Kerala HC on GST Show Cause Notices: Key Takeaways for Businesses

Introduction

The Kerala High Court (HC) recently ruled that consolidated GST show cause notices for multiple financial years can be prejudicial to assessees, as they may curtail the legally prescribed adjudication period. The ruling, in the case of Joint Commissioner (Intelligence & Enforcement) v. M/S. Lakshmi Mobile Accessories, establishes a crucial precedent under the Central Goods and Services Tax Act (CGST Act), 2017.

Key Issue:

• The State GST Department issued a single show cause notice covering six financial years (2017-18 to 2023-24) to M/S. Lakshmi Mobile Accessories, alleging suppressed turnover and demanding differential tax, interest, and penalties.
• The assessee argued that the limitation period should be determined separately for each year, not based on the earliest year in the notice.
• The Kerala HC upheld the assessee’s contention, stating that a consolidated notice cannot override statutory limitation periods.

Legal Context: Understanding Section 74 of CGST Act

Under Section 74 of the CGST Act, if tax has been not paid, short paid, or input tax credit (ITC) has been wrongly availed, authorities can issue show cause notices.

Key Points:

1. Time Limit for Adjudication: As per Section 74(10), proceedings must be completed within five years from the due date of filing the annual return for the relevant financial year.
2. Impact of Consolidated Notices: If multiple years are clubbed into one notice, the earliest financial year’s limitation period governs adjudication, reducing the time available for response.
3. Legal Precedent Affirmed: The Kerala HC reaffirmed that each financial year’s tax liability must be adjudicated separately.

Court’s Observations & Ruling

Findings of the Division Bench:

1. Prejudice to the Assessee: A consolidated notice for multiple years could force the assessee into premature adjudication, as the limitation period for the earliest year would apply to all subsequent years.
2. Statutory Interpretation of Section 74(10): The five-year adjudication period is independent for each financial year. Authorities cannot artificially restrict the period by issuing a single consolidated notice.
3. Remedy Suggested: The GST authorities can issue separate show cause notices for each year within their respective limitation periods. For 2017-18, they may proceed within the limitation timeframe prescribed under Section 74(10).

Final Judgment:

The Kerala High Court dismissed the appeal filed by the State GST Department, ruling in favor of M/S. Lakshmi Mobile Accessories.

Impact on Businesses & GST Compliance Best Practices

Implications of This Ruling:

? Assessees can challenge consolidated GST show cause notices where multiple years are clubbed together. ? GST authorities must issue separate notices for different financial years to ensure compliance with statutory limitations. ? Taxpayers should verify the limitation period in any notice received and contest it if it violates statutory guidelines.

Best Practices for Businesses:

• Track GST filings diligently to identify any potential tax demand issues.
• Consult tax experts if a consolidated notice is issued covering multiple years.
• Ensure accurate records for each financial year to facilitate individual adjudication if required.
• File responses promptly to avoid default judgments or penalties.