Bombay HC: Permanent GST Cancellation is Disproportionate for Procedural Lapses Rectified by Taxpayer.
Issue
Whether the permanent cancellation of a Goods and Services Tax (GST) registration is a disproportionate and excessive penalty for procedural lapses, such as non-filing of returns, especially when the taxpayer has subsequently rectified the default by paying all outstanding taxes, interest, and fees.
Facts
- The assessee’s GST registration was cancelled by the tax authorities due to procedural defaults like non-filing or delayed payment.
- After the cancellation, the assessee cleared all pending dues, including the principal tax amount, interest, and late fees.
- The assessee demonstrated bona fide (good faith) intent to comply, which was further supported by voluntary contributions made under their Corporate Social Responsibility (CSR) obligations.
- Aggrieved by the permanent cancellation, the assessee filed a writ petition before the Bombay High Court seeking restoration of their registration.
Decision
- The Bombay High Court ordered the restoration of the assessee’s cancelled GST registration.
- It applied the doctrine of proportionality, ruling that permanent cancellation was an excessive and disproportionate measure for a procedural error that had already been corrected.
- The Court observed that the taxpayer’s subsequent compliance, including clearing all dues, demonstrated an intent to adhere to the law, not to evade taxes.
- It held that restoring the registration serves the interest of the revenue as well, since a functioning business will continue to collect and pay GST, contributing to the exchequer.
Key Takeaways
- Penalty Must Fit the Offense: The doctrine of proportionality is a crucial safeguard. Tax authorities cannot impose the harshest penalty (permanent cancellation) for procedural defaults, especially when the taxpayer has made amends.
- Compliance Over Punishment: The primary objective of the tax framework is to ensure compliance and revenue collection, not to be purely punitive. Restoration is favored when it helps achieve this goal.
- Bona Fide Actions Matter: Courts will consider a taxpayer’s subsequent actions. Correcting errors and clearing dues are strong indicators of good faith, which can significantly influence judicial outcomes.
- Economic Sense: Keeping a compliant business operational is beneficial for both the taxpayer and the government, ensuring a continuous flow of tax revenue.