Introduction
Section 73 and Section 74 of the Central Goods and Services Tax Act 2017 commence the process of adjudication under GST wherein the Proper Officer issues a show cause notice to the registered taxpayer, on grounds of:
-
Any tax has not been paid or short paid; or
-
Tax has been erroneously refunded; or
-
Input tax credit (ITC) has been wrongly availed or utilized.
Under both sections, where the Proper Officer has cause to believe that any of the above issues exist, he/she shall serve a notice on the concerned taxpayer to show cause as to why the amount specified in the notice should not be paid by him along with interest and applicable penalty.
The point of contention between both these Sections are the reasons due to which the tax appears to be short-paid or erroneously refunded or ITC is availed wrongly. Section 73 deals with “Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized for any reason other than fraud or any willful-misstatement or suppression of facts” and Section 74 deals with “Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized by reason of fraud or any willful-misstatement or suppression of facts”.
Therefore, the basic element which differentiates Section 74 from Section 73 is the existence of i) fraud, or ii) willful-misstatement, or iii) suppression of facts. The commonalities between all three factors of Section 74 is judging the intention of the taxpayer by whom the mistake is made. Hence, the intention behind the mistake/error of the taxpayer, identifies the provisions under which the show cause notice is issued and gives a character to the taxpayer.
Further, the provisions of Section 74 also lay emphasis on the presence of purpose ‘to evade tax’ by the taxpayer. Therefore, issuing a notice in the first place, based on prima-facie observations, without identifying the existence, if any, of intent to evade tax by the concerned taxpayer, is void-ab-initio. Without any purpose, there would not be any resultant act, which would invalidate the provisions of Section 74 entirely. Contrary to the practice, the intent to ‘evade tax’ by the taxpayer has to be proven by the revenue authorities and cannot be simply negated. The intention of a taxpayer to evade tax, accompanied with any act of committing fraud or willful-misstatement or suppressing of facts, which would result in a case of short-payment of tax or excess availment of ITC or claim of erroneous refund, would attract the provisions of Section 74.
As per the 5th Edition of P. Ramanatha Aiyar’s Encyclopaedic Law Dictionary, evasion of tax has been defined to mean “illegal non-payment of tax which is due”. Therefore, it very clearly implies a deliberate action by oneself, which would result in loss of tax for the Government. This also implies that matters wherein there is no actual loss of revenue to the Government Exchequer, should not be adjudicated under Section 74. It defeats the very purpose of the proceedings.
When the Proper Officer observes any discrepancy indicating short payment of tax or excess availment of ITC or erroneous refund of tax, the circumstances in which such discrepancy exists is taken into account while issuing a show cause notice. It is the responsibility of the Proper Officer to understand the reasons behind the error and whether it is indicative of any purposeful intent. The show cause notice issued is the first step in the any process of adjudication and sets the tone for the remainder of the legal process. It is crucial that the Proper Officer takes into account all possible factors and has a complete understanding the context before issuing a show cause notice.
Clarity on Terms: Fraud, Willful-Misstatement, and Suppression of Facts
Firstly, there should be clarity on what is meant by fraud or willful-misstatement or suppression of facts. Thus, the three phrases have been defined herein under:
Fraud: Section 17 of Contract Act states that fraud means making a suggestion, as a fact, which the person does not believe it to be true. Fraud also means active concealment of fact. Generally, ‘fraud’ means deceit, trickery or misrepresentation.
Willful Misstatement: A false statement becomes ‘willful’ if it is deliberate or intentional. It is not willful if the statement is accidental or inadvertent or due to different bonafide interpretation. A statement will not become a misstatement only because some facts are not disclosed.
Suppression of facts: Explanation 2 to Section 74 states “For the purposes of this Act, the expression ‘suppression’ shall mean non-declaration of facts or information which a taxable person is required to declare in the return, statement, report or any other document furnished under this Act or the rules made thereunder, or failure to furnish any information on being asked for, in writing, by the proper officer.”
Drawing parallels from erstwhile taxation laws, it has been found that matters which indirectly lead to non-payment of duty are adjudicated differently, conditional upon the following factors:
-
Existence of fraud, collusion, willful misstatement or suppression of facts;
-
Intent to evade tax.
