GST Enforcement: Attach Bank Accounts Sparingly, Says Bombay High Court

Businesses living under the threat of bank accounts being attached during a pending goods and services tax inquiry can breathe easy.

The Bombay High Court recently ordered that GST officials must not exercise the power of attaching a taxpayer’s bank account on a routine basis as it’s a drastic step that can have wide consequences. An attachment order can’t be passed merely on the basis of a summons in the absence of any actual or pending proceedings, the court said, adding that tax officials must follow all the requirements under the law before resorting to it.

The GST law allows tax authorities to attach properties or bank accounts of erring taxpayers to prevent evasion. The government made the law even more stringent in December by allowing attachment of properties for not filing returns as well. The move was part of the government’s crackdown on GST evasion as tax collections fall short of budget targets.

“Tax authorities have increasingly been invoking the powers of provisional attachment in recent times under the guise of protecting interest of revenue,” Ritesh Kanodia, partner at tax advisory firm Dhruva Advisors, told BloombergQuint. “It’s increasingly been debated that such recovery proceedings are to be exercised only as a matter of last resort after issuance of an adjudication notice and after granting an opportunity of being heard.”

The high court order followed a petition by a Mumbai-based exporter.

Facts Of The Case

The Directorate General of GST Intelligence issued a summons to Kaish Impex during an investigation into allegedly fraudulent input tax credit utilisation by Maps Global, a Delhi-based exporter. The probe agency directed Kaish Impex to produce documents and evidence and provisionally attached and froze its banks accounts.

Kaish Impex moved the high court, contending that the GST intelligence wing can only provisionally attach bank accounts if proceedings are pending under the prescribed sections of the CGST Act, 2017. It argued that proceedings were initiated only against Maps Global, and Kaish Impex’s banks accounts stood outside the purview.

The GST department defended its move citing protection of the government’s interest and investigation. It argued that a summons issued under Section 70 of the GST Act also covers attaching assets of other taxpayers who are part of the inquiry.

The Bombay High Court rejected these arguments and quashed the order to attach Kaish Impex bank accounts saying:

• The attachment order assumed that proceedings under Section 67 of the GST Act were initiated against the petitioner. However, no such proceedings were actually initiated.
• An officer must form an opinion before resorting to provisional attachment.
• Tax officials must comply with Section 83 of the CGST Act which deals with the procedure of provisional attachment. Proceedings under this section can be only against a specific taxable person and cannot be extended to any other entity which is part of the inquiry.
• Attachment powers must be used on a limited basis.

Ambit Of Powers To Attach Assets

To ensure collections and plug revenue leakage, the CGST Act confers powers on Commissioners of the Goods and Services Tax for issuing summons, notices and conducting inquiries into suspected transactions. As such inquiries can be prolonged, Section 83 of the CGST Act allows the GST Commissioner to provisionally attach property or a bank account of a taxpayer during pendency of the proceedings for a maximum of one year.

But this power can be triggered only by an act or omission by a taxpayer against whom proceedings have been initiated. These can’t be invoked against a third party like a seller or supplier.

The CGST Act has a separate mechanism that allows recovery from third parties after an inquiry is concluded. The Bombay High Court’s judgment has drawn a line between the use of provisional attachment powers by a GST commissioner against a defaulting party and a third party.

Kanodia of Dhruva Advisors said the standard operating procedure for dealing with non-filers of returns states that the department can exercise its powers for recovery against defaulters. But powers against connected third parties which owe money to defaulting parties stands on a different footing, he said.

Section 83 said a GST commissioner could resort to provisional attachment of taxable person’s assets during the pendency of proceedings in instances like:

• Failure of a registered person to furnish periodic returns or obtaining registration under the GST Act despite falling within the prescribed registration thresholds.
• Default in paying tax after cancellation of registration.
• Suppression of transactions in supply of goods or services.
• Fraudulent or excess availment of input tax credit with an intent to evade tax.

Under the CGST Act, a tax officer must frame an opinion before exercising powers of provisional attachment.

But, according to Kanodia, it’s a belief among the authorities that unless punitive action is taken by the department, tax evasion through fake invoices and invalid refunds doesn’t get curbed. “Such powers should be invoked in good faith only when tax authorities certainly have reason to believe that tax has been evaded or recoverable, and it cannot be a mere means to forceful or illegal recovery outside the due process of law,” he said.

According to Anish Tripathi, GST consultant and tax expert, the rise in tax frauds has resulted in higher instances of provisional attachment. Claiming undeserved input tax credit based on fraudulently submitted invoices by the previous entity in the chain is rampant, he said, adding that the tax authorities have the right to probe the chain.

Tax Collection Targets And Excessive Use of Powers

The central government relies on tax receipts to meet its budgetary estimates and sets targets for direct and indirect tax collections.

“As the pressure for poor revenue mobilisation and unrealistic targets mounts on the department, we will see more and more irrational orders being passed,” Tripathi said. “This may be eventually be overturned by the Courts, but it ultimately wastes time, money and effort for the taxpayer.”

He said systemic changes were needed in the GST to minimise procedural loopholes, including changes like shifting from an “invoice-based model” to a model wherein input tax credit must be allowed only when the invoice has been actually paid for.