Correcting Procedural Mistakes in GST and Associated Demand

GST has matured to its sixth year. The Law, its systems, the processes, rates, compliances etc. have stabilized in these six years. From the very turbulent first year, the law, the regulators, the framers, and the subjects have moulded either the law or themselves in a positive manner and with a spirit to embrace this new law and make it workable. The evolution and adaptation were also dented by two strained years of covid. Yet, GST emerged as a true winner in all aspects.

While things look much stable now and with our short memory, we often forgot the rough times which this law has sailed through, times when GSTN was filled with technical glitches, times when taxpayers were struggling to understand the system and columns of various returns and how they would fill their data in to those tables and columns, times when the administrators were not equipped to help the approaching taxpayer on technical aspects and when the helplines themselves gave bizarre responses. More particularly, the first two years saw a lot of errors in filing of GSTR-1 and GSTR-3B. No errors were committed in GSTR-2 and GSTR-3 as those forms were kept in abeyance and finally abandoned by the government and thus, were never filled by the taxpayers. To worsen the situation, the time period to remove those errors had lapsed and thus, the taxpayer is left at the mercy of the proper officer for consideration of his problem arising of technical and procedural issues. Some of the most common errors made by the taxpayers included:

a. wrong GSTIN of buyer in GSTR-1

b. reporting of B2B sales as B2C

c. wrong invoice numbers in GSTR-1

d. netting of output and input liabilities in GSTR-3B

e. reporting of tax of purchase credit notes in columns of output tax

f. reporting of tax of sales credit notes in columns of Input Tax Credit

g. reporting of adjustment of tax on advances as Input Tax Credit

In all of the above cases, the net tax which was payable by the taxpayer was duly paid, however, they were reported in wrong columns of return. For example: tax reversal on credit notes on sales was wrongly reported in column of Input Tax Credit. Effectively, the same was to be reduced from output tax but the taxpayer inadvertently reported the same in ITC. The net effect of tax in both the cases would be the same and there is no special benefit which could be achieved by the taxpayer (barring few exceptions like export refund). Accordingly, from an accountant’s perspective it is the net tax, which was computed and paid, and the situation is revenue neutral. However, from the perspective of tax authorities, the same would result in excess claim of ITC and thus, is recoverable under Section 16 of the CGST Act, 2017 read with Section 74 of the CGST Act, 2017. Even after the same is explained by the taxpayer, the authorities deny the benefit by stating that they are helpless as there is no such legal provision or circular in this respect and such situations usually end up in issuance of demands against the taxpayer by way of issuance of a Show cause notice and order thereof.

In this article we would explore the possible responses to such situations, which are main reasons for such errors and why such errors should not be held to the detriment of the taxpayers. The main reasons for such errors are:

