Direct Recovery of GST in case of Discrepancy between GSTR 1 and 3B

About

The 48th GST council meeting resulted in the codification of Rule 88C in the CGST Rules, addressing differences in liability reported in GSTR-1 and GSTR-3B. This rule impacts taxpayers with discrepancies between reported supplies. They must ensure compliance, as the onus is on them.

The rule has statutory backing from Section 75(12) of the CGST Act, which allows for direct recovery of unpaid or short-paid tax based on GSTR-3B. The Finance Act, 2021 added an explanation defining "self-assessed tax" to include tax payable for supplies reported in GSTR-1 but not in GSTR-3B. This grants the department power for direct recovery in case of discrepancies. However, the provision didn't mention a hearing opportunity, which was later clarified in a circular.

Overview

To resolve the trade uncertainties caused by the lack of notice/intimation requirement before direct recovery, Rule 88C was added to the CGST Rules. This rule states that:

If the tax payable for a period under GSTR-1 is higher than the amount under GSTR-3B by a specified amount and percentage, the department will send a system-generated notification of the difference in Part A of Form DRC-01B to the registered person.

Upon receipt of the notification, the registered person must either pay the differential tax liability (including interest) within 7 days and furnish the details in Part B of Form DRC-01B on the common portal, or furnish a reply on the common portal explaining any unpaid differential liability in Part B of Form DRC-01B.

If the differential tax liability is not paid within the specified period, or if the registered person does not furnish a reply or explanation that is deemed acceptable by the proper officer, the amount will be recoverable under Section 79 of the CGST Act.

Rule 59 has been amended to state that if a registered person receives an intimation under Rule 88C, they cannot file GSTR-1 for a subsequent period unless they deposit the amount specified in the intimation or furnish a reply explaining any remaining unpaid amount. The 48th GST council meeting stated that this would allow taxpayers to pay or explain the difference without intervention from tax officers. The question remains whether the taxpayer's reply must be satisfactory to the officer.

The recently added rule makes reconciling differences between GSTR-1 and GSTR-3B a crucial, time-sensitive task. The rule provides only a 7-day window to resolve the differences and decide whether to pay or explain them.

The rule does not allow for an extension of the strict 7-day limit. If the difference is not resolved, the department will initiate direct recovery and prevent the filing of GSTR-1 for subsequent periods. As subsequent filing of both GSTR-1 and GSTR-3B is mandatory under Section 39, GSTR-3B cannot be filed for subsequent periods until the difference is resolved. If the default continues for another tax period, the filing of E-way bills will also be restricted under Rule 138E, crippling the business's ability to move goods and disrupting the entire supply chain.

The DRC-1B form is unclear as to whether it constitutes a demand notice under Section 75, which would entail the opportunity for a hearing, the grant of time and the requirement for the proper officer to issue a speaking order. Rule 88C, however, does not provide for any of these. If the registered person's reasons are not accepted by the proper officer, the difference is recoverable under Section 79 of the CGST Act. It's possible that some of the reasons given by the registered person may be accepted while others may not, necessitating a determination and order by the proper officer. However, it appears from Rule 88C and the DRC-1B form that the proper officer would initiate recovery proceedings directly without issuing an order. This raises the question of whether the registered person's only recourse is to seek a stay of recovery action from the High Courts

GSTR 1 vs 3B

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Conclusion

The implementation of Rule 88C is pending as the threshold for differences in tax liability between GSTR-1 and GSTR-3B has yet to be determined. Nevertheless, its implementation is likely to result in a surge of automated DRC-1B notices to taxpayers in the near future. It is crucial for the department to resolve these ambiguities promptly to prevent potential legal battles.