AMIT BAJAJ ADVOCATE

Introduction

The decision of the Gujarat High Court in Maruti Enterprise v. Union of India and its subsequent affirmation by the Supreme Court in Bhandari Scrap Traders v. Union of India have undoubtedly become the most significant pronouncements on Section 16(2)(c) of the Central Goods and Services Tax Act, 2017. The constitutional challenge mounted by a large number of purchasing dealers against the validity of Section 16(2)(c) has now come to an end. The Supreme Court has affirmed the view that input tax credit is a statutory concession subject to the conditions prescribed by the legislature and that Section 16(2)(c) cannot be declared unconstitutional nor read down to confine its operation only to cases involving fraudulent or collusive transactions.

Following these decisions, a perception has emerged in certain quarters that every pending dispute concerning denial of input tax credit on account of supplier default has also reached its inevitable conclusion. Such a perception, however, deserves closer examination.

A careful reading of both judgments suggests that while the constitutional validity of Section 16(2)(c) has attained finality, numerous questions concerning its factual application continue to remain open. Neither the Gujarat High Court nor the Supreme Court has laid down that every allegation of supplier default must necessarily result in denial of input tax credit to the recipient irrespective of the facts of the individual case.

The purpose of this article is not to question the correctness of the judgments. Rather, it seeks to identify the legal and factual issues which continue to survive despite the constitutional challenge having failed.

I. Constitutional Validity and Statutory Application are Two Different Questions

The first and perhaps the most fundamental distinction emerging from the judgments is between the validity of a statutory provision and its application in an individual case.

The constitutional challenge before the Gujarat High Court was directed against Section 16(2)(c) itself. The Court examined whether the legislature was competent to impose the condition that tax charged in respect of a supply must actually have been paid to the Government before the recipient becomes entitled to input tax credit. The Court answered this question in the affirmative. The Supreme Court has now affirmed that conclusion.

However, neither Court was called upon to determine whether Section 16(2)(c) stood violated in each of the numerous individual cases forming part of the batch of petitions. Indeed, the Gujarat High Court expressly clarified that it was not examining the merits of the individual matters and that the judgment was confined to the constitutional validity of Section 16(2)(c).

Consequently, appellate authorities and courts continue to retain jurisdiction to determine, on the evidence available in each case, whether the statutory condition contained in Section 16(2)(c) has in fact been violated.

This distinction is likely to assume considerable importance in future litigation.

II. Does Cancellation of Supplier Registration Establish Violation of Section 16(2)(c)?

One of the most common grounds on which input tax credit has been denied in recent years is that the supplier's registration was cancelled, often retrospectively, or that the supplier was subsequently found to be non-existent.

Whether these circumstances by themselves establish violation of Section 16(2)(c) remains an important question.

Section 16(2)(c) does not prescribe cancellation of registration as the condition for denial of credit. The statutory language is precise. It requires that "the tax charged in respect of such supply has actually been paid to the Government."

The emphasis, therefore, is upon payment of tax and not upon the subsequent status of registration.

Cancellation of registration may undoubtedly constitute an important circumstance. It may also provide the foundation for further investigation. Nevertheless, cancellation of registration and non-payment of tax are not legally synonymous.

Similarly, a finding that the supplier was non-existent cannot automatically establish that tax corresponding to the disputed invoices was never deposited in the Government treasury.

The distinction assumes significance because tax liability under the GST law is determined through adjudicatory proceedings. Unless there exists material demonstrating that tax relating to the disputed supplies has remained unpaid, the factual foundation for invoking Section 16(2)(c) may itself require closer scrutiny.

Neither Maruti Enterprise nor Bhandari Scrap Traders appears to dispense with this requirement.

 

III. Whether Revenue Must Establish Actual Non-Payment of Tax

The judgments proceed on the premise that Section 16(2)(c) links entitlement to credit with actual payment of tax to the Government.

An equally important question, however, concerns the nature of evidence necessary to establish such non-payment.

Can the Department merely rely upon retrospective cancellation of registration?

Can it rely only upon non-filing of returns?

Can it rely upon general intelligence reports?

Or must it establish, through adjudication against the supplier or other cogent evidence, that tax corresponding to the recipient's invoices remains unpaid?