1. Non clarity in compliances in the initial years of GST

2. Procedural lapses cannot deny legitimate benefit to the taxpayer

3. Rectification of procedural errors where no tax evasion is involved has been permitted by Courts

1. Non clarity in compliances in the initial years of GST

Most of the errors had occurred in the initial stages of GST due to absence of clarity in implementation, and thus, the errors could not be rectified in a timely manner by the taxpayers. While GSTR-1 was working since inception, GSTR-2 and GSTR 3 could not be implemented due to procedural issues. Form GSTR-2 was a monthly return that allows the taxpayer to declare and summarize the details of inward purchases of taxable goods and/or services. However, the GSTR-2 Form was suspended since September 2017 through amendment to the CGST Rules, 2017. In its place, GSTR-3B which is a return in a combined version of GSTR-2 and GSTR-3, was brought in use. Thus, had GSTR-2 and GSTR-3 forms were made available to the taxpayer, the reflection error could have been rectified by taxpayers. However, in the absence of the non-operation of the forms, the liability cannot be casted on the taxpayer, more so, when such representation was rectified later. The failure of machinery mechanism and non-clarity in operations cannot be read against the taxpayers when there is no effective shortfall in tax payment. Thus, the return as envisaged originally was supposed to cover all Input Tax Credit on the basis of GSTR-2 and not on the basis of GSTR-3B. The mechanism included reflection of all ITC available to taxpayer, its acceptance or reflection or modification by taxpayer and then finally, there was a matching and reconciling mechanism envisaged in the return filing system in FY 201718. The government clarified vide Para 1.3. of Circular No. 26/26/2017-GST dated 29.12.2017 that it has been further decided that the time period of filing of FORM GSTR-2 and FORM GSTR -3 for the months of July 2017 to March 2018 would be worked out by a Committee of officers and communicated later. Thus, the form GSTR-2 was still live and was not done away with by the government. In press Release dated October 9, 2017, government clarified that once a taxpayer files GSTR1 by 10th October, the corresponding entries in GSTR-2A of his buyer shall get auto populated. The buyer shall finalize his GSTR-2 after making modifications (additions, corrections or deletions), if required, in GSTR-2A. The Input Tax Credit (ITC) shall be availed by the buyer based on his GSTR-2. It is pertinent to mention that Rule 69 and Rule 71 clearly mention Form GSTR 2 and Form GSTR 3 for proper claim of ITC by the recipient. Many taxpayers waited for Forms GSTR-2 & 3 to be operational, however, these forms were never operational on the common portal and thus in absence of such Forms, demand for non-reflection in GSTR-3B cannot be saddled on the taxpayers. Thus, when the proper machinery mechanism was not in place, such errors cannot be held against the taxpayers, and they cannot be saddled with liabilities on these counts. Absence of proper machinery mechanism has been held against revenue in many decisions including Suresh Kumar Bansal v Union of India, wherein Hon’ble Delhi High Court held that there cannot be effective levy without proper machinery provisions. Hon’ble Supreme Court in Commissioner Central Excise and Customs, Kerala v. Larsen & Toubro Ltd., had held that in absence of machinery provisions to exclude non-service elements from a composite contract, the levy cannot be fastened on the assesses. Thus, machinery mechanism and that too proper mechanism should be in place to effect any levy or demand in a tax regime.

2. Procedural lapses cannot deny legitimate benefit to the taxpayer

It is a trite law that procedural lapse cannot lead to effective demand. In Mangalore Chemicals & Fertilisers Ltd. v. DCCE [1991 (55) E.L.T. 437 (S.C.)] while drawing a distinction between procedural condition which is technical in nature and a substantive condition, it was held that procedural lapses of technical nature can be condoned, so that substantive benefit is not denied. Hon’ble high Court in the case of Vimal Enterprise v UOI [2006 (195) E.L.T. 267 (Guj.)] held that mere procedural lapses should not hinder genuine benefits to taxpayer. The Hon’ble Court observed as under:

“Once the object for which a provision is enacted is satisfied merely venial or technical breach by itself should not permit the authorities to adopt a stand which frustrates the object for which the entire scheme of Modvat has been framed. The endeavour must be to ensure that the scheme is made effective and not frustrated. In other words, the goods, which have been subjected, to duty when used as inputs for manufacture of final product, should not be made to bear duty once again as that would have a cascading effect not intended by legislature in so far as the ultimate consumer is concerned.”

Thus, when there are any procedural errors in terms of reporting and not the nonpayment of taxes, such liabilities cannot be confirmed against the taxpayer. Similar issues were faced in e-way bill cases where penalty under Section 129 of the CGST Act, 2017 were confirmed against the taxpayers for frivolous errors. In Circular No. 64/38/2018-GST dated 14.9.2018, it was noted that proceedings under section 129 of the CGST Act are being initiated for every mistake in the documents mentioned in para 3 above. It was thus clarified that in case where a consignment of goods is accompanied by an invoice or any other specified document and not an e-way bill, proceedings under section 129 of the CGST Act may be initiated. Also, in case a consignment of goods is accompanied with an invoice or any other specified document and also an e-way bill, proceedings under section 129 of the CGST Act may not be initiated, inter alia, in the situations like spelling or typographic mistake etc. Taxpayers should however, be able to establish that such errors were only on account of reporting and not missing some substantial compliance part.

3. Rectification of procedural errors where no tax evasion is involved has been permitted by Courts

In GST era, in numerous cases, Courts have permitted rectification of errors where there are no effective demands arising after rectifications of such errors. Some of the important decisions are as under:

• In the case of Y. B. Constructions (P.) Ltd. V UOI [[2023] 148 taxmann.com 244 (Orissa)] Hon’ble high Court permitted the Petitioner to resubmit the corrected GSTR-1 for the F.Y. 2017-18 and 2018-19, and to enable the Petitioner to do so, a direction was issued to the revenue to receive such rectified GSTR-1 manually.

