Retrospective Cancellation of GST Registration Based on Non-Filing of Returns After Assessee Applied for Cancellation is Not Sustainable

Retrospective Cancellation of GST Registration Based on Non-Filing of Returns After Assessee Applied for Cancellation is Not Sustainable

Issue: Whether a GST registration can be retrospectively cancelled solely on the ground of failure to furnish returns for a continuous period of six months, when the assessee had already applied for cancellation of their GST registration prior to the period of non-filing.

Facts:

• The assessee had applied for cancellation of their GST registration.
• A notice was issued to the assessee seeking certain details related to the cancellation application.
• The assessee did not submit a reply to this notice, leading to the rejection of their application for cancellation of registration.
• Subsequently, a show cause notice (SCN) was issued to the assessee proposing cancellation of registration on the ground of failure to furnish returns for a continuous period of six months.
• The assessee again did not respond to this SCN, and consequently, their registration was cancelled with retrospective effect.

Decision: The court held that the main reason for retrospective cancellation (failure to furnish returns for six months) was not a sustainable ground in this case, as the assessee had already applied for cancellation of GST registration. Therefore, the assessee obviously could not have filed returns for six months. The cancellation of GST registration would take effect from the date of issue of the notice seeking retrospective cancellation, rather than a retrospective date. The decision was in favor of the assessee.

Key Takeaways:

• Retrospective Cancellation is an Extreme Measure: Retrospective cancellation of GST registration has significant implications, as it can impact the ITC chain for the assessee’s recipients during the retrospective period. It should be invoked only when there is strong justification, such as fraudulent activities or non-existent businesses.
• Ground for Cancellation Must be Valid: The ground cited for cancellation must be valid and applicable to the specific circumstances. In this case, the ground was “failure to furnish returns for a continuous period of six months.”
• Assessee’s Intent to Exit: When an assessee has already applied for cancellation of registration, their intention to exit the GST framework is clear. In such a scenario, penalizing them for not filing returns after their application for cancellation (and particularly after the initial application was wrongly rejected due to lack of response) becomes illogical.
• Prospective vs. Retrospective Effect: The court implicitly distinguished between a valid ground for cancellation of registration (which might arise from non-filing) and the retrospective effect of such cancellation. In this instance, while cancellation might be justified prospectively from the date of the SCN, making it retrospective when the assessee intended to cease operations earlier is not appropriate.
• Department’s Responsibility: The department also has a responsibility to process cancellation applications efficiently. The initial rejection of the assessee’s application due to non-submission of details, followed by retrospective cancellation on a ground that arose after the assessee sought to exit, points to an oversight in the process.
• Implications for Compliance: This ruling provides relief to businesses that genuinely intend to cease operations and apply for cancellation, preventing them from being unduly penalized for non-compliance that results from their attempt to exit the system.