The judgments do not answer these questions.

In many adjudication orders, the Department proceeds directly from cancellation of registration to denial of credit without demonstrating whether tax corresponding to the disputed invoices was ever determined to be payable by the supplier and remained unpaid after adjudication.

Whether such an approach satisfies the requirements of Section 16(2)(c) is an issue that appears to remain open.

IV. The Continuing Relevance of Proceedings Against the Supplier

The Gujarat High Court rejected the contention that recovery proceedings against the supplier must necessarily precede action against the recipient. It also accepted the legislative scheme contained in Sections 41, 53 and Rule 37A while distinguishing the earlier decisions rendered under the Delhi VAT Act.

Nevertheless, the judgments do not appear to hold that proceedings against the supplier have become wholly irrelevant.

Where no determination of supplier liability exists, or where the Department itself has not established that tax remains unpaid and the Department relies upon a mere fact that the supplier’s registration is cancelled for disallowance  of the ITC claimed by recipient, in such scenario, the recipient may legitimately contend that the factual requirements of Section 16(2)(c) have not yet been established.

The constitutional validity of Section 16(2)(c) has been upheld substantially on the strength of the statutory mechanism contained in Section 41(2), which permits reversal of credit upon non-payment of tax by the supplier and re-availment upon subsequent payment. The operation of this mechanism necessarily presupposes an identifiable determination that tax payable in respect of the relevant supplies has remained unpaid and, subsequently, has been discharged. In the absence of any adjudication or other legally sustainable determination quantifying the supplier's unpaid tax liability in relation to the disputed supplies, the statutory right of re-availment risks becoming incapable of practical implementation. Consequently, where the Department proceeds merely on the basis of cancellation of registration or allegations regarding the supplier, without establishing that tax in respect of the recipient's invoices remains unpaid, a substantial question arises whether the factual foundation for invoking Section 16(2)(c) and the consequential operation of Section 41(2) has been established.

V. The Significance of the Substituted Section 41

A notable feature of the Gujarat High Court judgment is its reliance upon the substituted Section 41 and the mechanism of reversal and re-availment introduced with effect from 1 October 2022. The Court observed that the substituted provision removes the concept of provisional credit while simultaneously permitting the recipient to re-avail the credit once the supplier subsequently discharges the tax liability.

This naturally raises an interesting issue concerning transactions pertaining to periods prior to 1 October 2022.

The statutory framework governing availment of input tax credit before substitution of Section 41 was materially different. Whether the reasoning adopted in Maruti Enterprise, founded substantially upon the substituted Section 41, applies with equal force to earlier tax periods may become a matter requiring judicial consideration.

The judgments themselves do not expressly address this question.

VI. Whether Partial Default by the Supplier Necessarily Defeats the Entire Credit Chain

Perhaps the most unexplored issue concerns situations where the supplier has discharged tax liability only partially.

Suppose a supplier is found liable to pay tax of ₹2 crore for a financial year. Suppose further that, after adjudication, it is held that tax amounting to ₹50 lakh alone remained unpaid.

Can every recipient who purchased goods from such supplier be denied the entire input tax credit?

Should the denial be proportionate?

Should it be invoice-specific?

Should it be restricted only to those invoices corresponding to unpaid tax?

The Act does not appear to provide an express mechanism for allocating such deficiencies. Neither Maruti Enterprise nor Bhandari Scrap Traders addresses this situation.This issue is therefore likely to assume considerable practical importance in future adjudication.

VII. Invocation of Section 74 Against Bona Fide Recipients

Another important aspect concerns the frequent invocation of Section 74.

Section 74 proceeds upon allegations of fraud, wilful misstatement or suppression of facts.

Supplier default, however, does not automatically establish fraud on the part of the recipient.

Where the Department relies exclusively upon defaults committed by the supplier, without producing evidence demonstrating collusion, connivance or knowledge attributable to the recipient, an important factual issue may arise regarding the very applicability of Section 74.

The constitutional validity of Section 16(2)(c) does not automatically resolve this question.

It continues to depend upon the evidence available in the individual case.

 

VIII. Burden of Proof Under Section 155

The Gujarat High Court has placed considerable reliance upon Section 155 while holding that the burden of proving entitlement to input tax credit rests upon the claimant.

