All You Need to Know About Inspection Under GST: Provisions, Circumstances, and Recent Case Laws

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Goods and Service Tax has been rolled out in July 2017, and trade & industry are yet to settle down due to the new legislation as well as frequent changes in the law. The Government has given enough legroom for the taxpayers to adapt and implement the same. As a result of it, there is rampant misuse of the provisions of the GST and this is resulting in a lot of revenue leakage to the department. We could see every day or the second day on the issue of fake invoices are issued or input tax credit availed wrongly / frequently. Recently we have seen new articles also that the department is using analytics for tracking such errant taxpayers and the department has held back about Rs40,000 Crores of input tax credit relating to about 2,000 taxpayers. With the rise of such cases, the department has no choice but to conduct inspections, search and seizures wherever required. Let’s examine the provisions of all these as per GST and also recent case laws relating to the same.

Read More: Recent Amendents in GST | Important Updates and Implications

The words “Inspection,” “Search,” & “Seizure” have not been defined in the GST Acts. GST Flyer on defined Inspection as “a softer provision than search which enables officers to access any place of business or of a person engaged in transporting goods or who is an owner or an operator of a warehouse or godown.”

Who can conduct an inspection?

Any officer not below the rank of Joint Commissioner can conduct an inspection or any officer authorized by him or above can conduct the inspection. Who can conduct inspection has been estated in the Circular No 3/2017.

Under which circumstances can inspection be conducted?

Inspection can be conducted by an officer when the officer has reasons to believe that

  1.    The taxable person has  

         a) Suppressed transactions relating to the supply of good or services or both

         b)  Suppressed information related to the closing stock

         c) claimed input tax credit above his entitlement

          d) contravened any provisions of the Act

      2.   A Transporter or owner or operator or warehouse/godown or any other place

        a)  Storing goods on which taxes have not been paid

        b)  Kept his books of accounts or goods which can cause tax evasion

 Reasons to believe

Reasons to believe are not explicitly defined in the GST Act, and in such cases, we have to rely on the generic meaning or borrow from the other Acts if necessary.

Reasons to believe is defined in Section 26 of the Indian Penal Code, “A  person is said to have “reason to believe” a thing if he has sufficient cause to believe that thing but not otherwise.”

From the above, it is clear that Reasons to believe is based on facts rather on interpretation. Facts can be based on the return filing data, data collected from the other agencies or data/input received from the intelligence wing or enforcement directorate or any other sources. It is less subjective and can differ from person to person.

Is it necessary for the concerned officer to disclose the Reasons to believe during or at the time of inspection or before the inspection?

GST Act is silent on the same.

In which locations or places inspection can be carried out?

Inspection can be carried out by the proper officer in any place of business

  • of the taxpayer or
  • any person engaged in the business of transportation of goods or
  • the owner or the operator the warehouse or godown or any other place.

In which form authorization has to be given by the concerned officer for carrying out inspection?

The authorization has to be given in Form GST INS-01

Case Law

In one of the recent judgments of the Allahabad High Court has held that “Reason to Believe” is mandatory for any search or seizure under GST.

Rimjhim Ispat Limited Vs. the State of Uttar Pradesh

“it is essential that the officer authorizing the search should have ‘reasons to believe.’ The principles that are culled out from the catena of decisions referred above is that the ‘reasons to believe’ should exist and should be based on reasonable material and should not be fanciful or arbitrary. It is also established that this Court in exercise of its powers under Article 226 cannot go into the sufficiency of the reasons and should not sit as an appellate court over the reasons recorded. It is also well established that the reasons may or may not be communicated to the assessee but the same should exist on record,” the Court said.

Inspection can be carried out by the department if they have a reason to believe that the taxpayer has not paid the taxes or availed more input tax credit than he is eligible. In the recent past, we have seen multiple cases where the taxpayer has issued fake invoices or claimed more input tax credit than the amount reflected in GSTR – 2A. As of now, they are issuing notices and asking the taxpayers to rectify the same but going forward, and they may carry out inspection. During the inspection, if any material evidence if found, then it can lead to seizure of the goods or issue of notices under Section 74 of the CGST Act. The enforcement has picked up and it is the right time for us to rectify the past misdeeds if any or educate the taxpayers as professional and avoid litigation which costs a lot of time and effort for all the parties involved. 


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