UNDERSTANDING THE GST ADJUDICATION PROCESS: FROM DETECTION TO APPEAL

INTRODUCTION

The Goods and Services Tax (GST), which took effect in India from 2017, has swept away huge structural changes to the landscape of indirect taxation. GST adjudication lifecycle consists of various stages, starting from detection of anomalies to investigations, to the issuance of SCNs adjudication and appeals. There are legal processes that manage each stage to guarantee fairness, transparency, and accountability.

This article covers the entire process under the umbrella of the GST law, commencing from the stage at which a case generally originates, be it system-based red flags, departmental audits, or any intelligence input, and explains how the proceedings pass through each stage before its final conclusion.

DETECTION AND INITIATION OF PROCEEDINGS

Proceedings under the Goods and Services Tax (GST) regime are an important part of curtailing tax evasion and ensuring compliance with legal regulations. It starts by noticing discrepancies or patterns that might indicate violations. The main concerns that lead to such proceedings include:

a. Data Analytics and Systematic Flags

GST Network (GSTN) uses advanced data analytics to process and analyze the humongous data collected from the taxpayers. Discrepancies found in this analysis can spark additional scrutiny. Common red flags include:

• Mismatch in GSTR-1 & GSTR-3B: If the details of outward supplies shown in GSTR-1 do not match with the summary return in GSTR-3B, it might be possible that the sales or tax liability is suppressed.
• Differences in Input Tax Credit (ITC): If the ITC claimed in GSTR-3B compared to that auto-populated in GSTR-2B shows a significant difference, it may indicate some ineligible or excess claims.
• Delay or non-filing of returns: If there is a consistent delay or failure to file statutory returns, it can trigger investigations.
• Unusual transaction patterns: Sudden surges of turnover, frequent return amendments, and transactions with high-risk taxpayers can all raise suspicion.

b. Audit Findings

Taxes authorities are empowered to do a registered person audit under Section 65 of CGST Act. These audits are conducted to ascertain the correctness of the turnover declared, tax paid, refund claimed, and ITC availed. The results of such audits, especially where there are major discrepancies or instances of non-compliance, may result in the commencement of proceedings.

c. Scrutiny of Returns

Section 61 of the CGST Act empowers tax officers to examine returns and other particulars for the purpose of ensuring their correctness. If exist discrepancies in scrutiny else wise, the taxpayer may be called for explanation. Failure to respond satisfactorily or correct the discrepancies will result in further action.

d. Intelligence Inputs

It can also be based on information received from other government departments, informants or internal intelligence units. These inputs of intelligence are collected and acted upon by the Directorate General of GST Intelligence (DGGI) which does the lion’s share of work in this regard.

e. Risk-Based Selection

The GST framework has provisions that have been termed as risk parameters, whereby tax payers who are likely to be at an increased risk of fraud are identified. Things like the nature of business, transaction volumes, and compliance history are taken into account. Taxpayers identified through this risk-based methodology may be audited or investigated.

f. Voluntary Disclosures

Taxpayers themselves can also discover errors or omissions in their returns and voluntarily inform the tax authorities of such omissions. The scope of this discretion is subject to judicial review; disclosures made under a commitment may mitigate penalties, but also further open the books for scrutiny to make sure the information is complete and accurate.

PRELIMINARY INQUIRY AND INVESTIGATION

Whenever there is a chance of non-compliance, a preliminary inquiry by the GST authorities is conducted to confirm the facts of the decrease. This is a critical phase to see whether formal proceedings would be appropriate.” These are the main components of this phase:

a. Issuance of Summons [Section 70 of CGST Act]

Section 70 of the CGST Act grants the proper officer the authority to summon any person whose attendance is considered necessary to provide evidence or produce documents relevant to an inquiry. The summons process is similar to that in civil court proceedings and ensures that the inquiry maintains judicial propriety.

b. Inspection, Search and Seizure (Sec. 67 of the CGST Act)

Section 67 gives powers to a proper officer not below the rank of Joint Commissioner to authorize inspections, searches, and seizure operations if there is reason to believe that:

• A taxable person has ‘hidden’ transactions or stock, claimed too much input tax credit, or broken terms to avoid tax.
• Any goods liable for confiscation or relevant documents secreted in any place.

In this case, any other officer may be authorized in writing by the officer to search and seize such goods, documents, or books as may be useful for the proceedings under the Act.

c. Statement recording and Collection of Evidence

Statements of the taxpayer and other persons concerned are recorded to gather evidences during the investigation. These statements are taken on oath and can be used in subsequent proceedings and are also used to be read by judges in other cases to expedite them. Gathering evidence can include scrutinizing financial records, invoices, or any documentation relevant to the case.

d. Retention and Return of Seized Items

According to Section 67(3) of CGST Act, any documents/books/things being seized shall be returned within a period of 30 days from the date of issuance of notice unless the documents are required to be kept for further investigation. The proper officer shall record in writing the reasons for retaining the seized items beyond this period.

e. Stipulatory Protections and Pro Novate Review

Taxpayers can be represented by a tax professional in the course of the investigation process. Moreover, natural justice is not only the wisest policy, but the statutory law that an opportunity to be heard, and to adduce evidence in defence, must be afforded to the taxpayer. These powers can only be exercised with a proper judicial oversight.

ISSUANCE OF SHOW CAUSE NOTICE (SCN)

a. Legal Framework: Section 73 and 74 of the CGST Act

The CGST Act specifies the circumstances when an SCN may be issued:

• Section 73: This section applies to cases involving non-payment, short-payment, erroneous refunds or incorrect availing or utilization of input tax credit (ITC), but where there is no element of fraud or willful misstatement.
• Section 74: It refers to similar cases but involving figurative fraud, intentional mis-statements, or concealment of facts with the intention to avoid tax.