In the latter section, the department is provided with an additional layer of authority to adjudicate the matters within an extended period of limitation, due to the gravity of the mistake. Therefore, the law makes it abundantly clear that such matters are exceptional and the extended period should only be invoked when there is serious evidence and backing of the same.
Role of Circulars and Burden of Proof
A Master Circular was issued by CBIC vide reference no. 1053/02/2017-CX dated 10th March 2017, which brought clarity to the process of show cause notices, adjudication and recovery. The Circular addresses each and every aspect of the adjudicatory process, including cases wherein extended periods are invoked while issuing demands. Referring to exceptional matters, wherein the Proper Officer issues show cause notices within the extended period of limitation, on grounds of non-payment/short-payment of duty by reason of fraud or collusion or willful misstatement or suppression of facts or contravention made with intent to evade payment of duty, the Circular necessitates the existence of ingredients necessary to justify the extended period invoked.
The entire purpose of providing an extended period is because it is understandable that such matters involving fraud or willful misstatement or suppression of facts would require a certain level of proficiency and effort by the Proper Officer to unearth the same. This is because, in such cases, it is expected for the defaulter to be crafty in his/her dealings, such that the evasion of tax would remain buried. Therefore, it is reasonable and rightfully so, that the Proper Officer is authorized to initiate proceedings in such matters. However, the taxpayer should be respectfully provided with the aspects of the investigation, which lead to the Proper Officer in forming such conclusion, so that natural justice can unfold duly.
Elaborating further, the Circular states that “the onus of establishing that these ingredients are present in a given case is on revenue and these ingredients need to be clearly brought out in the Show Cause Notice along with evidence thereof. The active element of intent to evade duty by action or inaction needs to be present for invoking extended period.” Therefore, the authorities have very clearly spelt out the distinction between matters adjudicated within normal and extended limitation periods, focusing on the elements of fraud, willful-misstatement or suppression of facts. Further, the importance of bringing out the intention to evade tax has been emphasized, for which the responsibility lies with the authorities.
Issues in Current Implementation
Fraud or willful misstatement or suppression of facts are serious allegations on any taxpayer which cannot be exercised lightly or without serious consideration of the existing facts and circumstances. Any such allegation must be backed by proper evidence before invoking it on any taxpayer, wherein the intention to evade tax must be established. However, in most cases, the communicated grounds for invoking Section 74 seem to be almost practiced and default in nature, without actual efforts being taken to find out the intention behind the errors. This is leading to gross misuse of the provisions of the Act and is hampering the image of the authorities.
Fraud has not been defined under GST Law. The officials have been entrusted with so much authority, as to carefully interpret certain actions to be fraudulent on the part of the taxpayers, which would be likely to be inflicted only in exceptional cases, where there is cause to prove the same. When a taxpayer is held accountable and said to be fraudulent in his actions, it is necessary for the authorities to prove that there was an intent on his end, to evade the payment of tax.
As per the Bharatiya Nyaya Sanhita, 2023 “fraudulently means doing anything with the intention to defraud but not otherwise;” Therefore, there is very clearly a connotation of a positive act from the taxpayer’s end, associated with the term ‘fraud’. The process of fraud cannot be simplified and stated to have occurred, without any basis to reiterate the same. To take or withhold from, by fraud, what is his by right, is to be fraudulent.
As per the Supreme Court’s judgment in Collector of Central Excise v. Chemphar Drugs & Liniments (1989), it was adjudged that: “Something positive other than mere inaction or failure on the part of the manufacturer or producer or conscious or deliberate withholding of information when the manufacturer knew otherwise, is required before it is saddled with any liability, beyond the period of six months. Whether in a particular set of facts and circumstances there was any fraud or collusion or willful misstatement or suppression or contravention of any provision of any Act, is a question of fact depending upon the facts and circumstances of a particular case.”
In Cosmic Dye Chemical v. Collector of Central Excise (1995), the meaning of fraud was explained as: “Now so far as fraud and collusion are concerned, it is evident that the requisite intent, i.e., intent to evade duty is built into these very words. So far as misstatement or suppression of facts are concerned, they are clearly qualified by the word ‘wilful’ preceding the words ‘misstatement or suppression of facts’ which means with intent to evade duty. The next set of words ‘contravention of any of the provisions of this Act or rules’ are again qualified by the immediately following words ‘with intent to evade payment of duty’. It is, therefore, not correct to say that there can be a suppression or misstatement of fact, which is not willful and yet constitute a permissible ground for the purpose of the proviso to Section 11-A. Misstatement or suppression of fact must be willful.”
