Whether Issuance of Pre-SCN Intimation is Mandatory or Optional

It is natural for taxpayers to panic when they receive any notice from the tax authorities. And when it is a show cause notice, it is even more stressful, because the issuance of a show cause notice implies that the tax authorities have found some mistake or wrongdoing in regulatory compliance matters and want an explanation for it.  Understanding the notices and responding to them promptly and accurately is crucial, as ignoring or not responding to them can lead to future legal proceedings. The First Report of the Tax Administration Reforms Commission highlighted the need for a pre-show cause notice to reduce the burden of unnecessary litigation before finally issuing the show cause notice. They felt that this could prevent unwanted disputes that take up valuable time of the tax department. Based on these recommendations, CBIC issued a circular December 21, 2015, making the ‘Pre-notice Consultation’ mandatory in all cases involving a demand of INR 50 lakhs or more. The aim of pre-show cause notice (SCN) is to reduce the burden of unnecessary litigation and promote voluntary compliance. Here, we discuss in detail the essentials of pre-SCN intimation. So read on. But first, let us discuss what is show cause notice (SCN) is and why it is a cause of concern for the taxpayers.

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What is a show cause notice (SCN)?

The tax authorities issue a show cause notice (SCN), to a taxpayer to notify them of a default they have identified, especially non-compliance with GST law. They are sent to the taxpayer seeking a satisfactory explanation or justification for any default discovered or failing to comply with the regulatory processes. The tax authorities may also seek some additional information from the taxpayer. This gives the taxpayers an opportunity to provide an explanation along with proof and avoid further legal complications. These notices are issued by GSTN to taxpayers for non-payment of tax, erroneous refund, to justify their claim of input tax credit, or any other breach of GST law. This is an important aspect of the GST regulation to ensure strict compliance and curb tax evasion. The show cause notice is the last opportunity for the taxpayer to prove his innocence and if he fails to do so, the tax authorities can take legal action, resulting in fines and other consequences. It is crucial for the taxpayer to respond to the SCN within the specified time, as it can significantly impact his tax assessment. show cause notice can be issued under GST for the following reasons:

Issue of SCN under Section 73(1) and Section 74(1)

If the taxpayer has delayed payment of or not paid the tax which is payable under law, has availed refund erroneously, or utilized input tax credit wrongly, a proper officer can issue a show cause notice under section 73(1) and 74(1). When the demand is not based on the willful suppression of facts, Section 73 is applicable, and for willfully suppressing or misleading facts or by fraud, Section 74 is applicable. In the show cause notice, the officer specifies, interest and penalty if applicable and other relevant statutory provisions, beside tax, refund or ITC demand. The procedural formalities for the issuance of show cause notice under these sections are stipulated in Rule 142 of CGST Rules, 2017. As per sub rule 1(A), before serving the show cause notice, the proper officer must communicate to the taxpayer the details of any tax, interest and penalty as confirmed by the officer in part A of form GST DRC-01A. Further under sub-rule 1(A), there is no amount restriction for the issue of pre-SCN. It is applicable to all show cause notices, irrespective of the amount of demand. First, let us know more about the show cause notice:

Show cause notice when there is no fraud

Section 73(1) of the CGST Act provides for issue of show cause notice for reasons other than fraud or intention to evade tax. They are:

• GST is short levied or not levied
• GST is short paid or not paid
• Error in refund claim
• Utilization of inapplicable input tax credit

The proper officer must issue the SCN within 3 months before the time limit. The maximum time limit for the order of payment is 3 years from the due date of filing the annual return for the year to which the amount relates. The officer can also issue a statement subsequently for any unpaid tax, wrong refund or wrong ITC for the periods not covered in the SCN. If the taxpayer pays all the dues within 30 days from the date of the notice, penalty is not applicable, and all proceedings will be closed. If the taxes are not paid within the specified time, then penalty at 10% of tax, subject to a minimum of INR 10,000, is levied.

