ICAI issued Handbook on Inspection, Search, Seizure and Arrest under GST

The Institute of Chartered Accountants of India(ICAI) has issued Handbook on Inspection, Search, Seizure and Arrest under GST.

Introduction

1. Inspection under GST

Inspection is not search; these are two different proceedings and the subtilty of the differences must be appreciated from the law itself. Inspection is a permitted method to access a taxpayer’s premises, but only as an anti-evasion measure as laid down in the law in the form of ‘pre-requisites’ to invoke the exceptional powers allowed. After all, GST is a self-assessment based tax regime. Any provision that appears to enter into the self assessment regime, needs the express consent of the Parliament. Any proceeding that invokes such authority must be tested for its validity before applying the same as it is an exceptional power contained in section 67 of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act or Central GST Act). This Handbook discusses the contours of this power and presents the do’s and don’ts that taxpayers and professionals need to be aware of, as misapplication of this provision is easily possible, especially due to the wide-ranging powers that tax authorities enjoyed under the earlier tax regime.

2. Mandate to ‘question the questionable proceedings’

Section 160(2) of the CGST Act prohibits a taxpayer from ‘questioning invalid proceedings’ as responding to matters contained in an invalid notice (order or communication) that amounts to entertaining such proceeding indirectly. This provision may be understood as taxpayer giving validity to an otherwise invalid proceeding by (i) failing to question its validity or (ii) attending to it on merits before examining its validity. This is also called ‘acquiescence’, which means ‘admitting its validity by omission or submission’ to requirements in such notice, order, or communication.

3. ‘Access to business premises’ does not authorize ‘inspection’

This handbook discusses the scope of section 71 of the CGST Act and the extent to which the power of access under this section can be availed by the Proper Officers to carry out their objects. Taxpayers are well within their rights in law to question the validity of any action by an officer for the purpose of seeking access to business premises including checks and verification based on a logical exercise of authority, akin to those under earlier tax regime. Also, the powers under section 71 appear to overlap with those under section 67 and the nature of their difference is sought to be brought to reader’s attention in this Handbook.

4. GST ushers in a ‘self-assessment’ tax regime

If one were to look for the most powerful provision in the entire CGST Act, section 59 would take the top spot. It is a very short provision, but it appoints the registered person to be the only one with authority to conduct ‘assessment’ of tax payable under the Act (and under IGST and Cess Acts). When the law appoints the registered person to carry out assessment of tax payable, the Proper Officer cannot seek to carryout assessment. And once self-assessment has been made and the Proper Officer is dissatisfied with the outcome of such self-assessment then it is the responsibility of the Proper Officer to produce material to question the validity of the self assessment carried out by the registered person and demand tax, in accordance with the procedures established in this law.

Section 155 of the CGST Act places the ‘burden of proof’ upon the registered person only in respect of ‘eligibility to input tax credit’ and therefore, by implication of this provision, the burden of proof on ‘all other aspects’ of assessment carried out, lies on the Proper Officer. This is evident from the provisions of section 75(7) of the CGST Act, which only makes it necessary that show cause notice issued should contain specific ‘grounds’ which support the demand and also requires the Adjudicating Authority to confine the order confirming demand, if any, to be based on those ‘grounds’ and no other.

5. No burden to prove innocence

Previously, the taxpayer was expected to prove the innocence or demonstrate the correctness of tax position (levy, classification, valuation, credit, etc.) adopted and Revenue would merely question its correctness. But in GST, given that every administrative proceeding is laid down with a clear ‘due process’, it may be argued that the provisions of section 59 read with section 155 of the CGST Act, makes it abundantly clear that the taxpayer does not bear the initial burden to prove that the self-assessment carried out is accurate. This is significant and one must take time to read any good book on ‘Rule of Law’ to appreciate this concept and to recognize the responsibility that GST has placed the burden on the Revenue in case of dissatisfaction over the self-assessment carried out by any registered person.

