RECOVERING THE UNRECOVERABLE

Recovery
proceedings are initiated to realise the taxes dues. The proceedings are a
final step towards the realisation of any tax or amount which has been
confirmed as payable after following the due process of adjudication and has
remained unpaid beyond the statutory time limit. Government has set in place
three broad routes for collection of taxes – (a) self-assessment; (b)
adjudication; and (c) tax deduction at source / tax collection at source. Under
Article 265 of the Indian Constitution, not only should the levy of tax be
under authority of law, its collection should also be backed by a clear
authority of law. Recovery is the end stage of collection and any action beyond
statutory boundaries would be unconstitutional and rendered void. This article
aims at discussing the various circumstances under which recovery could be
initiated and their respective modes.

CIRCUMSTANCES
WARRANTING RECOVERY

Self-assessed
/ admitted taxes

The self-assessment
scheme requires taxpayers to compute the taxes and discharge the dues by
reporting in tax returns u/s 39 of the CGST / SGST Act. Self-assessed taxes are
considered as admitted taxes (though there is no estoppel in tax law)
and are recoverable without any adjudication u/s 73/74 (sec. 75[12]).
Self-assessed taxes are payable on or before the due date of filing the returns
and are to be discharged on FIFO basis (section 49[8]), i.e., any payment would
be first adjusted towards previous period tax liabilities and then towards
current period tax dues. The common portal maintains an indelible trail of tax
liabilities and its eventual adjustment.

Primary issues
arising here are: (a) GSTR3B does not appear to be a ‘return’ u/s 39 (refer
our previous article in BCAJ September, 2019) and one may contend
that tax liabilities reported in 3B are not covered by the said section; (b)
GSTR-9 (annual return) may also involve admission of tax liabilities, but this
is a return u/s 44 and not u/s 39; (c) GSTR3B online module does not permit the
taxpayer to file its return without payment of the reported tax liabilities,
and hence reported tax cannot remain unpaid if returns are filed; and (d)
reporting of outward supplies in GSTR-1 statement u/s 37 does not constitute
filing of return u/s 39. In effect, though the taxes are ‘self-assessed’
(liability is determined by the taxpayer), such self-assessment is not through
the return specified u/s 39. Consequently, section 75(12) does not seem to
apply under the current return filing scheme. The Revenue may still want to
invoke recovery provisions on the ground that they are admitted taxes even
though the admission is not by way of a return u/s 39. A better alternative for
the Revenue would be to conduct full-fledged assessment proceedings and then
proceed for any recovery.

Taxes arising
from adjudication / assessments

Taxes assessed by
way of an order of adjudication u/s 73/74 are recoverable after three months
from the date of service of the order. Three months’ time enables the taxpayer
to prefer any appeal before the appellate forum on any aggrieved point of
assessment. Once an appeal is preferred, the tax demand continues unless it is
stayed by a higher forum (say, a High Court, etc.). Section 107(7) provides for
an automatic stay over recovery of demands on payment of 10% of the disputed
tax dues under first appeal (20% in case of second appeal u/s 112[8]). In cases
of multiple issues involved, taxes due on issues not disputed would be payable
on expiry of three months from service of order. The proper officer in such
cases is required to issue a demand notice in DRC-07 and proceed towards
recovery on its expiry. The proper officer can also seek special permission for
recovery in a shorter period in case he believes that the action of the
taxpayer (such as fleeing the country, disposal of assets, etc.) in the interim
may jeopardise the recovery.

Taxes
collected and unpaid

Taxpayers are
required to remit any amount collected as taxes forthwith to the government.
The taxpayer is not allowed to hold on to taxes which are collected,
irrespective of whether such amounts are duly collectible under law. This is
based on the fundamental tenet of indirect
taxation wherein taxpayers are made ‘agents’ of the government and such agents
are not permitted to engage in profiteering from taxes. A classic case would be
where taxable person collects taxes from the recipient prior to its time of
supply (such as advance, including taxes collected prior to sale of goods).
Such amounts are payable forthwith (implying on the immediate due date) and the
taxable person cannot claim that the time of supply of provisions is yet to be
triggered. The section provides for an issuance of a show cause notice and its
conclusion prior to proceeding on the recovery (one-year time limit). Where the
amount is held to be wrongly collected by the taxpayer, the section also
provides for a claim of refund by the person who has ‘borne’ the incidence of
taxes, failing which the same would be credited to the Consumer Welfare Fund.

Recovery of legacy tax liabilities

Section 174(2) saves the rights, obligations or liabilities in respect
of anything done prior to the repeal of earlier laws. Under this provision, tax
demands pertaining to pre-GST periods can be enforced against the defaulter and
recovered under the respective laws. The erstwhile Central excise, VAT laws
contained similar provisions for recovery of tax dues. Simultaneously, section
142(8) of GST law also enables recovery of tax dues which are unrecovered under
the earlier tax laws.

