Madras HC Allows Conditional Restoration of GST Registration

GST is a transformational indirect tax reform introduced with the aim of streamlining the indirect tax system and reducing the cascading effects of the multiple taxes that were being applied on goods and services at the time. It replaced the complex web of indirect taxes levied by the Central and State Governments, allowing businesses seamless interstate trade, creating a common national market for them across the country. The government has made many amendments and revisions to the GST regulatory processes as per the evolving economic situation, aiming to make compliance easier for taxpayers. Despite these measures, many debates, and legal battles are continuing about GST compliance and regulatory requirements. In this context, the Madras High Court’s landmark ruling in favor of the taxpayer restoring their GST registration that was cancelled by the tax authorities speaks volumes about the integrity and fairness of the judiciary in our country. In this article, we discuss the facts of the case and matters related to it in detail. One important step in GST compliance for businesses operating in India is GST registration, which is mandatory for those with an annual turnover exceeding the specified threshold limit. By registering under GST, businesses can collect taxes on behalf of the government, claim input tax credit on purchases, and enjoy other benefits including authenticity and credibility, goodwill and trust of the government and their customers. Along with the benefits they have the duty to ensure compliance with GST laws, like remitting the tax collected and filing of returns accurately within the stipulated time. Non-compliance can lead to legal repercussions like cancellation of GST registration and other consequences. Cancellation of registration can deprive the businesses of the benefits of GST, so they try to avoid it. What are the reasons for the cancellation, and can they seek to revoke the cancellation? Let us discuss in detail:

Reasons for involuntary cancellation of GST registration

• Non-payment of taxes

The primary reason for involuntary cancellation of GST registration is not paying the collected taxes within the stipulated time and not maintaining proper records as required by the law.

• Non-filing of returns

Not filing or late filing of returns consistently for a longer period, can result in the tax authorities cancelling the GST registration of the taxpayers

• Low turnover

The turnover of some businesses may fall below the specified threshold level for registration, then the authorities may consider cancelling GST registration of the business.

• Death or closure

When the proprietor or owner expires, or the business is permanently closed, the GST registration may be closed, as the legal entity who obtained the registration does not exist.

• Migration to composition scheme

When the business opts for the composition scheme, the registration obtained for the regular scheme is cancelled. Businesses that do not wish to continue with GST, can apply for cancellation voluntarily. The reasons can be many like closure of operations, death or change of partner, restructuring of the company, etc.

Consequences of cancellation of GST registration

• Inability to collect GST
• Loss of input tax credit
• Interruption in interstate trade
• Compliance challenges
• Reduced profitability due to loss of ITC
• Operational challenges like pricing, supply chain and logistics
• Recovery of taxes causing additional financial strain
• Re-registration complexities like scrutiny
• Loss of credibility and trust of customers
• Difficulty in reestablishing the trust of customers
• Creditors and debtors will be affected
• Reduced competitiveness and increased costs
• Constrained growth opportunities
• Impact on supplies and customers
• Increased costs and cash flow challenges
• Risk of penalties due to non-compliance

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Surrender and Cancellation of Registration under GST

Background of the landmark case

The background of the landmark case of A R J Engineering Works vs Deputy Commissioner (ST) (Madras High Court) is as follows:

Petitioner’s argument

The petitioners, A R J Engineering Works appealed to the high court to revoke the cancellation of their GST registration by the tax authorities stating valid reasons for non-filing of returns on time. They stated ill-health as the reason for the delay in filing the returns within the stipulated date, leading to the cancellation of their GST registration. The petitioners argued that despite many requests for revocation of their registration cancellation, and appeal under section 107 of GST Act, the tax authorities dismissed their appeals on the grounds of being time-barred. Because of the cancellation they could not file the returns. Referring to a similar case at the Madras high court, the Suguna Cutpiece vs The Appellate Deputy Commissioner (ST) (GST) and others, dated 31.01.2022, they pleaded that the cancellation of registration under GST be revoked.

Respondent’s response

The Respondent represented by Mr. V. Prashanth Kiran, on behalf of the government, acknowledging the petitioner’s notice, referred to the conditional nature of the high court’s decision in the previous case of Suguna Cutpiece vs The Appellate Deputy Commissioner. They prayed that similar conditions be stipulated in the present case also.

Madras High Court’s decision

After due consideration of the merits of the case and the arguments of both sides, the high court decided to resolve the case as follows:  it decided to follow the precedent set by the previous case of Suguna Cutpiece vs The Appellate Deputy Commissioner and directed the GST authorities to revoke the cancellation of GST registration of A R J Engineering Works but with strict conditions for the restoration of the registration. The conditions were as follows:

• The petitioner must file the returns for the period prior to the cancellation of registration along with payment of the tax dues including interest, late fees for belated filing of returns within 45 days from the date of receiving the copy of the court order
• It is also clarified that such payment of tax, interest, fine or fee etc., must not be allowed to be adjusted from and out of any Input Tax Credit which may be lying unutilized or unclaimed with the petitioners
• Only the approved input tax credit will be allowed to be used for discharging future tax liability under the Act and Rules
• The petitioner must also pay GST and file the returns for the period after the cancellation of registration by declaring the correct value of the supplies.
• The eligible input tax credit will be allowed to be utilized only after scrutiny and approval by the respondents or any other competent authority
• After the petitioners pay the tax, penalty and upload the returns, the registration will stand revived forthwith.
• The respondents must take suitable steps by instructing the GST network, New Delhi to make suitable changes in the architecture of the GST Web portal so that the petitioner can file the returns and pay the tax, penalty and fine.
• The above exercise must be carried out by the respondents as per court order No. W.P.Nos.12785 & 12786 of 2024 in https://www.mhc.tn.gov.in/judis within thirty (30) days from the date of receipt of the copy of this order
• The GST registration must be restored subject to fulfilling the above conditions.