6. Burden in case of ‘tax evasion’

Where a taxpayer is answerable to a notice demanding tax, involving evasion of tax and once the Revenue makes out a prima facie case on facts, it raise a presumption against such taxpayer. Now, it becomes imperative for the taxpayer to either rebut that presumption or to affirm that presumption due to failure of rebuttal. There is a difference between ‘burden’ and ‘onus’ under the Evidence law where the burden always remains on the person whom the law states to bear it, but when new material is introduced, in rebuttal or otherwise, then the onus to prove all the requirements of its admissibility shifts to the person introducing such material. In Narayan Bhagwantrao Gosavi Balajiwale v. Gopal Vinayak Gosavi & Ors. AIR 1960 SC 100, the Apex Court has held that when both sides introduce evidence, the question of ‘burden of proof’ becomes academic. Care must be taken not to displace the burden by doing anything that can cause it to shift on to the taxpayer. After all, in a self-assessment based tax regime, the Revenue must show that a prima facie case exists against the taxpayer’s determination of liability and it does not suffice to put forward an alternate interpretation and leave the taxpayer to prove the correctness of the self-assessment carried out. To do so would be violative of the mandate contained in section 59 of the CGST Act.

7. Applicability of the principles of Indian Evidence Act to GST

When it comes to demanding tax, that has already been self-assessed, it is not sufficient to merely doubt its correctness and leave the taxpayer to run around to get the notices set aside. Any statement should be made responsibly. The standard of care in establishing facts cannot be anything short of the standards laid down in the Indian Evidence Act. While the rigorous rules of procedure contained in Indian Evidence Act are applicable only to matters before a Court, the Apex Court in the case of Chuharmal, Etc. v. UoI & Ors AIR 1988 SC 1384, has stated that since equitable principles of common law are contained in Indian Evidence Act, their applicability to taxation matters is not barred and must be admitted to establish facts for the purpose of determination of question of law which relies on established facts. This Handbook discusses the ‘due process’ laid down in each provision in its strict sense because the Act contains the intent of the Legislature. In EP Royappa v. State of TN, AIR 1974 SC 555 stated that passion to protect interests of Revenue does not authorize bypassing the ‘due process’ laid down in the law.

8. Applicability of the principles of Administrative Law to GST

The principles of natural justice are touted all too often, but the roots of the requirement that these principles must be adhered to flow from Administrative Law. It is an uncodified law like Torts. Administrative Law contains the requirements of administrative action to meet the standards of ‘equity, justice and good conscience’ in any civilized society which claims that rule of law prevails.

If a Proper Officer conducts audit under section 65 of the CGST Act and takes exception to a certain tax position adopted by the registered person and issues Form GST ADT – 02 with an observation that certain amount of tax is payable, then if the same officer were to sit in judgement to adjudicate, it would be in direct violation of the first principle of natural justice (Para 1.18). It is for this reason that CBIC Circular 31/5/2018-GST dated 9 Feb 2018 amended by Circular 169/1/2022-GST dated 12 Mar 2022, in amended Para 6 states that Officers of Audit and Intelligence Commissionerate are permitted to carry out their audit or investigations and issue show cause notice. But for purposes of adjudication, the file and the notice must be transferred to Proper Officer (subject to pecuniary limits) in the Executive Commissionerate to hear the noticee and adjudicate. This administrative segregation of audit or investigation and subsequent adjudication by Central tax administration is to ensure that the first principle of natural justice (Para 1.18) is upheld. However, State tax departments appear to ensure independence in adjudication even without this form of express segregation of functions, in view of the merged functions practiced without any objections in earlier tax regime.

The show cause notice can neither be vague nor allegations be without evidence commensurate with the severity of allegations levelled against the noticee. The SC has held in CCE v. Brindavan Beverages (P) Ltd. (2007) 213 ELT 487 that defective notice is incurable and fatal to the demand. This principle can be found in section 75(7) of the CGST Act which states that the grounds on which an order may be passed must be the very grounds on which the notice was issued. No adjudicating authority is empowered to cure deficiencies in the notice which upholds the second principle of natural justice (stated above).

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