Dual proceedings and trapped Taxpayers - Applicability of Section 6(2)(b) of GST Act

Recently on September 30, 2023, the time limit specified under Section 73(2) of CGST Act, 2017, for issuing show cause notices about the Financial Year (FY) 2017-18, expired. However, before the said date, the taxpayers were deluged with Form GST DRC-01 (‘Notices’) from the officers of both State and Central Tax authorities on similar issues or tax periods, for all pending matters for the relevant financial year.

Receiving these notices from both Central and State authorities at the eleventh hour has created a widespread panic amongst the taxpayers, as these notices propose to demand the same quantum of tax with interest and penalty on similar issues or tax periods.

Taxpayers were not able to fathom the consequences of such parallel proceedings. For instance, if the said notices from multiple authorities culminated into demand orders, then the question arising was whether the taxpayer was required to challenge both orders before the appellate authority and. if yes, whether the statutory pre-deposit would be required for both the appeals, etc.

The above situation raises a fundamental question: whether the GST law permits the tax authorities to issue multiple notices to taxpayers on similar subject matters when inquiry/audit or inspection has already been undertaken by either the proper officer of the Staerte or Central tax authorities?

To analyze this, it is important to visit Section 6(2)(b) of the Central Goods and Services Act, 2017 (CGST Act), which states that,

“where a proper officer under the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act has initiated any proceedings on a subject matter, no proceedings shall be initiated by the proper officer under this Act on the same subject matter.”

Similarly, Section 6(2)(b) of the Karnataka SGST Act, 2017, states that,

“where a proper officer under the Central Goods and Services Tax Act has initiated any proceedings on a subject matter, no proceedings shall be initiated by the proper officer under this Act on the same subject matter.”

Thus, it can be noted that Section 6(2)(b) of both the CGST/SGST Act, 2017, prohibits separate initiation of proceedings on the same subject-matter by the respective proper officers of CGST or SGST Act when proceedings on the same subject-matter by the proper officer under the State Act or Central Act, has been initiated.

The terms “proceeding” or “subject matter” have not been defined under the GST laws. This lack of clarity regarding the applicability of Section 6(2)(b) has led many taxpayers to seek judicial intervention in cases where such taxpayers were subjected to summons or inquiry investigation, etc. on the same subject matter or tax period by different wings of Centre and State Tax departments.

In GK Trading Company v. Union of India, the High Court of Allahabad, upon considering the scope of Section 6(2)(b) and Section 70, pointed out that the word “proceedings” used in Section 6(2)(b) is qualified by the words “subject-matter” which indicate an adjudication process or proceedings on the same cause of action and for the same dispute, which may be proceedings relating to assessment, audit, demands and recovery and offenses and penalties, etc.

It was further pointed out that these proceedings are after an inquiry under Section 70 of the CGST Act and that the words “in any inquiry” are dealt with in various provisions under Chapter XIV viz., Sections 67 (power of inspection, search and seizure), Section 68 (inspection of goods in movement), Section 69 (power to arrest), Section 71 (access to business premises) and Section 72 (officers to assist proper officers).

Thus, it was held that the proper officer may invoke power under Section 70 in any inquiry, and the prohibition under Section 6(2)(b) shall only come into play when any proceeding on the same subject matter had already been initiated by a proper officer under the State Act.

Therefore, the plea of the appellant challenging the summons for conducting an inquiry was held not to be barred by Section 6(2)(b) of the CGST Act. Thus, the key phrases occurring in both the provisions viz., “in any inquiry” and “proceedings on the same subject matter” indicate the crucial difference between these two provisions.

Thus, an important question that arises is what are the options available to taxpayers in cases where parallel proceedings are initiated on the same subject matter by the Centre and State Authorities?

Given the above interpretation of the courts, the bar of Section 6(2)(b) may be applicable only in scenarios wherein under inquiry, proceedings (Form GST DRC-01A or DRC-01) have been initiated by both Central and State tax Authorities on the same subject matter (same cause of action for the same dispute or tax period).

Similar to FY 2017-18, the time limit specified under Section 73(2) of CGST Act, 2017, for issuing show cause notices about FY 2018-19 is December 31, 2023. Thus, the taxpayers, even in this period may face multiple notices from the Central and State Tax authorities on the same subject matter. In such a scenario, the notices may avail efficacious remedy provided by GST Law, by way of appeals or may approach the High Court to contest the jurisdiction of the tax authorities involved in such proceedings. 

Considering the hardship being caused to the taxpayers because of last-minute notices supplemented with a lack of inter-departmental coordination, it is high time the Government issues suitable instructions and guidelines to be followed scrupulously by the authorities. This can avoid unwanted litigation and not force the taxpayers to explore the Constitutional remedies.

About the Authors: Brijesh Kothary is a Partner, Chitrartha Gupta is a Senior Associate and Gauri Salunke is an Associate at Lakshmikumaran and Sridharan.