Importantly, for periods related to FY 2024-25 and beyond, a new Section 74A has been introduced, combining provisions related to both fraudulent and non-fraudulent cases.

b. Time Limits for Issuance

SCNs need to be issued in a timely manner to ensure that principles of natural justice are upheld:

• Section 73: SCN should be issued at least 3 months before the expiry of 3 years from the due date of the annual return for the relevant FY.
• Section 74: An SCN shall be issued at least six months before the completion of five years from the due date for filing the annual return for the concerned financial year.

Ex: the due date for filing the annual return for Financial Year 2020-21 was 31st December 2021. Thus, under Section 73, the SCN was to be issued within 30th September 2024 and under Section 74 by 30th June 2026.

c. Understanding Voluntary Payment and its Consequences

Taxpayers may also make voluntary payments to help reduce the penalty:​

Before SCN: Voluntary payment through Form DRC-03 helps avoid a Penalty.

After SCN: If within 30 days, payment is made, then the reduced penalty is applicable.

• Section 73: 10% of the tax due or ₹10,000, whichever is higher.
• Section 74: 25% of the tax amount

REPLY, REPRESENTATION, AND PERSONAL HEARING

The taxpayer can respond to the Show Cause Notice (SCN) once it is issued. This step makes sure that before anything is finalized, that that taxpayer has the opportunity to have their case presented. The rules governing this process are set out below.

a. Reply to the SCN

On receipt of SCN, the taxpayer must file a written reply to the relevant adjudicating authority typically within thirty days of receipt as per Section 73 and 74 of the CGST Act.

• A response to SCN must also be filed together with supporting documents or records denying the allegations made therein.
• The response is filed online in Form GST DRC-06 on the GST portal.

b. Right to Personal Hearing

The taxpayer is granted the right to a personal hearing under Section 75(4) of the CGST Act. Where the taxpayer makes a request, the adjudicating authority ought to give an opportunity for hearing.

• It should be scheduled after the taxpayer receives the SCN and the reply filed by the taxpayer.
• A taxpayer can represent himself or herself or be represented by an authorized representative.

c. Non-compliance with reply or Hearing

If a taxpayer does not respond or appear for a hearing, the adjudicating authority, at this stage, may take up the case ex parte, based on the available records.

ADJUDICATION AND PASSING OF ORDER

After receiving the reply to the SCN along with concluding of personal hearing (if any), the adjudicating authority adjudicates the matter based on available records, submissions and provision of the law.

a. Relevant Provisions

Provisions regarding the issuance of adjudication orders post the SCN process are provided in section 73(9) and section 74(9) of the CGST Act.

The authority is also required to pass an order in writing by giving specific reasons setting out the amount of tax, interest and penalty, if any, payable.

b. Time limit for passing order

Section 73 (non-fraud cases):  Order to be passed within 3 years from the due date for filing annual return for the relevant year.

Section 74 (fraud cases): Order to be passed within 5 years from the due date of annual return for the relevant year.

c. Format of the Order

The issuance of order is in Form GST DRC-07 that acts as a summary of demand.

The order includes:

• Tax, interest, and penalty affirmed
• Grounds for decision
• Reference to answer and hearing
• Directions for payment

d. Implication of Order

If the taxpayer does not pay the sum within the time allowed, the order becomes the basis for recovery proceedings under Section 78.

The taxpayer also obtains the right to appeal under Section 107 within three months from the date of such order.

APPEALS AND FURTHER REMEDIES

In such a situation, if a taxpayer wants to appeal against the adjudication order passed by the GST authorities, the GST law prescribes a mechanism thereof.

a. First Appeal: Section 107 of CGST Act

The aggrieved taxpayer can file an appeal against the adjudication order before the Appellate Authority as per Section 107.

Limitation: The appeal should be filed within 3 months of communication of the order.

Form: The appeal shall be presented in Form GST APL-01 and shall be accompanied by a copy of the order appealed against.

b. Pre-Deposit Requirement

As per Section 107(6), for the appeal to be admitted:

• 100% of the admitted tax liability must be paid.
• 10% of the disputed tax amount must be paid as a pre-deposit (subject to a maximum of ₹25 crore).

c. Further Appeal to Appellate Tribunal (GSTAT)

If unsatisfied with the decision of the Appellate Authority, an appeal can be filed before the Goods and Services Tax Appellate Tribunal (GSTAT) under Section 112.

The Tribunal is the second level of appellate review but is not yet fully functional across all jurisdictions as of early 2025.Time Limit: Appeal must be filed within 3 months of receipt of the order from the Appellate Authority.

d. Appeal to High Court and Supreme Court

On substantial questions of law, further appeals lie to the High Court under Section 117, and subsequently to the Supreme Court under Section 118.

e. Alternate Remedies

In cases involving procedural violations or denial of natural justice, a taxpayer can also approach the High Court under Article 226 of the Constitution through a writ petition, though this is an exceptional remedy.

CONCLUSION

The GST regime provides a robust, time-bound, and procedurally fair framework for identification, investigation, and adjudication of such tax disputes. The entire process, from detecting discrepancies to issuing orders and appreciating appellate remedies, is the right balance between enforcement and protecting taxpayer rights. But successful implementation relies on timely compliance, adequate documentation and informed representation on the taxpayers’ part.

Author Details: Ananya Pathak, 4th year, B.Com LL.B., Jiwaji University