Mismatch in tax liabilities - No longer a factual concern

Krishan Arora,
Sachin Sharma,
Sahil Gera
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It is a well-known fact that the principles of natural justice have always been a matter of grave concern in any taxation proceedings, be it proceedings under Vat Act, Income Tax Act, Stamp Act, or any other Act. Adherence to Principles of Natural Justice is the very soul of administration of justice. Still, there are voluminous cases pending at various level of adjudication under different laws revolving around ignorance of providing an opportunity of being heard to the aggrieved.

Rule 21A of Central Goods and Service Tax (CGST) rules[i] has been in the buzz since its introduction, getting criticism over ignorance of principal of natural justice. The said rule has enriched proper officers with the power to suspend the GST registration of any taxpayer without any prior notice or granting opportunity of being heard in certain circumstances which inter alia includes mismatch in GSTR 1 & GSTR 3B.

While the taxpayers were still in dilemma, the government introduced section 114 of Finance Act, 2021[ii] widening the powers available to officers for initiating recovery proceeding without issuance of show cause notice (SCN) in case of mismatch between GSTR 1 and GSTR 3B.

Legal provision and interpretation

Vide Section 114 of the Finance Act, 2021ii, an explanation was inserted to section 75(12) of the Central Goods and Services Tax Act, 2017 iii to cover tax liability declared in GSTR 1 under the ambit of “self-assessed tax”.

Prior to insertion of said explanation, the aforesaid Section simply states that recovery proceedings will be initiated without issuance of Show Cause Notice (SCN) in case if any amount of ‘self-assessed tax’ as furnished in GSTR 3B remains unpaid. In other words, earlier the tax liability declared under section 37 (GSTR-1) was not covered as self-assessed tax.

The newly inserted explanation read as follows:

For the purposes of this sub-section, the expression “self-assessed tax" shall include the tax payable in respect of details of outward supplies furnished under section 37, but not included in the return furnished under section 39

Accordingly, the explanation has widened the scope of the term ‘self-assessed tax’ by including outward supplies furnished in GSTR-1, but the tax on which has not been paid through Form GSTR-3B.

Government’s standpoint

The intention of the exchequers behind bringing such an amendment, as explained through a series of tweet by Central Board of Indirect Taxes (CBIC)[iii], is to impart payment discipline in the system and to facilitate recipient of supply of goods or services to avail Input Tax Credit (ITC) in a timely manner. As we all know one of the conditions to avail ITC on inward supplies of goods or services is that the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of ITC. While putting such a check by a registered person on their supplier of goods or services was practically impossible, such an amendment would keep a check on the suppliers that they discharge entire tax on supplies they declare in GSTR 1, thereby putting a curb on issue of fake invoices for transferring ITC. This amendment indirectly addresses the concerns of recipients that they won’t be able to avail ITC if the supplier does not pay due tax on the said supply. Moreover, an additional feature has been added on the GST portal which provides summary of percentage of liability paid in GSTR 3B as compared to GSTR 1, basis which the purchaser can search any GSTIN and verify whether the supplier has paid tax in GSTR 3B, as declared in GSTR 1. This new feature would save genuine purchaser from bogus supplier who declares invoices in GSTR 1 without discharging tax liability on the same through GSTR 3B.

Taxpayer’s perspective

If we look at the amendment through the lenses of a compliant and genuine taxpayer, it appears that such stringent provisions have put the businesses under tremendous pressure without giving any opportunity of being heard. It can’t be denied that there may be genuine reasons for mismatches between GSTR 1 and GSTR 3B. For instance:

  • A registered person may have made a typographical error or may have wrongly reported any detail in GSTR-1 or GSTR-3B which has been rectified in subsequent month’s return
  • There may also be cases where supply could not be declared by the registered person in GSTR-1 of an earlier tax period, though the tax on the same was paid by correctly reporting the said supply in GSTR-3B. The details of such supply would have been reported subsequently thereby creating mismatch in GSTR 1 and GSTR 3B for subsequent month’s return.

In all such cases, a taxpayer might get burdened with numerous communications to pay the amount short paid/ unpaid or to explain the reasons for differences which in some cases might be getting nullified over a period of time.

Way forward

Provision for recovery of short payment of tax liability under section 75(12) coupled with suspension of registration under rule 21A of CGST rules has made it imperative for a taxpayer to be more cautious and exercise greater due diligence during monthly compliances.

In order to make it effective, CBIC has also issued guidelines[iv] which provides for a communication that may be sent by proper officer to taxpayers to explain the reasons for such mismatches ‘within reasonable time’. These guidelines, though appearing to be a good move, need to be implemented in true spirit by proper officers across states. However, the words ‘may’, ‘reasonable time’ used in the guidelines make the entire process more inclined towards the discretion of proper officer rather than showcasing good intent of the exchequer.

Accordingly, the CBIC should come out with proper procedures laying down the selection criteria such as, frequency of mismatches and the quantum involved, beyond which the case would be considered for sending communication. Needless to mention, the taxpayers should conduct periodic review of their compliances under GST to avoid such communications.