The GST regime is considered to be a self-assessment regime where the taxpayer determines, based on the provisions, what their liabilities are. In many cases, short-payment of tax or excess ITC availment are on account of difference in interpretation or misunderstanding of the law, but that cannot be understood as an attempt to evade tax. Any simple mismatch cannot be considered as a willful misstatement. It puts the taxpayer in an uncomfortable position, without so much as allowing them to understand the law and then pay taxes. This ends up creating a highly unforgiving and mistrustful attitude towards all taxpayers, defeating the actual intent of the GST law. Subjecting the taxpayers to full accountability for any mismatches or alleged mistakes in tax payment, and deeming the same to be intentional, in a self-assessment tax regime is bureaucratically unreasonable.
In the matter of Uniworth Textiles Ltd. v. CCE [2023], the Hon’ble Supreme Court ruled: “We have heard both sides… We are not convinced by the reasoning of the Tribunal. The conclusion that mere non-payment of duties is equivalent to collusion or willful misstatement or suppression of facts is, in our opinion, untenable… Construing mere non-payment as any of the three categories contemplated by the proviso would leave no situation for which, a limitation period of six months may apply… Therefore, something more must be shown to construe the acts of the appellant as fit for the applicability of the proviso.”
To avoid unnecessary complication and deliberation, there has been a clear-cut definition by the Statute of what constitutes ‘suppression of facts’ under GST law. However, this will prove to be effective only when theoretical clarification is also accompanied with practical implementation. “Suppression” can only be established when it results in non-declaration of facts. ‘Non-declaration’ does not imply declaration of facts deemed to be lesser than, what is interpreted to be sufficiently declared in the eyes of the authorities.
As per the 5th edition of the legal dictionary by P. Ramanatha Aiyar, suppression of facts is defined as: “The expression ‘suppression of fact’ is to be construed strictly because it has been used in company of such strong words as fraud, collusion or willful default. It does not mean omission. The act must be deliberate. In taxation, it can have only one meaning that the correct information was not disclosed deliberately to escape from payment of duty…”
This has been abided further by the Supreme Court in Anand Nishikawa Co. Ltd. v. CCE, wherein the relevant judgment is: “Suppression of facts can have only one meaning—that the correct information was not disclosed deliberately to evade payment of duty. When facts were known to both the parties, the omission by one to do what he might have done and not that he must have done, would not render it suppression. It is settled law that mere failure to declare does not amount to willful suppression. There must be some positive act from the side of the assessee to find willful suppression.”
On a practical basis, show cause notices and orders are being issued under Section 74 of the Act, majorly on grounds of material ‘suppression of facts’ and that there is deliberate withholding of information by the taxpayers. If the scrutiny/investigation was not conducted, the corresponding discrepancies/misstatements would have remained concealed from the Department, which is taken to mean as suppression. Further, this has been observed in most of the adjudication proceedings, subsequent to audit conducted of taxpayers under Section 65 of the Acts.
Justice Atul Sreedharan in the matter of Khursheed Ahmad Lone v. Union Territory observed that the Government Authorities often make “stock arguments” that are “copy-paste” in every case. Something similar is happening in GST Department as well. The Department is taking same argument in almost every notice to invoke Section 74. In audit matters, the entire books of accounts of the taxpayer are scrutinized and investigated by the authorities, keeping in mind the GST law. Where there are mismatches or misstatements or any violations observed, the same is rectified and corrected by the taxpayers during the process of audit. Thereafter, adjudicating the disputed matters under Section 74 on the basis that it was intentionally suppressed seems convenient. In this manner, the aim at projecting GST law as a self-assessment regime is not only contradicted but implies that all taxpayers should be subjected to audit, lest any fraudulent misstatements go unidentified.