An equally important question concerns the stage at which such burden stands discharged.

Where the recipient produces tax invoices, proof of payment, transportation documents, e-way bills, books of account, and establishes actual receipt of goods, does the evidentiary burden thereafter shift to the Department to establish non-payment of tax?

Or does the burden continue to remain entirely upon the recipient even in relation to matters lying exclusively within the knowledge of the supplier and the tax administration?

The judgments do not expressly resolve this evidentiary issue.

Future litigation may therefore focus not merely upon the existence of Section 155 but also upon the principles governing shifting burdens of proof.

 

 

Conclusion

The constitutional debate surrounding Section 16(2)(c) has, for all practical purposes, reached its conclusion. The Supreme Court has affirmed that Parliament was competent to impose actual payment of tax as a condition for availment of input tax credit and has declined to read down the statutory provision. That position now constitutes binding law.

However, it would be an overstatement to conclude that every pending dispute involving denial of input tax credit has automatically been decided by these judgments.

The constitutional validity of a statutory provision and its factual application in individual cases are conceptually distinct. The latter continues to depend upon the evidence adduced before the adjudicating authority and the appellate forums.

Questions concerning proof of actual non-payment of tax, the evidentiary value of retrospective cancellation of registration, the necessity of establishing supplier liability, the effect of partial tax defaults, the applicability of Section 74, the operation of Section 155, and the implications of the substituted Section 41 for earlier tax periods remain capable of generating substantial legal debate.

It is therefore likely that while Maruti Enterprise and Bhandari Scrap Traders have settled the constitutional controversy, they have by no means brought to an end the litigation concerning Section 16(2)(c). The next phase of GST jurisprudence is likely to be shaped not by constitutional challenges, but by judicial examination of these unresolved factual and evidentiary issues.

The power of arrest under the Goods and Services Tax regime is one of the most sensitive and closely scrutinised aspects of GST enforcement. While Section 69 of the CGST Act, 2017 authorises the Commissioner to order arrest when he has “reasons to believe” that a person has committed offences under Section 132, that power must be exercised within the broader procedural framework governing criminal investigations in India. The GST Acts do not exist in isolation. They operate within the constitutional ecosystem of Article 21 and the procedural safeguards enshrined in the Bharatiya Nagarik Suraksha Sanhita, 2023 (BNSS), which has now replaced the Code of Criminal Procedure.

A crucial provision of BNSS is Section 35, which governs the circumstances and manner in which an arrest may be made. For offences punishable with imprisonment of less than seven years or which may extend up to seven years, the officer cannot proceed to arrest unless the conditions under Section 35(1)(b)(ii) are satisfied. This requires the arresting authority to record reasons in writing demonstrating why arrest is necessary, such as preventing the accused from tampering with evidence or influencing witnesses. The statute does not permit the officer to use arrest as a matter of course. It mandates an independent application of mind and a reasoned justification supported by tangible material. Significantly, Section 69 of the CGST Act may confer the power to arrest, but the actual exercise of that power is restricted by Section 35 of BNSS. Thus, in GST cases involving offences punishable up to seven years, the authority must demonstrate compliance with Section 35(1)(b)(ii) of BNSS before depriving any person of liberty.

This legal position has been expressly recognised by the Gauhati High Court in Gaurav Aggarwal vs. Union of India [2025] 178 taxmann.com 237 (Gauhati). The Court held that a mere mechanical reproduction of the statutory language contained in Section 35(1)(b)(ii), such as stating that the accused may tamper with evidence or influence witnesses, is wholly insufficient. Unless the arresting officer has material on record to justify such apprehension and unless those reasons are specifically recorded in writing, the arrest violates Section 35 and becomes illegal. The High Court emphasised that the requirement of satisfaction under Section 35(1)(b)(ii) is not a mere formality but a statutory obligation, and its breach vitiates the arrest.

