Retrospective cancellation of a GST registration is invalid if it was not proposed in the show-cause notice.

Retrospective cancellation of a GST registration is invalid if it was not proposed in the show-cause notice.

Issue

Can a GST authority cancel a taxpayer’s registration with retrospective effect if the show-cause notice (SCN) that initiated the proceeding did not specifically state or propose that the cancellation would be from a past date?

Facts

• An assessee had a GST registration with effect from the start of the GST regime on July 1, 2017.
• After their own application for cancellation was rejected, the tax department initiated its own proceedings to cancel the registration.
• The department issued a Show Cause Notice (SCN) to the assessee, which proposed to cancel the registration.
• However, the final order that was passed by the authority went a step further and cancelled the assessee’s registration with full retrospective effect, back to July 1, 2017.
• The critical flaw in this process was that the SCN itself did not mention or propose a retrospective cancellation; it only proposed a simple cancellation.

Decision

The High Court ruled in favour of the assessee.

• It held that the final order passed by the authority cannot travel beyond the scope of the show-cause notice that initiated the proceedings.
• Since the SCN did not propose to cancel the registration retrospectively, the authority had no legal power to do so in the final order. Such an action is contrary to law and a clear violation of the principles of natural justice.
• The court clarified that in such cases, where the SCN is silent on the effective date, the cancellation should be deemed to be effective from the date of the issuance of the SCN.
• The impugned retrospective order was therefore set aside.

Key Takeways

1. The SCN is the Foundation of the Case: A show-cause notice is the foundational legal document of any adjudication proceeding. It sets the boundaries of the case, and the final order cannot go beyond the allegations and proposals made within it.
2. Retrospective Action Requires a Specific Proposal: A retrospective cancellation has very serious and harsh consequences for a taxpayer and their customers (as it can impact the validity of past transactions and the input tax credits of their buyers). Because of this severity, it must be specifically and clearly proposed in the SCN to give the taxpayer a fair and explicit opportunity to object to it.
3. This is a Core Principle of Natural Justice: A taxpayer can only be expected to defend themselves against the specific allegations that are made in the SCN. If the notice is silent on a harsh action like retrospective cancellation, imposing it in the final order is a clear violation of the right to be heard.
4. A Settled Legal Position: This issue has come up before many High Courts across the country, and the legal position is now well-settled. Tax authorities are expected to know and follow this principle, and their failure to do so will almost certainly result in their orders being set aside or modified by the courts.