The most fundamental objective of conducting audit is in order to improve the books of accounts and increase the level of compliance with established laws and regulations in place. There is still a lack of awareness regarding applicability and provision of laws. Through audit, the concerned taxpayers are made aware of the errors and contraventions, if any, persisting in their businesses. Analogously, considering audit to be a participative process to ensure that duty is paid correctly on chargeable amounts, Medisray Laboratories (P.) Ltd. v. Commissioner of CGST ruled that “it cannot be said that only because audit party had found some credit availed has inadmissible, suppression of fact is made out.”
Another practical observation has been made with respect to adjudication of similar matters by different jurisdictional authorities. There are comparable grounds mentioned for chargeability of tax and issuance of show cause notices against respective taxpayers but difference with respect to provisions under which they are adjudicated. Various taxpayers are being adjudged under both, Section 73 and Section 74, but for identical, circumstantial inconsistencies. Various discrepancies are held by different officers to be unintentional or intentional, causing the same to be adjudicated under Section 73 and Section 74 respectively. This is without attempting to understand the full facts of the matter and pre-conceivably deciding the issue.
Likewise, it has been observed that most audit proceedings seem to be adjudicated under Section 73 by the officers of the respective State whereas nearly all such proceedings are carried on further under Section 74 by the Centre. There are contradictory conclusions arrived at, by different officers for the same circumstances. This hardly leaves any bare room or cause for the taxpayers to explain themselves. They have no option but to rely upon the interpretation and judgment of their jurisdictional officer in litigious matters.
There is, very evidently, a lack of unity and agreement amongst the authorities themselves, with respect to interpretation and understanding of the law. It is tricky, to say the least, to expect regular taxpayers to carry out self-assessment and comply with the law perfectly when there are no such guidelines to conduct the same. This creates a lack of conviction amongst the people and portrays the law to be intangible and conflicting.
Conclusion
The basic difference between Section 73 and Section 74 is the difference between bonafide mistake and malafide intent. Not only within GST law, but under any law, the emphasis on evidence is given utmost priority where implication for malafide intent is made. As per Hon’ble Apex Court’s judgment in the case of Rajasthan State Electricity Board v. Dy. CIT, it was held that “It is true that while interpreting a Tax Legislature the consequences and hardship are not looked into but the purpose and object by which taxing statutes have been enacted cannot be lost sight… The burden of proving that the assessee has attempted to evade tax is on the revenue which may be discharged by the revenue by establishing facts and circumstances from which a reasonable inference can be drawn that the assessee has, in fact, attempted to evade tax lawfully payable by it.”
As per the judgment of the High Court of Telangana in the case of Sujata Electrical Infratech India (P.) Ltd. v. Dy. CIT, the rulings were: From the present facts, it must be ascertained whether requisite mens rea was present to infer a willful attempt at evading tax. Unless a person with dishonest intention tries to conceal facts and consequently attempts at evading the tax, which he was liable to pay, the requisite ingredients to prosecute person under Section 276C could not be said to be satisfied.
It is pertinent to mention here that, proposing penalty under Section 74 of the Acts is directly condescending the taxpayer of malafide intention to evade tax, either by way of fraud or through willful misstatement or through suppression of facts. Therefore, unnecessary proposal under Section 74 hassles the concept of ease of doing business and also results in wastage of time for the department as well as for the taxpayer, increasing the burden of litigation and increasing the cost of collection for the Government.
Accusations without any evidence of wrongdoing and subsequent demand is no more than abuse of power and amounts to extortion from the department who seems to have a view that they can accuse anyone with suppression without cogent evidence in support as long as such point is found by them in any judicial proceedings.
It is undisputedly clear that the malafide notion behind any misstatement/mismatch, if any, needs to be proved, based on actual evidence, and cannot be presumably arrived at, basing it on delay or miscalculation of tax paid. Any difference in liabilities on account of difference in interpretation of the law cannot be held as willful misstatement. This would make the operation of Section 73 of the Act redundant. Further, the onus is on the statutory authorities to interpret each situation prudently and lay out the reasoning behind identifying any factors of fraud or willful misstatement or suppression of facts. They have been entrusted judiciously with such authority which must be exercised with caution. This would not only have a better impact on removing the existence of actual mens rea and improving compliance with GST law but also provide a sense of assurance to the taxpayers about the judiciary.