Show cause notice when there is fraud

Section 74(1) of the CGST Act specifies the issue of SCN when there is willful evasion of tax. It applies to cases of tax evasion due to fraud, willful misstatement, suppression of facts that result in:

• Unpaid, short paid tax
• Wrong refund
• Wrongfully availing or utilizing of ITC

The proper officer must issue the SCN within 6 months before the time limit. The time limit for this is 5 years from the due date of filing of annual return for the year to which the amount relates. He can also issue a statement for taxes not paid, wrong refundsor wrongly availed ITC for the periods not covered in the SCN. If the taxpayer pays the tax along with interest at 15% penalty based on either his or the officer’s calculations before the notice or statement is issued, and informs the department in writing, then the notice will not be issued. But if there is a shortage, a notice for the balance amount is issued. If the taxpayer pays all his dues with 25% penalty within 30 days from the date of the notice, then all proceedings will be closed.

What is GST DRC-01A?

Form GST DRC-01A, called ‘Intimation of tax ascertained payable’, is a formal intimation by the GST informing the taxpayer that the department has ascertained the amount of tax, interest, and penalty under Section 73(1) or 74(1) of the CGST for which they are liable to pay. It is issued before the issuance of the show cause notice, giving them an opportunity to respond to the proposed liability before the notice is served. The taxpayer must respond to the intimation by using the second part, which is part B of Form GST DRC-01A, to accept or reject the ascertainment of the amount payable.

Read more:

FORM GST DRC-01A: Intimation of Tax Ascertained Payable

Is Form GST DRC-01A a pre-Show Cause Notice?

The fact that GST DRC-01A and pre-show cause notice are the same was emphasized in a case in Allahabad High Court in Nanhey Mal Munna Lal vs. State of UP. The HC clarified that GST DRC-01A is a ‘pre-show cause notice’ issued with the intention of providing an opportunity to the assesses to resolve the dispute either by depositing the amount of tax and interest demanded or by disagreeing with the ascertainment, which can result in the show cause notice under Section 73(1) or Section 74(1) being issued. Thus, it appears that sections 73(1) and 74(1), read with Rule 142(1A), provide the taxpayer a pre-show cause notice stage, which will benefit both the assesses and the department as it will reduce litigation and uphold the principles of natural justice. The case of M/S Nanhey Mal Munna Lal vs State of U.P. And 4 Others at Allahabad High Court confirmed that Form GST DRC-01A is a pre-Show Cause Notice.

Facts of the case

In the case of M/S Nanhey Mal Munna Lal vs State of UP and 4 Others at Allahabad High Court, the department contended that they were not required to send a statement in Part-A of GST DRC-01A under Rule 142(1A) of the CGST Rules in view of the amendment in Rule 142(1A) with effect from October 15th, 2020. The High Court, consisting of Justice Surya Prakash Kesarwani and Justice Jayant Banerji, held that upon perusal of Form GST DRC-01A under Rule 142(1A) of the CGST Rules, it indicated that the form  is a pre-show cause notice intimation with reference to sections 73(1)/(5) or 74(1)/(5) to the taxpayer to the assesses so that they can either deposit the amount of tax and interest or disagree with the demand that may lead to the issuance of show cause notice under sections 73(1) or 74(1) as the case may be. Such an intimation in Form GST DRC-01A under Rule 142(1A) provides the taxpayer with an opportunity to resolve the dispute by paying the tax and interest or disagree and face the adjudication proceedings under the Act. Thus, prima facie, it appears that Section 73(1) or 74(1), read with Rule 142(1A), intends to offer the assesses a pre-SCN stage and ultimately benefit both the assesses and the department by reducing the litigation proceedings and upholding the principles of natural justice at the pre-show cause notice stage, the bench said.

