Assessments under GST are going on and businesses across the countries are immersed with Show Cause Notices being issued on various grounds. Show Cause Notice under GST are issued in Form DRC-01 and the process is going on from the last 2-3 years. However, what has triggered the issuance of SCN at such a large scale in the last 4-5 months? Reason for the same is Section 73(10) of CGST Act, 2017. Section 73(10) specifies time line for determination of tax not paid or short paid or Incorrect ITC Claimed.
Show Cause Notices are issued on various grounds some of which are legitimate and some are based on system incorrect calculations. Businesses are required to reassess their strategies and address the potential issues. Past Notices can act as a guide to which issues may emerge for subsequent periods and how to manage the same in advance efficiently.
This Article contains a detailed discussion of various grounds on which show cause notices are being issued and what action a taxpayer is required to be take to avoid the same.
1. Time limit of issuance of Show Cause Notice
Reason that businesses are flooded with GST notices in the last 4-5 months is the time limit given under Section 73(10) of CGST Act. Brief timelines given under Section 73 is as follows:
- Under Section 73 of CGST Act, where it appears to the proper officer that the taxpayer has not paid or short paid or claimed wrongly availed Input Tax Credit then he shall serve the Show Cause Notice on such person.
- Such notice shall be issued in form GST DRC-01 and Proper officer shall issue the final order determining the tax payable in Form GST DRC-07 after considering the submission made.
- As per Section 73(10) of CGST Act, Proper officer is required to issue the order within 3 years from the due date of filing of annual return for the concerned Financial year.
- Proper officer is required to issue the notice in Form GST DRC-01 atleast 3 months prior to time limit given for issuance of order.
- Time limit for issuance of order for FY 2017-18 was 31st December, 2023.
- Extended timelines for issuance of order for FY 2018-19 was 31st March, 2024. However, same is further extended to 30th April, 2024 for FY 2018-19 and 31st August, 2024 for FY 2019-20 vide Notification No. 56/2023-Central Tax dated 28th December, 2023.
- Similarly, time limit of issuance of Show Cause Notice is also extended to 31st January, 2024 for FY 2018-19.
2. Grounds on which Show Notices is being issued
Show Cause Notices are issued on various grounds and some of which are legitimate and some of which are based on incorrect value picked by softwares. Following are the possible gounds of issuance of Show cause notice:
a. Difference in Tax Payable Declared in GSTR-1 and Tax paid through GSTR-3B
- If tax payable declared in GSTR-1 is higher than tax payment made through GSTR-3B then Show Cause Notice is requiring the taxpayer to pay the differential amount of tax alongwith interest and penalties.
- In Various cases, if any amendment is made in any invoice, e.g., B2C invoice is further amended as B2B Invoice then while determining GST payable as per GSTR-1, system is only considering invoices declared under B2B Invoices and not giving effect to amount reduced through amendment.
- Taxpayers are required to be very cautious while filing information in GSTR-1 and GSTR-3B and any difference is required to be addressed properly.
b. Difference in Tax payable declared in GSTR-9 and tax payment made through GSTR-3B
- If tax payable declared in GSTR-9 is more than tax payment made through GSTR-3B then show cause notice is requiring the taxpayers to pay the differential amount of tax alongwith interest and penalties.
- However, while determining the difference in tax payable and tax payment made through GSTR-3B, the system calculates tax payable as higher of amount declared in GSTR-1 and amount declared in GSTR-9.
- Therefore, if taxpayers are required to reduce liability declared in GSTR-1 then Taxpayers are required to make corrections in GSTR-1 through proper amendment in GSTR-1 of future period instead of making amendment through GSTR-9 directly. If less amount is declared in GSTR-9, system is considering amount declared in GSTR-1 as tax payable.
c. Excess ITC Claimed in GSTR-3B as compared to ITC reflecting in GSTR-2A or Table-8A
- System computes the eligible ITC on the basis of the GSTR-1 filed by the supplier and then compares the same with ITC claimed by the taxpayer in GSTR-3B.
- If excess amount is claimed then such excess amount is required to be reversed alongwith applicable interest and penalty.
d. ITC reversal on account of Ineligible ITC
- GST System tracks ITC ineligible under Section 17(5) of CGST Act on the basis of HSN Code declared by the supplier such as Insurance, Motor Vehicle Purchase, Hardware etc.
- Such ineligible ITC is compared with ineligible ITC declared by the taxpayer in Annual return and requires reversal of differential amount of ITC alongwith interest and penalty.
- There are many cases where ITC is eligible and alleged as ineligible in the Show Cause notice. Taxpayers can claim the benefit of ITC by substantiating that Input or Input services are not restricted under Section 17(5) of CGST Act.
e. ITC on supplies made by cancelled dealers
- There are many GST registrations which are getting cancelled with retrospective effect. In some cases, registrations are cancelled with effect from 1st July, 2017 itself.
- If invoice date is after the effective date of cancellation of GST registration then show cause notice requires taxpayer reverse ITC corresponding to invoices issued by such suppliers after effective date of cancellation of GST registration alongwith interest and penalties.
- This can cause genuine hardship to the taxpayers as taxpayer can’t keep control over the GST registration status of the supplier after completion of supplies. GST registration of a supplier can be canceled after completion of supplies with the taxpayer with retrospective effect.
f. ITC on supplies made by supplier who filed GSTR-1 but failed to pay tax through GSTR-3B
- In the implementation phase of GST, there have been many cases where suppliers filed the GSTR-1 disclosing all sales but failed to file GSTR-3B and did not pay corresponding taxes.
- Department is disallowing ITC corresponding to suppliers who have filed GSTR-1 but did not file GSTR-3B.
- Therefore, taxpayers are required to be more vigilant about GSTR-3B filing status of the suppliers as well because mere reflection of ITC in GSTR-2A or GSTR-2B does not ensure eligibility of ITC unless supplier has paid such tax liability
g. Reversal of common ITC corresponding to exempted supplies
- Rule 43 of CGST Rules, 2017 requires taxpayers to reverse ITC attribution to the exempted supplies from the common ITC.
- Where the supplier has disclosed any exempted supplies in GSTR-1 or GSTR-9 then Show Cause Notice requires the taxpayer to make reversal of ITC corresponding to such exempted supplies. DRC-01 considers the entire ITC as common ITC and computes ITC reversal accordingly.
- Taxpayers are suggested to make the correct ITC reversal at the time of filing of GSTR-3B or GSTR-9 itself.
Above mentioned list of reasons is not exhaustive and notice can be issued on any other ground as well.
3. Way Ahead
In response to these developments by GST authorities, businesses are strongly required to reassess their strategies and address the potential issues which triggered the issuance of DRC-01. Taxpayers need to be very vigilant about the compliance of suppliers and any non-compliance on part of the supplier can cause a huge ITC loss to the taxpayers. Mere filing of GSTR-1 by the supplier is not sufficient. Supplier is required to make corresponding payment of tax as well. Further, correct legal disclosure is the best way to avoid DRC-01.