While the recovery proceedings initiated prior to 30^th June,
2017 are saved by the said provisions, a question arises whether Revenue should
initiate recovery (such as garnishee proceedings, etc.) after 30^th
June, 2017 under the erstwhile law or u/s 142(8) of the GST law. One view would
be that section 174(2)(d) r/w/s 174(2)(e) permits any legal proceeding to be
instituted, continued or enforced in respect of tax dues of the earlier laws
despite their repeal w.e.f. 30^th June, 2017. Such legal proceeding
(including recovery proceedings) can be instituted even after the repeal as
long as it pertains to tax dues pertaining to the period prior to the repeal.
The provisions of section 142(8) are in addition to the erstwhile recovery
provisions and the recovery officer can opt for either of these provisions.

The alternative view would be that section 174(2) in its entirety only
permits institution of proceedings qua the tax defaulter. A garnishee
proceeding, which is an independent proceeding, cannot be instituted after 30^th
June, 2017 as there is no pre-existing liability on the defaulter’s debtor to
the government as on the said date. One of the arguments being canvassed in Sulabh
International Social Service Organization vs. UOI 2019 (4) TMI 523 (JH)
is that the term ‘instituted’ refers to proceedings already instituted before
30^th June, 2017. It is on account of this deficiency in the repeals
/ saving provision that section 142(8) comes into operation for recovery
actions instituted after 30^th June, 2017. Therefore, any recovery
proceeding should necessarily be initiated under the GST law. Rule 142A
provides for issuance of DRC-07A for creation and recovery of the legacy tax
liabilities on the GST portal.

Recovery of transitional credit

The transition scheme has been codified for enabling tax credits on
introduction of GST. Recovery of incorrect transition credit falls under two
variants: (a) recovery due to non-conformity with erstwhile provisions, say
Cenvat, availed on input services ineligible under Cenvat Rules. The recoveries
would be either covered under the repeals and savings provisions or u/s 142(8) (alternative
view discussed above); and (b) recovery due to non-conformity with GST
provisions, say ineligible cess carried forward or ineligible credits of stocks
u/s 140(3), etc. These recoveries arise due to violation of GST law and would
be recoverable through specific provisions under GST law rather than any
erstwhile law. However, GST law lacks a specific recovery provision for transitional
items such as these.

Overlooking the literal interpretation and giving a wide meaning to
‘input tax credit’¹  u/s
73/74, transitional credit could at the most be recoverable under the said
sections, in which case it would form part of GST liabilities and hence covered
under the previous heading – Taxes arising from adjudication /
assessments. The scope of section 73/74 in this context has been
discussed in an earlier article.

Recovery in case of clandestine removal /
non-accounted goods

Goods without appropriate documentation are considered as tax-evaded
goods and such goods are liable for seizure. Such evasive acts may be
identified as a result of inspection, search or interception. In case of
hazardous, perishable goods or any other relevant consideration, the proper
officer would dispose of the goods by following the process through DRC-16.
However, the said recovery is subject to the final outcome of the assessment
following the inspection, search or interception.

MODES OF RECOVERY

Recovery by
deduction / adjustments

The section
empowers the proper officer to adjust amounts held by the government (e.g.,
refunds) and due to the taxpayer against any dues to the government. Refund may
be either held by the proper officer himself or by any specified officer.
Amounts lying under the electronic cash ledger balance would also be subject to
such adjustments as being amounts held by the government. The proper officer
would issue DRC-09 intimating the specified officer to adjust the tax dues from
the amounts due to the taxable person. Rule 143 includes, amongst others,
officers of public sector undertakings / State-operated undertakings within its
coverage, implying that the proper officer can directly approach such creditors
for recovery.

Recovery by
detention and sale of goods

The proper officer
or any other specified officer/s is empowered to detain goods belonging to the
defaulter and under the control of the proper officer. The process of acquiring
control over goods has not been specified under the section. One would view
this section as being limited only to goods which are already under control of
the proper officer (say, confiscation of goods u/s 130 or seizure u/s 67). Rule
144 requires the officer to issue a notice in DRC-10 for public auction of
goods under its control and conclude the recovery through DRC-11 and DRC-12. An
issue would arise as to ascertainment of goods which are ‘belonging’ to the
taxpayer. The answer possibly lies in the underlying principle followed by all
the modes of recovery, i.e., recover amounts over which the taxpayer has
financial claim and not just possession / legal title.