The Supreme Court’s landmark judgment in Arnesh Kumar vs. State of Bihar (2014) 8 SCC 273 provides the constitutional foundation for these safeguards. The Court held that arrest cannot be made on a mere ipse dixit of the police or investigating officer and insisted that arrest in offences punishable up to seven years must adhere strictly to the procedural requirements of Sections 41 and 41A of the CrPC, which now find place in Section 35 of BNSS. The Court warned that the power to arrest must not be confused with the need to arrest and directed Magistrates not to mechanically authorise remand without verifying compliance with statutory conditions. These principles are of universal application and govern arrests under GST law as well.

In addition, the Supreme Court in Radhika Agarwal v. Union of India (2025) reaffirmed that GST officers are bound by the procedural safeguards of the criminal process. The Court held that the investigation and arrest powers under GST cannot override the protections under Sections 41, 41A and their successor provisions in BNSS. As a result, before arresting any person under Section 69 of the CGST Act for offences punishable up to seven years, GST officers must issue a notice under Section 35(3) of BNSS, seek cooperation from the accused, and record detailed reasons showing the necessity of arrest in accordance with Section 35(1)(b)(ii).

When an arrest takes place without issuance of the mandatory notice under Section 35(3), without recording reasons under Section 35(1)(b)(ii), or on the basis of a mechanical and unreasoned formality, such arrest directly infringes the constitutional guarantees of Articles 21 and 22. Midnight arrests or sudden custodial actions for offences punishable up to five years, without statutory justification, become particularly vulnerable to judicial scrutiny. Courts across India have consistently held that personal liberty cannot be curtailed without strict adherence to statutory and constitutional protections.

Thus, the legal framework governing arrest under GST establishes a clear and stringent standard. Section 69 of the CGST Act grants the power, but Section 35 of BNSS restricts and conditions its use. The Supreme Court in Arnesh Kumar and the High Court in Gaurav Aggarwal have clarified that arrest is permissible only when supported by demonstrable necessity recorded in writing and grounded in material facts. Any arrest lacking such compliance is illegal, arbitrary and unconstitutional. As GST enforcement matures, the faithful application of these safeguards will be essential to ensure that the objective of tax administration does not overshadow the fundamental rights of the citizen and the rule of law.

Introduction

In recent times, the GST Department in Punjab has intensified its enforcement activities by conducting frequent raids under Section 67 of the Central Goods and Services Tax Act, 2017 (CGST Act) and the Punjab Goods and Services Tax Act, 2017 (Punjab GST Act). During such raids, it has become commonplace for the authorities to seize loose sheets, WhatsApp chats, and digital data, and subsequently initiate coercive action alleging unaccounted supplies of goods or services.

However, a pertinent question arises — can loose papers and uncorroborated digital messages be treated as conclusive evidence of undisclosed transactions under the law?

The answer lies in the landmark decision of the Hon’ble Supreme Court in Common Cause (A Registered Society) v. Union of India, [2017] 394 ITR 220 (SC), wherein the apex court elaborated on the evidentiary value of such materials.

Factual Background of the Supreme Court Case

In this case, searches were conducted on the Sahara and Birla groups by investigating agencies. Materials seized included random sheets, loose papers, computer printouts, pen drives, and hard disks which allegedly contained incriminating entries pointing to possible pay-offs to high-ranking public officials.

 

The Petitioners prayed for investigation against various individuals based on such material. However, the Supreme Court refused to order any investigation and laid down important principles that are equally applicable in the context of tax laws such as GST.

Key Legal Principles Laid Down

1. Loose Papers Not Admissible Under Section 34 of the Indian Evidence Act

The Court held that loose sheets of paper have no evidentiary value unless they are shown to be part of regularly maintained books of account. As per Section 34 of the Indian Evidence Act, entries in books of account are relevant only if they are maintained in the regular course of business.

“Loose sheets of papers are wholly irrelevant as evidence being not admissible under Section 34… being of no evidentiary value.” — Para 20, Common Cause Judgment

This reasoning was based on the earlier decision in C.B.I. v. V.C. Shukla (1998) 3 SCC 410, where the Court had drawn a clear distinction between books of account and scraps of paper or personal notes.

 

2. Requirement of Corroborative Evidence

Even if entries are made in proper books of account, they cannot alone be used to fasten liability. There must be independent corroborative evidence to support those entries.

