GST Registration & Payment of Tax After Inspection Is Not Voluntary: Madras HC Ruling
Case Background
The Madras High Court recently ruled that GST registration and payment of tax following an inspection cannot be considered a voluntary act. The judgment was delivered in a case where a charitable trust operating a marriage hall was found evading tax obligations.
The Central GST (CGST) department’s preventive unit conducted an inspection of the trust’s marriage hall and uncovered financial records indicating receipt of ₹3.86 crore in rental income from July 2017 to January 2020. Despite earning substantial revenue, the trust had neither registered under GST nor paid applicable taxes.
Tax Demand & Legal Proceedings
Following the inspection, the trust made partial tax payments amounting to ₹58.93 lakh and an additional penalty of ₹8.84 lakh, applying the ‘cum-tax’ basis under Rule 35 of CGST Rules. However, the Assistant Commissioner rejected this approach and issued a show cause notice, demanding:
- Total GST liability: ₹69.54 lakh
- Additional penalty: ₹69.54 lakh
- Balance GST liability: ₹10.60 lakh
- Interest on unpaid tax
The trust argued that it had neither suppressed payments nor willfully misrepresented its income. It contended that invoking Section 74(1) of the CGST Act (related to tax fraud and suppression) was unjustified.
Court’s Key Observations
- GST Evasion & Non-Compliance: The trust deliberately avoided GST registration and issued receipts labeled as ‘donations’ instead of taxable rent.
- Inspection Triggered Compliance: The payment of tax was made only after the inspection, negating the claim of voluntary compliance.
- Applicability of Section 74: The court upheld the tax authorities’ decision to invoke Section 74, stating that the trust’s conduct constituted suppression and fraudulent activity.
- Cum-Tax Basis Rejection: The court found no merit in the assessee’s claim for a cum-tax benefit and affirmed the department’s stance.
- Penalty & Liability Confirmation: The appeal was dismissed, confirming the Assistant Commissioner’s demand for the full penalty amount.
Impact of the Ruling
This judgment reinforces the importance of timely GST registration and compliance. Businesses and charitable institutions earning above the GST threshold must:
- Ensure timely registration under GST to avoid penalties.
- File regular GST returns to maintain compliance.
- Avoid misrepresentation of taxable income to prevent penal actions.
Failure to comply could lead to stringent actions under Section 74, including full tax recovery, penalties, and interest. The ruling serves as a strong warning against tax evasion practices.
Conclusion
The Madras High Court’s verdict highlights that payment of GST after an inspection cannot be deemed voluntary. Taxpayers must proactively comply with GST laws to avoid severe penalties and legal consequences.