Act is warranted in cases where there has been only issue of fake invoices, without any accompanying supply of goods or services, and only penal provisions under section 122 of the Act are invocable in such cases.
It is indeed a unequivocal direction to field formations who tend to invoke all possible provisions available in the book and to confirm demand of tax as well as impose penalties under all of them. This circular brings out the correct legal position as the Sections 73 and 74 of the Act are meant for demanding tax where it has not been paid or has been short paid but there can be no demand of GST where the taxable event, i.e. supply of goods or service has not taken place.
However for passing on or availing of fraudulent Input Tax Credit, penalty is definitely warranted which is provided for under Section 122 of the Act and is equal to the amount of fraudulent credit passed on or availed. Before this clarification there was a general understanding in the department as well as among the trade that in such cases not only the GST is leviable, but penalty is also imposable as Section 74(1) also speaks of penalty. Under this premise many show cause notices might have already been issued by the department.
In this context there comes out one glaring gap in the legal provisions which relates to provision for deemed conclusion of proceedings. Both the Sections 73 and 74 of the Act which provide for demand of tax as well as penalty have provisions for deemed conclusion of all proceedings, on payment of short paid tax, interest and penalty of specified amounts. Even the penal proceedings including those against co-noticees under Section 122 of the Act are also concluded if the person liable for payment of the GST under section 74 avails of benefit of this provision.
Section 74 of the Act which deals with recovery of tax not paid by reason of fraud or mis-statement/suppression of facts, provides that if the taxpayer pays the entire amount of short paid tax along with interest and 15 percent of the amount of tax before issue of proposed demand notice then both demand and penal proceedings would be concluded and no show cause notice would be issued.
Even in cases where the demand notice has been issued/adjudicated, the proceedings can be concluded if the noticee pays the amounts of tax, interest and penalty at the rate of 25 percent/ 50 percent of the tax. Obviously evasion of tax by reason of fraud is a serious offence for which law provides for not only recovery of tax evaded but also a mandatory penalty of equivalent amount, whereas in cases of fraudulent ITC only equivalent penalty can be imposed as there is no evasion of tax as such.
When benefit of deemed conclusion is available in cases of fraudulent evasion then there can be no reason to deny it to cases of fraudulent ITC. Therefore a good case is made out for making provision for deemed conclusion of penal proceedings under Section 122 of the Act, on payment of 15 percent, 25 percent or 50 percent of the fake ITC involved, depending on the stage of the proceedings, i. e. before or after the issue of show cause notice, similar to provisions under Section 74 of the Act.
Since most of the cases booked by the department under the GST regime pertain to fraudulent ITC, not involving actual supply of goods or service, a provision for deemed conclusion of proceedings on voluntary payment of specified penalty would help in getting good amount of revenue for the government and also reduce the future litigation which would administratively burden the department without any commensurate revenue.
The writer, OP Dadhich, is a former member of the Central Board of Indirect Taxes & Customs (CBIC).