This aligns with the Supreme Court’s observation:

“The statement made therein shall not alone be sufficient evidence to charge any person with liability… independent evidence is necessary as to the trustworthiness of those entries.” — V.C. Shukla Case

Thus, merely finding a WhatsApp message or handwritten note indicating a sale or payment cannot be taken as conclusive evidence of a supply of goods or services under GST law.

3. Investigation Cannot Be Based on Inadmissible Material

The Court cautioned against initiating investigations or criminal proceedings based solely on inadmissible, unauthenticated material, such as loose papers or unverified digital records.

“There has to be some relevant and admissible evidence and some cogent reason… supported by other circumstances.” — Para 21, Common Cause Judgment

 

This protects taxpayers from arbitrary action based on unverified, possibly fabricated entries.

4. Loose Papers and WhatsApp Chats Not Maintained in the Course of Business

In the GST context, WhatsApp chats or notes scribbled during day-to-day activities may represent casual calculations, discussions, or projections, and unless they are backed by invoices, e-way bills, ledger entries, or bank records, they cannot be used to infer actual taxable supplies.

The Income Tax Settlement Commission, whose observations were accepted by the Supreme Court, held in the Sahara case that:

“The department has no evidence to prove that entries in these loose papers and electronic data were kept regularly during the course of business…” — Para 22, Common Cause Judgment

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Implications for GST Raids in Punjab and Beyond

Given the ruling of the Supreme Court, certain legal safeguards must be respected by GST officers during search and seizure operations:

 

 Due Diligence Before Drawing Conclusions

Officers must not treat every scribbled figure or informal communication as proof of undisclosed supply. They must examine whether:

        •       The document was maintained regularly.

        •       There is any corroborative evidence (e.g., stock movement, cash trail, invoice, recipient statement).

 

❌ No Blind Reliance on WhatsApp or Personal Notes

WhatsApp chats, Excel files, or calculations found on devices during a raid must be linked with actual business transactions before forming a basis for tax liability.

Protection from Arbitrary Action

In the absence of credible, corroborated evidence, initiating proceedings or making tax demands solely based on loose documents may violate the taxpayer’s right to fair investigation and due process under Articles 14 and 21 of the Constitution.

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Relevant Case Law

          •       Common Cause v. Union of India (2017) 394 ITR 220 (SC)

          •       C.B.I. v. V.C. Shukla (1998) 3 SCC 410

          •       State of Haryana v. Bhajan Lal 1992 Supp (1) SCC 335 – Laid down the test for quashing FIRs filed on the basis of legally insufficient material.

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Conclusion

The Supreme Court’s verdict in Common Cause v. Union of India serves as a crucial judicial precedent to prevent the misuse of unverified and inadmissible material during tax enforcement actions.

For businesses in Punjab and across India, this ruling reinforces the principle that substance must prevail over form, and truth must be established through legally admissible and corroborated evidence — not mere conjectures or random entries.

As GST enforcement continues to evolve, it is essential for both taxpayers and authorities to act within the framework of law and constitutional safeguards.

In a significant ruling, the Gauhati High Court, in the case of Mahabir Tiwari v. Union of India, has set aside and quashed Notification No. 56/2023-Central Tax, dated December 28, 2023. This notification, which extended the time limit for issuing orders under Section 73(10) of the Central Goods and Services Tax (CGST) Act for the financial years 2018-19 and 2019-20, was deemed "ultra vires" (beyond legal power) due to the absence of a recommendation from the Goods and Services Tax (GST) Council.

The petitioner, Mahabir Tiwari, challenged the validity of the said notification, arguing that the extension of the limitation period for proceedings under Section 73 was invalid as it was done without the mandatory recommendation of the GST Council and without considering any "force majeure" conditions. The petitioner's firm had faced a demand of Rs. 1,20,01,973 based on an order passed on August 29, 2024, following the challenged extension.

The Core of the Legal Challenge: Section 168A and GST Council's Role

The crux of the matter revolved around Section 168A of the CGST Act, 2017, which grants the Government the power to extend time limits in special circumstances. Crucially, this power can only be exercised "on the recommendations of the GST Council by notification" and specifically for "actions which cannot be completed or complied with on account of force majeure". The petitioner contended that there was no force majeure as required under Section 168A for the extensions granted.

