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October 20, 2020

Show Cause Notice issued for GST cancellation cannot be vague – Gujarat HC

by CA Shivam Jaiswal in Legal Court Judgement

Show Cause Notice issued for GST cancellation cannot be vague – Gujarat HC

Registration of an entity is the initial basic step one has to follow to carry on supply or any other GST compliances. While one may find the registration process unnecessary and complicated, it is followed by a number of advantages, such as legal recognition as supplier of goods/services, availment of ITC, legal authorisation to collect tax from customers etc.

The registration granted under GST can be cancelled for specified reasons. The cancellation can either be initiated by the department on their own motion or the registered person can apply for cancellation of their registration. In case of death of registered person, the legal heirs can apply for cancellation. In case the registration has been cancelled by the department there is a provision for revocation of the cancellation.

The GST law provides for two scenarios where cancellation of registration can take place:

1. Taxable person no more requires the registration and wants to voluntarily cancel it

2. When the proper officer considers the registration liable for cancellation in view of certain specified defaults:

  • registered person has contravened such provisions of the Act or the rules made thereunder as may be prescribed
  • a person paying tax under composition scheme has not furnished returns for 3 consecutive tax periods
  • a person, (other than a person under composition levy), has not furnished returns for a continuous 6 months
  • any person who has taken voluntary registration under of section 25(3) has not commenced business within 6 months from the date of registration
  • registration has been obtained by means of fraud, wilful misstatement or suppression of facts

What is the procedure for cancellation of registration?

  • In the event, the Superintendent of Central Tax has reasons to believe that the registration of a person is liable to be cancelled, a notice to such person in FORM GST REG-17, requiring him to show cause, within a period of 7 working days from the date of the service of such notice, as to why his registration shall not be cancelled is issued.
  • The reply to the show cause notice issued has to be furnished by the registered person in FORM REG-18 within a period of seven working days.
  • In case the reply to the show cause notice is found to be satisfactory, the Superintendent of Central Tax will drop the proceedings and pass an order in FORM GST REG –20.
  • However, when the person who has submitted an application for cancellation of his registration is no longer liable to be registered or his registration is liable to be cancelled, the Superintendent of Central Tax will issue an order in FORM GST REG-19, within a period of 30 days from the date of application or from the date of the reply to the show cause issued, cancel the registration, with effect from a date to be determined by him and notify the taxable person, directing him to pay arrears of any tax, interest or penalty
  • The registered person whose registration is cancelled shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock or capital goods or plant and machinery on the day immediately preceding the date of such cancellation or the output tax payable on such goods, whichever is higher.
  • In case of capital goods or plant and machinery, the taxable person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery, reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery under section 15, whichever is higher
  • The cancellation of registration shall not affect the liability of the person to pay tax and other dues for any period prior to the date of cancellation whether or not such tax and other dues are determined before or after the date of cancellation.

Let us refer to the case of Mahadev Trading Company Vs Union of India (Gujarat High Court), where the main issue under consideration was whether a vague show cause notice issued for cancellation of registration is sustainable or not?

Observations of the High Court

HC directed for the appearance of the signatory of the show cause notice and upon perusal of the show cause notice indicated that to such show cause notice no response could be given by any assessee.

The show cause notice was as vague as possible and did not refer to any particular facts much less point out so as to enable the noticee to give his reply.

What was mentioned in the show cause notice?

It was mentioned in the Show Cause Notice for Cancellation of Registration that the Superintendent noticed on the basis of information which has came to his/her notice, that the registration was liable to be cancelled in case, Registration was obtained by means of fraud, wilful misstatement or suppression of facts.

The petitioner was hereby directed to furnish a reply to the notice within seven working days from the date of service of this notice.

If the petitioner failed to furnish a reply within the stipulated date or failed to appear for personal hearing on the appointed date and time, the case would be decided ex parte on the basis of available records and on merits.

Submissions by Petitioner

According to the petitioner, without fixing a date for hearing and without waiting for any reply to be filed by the petitioner, the cancellation order was passed whereby registration of the petitioners with GST department was cancelled.

Although the cancellation order referred to a reply submitted by the petitioner and also about personal hearing, but according to the petitioner neither he had submitted any reply nor was afforded any opportunity of hearing.

Submissions by Respondent

The respondent explained that some discrepancy occurred on account of some technical glitch in the system (on-line portal).

Conclusion by the High Court

The High Court did not enter into the merits of the impugned order as they were convinced that the show cause notice itself could not be sustained for the reasons already recorded above. Therefore, the cancellation of registration resulting from the said show-cause notice also could not be sustained.

Therefore, the impugned show cause notice and the impugned cancellation order were hereby quashed.

In simple words, if the show cause notice for cancellation of registration is vague then the order of cancellation cannot be sustained. The taxpayer should also be given proper opportunity to be heard before their registration is cancelled.

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