[Opinion] Mandatory 20% Pre-Deposit in Absence of Gst Tribunal: Unjust Burden on Assessee?

Since its inception in 2017, the Goods and Services Tax (“GST“) law in India has undergone significant changes, aimed at streamlining tax administration and compliance. However, the delay in establishing the Goods and Services Tax Appellate Tribunal (“GSTAT“) has led to various challenges, particularly concerning recovery proceedings initiated by GST authorities before the expiration of the limitation period for filing appeals.

As per Section 112 of the Central Goods and Services Tax Act, 2017 (“CGST Act“), taxpayers have the right to file an appeal before the GSTAT against orders passed by the appellate authority within the time limit of three months from the date of communication of the order. The provision provides for payment of 20% of the tax amount in dispute for filing of the appeal. The recovery proceedings for the balance amount are deemed to be stayed on payment of such pre-deposit. However, since the GSTAT is not functional till date, there have been instances where the department has initiated recovery of confirmed dues from the assessee, in absence of appeal being filed.

The Government had issued the CGST (Ninth Removal of Difficulties) Order, 2019 dated 03.12.2019, wherein it was stated that an appeal to GSTAT can be filed within three months from the date of communication of the order or the date on which the President or the State President, as the case may be, of the Appellate Tribunal after its constitution under Section 109, enters office, whichever is later.

On 06.05.2024, Justice (Retd.) Sanjay Kumar Mishra took oath as the President of the GSTAT. Therefore, in terms of the aforesaid Removal of Difficulties Order, the limitation period to file appeal before the GSTAT would expire on 06.08.2024. However, the GSTAT is proposed to be constituted w.e.f. 01.09.2024. The Finance Bill, 2024 has sought to overcome the issue by amending Section 112 of the CGST Act. As per the proposed amendment, w.e.f. 01.08.2024, the limitation period for filing appeals shall be three months from the date of communication of order or the date, as may be notified by the Government, on the recommendations of the GST Council, whichever is later.

Thus, the time limit to file appeals against orders already passed by the appellate authorities will commence on the date notified by the Government.

Meanwhile, the CBIC has issued Circular No.224/18/2024-GST dated 11.07.2024(“Circular“), which lays down the procedure for payment of an amount equal to the pre-deposit amount to obtain stay against recovery proceedings by the Department. The Circular states that a taxpayer who wishes to file appeal against the appellate authority’s order, must pay an amount equivalent to the 20% of the disputed tax amount and file an undertaking with the jurisdictional proper officer stating their intention to file an appeal before the GSTAT. The Circular has clarified that on doing so, the recovery proceedings for the balance amount will stand stayed as per Section 112(9) of the CGST Act. The Circular further states that if an assessee fails to make payment of such amount or does not provide the undertaking to the proper officer, it will be presumed that the taxpayer is not willing to file appeal against the order of the appellate authority. In such cases, it has been clarified that recovery proceedings can be initiated in accordance with relevant provisions of the CGST Act.

It appears that this Circular is going beyond the provisions of Section 112 of the CGST Act, in as much as it is making it mandatory to pay pre-deposit even before the limitation period for filing an appeal has started. This is further substantiated by the clarification in the Circular that the amount deposited by the taxpayer will be adjusted against the amount of pre-deposit required to be deposited at the time of filing appeal before the GSTAT. It is evident that the Circular confers unfettered power to the department to initiate recovery proceedings against taxpayers on non-payment of pre-deposit when the limitation period for filing appeal under Section 112 has not even begun.

In a landmark ruling, the Bombay High Court in the case of UTI Mutual Fund v. ITO, has observed that recovery proceedings cannot be initiated pending the expiry of the time limit for filing an appeal.

At this juncture, reference is made to the erstwhile Central Excise regime, where a circular was issued for recovery of confirmed demands during the pendency of stay hearings. The validity of this circular was challenged before several High Courts. The Hon’ble Punjab and Haryana (“P&H”) High Court in the case of PML Industries Ltd. v. CCE, has held that the condition of recovery where no stay is granted within 30 days of filing the stay application is illegal, arbitrary, unjustified and was consequently set aside.

It was held by the P&H High court that the statutory right of appeal or of consideration of an application for pre-deposit cannot be frustrated administratively. The Court observed that the Revenue cannot take away a right which has been conferred by statute only for the reason that the application for waiver of pre-deposit could not be disposed of within 30 days. It was held that the Revenue cannot encroach upon the right of due consideration by the Appellate Authority on the strength of a circular. This decision was subsequently affirmed by the Hon’ble Supreme Court.

In the GST regime as well, the requirement to pay pre-deposit arises at the time of filing of the appeal. Since the GSTAT is not constituted yet, the Finance Bill 2024 has proposed to amend section 112 of the CGST Act, to state that the limitation period shall expire after three months from a date to be notified or date of communication of the order, whichever is later. The Circular, though introduced as a trade facilitation measure, is forcing the assessee to make payment of pre-deposit at a time when it is practically not possible to file an appeal before the GSTAT.

It is pertinent to note that the provisions for recovery provided under Section 78 of CGST Act, also align with the limitation period of 3 months provided under Section 112 for filing of an appeal. Section 78 provides that any amount payable in pursuance of an order shall be paid within three months from the date of service of such order, failing which recovery proceedings shall be initiated. Therefore, if an assessee does not file an appeal within the limitation period, only then the department can initiate recovery under Section 78 of the CGST Act.

A view can be taken that the direction given in the Circular regarding initiation of recovery proceedings in cases where the assessee fails to pay 20% of the disputed tax amount, in the absence of a functional GSTAT, imposes unjust burden on taxpayers. Although the Circular has prescribed a mechanism to make the payment of such amount on the GST portal, in an attempt to facilitate the taxpayers, the clarification that non-payment of such amount will lead to the presumption that the assessee is not willing to file an appeal is exemplifying the overreach of the Executive power.

While the government has reiterated its commitment to establishing the GSTAT, it remains to be seen whether the GSTAT would in fact be functional w.e.f. 01.09.2024. Till such time the GSTAT is constituted, the recovery proceedings for confirmed dues against the assessee should not be initiated where the assessee files a declaration that he wishes to file an appeal against the order. The payment of an amount equal to the pre-deposit, pending filing of appeal, should not be insisted upon, in light of the settled legal position as laid down by various High Courts. In case the department initiates recovery proceedings relying on the Circular, the assessee may choose to challenge the validity of the Circular before the jurisdictional High court on the ground that initiating recovery proceedings within the limitation period is a substantive infraction of the principles of natural justice, equity and fairness.

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