• Similarly, in the case of Deepa Traders v Principal Chief Commissioner of GST & Central Excise [2023] 149 taxmann.com 45 (Madras), Hon’ble Madras High Court allowed rectification of GSTR-1 even when petitioner has missed the deadline for rectification as petitioner has averred that the tax liability has been met in full based on the turnover reported and it is only the correction of the errors that is sought, to enable proper reconciliation of the petitioner's returns and annexures with those of the third parties.

• In the case of Shiva Jyoti Construction v Chairperson, CBIC [[2023] 147 taxmann.com 511 (Orissa)], Hon’ble Court held allowed Petitioner to resubmit the corrected Form-B2B under GSTR-1 for the aforementioned periods September, 2017 and March, 2018 as there will be no loss whatsoever caused to revenue.

• In the case of M/s. Mahalaxmi Infra Contract Ltd. v. Goods and Services Tax Council reported in 2022-VIL-735-JHR, the Court considered an identical issue and granted relief to the assessee while holding that the instant case does not present any additional tax impact, or loss of revenue for the State Exchequer and, in fact, such correction of relevant returns in case of the petitioner i.e., GSTR-1, GSTR-2A would allow the recipient to rightly avail the ITC against the tax paid under Tax Invoice issued by petitioner.

• In the case of Sun Dye Chem V. Assistant Commissioner (2021 (44) GSTL 358) reiterated in Pentacle Plant Machineries Pvt. Ltd. V. Office of the GST Council, New Delhi (2021 (52) GSTL 129) to the effect that those petitioners must be permitted the benefit of rectification of errors where there is no malafides attributed to the assessee. The errors committed are clearly inadvertant and, the rectification would, in fact, enable proper reporting of the turnover and input tax credit to enable claims to be made in an appropriate fasion by the petitioner and connected assesses.

• In the case of State of Mysore v. Mallick Hashim & Co., AlR 1972 SC 1449, the Hon’ble Supreme Court has held that no conditions could be imposed which destroy the right to a refund which is otherwise absolute.

• Hon’ble Supreme Court, in the case of CCE v. Home Ashok Leyland Ltd. [2007] 7 STT 354, has held that Rule 57A recognizes the right of the manufacturer to take credit for the specified duty paid on the inputs. whereas Rule 57E is a procedural provision. Rule 57E being procedural and classificatory would not affect the substantive rights of the manufacture of the specified final product to claim the Modvat credit for the duty paid on the inputs subsequent to the date of the receipt of those inputs.

• In the case of Tara Exports v. Union of India [2018] 98 taxmann.com 363 (Madras), it was held that GST is a new progressive levy and the due date contemplated under the laws to claim the transitional credit is procedural in nature. In view of the GST regime and the IT platform being new, it may not be justifiable to expect the users to back up digital evidences. The Court observed that even under the old taxation laws, it is a settled legal position that substantive input credits cannot be denied or altered on account of procedural grounds.

• Madras High Court, in the case of Hospira Health Care India (P.) Ltd. v. Development Commissioner [2016] 69 taxmann.com 18 (Madras), has held that a procedure should not run contrary to the substantive right in the policy. If the procedural norms are in conflict with the policy, then the policy will prevail and the procedural norms to the extent they are in conflict with the policy, are liable to be held bad in law.

• In the case of SK Impex v. Union of India [2020] 117 taxmann.com 256 (Gujarat), the assessee stated that mistake happened due to bona fide mistake on part of its accountant which was an inadvertent error, and it is eligible for eligible credit of ITC. Thus, in numerous other cases, the Courts have come to the rescue of the taxpayers saving them from huge liabilities arising on account of technical breaches. If the taxpayer has acted in a bonafide manner and has discharged his proper taxes, the technical or procedural errors cannot be held against such honest and compliant taxpayers. We hope that a proper Circular would be issued by the government to stop issuance of demands on account of procedural errors leading to frivolous litigations.