Recovery by
garnishee

The proper officer
is empowered to issue a garnishee to a third-party debtor who holds sums to the
account of the taxpayer. A garnishee is an instruction to the third-party
debtor to pay the required sum forthwith or within the time specified, or pay
it on becoming due to the proper officer instead of the tax defaulter. The
proper officer would have to issue the notice in DRC-13 which would have
overriding claim against any other claims of the tax defaulter. The payment by
the third party to the government would constitute sufficient discharge of the
debt due to the tax defaulter (issued in DRC-14). Failure on the part of the
third party to comply with the notice would result in its treatment as a
defaulter under law and initiation of an independent recovery process on such
person. Recovery can also take place where any amounts are due under an
execution decree to the taxable person and the proper officer can request the
court to execute the decree in its favour for settlement of tax dues (DRC-15
and process of Civil Procedure Code, 1908).

Recovery by
distraint (seizure)

The proper officer
can also seize any movable / immovable property belonging to or under the
control of the taxable person and detain the same until the amount is paid.
Unlike detention, this provision extends to all property (such as fixed assets,
land, building, etc.) for recovery proceedings. If the said amount is not paid
within 30 days, the proper officer is empowered to sell the property for
realisation of the amounts due after deduction of the expenses of sale.

Recovery as
land revenue

Amounts due to the
government can be recovered as arrears of land revenue by applying to the
District Collector. The proper officer would issue a certificate to the
District Collector for recovery of the tax dues under the respective Revenue
Recovery Act under which all rents, incomes arising from the land would accrue to
the government account.

Government has
various options for recovery and though not explicit, the general practice has
been to recover amounts based on their ease of recovery without any specific
sequence. It is discretionary for the officer concerned that he may recover the
amount by attachment and if, in the opinion of the officer concerned, the goods
are of such nature that they are not saleable or would not fetch any price he
may not recover the amount by attachment and sale of such goods. The use of the
methods as provided is discretionary and even if the approach was slightly
indirect it need not be interfered with by the court (Prem Chandra Satish
Chandra vs. CCE (1980 6] E.L.T. 714 [All.]).

PROPER ADMINISTRATION AND OFFICER FOR
RECOVERY

Recovery
proceedings are to be conducted only by the ‘proper officer’ who may or may not
be the adjudicating officer. Section 2(91) of the CGST Act grants the Board the
power to assign the recovery functions to specified officers under its
administration. In view of the cross empowerment provisions, the challenge
would arise on the front of deciding the ‘proper officer’ for recovery
provisions. Does adjudication performed by the Centre permit the state tax
officer to proceed on recovery? The 16th Council meeting has provided exclusive
administrative powers to the state / Central administration based on the
allocation agreed between the governments. Moreover, section 6(2) provides that
where the proper officer has initiated a proceeding on a subject matter under
the CGST Act, the corresponding proper officer under the SGST Act is prohibited
from initiating any proceeding and vice versa. Recovery proceedings
would have to be initiated only by the proper officer from the administration
assigned for the taxpayer.

In the case of the
SGST Act, the Commissioner of the state would be empowered to perform the
assignment. Under the CGST law, the delegation is as follows:

State Commissioners
have also issued necessary instructions delegating their powers to Assistant
Commissioners for performing the recovery functions. Recently, the High Court
in Valerius Industries vs. UOI 2019 (9) TMI 618 (Guj.) held that
the State Commissioner being a delgatee himself, cannot further delegate the
recovery powers conferred by the State to its junior officers. The provision of
attachment of property on this ground was struck down by the court.

PROCEDURE FOR RECOVERY

The basic
requirement of recovery is that there should be a tax due either through self /
revenue assessment. Rule 142 prescribes the forms and the demand notice to be
issued along with the order of assessment directing the taxable person for
payment of tax dues. The notice is required to quantify the tax, interest and
penalty payable on account of assessment. This demand notice should be arrived
at after adjustments of amounts already paid to the government. Once the
pre-conditions for recovery are satisfied, the recipients to whom the
directions are being served would have to be issued a notice instructing them
to either exercise distraint or appropriate the amounts held with them to the
government. Revenue has in multiple cases attempted to recover taxes pending
adjudication or without any adjudication. This action has been clearly struck
down by courts from time to time and as recently as in Mono Steel India
Ltd. vs. State of Gujarat (2019-TIOL-422-HC-AHM-GST) where bank
attachment immediately on issuance of a show cause notice was set aside.

