Cancellation of GST registration with retrospective effect

Off late it is common to come across situations where GST registration has been cancelled with retrospective effect.

In this article, we discuss the powers of the GST authorities concerning cancellation of registration, the impact of the cancellation on the registrant and its customers, and the available legal remedies.

What does the GST law say on this?

Section 29 (2) of the CGST Act read with Rule 21 of the CGST Rules empowers the GST authorities to cancel a registration, with a retrospective effect, upon committing certain offenses specified therein.

Such offenses include non-filing of returns for a continuous period of 6 months or more, availing of ITC in violation of section 16 of the CGST Act, violation of Rule 86B of CGST Rules i.e., discharging more than 99% of GST liability through IT, etc.

The procedure prescribed in this regard is as follows:

• Upon identifying any such offense, a notice in Form GST REG-17 can be issued to seek an explanation as to why registration should not be canceled.
• To which a suitable response in Form GST REG-18 can be filed. Based on this, an order shall be passed in Form GST REG-20, either dropping the proceedings (i.e., revocation of cancellation) or canceling the registration.

What are the Courts saying about this?

Retrospective cancellation of GST registration has been a dispute with the GST authorities, leading to knocking on the doors of High Courts across the Country. Notable judgments on this aspect are as follows:

• Retrospective cancellation of registration is not valid merely based on non-filing of some returns-  SUNRISE INDIA VERSUS THE COMMISSIONER, DELHI GOODS AND SERVICE TAX & ANR - 2024 (4) TMI 1123 - DELHI HIGH COURT
• Cancellation of GST registration with retrospective effect is not valid which is without any objective criteria- SWATI GUPTA VERSUS COMMISSIONER OF DELHI GOODS AND SERVICES TAX & ANR. - 2024 (4) TMI 1128 - DELHI HIGH COURT
• Where registration was canceled retrospectively without spelling out the reason for retrospective cancellation, it was held that registration shall be canceled with prospective effect- MUKESH KUMAR SINGH VERSUS COMMISSIONER OF DELHI GST AND ORS - 2024 (4) TMI 1082 - DELHI HIGH COURT, RAVI PARKASH GOEL, PROPRIETOR OF M/S. GOPISH PHARMA VERSUS SALES TAX OFFICER CLASS II/AVATO, WARD 71, DELHI & ANR. - 2024 (5) TMI 1187 - DELHI HIGH COURT.

High Courts made one point noticeably clear that the registration cannot be canceled with retrospective for frivolous reasons and such a power must be exercised with caution.

Impact on registrant- From the date of notice in Form GST REG-17 till such proceedings are concluded:

• GST registration shall be suspended in terms of Rule 21A of the CGST Rules.
• The registrant shall not make any taxable supply or issue any tax invoice i.e., Business comes to a standstill.
• The registrant shall not be granted any refund under section 54 of the CGST Act.
• In case of revocation or cancellation, the registrant shall be allowed to issue an invoice for the period between initiation and dropping of the proceedings.

Impact on customers

The ITC chain gets broken, leading to the reversal of ITC despite paying the consideration along with GST to the supplier.

Safeguards for the registrants

• File returns on time and adhere to all applicable compliances.
• When taxpayers do adhere to the compliance requirements and despite no violation under Section 29 (2) of the CGST Act read with Rule 21 of the CGST Rules, the GST authorities sometimes cancel the registration arbitrarily. In such cases, one may approach the jurisdictional High Court through a writ petition to seek relief.

Safeguards for the customers

• Incorporate appropriate clauses in the purchase order/agreement to recover the GST liability along with interest, penalty, and litigation cost (if any), in the event of failure to deposit GST with the Government.
• Evaluate the possibility of payment of GST portion to the suppliers only after furnishing the proof of filing of GST returns and payment of GST.

Pradeep is a Chartered Accountant with over a decade of experience advising Indian and multinational clients. His impressive career path includes stints at renowned firms like PwC, Deloitte, and Economic Laws Practice.

He currently runs Unnathi Partners based out of Bengaluru, a consulting firm specializing in accounting, tax, and regulatory consulting services. He is reachable at pradeepreddy@unnathipartners.com or +91-9686700879