The High Court observed that Notification No. 56/2023-Central Tax, dated December 28, 2023, which extended the limitation for financial year 2018-19 until April 30, 2024, and for financial year 2019-20 until August 31, 2024, was issued without the recommendation of the GST Council.

Precedent and Judicial Reasoning

The court heavily relied on a similar case, Barkataki Print and Media Services v. Union of India, where a Coordinate Bench of the same High Court had already ruled Notification No. 56/2023-Central Tax to be ultra vires for the very same reason – being issued without the GST Council's recommendation.

In its detailed reasoning, the Gauhati High Court affirmed that the term "on the recommendation of the Council" in Section 168A implies that such a recommendation is a "sine qua non" or an essential prerequisite for the Government to exercise its power to extend timelines. The court cited the Supreme Court's observations in V.M. Kurian v. State of Kerala, emphasizing that the meaning of "recommendation" must be understood in the context of the rules and their objectives, signifying a "favourable report".

The judgment further delved into the constitutional framework of GST, particularly Articles 246A and 279A, highlighting the unique cooperative federalism inherent in the GST regime. The court clarified that while not all recommendations of the GST Council may be binding, the specific wording of Section 168A makes the existence of a recommendation a mandatory condition for exercising delegated legislative power. The court noted that the Central Government's admission of no recommendation from the GST Council, while still stating "on the recommendations of the Council" in the notification, amounted to a "colourable exercise of power".

Furthermore, the court found that the "force majeure" condition, which is a prerequisite for extensions under Section 168A, was not considered by the GST Council before the issuance of Notification No. 56/2023-Central Tax.

Outcome and Implications

In light of these findings, the Gauhati High Court concluded that Notification No. 56/2023-Central Tax was indeed ultra vires the Central Act and legally unsustainable. Consequently, the Demand-cum-Show Cause Notice dated May 30, 2024, and the subsequent Order-in-Original dated August 29, 2024, issued against Mahabir Tiwari, were also set aside and quashed, as they were based on an invalid extension of the limitation period.

This judgment reinforces the critical role of the GST Council in the Indian indirect tax system, underscoring that the Government's power to extend time limits under Section 168A is not unfettered but is contingent upon the specific recommendations of the Council and the presence of force majeure conditions. It provides significant relief to taxpayers affected by extensions issued without adherence to these statutory requirements.

Mahabir Tiwari vs. Union of India [2025] 175 taxmann.com 176 (Gauhati)[02-06-2025]

The Hon'ble Punjab VAT Tribunal in the case of Rakesh jewellers vs State of Punjab Appeal no. 227 of 2018 dated 22.04.2022 has quashed a penalty  u/s 51(7)(b) of Punjab VAT Act which was levied on the ground that goods i.e. 1 Kg Gold Bar was not accompanying the physical copy of invoice at the time of detention of goods.

Amendment in section 7-Scope of supply:

Section of 7 of the CGST Act, 2017 deals with the scope of supply. It defines supply in an inclusive manner. It is proposed to add clause (aa) in sub-section 1 of section 7 which runs as under:

“(aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice versa, for cash, deferred payment or other valuable consideration.

 

Explanation.––For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of 77 activities or transactions inter se shall be deemed to take place from one such person to another;”

 

The above amendment seem to have been carried out to nulify the landmark judgement of Hon’ble Supreme Court  in the case of  Calcutta. Club Limited (2017) 5 SCC 356 wherein the court held that service tax need not be charged by clubs for services to its members. The verdict was seen as also being applicable in GST as GST has replaced service tax.

 

Now after this amendment such transaction and activities will be covered by scope of supply.

It is pertinent to mention here that along with this amendment simultaneously para 7 of Schedule II to CGST Act is also proposed to be omitted, which provided the similar provisions which was deemed to be as supply even without consideration. Now after the amendment the said activites are itself included in the definition of scope of supply with a specific explanation overriding any other law or judgement contrary to it.

 

Amendment in section 16-Additional condition for claiming ITC:

 

 Section 16 of the CGST Act deals with the conditions for claiming input tax credit by any person. An additional condition is proposed to be added in section 16 which mandates that the invoice or debit note on the basis of which credit is taken must be uploaded in GSTR-1 by the supplier and the same should also have been communicated to the recipient in terms of procedure laid down in section 37. The proposed amendment is as follows:

 

“(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;”.

