GST officers told to split multi-yr tax notices, substantiate fraud claims | Economy & Policy News

Tax officers can no longer club several years into one show-cause notice without showing how much tax is being demanded for each year. In one of several circulars issued on Monday, the Central Board of Indirect Taxes and Customs (CBIC) has directed them to clearly split the demand financial year-wise in multi-year notices so that taxpayers can understand and respond properly. The circulars follow the recommendations made by the GST Council at its meeting earlier this month.

 

The circular sets basic standards for show-cause notices, adjudication orders and appeals under the goods and services tax (GST) regime so that proceedings are clearer and fairer.

  

A notice must now spell out the facts, the evidence, the legal provisions and the exact amount of tax being demanded. Simply copying sections of the law is not enough. Officers also cannot invoke the stricter provisions meant for fraud, wilful misstatement or suppression of facts just because tax has not been paid or a mismatch has been found. They must show specific evidence of intent to evade tax in the notice itself.

 

Adjudication orders must deal with the points raised by the taxpayer. A line saying “reply has been considered” is not acceptable. Officers should explain why they have accepted or rejected a submission. Personal hearings should be meaningful, and virtual hearings are encouraged.

 

“Equally significant is the detailed guidance on adjudication. Conceptually, it brings a similar structured adjudication discipline into the GST framework as was available through the Master Circular on show cause notices and adjudication in the pre-GST regime. The emphasis on clearly articulated allegations, supporting evidence, meaningful consideration of taxpayers’ submissions and reasoned orders should improve the quality and consistency of adjudication and help reduce avoidable litigation,” said Saurabh Agarwal, tax partner, EY India.

 

Manoj Mishra, partner and tax controversy management leader, Grant Thornton Bharat, said: “The 57th GST Council placed procedural reform and dispute prevention firmly at the centre of the next phase of GST, and through Circular 258, it seeks to address a recurring fault line in GST litigation, where taxpayers are often compelled to first challenge defects in the proceedings before contesting the underlying tax demand. By emphasising on evidence-backed notices, year-wise delineation of demands in multi-year SCNs, and separate grounds and quantification for fraudulent and non-fraudulent demands under Sections 73 & 74, the Circular seeks to bring discipline to the initiation and adjudication of GST proceedings. Significantly, while prescribing year-wise clarity, the contentious question of whether consolidated multi-year notices are legally sustainable is still left unresolved.”

 

The Board has also issued clearer instructions on GST registration. Until now, many genuine businesses faced repeated queries or delays because officers in different states interpreted the same rules differently. The new guidance tries to reduce that friction. It spells out what documents are actually needed in common situations — for instance, when someone works from a co-working space, when a family member allows the use of their premises, or when the place of business is an unmanned ATM or a telecom tower. It also flags that officers should not raise irrelevant or state-specific objections that go beyond the prescribed list of documents. The practical effect is that applicants can better prepare their papers in advance and are less likely to get stuck in avoidable back-and-forth.

 

Agarwal said the guidance “addresses several practical issues that have often resulted in ground-level queries and disputes, including co-working spaces, consent-based premises, ATMs and telecom towers, and state specific information requirements. Together with defined documentation requirements for different forms of businesses, this should help reduce differing interpretations and make the registration process more predictable for genuine taxpayers.”

 

On the export front, the Board has removed a long-standing grey area for service exporters. For a service to qualify as an export under GST, the payment must be received in a manner that meets the conditions laid down in the law. The clarification now makes it clear that money received in special rupee accounts meant for non-residents — such as Special Non-Resident Rupee (SNRR) accounts, which are rupee accounts opened by non-residents for specific business purposes, or INR Nostro accounts held by foreign banks with Indian banks — will be accepted. It has also said that if an exporter simply nets off what it is owed from overseas against what it owes for imports, and does so in line with Reserve Bank of India rules, that too will count as a valid receipt of export proceeds. In short, the tax department will no longer insist only on a direct foreign exchange inflow when the underlying settlement is already permitted under foreign exchange rules.

 

The clarifications are expected to reduce avoidable litigation for exporters. Courts have, in several cases, already accepted set-off or netting-off of export receivables against import payables as a valid mode of realising export proceeds when done in line with Reserve Bank of India rules. By formally recognising such settlements under GST as well, the Board has now aligned the tax treatment with the position already taken by courts, reducing the scope for fresh disputes on this issue.

 

Agarwal said the clarification is useful “particularly recognition of set-off as a valid mode of settlement under foreign exchange management act (FEMA). Where export receivables are set off against import payables in accordance with RBI directions, the prescribed realisation condition for qualifying as export of services under the IGST Act would be regarded as fulfilled. This aligns the GST treatment with permitted foreign exchange settlement mechanisms and provides welcome clarity for cross-border transactions.”

 

Mishra of Grant Thornton Bharat said the move “addresses this gap by aligning GST more closely with FEMA and RBI-recognised settlement mechanisms… where export proceeds are legitimately realised or settled under FEMA, GST benefits should not be denied merely because the consideration follows an alternative RBI-permitted settlement mechanism. This is an important step towards aligning zero-rating with commercial reality rather than the form of payment.”

 

Separately, exporters who had been stuck with old demands linked to an earlier restriction on integrated tax refunds have also received some relief. The Board has clarified that the removal of that restriction will apply retrospectively from 23 October 2017, in line with a recent Supreme Court ruling. Officers have been told to close pending proceedings on this issue accordingly. For many exporters who had used certain duty-free import schemes and later faced recovery of refunds, this could mean long-running disputes are finally put to rest.

 

The Board has also clarified how companies should share tax credit on common services (such as audit, legal or software bills) that one office receives on behalf of its other branches. Under the Input Service Distributor (ISD) system, the office that gets these common bills must pass on the credit to the branches that actually used the services. The new guidance makes it clear that this credit should be distributed in the same month the office finds it eligible, and that the receiving branch — not the distributing office — is responsible for checking whether the credit can actually be claimed. This removes confusion about timing and responsibility that had often led to disputes.

 

Agarwal of EY India said the clarifications on ISD address an important practical issue by giving greater certainty on when the credit should be distributed. Agarwal said overall the circulars “signal a welcome move towards greater certainty and procedural discipline under GST and should help resolve several issues that have been contributing to disputes at the ground level. Consistent implementation across field formations will, however, remain key.”