Then the case W.P.Nos.12785 & 12786 of 2024 were disposed of on the above terms at no costs. Consequently, the connected petitions were also closed.

Read more

Reactivating Cancelled GST Registration

Key highlights of the court’s ruling

• Judicial review and decision

The Madras High Court upheld the principle of judicial review regarding the cancellation of GST registration. It emphasized the importance of reasonable, justifiable and fair decisions by the tax authorities that are compliant with the GST laws

• Conditional restoration

The court set the framework for the conditional restoration of cancelled GST registration by outlining specific conditions including payment of GST dues, filing up to date returns, and compliance with regulatory requirements within the specified timeline.

• Procedural safeguards

The court stressed the importance of procedural safeguards in the cancellation and restoration process. It instructed the tax authorities to provide adequate opportunity for businesses to rectify errors and comply with the requirements of GST before cancelling their registration.

• Impact on business operations

The court recognized the impact of registration cancellation on business operations and highlighted the necessity of balancing regulatory enforcement with its effect on economic activity. It stressed the importance of maintaining a conducive environment for business growth along with compliance.

• Setting a precedent

The decision of the court granting conditional restoration of GST registration has set a precedent for future cases and interpretations concerning GST registration. It emphasizes the role of the judiciary in ensuring fair and equitable application of tax laws while protecting the interests of businesses.

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Cancellation or Suspension & Revocation of GST

Legal and economic implications

The Madras High Court’s decision in the case of A R J Engineering Works vs Deputy Commissioner has broader legal and economic implications like:

• The cancellation of GST registration can have serious implications for businesses especially small traders. Supporting the survival and growth of industries especially SMEs is crucial for the economic growth of our country. The court ruling in favor of the business is a positive step in protecting industries and businesses from the complex regulatory procedures.
• Before cancelling the registration, the businesses should be given the opportunity to rectify their errors through warnings, fines, temporary suspensions. Cancellation must be the last recourse as industries are crucial for job creation and contribution to GDP of the country.
• Simpler compliance processes and adequate support from the tax authorities is crucial for businesses for the smooth conduct of their business which in turn can garner greater participation of firms in the formal economy.
• By encouraging greater participation of businesses in GST, tax authorities can monitor financial transactions and check tax evasions. Cancellation only reduces the participants and discourages new entrants from registering in GST.
• Cancellation can cause disruption in business operations and affect productivity of businesses which in turn adversely Impact the country’s economy.
• Without the provision to claim ITC, businesses face considerable financial strain as their tax liability increases. Moreover, the interest, late fees and penalties add to their problems
• Due to the legal repercussions of operating without GST registration, the businesses face complexities that can threaten their business.
• Our constitution guarantees the right to work and run a business to all the citizens. So they should not be deprived of this right by cancelling their registration. The government will also lose the tax revenue and the goals of GST will be defeated if renewal of registration is not allowed
• A fair and supportive approach must be adopted by the tax authorities so that businesses can thrive in a conducive atmosphere that supports progress and economic growth.

Conclusion

The Madras High Court’s decision to allow conditional restoration of GST registration in the case of  A R J Engineering Works vs Deputy Commissioner marks significant landmark India’s indirect tax landscape. The ruling emphasizes the importance of creating a balance between regulatory enforcement and the operational needs of businesses. The decision of the high court is instrumental in influencing policy decisions on GST reforms in the country. Businesses often face cancellation due to non-compliance, failure to file returns, or other regulatory lapses. Such cancellations can have severe implications, including the inability to issue tax invoices, loss of input tax credits, and legal repercussions.  As businesses navigate the complexities of GST compliance, this ruling provides them a lifeline of fairness and justice and protection of their needs. The ruling has brought to light the judiciary’s role in upholding fairness and transparency in tax administration, setting precedent for future reference in legal disputes about regulatory compliance in GST.

Frequently asked questions

1. How to revoke the cancellation of GST registration?

Answer: The registered person can apply for revocation of registration cancellation in form GST-REG-21, when the registration has been cancelled suo moto by the proper officer.

2. When is revocation of GST registration cancellation applicable?

Answer: A taxpayer can apply for revocation of GST registration cancellation when the tax officer has cancelled the registration on his own motion. The taxpayer can then apply for revocation of cancellation within thirty days from the date of the cancellation order.

3. When is the GST registration of a taxpayer suspended?

Answer: The GST registration of a taxpayer can be suspended by a proper officer if he has reason to believe that the cancellation of registration is necessary. After reasonable notice given to the taxpayer the officer can suspend the taxpayer’s registration. Also When the tax authorities observe significant differences in the information contained in GSTR-3B and GSTR-2A, B and the taxpayer fails to explain or clarify the anomalies, the authorities can suspend the registration.

4. What is the time limit for applying for revocation of cancellation of GST registration?

Answer: The taxpayer must apply for revocation of cancellation of GST registration within 30 days of the date of receipt of order of cancellation.

5. If the taxpayer has opted to cancel his GST registration voluntarily, can he apply for revocation of cancellation of registration?

Answer: The option to revoke the cancelled registration is only available in cases where the officer has cancelled the registration. This facility is not available for taxpayers who have voluntarily cancelled their registration.