HC Slams Arbitrary GST Cancellations: Reason Must Be Given for Backdated Action

Recently, the GST department had unfairly cancelled a company’s registration from a past date without giving a proper reason. The company approached the Delhi High Court. The court said such a cancellation is not allowed unless the department gives clear reasons and proper notice (also, the GST cancellation order issued to the company was retrospective in nature, meaning GST was cancelled from a past date, and its retrospective nature was not mentioned in the notice). So, the Court changed the GST cancellation date to the date of the SCN and protected the company’s past business activity from being declared invalid. This kind of retrospective cancellation affects many things, including business records, tax filings, and customers who may have claimed Input Tax Credit (ITC).

The appeal was filed by a company named M/s V R Impex (petitioner) against the Commissioner of Delhi Goods and Services Tax (GST) and another (respondent) in the Delhi High Court, before the bench comprising Honourable Justice Prathiba M. Singh and Justice Shail Jain. Through the writ petition, the company challenged the retrospective cancellation of its GST registration with effect from 30th August 2019 via an order dated March 16, 2023.

The company was issued a show cause notice (SCN) dated 4th April, 2022, asking the company the reason why its GST registration should not be cancelled. The notice was issued on the grounds that the company’s principal place of business was not found at the time of the field visit. However, it is important to note that the SCN did not mention anywhere that the registration might be cancelled retrospectively. Then later, the GST department issued a GST registration cancellation order dated March 16, 2023, with retrospective effect from 30th August 2019, meaning four years back from the issuance of the order. Meaning, all financial activities performed by the company after the effective date will be considered invalid, and customers may lose ITC. The company argued that this cancellation was unfair and illegal, especially when it was never mentioned in the SCN.

When the court analysed the entire case, judges concluded that retrospective GST registration cancellation is not automatically allowed. There must be clear and proper reasons written in the SCN and the final cancellation order. For announcing its decision, the court also cited some previous judgments titled Subhana Fashion v. Commissioner (GST), Balaji Industries v. CGST Commissioner, Riddhi Siddhi Enterprises v. Commissioner (CGST), and Delhi Polymers v. Commissioner (Trade) and Taxes. In all of these cases, the court ruled that retrospective GST registration cancellation needs specific justification. Additionally, the SCN must be clear if the department wants to cancel registration effective from a past date, and taxpayers must be given a proper chance of hearing. Just because the taxpayer did not file returns for a few months does not mean the GST registration can be cancelled retroactively.

In the current case, the judges noted that the SCN did not mention retrospective cancellation of GST, and the final GST cancellation order gave no reason why the company’s GST registration was being made effective from a past date (retrospective). This was considered a serious violation of legal procedure and the principles of natural justice. Therefore, the court ordered that the GST cancellation should only be effective from the date of the SCN, which is 4th April 2022. The earlier cancellation date of 30th August 2019 is invalid; hence, the GST cancellation date was changed to the SCN issue date, so now it takes effect only from 4th April 2022.