 

It is pertinent to mention here that the proposed amendment seem to have been added to provide a legal backing for Rule 36(4) of CGST Rules, 2017, which allows only 5% ITC in excess of eligible ITC available in respect of invoices or debit notes the details of which have been uploaded by the suppliers in GSTR-1 u/s 37(1) of CGST Act, if that be the case can it be said Rule 36(4) till date is ultra vires of the Act, is a question which could be subject to judicial scrutiny.

 

 Amendment in section 35 and 44-No requirement of GST audit:

 

 Section 35(5) which mandated for audit of annual accounts by a chartered accountant or cost accountant if turnover exceeded prescribed limit, is proposed to be omitted. Now after the amendment there will be no need of GST audit u/s 35(5). Section 44 simultaneously has also been proposed to be amended to provide that every registered person shall file an annual return  which may include a self certified reconciliation statement, reconciling the value of supplies declared in the return furnished for the financial year, with the audited annual financial statement for every financial year electronically, within such time and in such form and in such manner as may be prescribed.

 

The time period earlier prescribed for filing annual return as 31^st December every year now is also proposed to be amended within such time as may be prescribed.

 

Amendment in section 50-Interest only on tax paid through cash ledger:

 

 Section 50 is proposed to be amended to provide that interest on tax payable in respect of supplies made during a tax period and declared in the return for the said period furnished after the due date in  accordance with section 39 of the Act, i.e. after the due date of GSTR-3B,   shall be payable on that portion of the tax which is paid by debiting the electronic cash ledger.

 

In nut shel the proposed amendment provide for levy on interest only on that part of tax  which is paid from the cash ledger, if the return GSTR-3B is filed late.

 

 This amendment is proposed wef 01.07.2017. Similar amendment was also carried out in the Finance Act, 2019 however it was made applicable wef 01.09.2020. Now, the same is done with retrospective effect.

 

Amendment in section 75-change in definition of self assessed tax:

 

Section 75(12) which provides for the recovery of self assessed tax which remains unpaid as per GSTR-3b i.e. return filed u/s 39, is proposed to be amended to add an explanation which defines the word self assessment tax.

 

The proposed amendment defines self assessment tax  as including the tax payable in respect of details of outward supplies furnished u/s 37 but not included in a return furnished u/s 39.

 

 In other words the tax liability declared in  GSTR-1 but not declared in  GSTR-3b will be considered as self assessed tax u/s 75(12) and recovery of such tax can be initiated u/s 79 of CGST Act, 2017. It is pertinent to mention here that section 79 provides various modes of recovery of tax including attachment of immovable property etc.

Amendment in section 129, 130 and 74:  

Section 129 of CGST Act which deals with detention, seizure and release of goods and conveyance in transit  has been amended to a large extent.

 

 Unamended Section 129(1) provides that goods in  transit detained on the ground of their transportation in contravention of the provisions of the Act or rules shall be released either

 

(a)       on 100% payment of tax and penalty equal to 100% of tax payable in case of taxable goods and 2% of value of goods or 25000 which ever is less where the owner comes forward and

 

(b)       on deposit of applicable tax along with 50% of value of goods and in case of exempted goods in such case on deposit of 5% of value of exempted goods or 25000 whichever is less where the owner does not come forward

 

It is proposed to amend the above Clauses (a) and (b) of section 129(1) to provide that goods shall be released

 

(a) on penalty of 200% of tax payable on the goods in question, where owner comes forward

 

and

 

(b)on payment of penalty @ 50% of the value of goods or 200% of tax payable whichever is higher, where the owner does not come forward.

The word applicable tax has been omitted in the proposed amendment in both the above clauses. However the proposed  amendment would not result in any relief from the amount payable under section 129 as with deltetion of the words applicable tax, penalty amount has been doubled.

 The unamended provisions give an impression of double taxation because not only applicable tax is supposed to be paid u/s 129 but also is required to be paid in the returns filed u/s 39, since the ITC of tax paid u/s 129 is denied u/s 17(5) to the recipient, so in order to give ITC of the applicable tax on goods in question one has to pay applicable tax again u/s 39 in the return filed by such person.

