Indirect Tax Updates – March 2022

Goods and Services Tax

Jharkhand High Court quashes Show Cause Notice due to insufficiency of details of contravention; holds summary of Show Cause Notice in Form DRC-01 cannot substitute requirement of a proper Show Cause Notice

The Jharkhand High Court in NKAS Services Pvt. Ltd. v State of Jharkhand has quashed the Show Cause Notice issued under Section 73 of Jharkhand Goods and Services Tax Act, 2017 (JGST Act) and summary of Show Cause Notice issued to the assessee in Form DRC-01 under Rule 142(1)(a) of the Jharkhand Goods and Services Tax Rules, 2017 (JGST Rules) on the ground that they did not fulfil the ingredients of a proper Show Cause Notice and thus, amounted to violation of principles of natural justice.

The High Court observed that the Show Cause Notice was issued without stating any contravention committed by the assessee. Even Form DRC-01 did not disclose the complete material basis for the tax demand. Further, the High Court noted that while Form DRC-01 did not mention or indicate the contravention by the Petitioner, even otherwise a summary of Show Cause Notice in Form DRC-01 could not have substituted the requirement of a proper Show Cause Notice which needs to specify the grounds for proceeding against a person for imposition of tax, interest or penalty.

This decision is important as under the GST regime, the tax department has been proposing to raise tax demand without mentioning the details of violation committed by the taxpayers in the Show Cause Notice. The tax department has been briefly indicating the grounds for proposing to raise tax demands in summary Form DRC-01. However, as per the judgment, this is not sufficient as it does not provide a material basis to the assessee to defend itself.

Input tax credit can be blocked only when there is balance in Electronic Credit Ledger; blocking future credit that is yet to be availed through a negative balance is not possible

The Gujarat High Court in Samay Alloy v State of Gujarat has held that under Rule 86A of the Central Goods and Services Tax Rules, 2017 (CGST Rules), the input tax credit (ITC) can be blocked only when credit is available in Electronic Credit Ledger (ECL) and that under this rule, there is no power with the authorities to negatively block credit to be availed in future.

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