Pre-show cause notice issuance amendment

With effect from October 15, 2020, the amendment passed to Rule 142 of CGST Rules, 2017, made issuance of pre-SCN optional. Before the amendment, it was mandatory for the tax authorities to issue the pre-show cause notice. After the amendment, it can be issued at the discretion of the tax authorities. The pre-amendment rule stated that ‘the proper officer shall’ communicate tax details before issuing the show cause notice. The amendment replaced the word ‘shall’ with ‘may’ making the issuance of the intimation discretionary. But another aspect of the rule came up in the case of M/s. New Morning Star Travels vs. DC (ST) Andhra Pradesh High Court, in which an important factor of pre-show cause notice issuance got clarified.

Facts of the case

M/s. New Morning Star Travels (petitioner) challenged the combined assessment order for the period from July 1, 2017 to March 31, 2021, levying tax, interest and penalty. They stated that the details of the above demand were not communicated to the petitioner in GST DRC 01A before issuing the show cause notice (SCN) as required in Rule 142(1A) of the CGST Rules. They also stated that, as a major part of the tax demanded pertained to the pre-amendment period, it was mandatory for the department to issue the pre-SCN in accordance with the rule prior to the amendment. Because of this, the petitioner was deprived of the valuable opportunity to submit his response before the issuance of the show cause notice. Therefore, the petitioner submitted that the order was not sustainable under law. The department, as respondents, argued that some part of the period pertained to post-amendment, and as per the amendment, it was discretionary to issue the GST DRC 01A. Therefore, the order cannot be validated.

Andhra Pradesh HC observations and decision

The Andhra Pradesh High Court observed that GST DRC 01A was a mandatory requirement prior to amendment of Rule 142 of CGST Rules, and the department was required to issue the pre-SCN before issuing the show cause notice, as most of the tax period is related to the pre-amendment period. As the department did not issue the GST DRC 01A, and in view of the ambiguity, the benefit should be given to the taxpayer. Therefore, HC set aside the impugned order and directed the department to issue a fresh intimation under GST DRC 01A. This judgement settled the issue that has caused confusion for a long time. If the tax demand pertains to the pre-amendment period, then the issuance of pre-SCN is mandatory, while if the demand pertains to the post-amendment period, it is discretionary for the proper officer to issue the pre-SCN. Taxpayers can take advantage of this judgment in future cases related to the issuance of show cause notices.

Conclusion

The aim of the pre-show cause notice was to reduce the burden of litigation for both the taxpayers and the tax authorities. But the amendment to Rule 142 made the issuance of pre-SCN discretionary for the tax officer. This transition from mandatory to optional is significant but also causes a lot of confusion to the taxpayers about regulatory compliance and legal consequences. The Andhra Pradesh High Court judgement on the M/s. New Morning Star Travels case in favor of the taxpayer is a positive move. It is also important that businesses understand the procedures, laws, and amendments thoroughly to be compliant and avoid legal complications.

Frequently asked questions

1. What is Rule 142(1A) of the CGST Rules?

Answer: As per Rule 142(1A), the tax officer must mandatorily issue the intimation in Form GST DRC 01A with details of tax, interest, and penalty ascertained by them, failing which the show cause notice under Section 73(1) or 74(1) would be issued.

2. What are the changes after the amendment to Rule 142(1A) of the CGST Rules?

Answer: After the amendment to Rule 142(1A) of the CGST Rules, it is optional for the proper officer to issue the intimation in GST DRC-01A.

3. How do I reply to Form GST DRC-01A?

Answer: After you receive the intimation in Form GST DRC-01A, you must submit your reply in Form GST DRC-01A, Part B in the GST portal, if you have made a part payment of the ascertained liability or that the liability is not accepted by him.

4. What happens if you do not file the reply to Form GST DRC-01A?

Answer: If the taxpayer does not file the reply to Form GST DRC-01, then he will receive the show cause notice as to why the department should not start judicial proceedings against him for the offences mentioned in the pre-SCN.

5. What is a show cause notice?

Answer:  The essential principle of jurisdiction is that the guilty must be given a chance to be heard. A show cause notice is a document that allows the taxpayer to explain why a specific course of action should not be taken against him with respect to GST.