After the amendment only penalty is payable u/s 129(1)(a) or (b), which can be further contested in appeal.

Amendment in section 74:

 Consequent to the amendment in section 129(1)(a) and (b) a simultaneous amendment is made in section 74 so as to make seizure and confiscation of goods and conveyances in transit a separate proceeding from recovery of tax.

No provisional release of goods detained u/s 129 on bond:

Sub-section 2 of section 129 is proposed to be omitted which provides for application of section 67(6) to the goods detained u/s 129. Section 67(6) provides for provisional release of goods seized upon execution of bond and furnishing of a security  or on payment of tax, interest and penalty payable.  Now after the amendment there will no provisional release of goods u/s 129.

Proceedings u/s 129 to be completed within 14 days:

Section 129(3)  is also proposed to be amended so as to provide that notice after detention or seizure will be issued within 7 days specifying the penalty payable and thereafter  an order shall be passed within a period of seven days from the date of service of notice for payment of penalty under clasue (a) or clause (b) of section 129(1).

Sub-section 6 of section 129 is also proposed to be amended to provide that if a person  transporting the goods or owner of the goods  fails to pay the amount of penalty u/s 129(1) within fifteen  days from the date of receipt of order then goods or conveyance so detained or seized shall be liable to be sold or disposed off in the manner and within the time prescribed.

The interesting thing in the amendment is that both goods and vehicle can be sold or disposed off to realize the penalty amount in case of non payment, However an option is proposed to be given to the transporter to get his conveyance released on payment of Rs. 1 Lakh or penalty u/s 129(3) which ever is less.

So the proposed amendment in section 129(6) itself provide for a procedure for realization of penalty instead of initiating  proceedings u/s 130

 Amendment in section 130:

 Consequent to amendment in section 129, amendment in second proviso to section 130(2)  is also made to provide for that the aggregate amount of fine in lieu of confiscation and penalty shall not be less than 100% of the tax payable on such goods, which in the pre-amended law is the amount equal to the penalty payable u/s 129(1).

Sub-section 3 of section 130 is also proposed to be omitted which makes the owner of the goods liable for payment of tax, penalty or other charges payable in respect of goods or conveyance confiscated. That means after the omission of sub section 3 only fine in lieu of confiscation and penalty which shall not be less than 100% of the tax payable, will be payable u/s 130 where the goods are confiscated.

Amendment in section 107-25% pre-deposit in appeal against  order u/s 129 :

 Section 107(6) is amended to provide that appeal against order u/s 129(3) will be filed only after a sum equal to 25% of the penalty has been paid by the appellant.

Amendment in section 83:

 Section 83 is amended so as to provide that that whenever proceedings under chapter XII(Assessments) Chapter XIV(Inspection , search and seizure) or Chapter XV(demand and recovery) are initiated the Commissioner may for the purpose of protecting interest of the Govt Revenue may provisionaly attach any propery belonging to any taxable person or any person specified u/s 122(1A). In the unamended section attachment could be done only during the pendency of proceedings u/s 62,64,67,73 or 74.

Amendment in section 16 of IGST Act-

There is a proposal for a major amendment in section 16 of IGST Act. Section 16(3) of IGST Act today provides that Export of goods or services can be done in two ways

One With payment of IGST where refund is automatically  given by customs

Two without payment of IGST where refund has to be applied of unutilized Input tax credit

Now the proposed amendment provides that export of goods or services will be done only without payment of IGST under a bond or LUT.

It is further provided in the proposed amendment that in case of non-realisation of sale proceeds within the time limit as specified under The Foreign exchange Management Act, 1999, the refund obtained would be deposited within 30 days along with interest.

It is pertinent to mention here that recently a similar Rule 96B was introduced vide Notification No 16/2020 Dated 23.03.2020. It seems this proposed amendment u/s 16 is also introduced to give a legal backing to the Rule 96B. It is strange that rules are introduced before the relevant amendment under the Act.

Under the proposed amendment it is further provided that export of goods or services with payment of IGST will be made only by those class of persons or in case of those class of goods, which are notified by the Government on the recommendation of the GST Council.

 

All the proposed amendments in the GST will be applicable from such date as the Central Government may by notification appoint.