PECULIARITIES UNDER GST

Though there is
standardisation of the legal framework, the current GST structure (CGST / IGST
and 29 states and 7 UTs; pre- 6^th August, 2019) is still fettered
with tax segmentation and multiple state administrations. This poses definite
challenges over acquisition of jurisdiction for proceeding with recovery.
Section 25 has fragmented a single unified legal entity, based on its presence
across the states, into ‘distinct persons’ for purposes of implementation of the
Act, implying that each state registration is ring-fenced from the rest of the
entity. While the Act has placed this fiction from a legal perspective, most
organisations are unified from an operational perspective. The challenges are
explained by way of examples:

Q1 – ‘A’ a multi-locational entity having registration in all states
would still operate on a single bank account, unified debtor / creditor
relationships and directors / workforce. The proper officer in Maharashtra
having jurisdiction over A_MH would like to proceed with a garnishee
order to a bank or a debtor of A_DEL.

A1 – Explanation to section 79 prescribes that person would include
‘distinct persons’. The officer is within his powers to issue garnishee notice
to any bank / debtor and recover the sums due from the distinct person. In the
context of recovery, one may have to view the entire entity as one person even
though there is a bifurcation for the purpose of levy and collection of taxes.
Of course, this is an issue that would be subject to judicial scrutiny.

Q2 – Extending this example further to a scenario where distinct bank
accounts / debtor lists are maintained based on registrations… does the
officer have jurisdiction to recover sums due from a debtor of another distinct
person of the entity?

A2 – The proper officer can issue a garnishee to any debtor it chooses
to and is not limited by the geographical limits of the state. The proper
officer can issue a garnishee to all bank accounts / creditors for the purpose
of recovery.

Q3 – A_DEL, a distinct person, has been sanctioned a
CGST/SGST/IGST amount. Would the proper officer of A_MH be entitled
to adjust demands with the refunds sanctioned to A_DEL?

A3 – Specified officer has been defined to include any officer of the
Central / state government. The proper officer may direct the officer of A_DEL
to appropriate the refunds to the outstanding demands in Maharashtra.

SPECIAL PROVISIONS IN RECOVERY

Section 80 – Recovery in instalments: A Commissioner is empowered to permit payments of tax dues in
instalments subject to the condition that any default therefrom  would make the entire balance outstanding
without any further recovery notice. The officer in such cases directly
proceeds for recovery of the balance amount after the act of default.

Section 81 – Transfer of property void in certain cases: This
section repudiates any transfer of property by sale, mortgage, exchange, etc.,
which is in the possession of a taxpayer if such transfer has been conducted
with an intention to defraud the government. The proper officer in such cases
is permitted to recover its tax dues from the property notwithstanding the fact
that the property has been transferred by the taxable person. The proviso to
the said section carves out an exception for cases where the transfer is made
for adequate consideration in good faith, or with the prior permission of the
proper officer.

Section 82 – Tax to be first charge on property: This section overrides all laws, except the Insolvency and
Bankruptcy Code, 2016, to state that any amount payable as taxes under the GST
law would be a first charge over the property. In Central Bank of India
vs. State Of Kerala [2009] 21 VST 505 (SC), the three-judge Bench held
that in case of specific provisions in the statute, the sovereign State would
have primacy over secured debt for realisation of sovereign dues and
distinguished the decision in Union of India vs. SICOM Limited [2009] 2
SCC 121, delivered in the context of Central excise, held the converse
in the absence of a specific provision in the statute.

Section 83 – Provisional attachment of property: This section empowers the proper officer to obtain the permission
of the Commissioner seeking provisional attachment of property during the
pendency of any proceeding in order to protect the interest of the Revenue.
Such provisional attachment is valid for a period of one year from the date of
attachment.

Section 84 – Continuation and validation of recovery proceedings: Where the demand notice is subject to appeal, revision, etc., any
subsequent enhancement at a higher forum would need to be followed up with an
additional demand notice. The recovery proceedings in respect of the original
demand can be continued without a fresh notice from the stage at which such
proceedings stood immediately before the disposal of such proceedings. For
example, in case a garnishee order has been issued to a debtor and the same has
been stayed by a court, the proper officer need not issue a fresh garnishee
notice after the passing of the order and can proceed for recovery to the
extent the original demand is confirmed. In case of any enhancement, a fresh
demand notice recovery process would have to be initiated.

LIABILITY IN SPECIAL CASES

The GST law
prescribes cases where the recovery provisions can extend beyond the taxable
person. The cases have been tabulated below:

One must note that
there is no outer time limit for recovery of tax dues once the adjudication has
been completed within the specified time frame. Generally, one should expect
that the Revenue would proceed on recovery at the earliest for recovering its
arrears.

Recovery is a necessary tool for the
government to realise its taxes. Yet, this tool should be used cautiously and
wisely for effecting its end purpose rather than mere display of authority over
the taxpayer. The erstwhile law as well as GST Law has already experienced
hasty use of these provisions and leading to the closure of the enterprise
itself. The heads of administration should issue circulars limiting the
instances where such provisions should be invoked, in a way ensuring efficient
recovery of taxes rather than killing the golden goose itself.