How to raise vitiated, unsustainable as well as untenable demand in GST.

One of my friend sought my help in replying to Audit Slip received by him. As I was going through the same, I was not surprised to see a demand of GST @18% on the entire trade payable as on 31/03/2023 as per the audited financial statement under the assumption as well as the presumption that the entire amount is due for payment for more than 180 days. When we examined this aspect in detail, it was observed that the total purchases of all the materials during the year 2022-23 was almost eight times of the trade payables as on 31/03/2023 meaning thereby the trade payables are only 45 days old. We enclosed ledger abstract of few major suppliers to substantiate the claim. Our reply was We have carefully and critically examined the trade payables as on 31/03/2023 and furnish that all the creditors are less than 60 days old. As per our terms of contract with our suppliers, payments are normally made within 45 to 60 days. It is once again reiterated that not even a single case is due for payment for more than six months. The allegation seems to be based on assumption rather than on verification of facts. Hence the entire proposal may please be dropped at audit stage itself.

While we were confident that the demand proposed in audit slip is likely to be dropped in the show cause notice. The SCN was issued on 09/09/2026 wherein it was proposed as:

DISCUSSION AND FINDINGS: The reply was considered as per the Balance sheet note 6 the outstanding dues of creditors other than micro enterprises is Rs.4474930- The tax payer has furnished the ledger extract details relating to 1) Tvl.Mita Fasteners Pvt ltd., (2) Sree Parameswari industries and (3) Tvl.Ferro Plast for the year 22-23, the actual payments when made the details are not furnished, therefore ITC reversal proposed is hereby confirmed.

In the process of reply to the show cause notices, as I was examining the similar cases, if any in TAXTMI, I found that DSV Air and Sea Private Limited Versus State of Tamil Nadu, The Deputy State Tax Officer-1, Commissioner of Commercial Taxes, Chennai - 2024 (3) TMI 1276 - MADRAS HIGH COURT is identical to the facts of my case. Let us analyse the case law now.

The taxpayer was subjected to audit and audit slip was issued on 26/09/2023. As the time limit for issuing SCN for the year 2017-18 was 30/09/2023, SCN was issued on 30/09/2023. As the last date for passing the final order stood as 31/12/2023, OIO was passed on 31/12/2023. The taxpayer had operations in other states as well and taking a cue from the audited financial results for the year ended on 31/03/2018, OIO confirmed demand of 18% GST on the entire trade payables as on 31/03/2028 which stood at around 86 Crores. As making a pre deposit of even 10% on this vitiated demand is not practical, a writ was preferred before the High Court of Madras. This case is a landmark case decided as early as on 27/03/2024 itself by way of concluding that the demand of GST on entire trade payable is vitiated, unsustainable as well as untenable in law. Moving further, the High Court suggested to go for first appeal by making the required pre deposit of 10 % on all other demands other than that of trade payables. The operative portion of the Madras High Court order reads as "8. Since it was concluded earlier that the findings with regard to imposition of GST on trade payables by treating the total tax payables as taxable supplies is prima facie untenable, the petitioner shall remit 10% of the disputed tax demand pertaining to all the other heads of demand under the impugned order as a condition for remand.

9. For reasons set out above, the impugned order is quashed subject to the condition that the petitioner remits 10% of the disputed tax demand under all heads, except trade payables, within two weeks from the date of receipt of a copy of this order. Subject to the receipt of 10% of the disputed tax demand as indicated above, the 2nd respondent is directed to provide a reasonable opportunity to the petitioner, including a personal hearing, and thereafter issue a fresh order after duly considering all the petitioner's contentions within two months, and all contentions are left open to the petitioner.

10. The writ petition is disposed of on the above terms. There will be no order as to costs. Consequently, connected miscellaneous petitions are closed.

As this decision was available in April 2024 itself, all State Tax Officers all over Tamil Nadu were expected to take a clue and be more cautious in raising focus as well as fictious demands which only increases the litigation but stands as a burden of tax officials as the order is finally quashed or set aside, taxpayer as he id burdened with legal expenses as well as the Judiciary as they are burdened with disposal of unsustainable and untenable matters.

Though my case is currently sub-judice, through this article I appeal to the State Tax Authorities to issue urgent clarifications to all state tax officers in Tamil Nadu to desist from raising such GST demands on the entire trade payables as on the account closing date. The cases where payments were not made within 180 days must be separately identified and demand be raised only on such cases.

Conclusion: Everything else is changing around us except the mindset of the tax officials in GST. Artificial Intelligence is there to check whether this demand is tenable. GSTAT orders are coming out during last two months to guide the proper officers to pass qualitative adjudication orders. Let the tax officer whose order is quashed as in the above referred case understand that he is passing a WRONG order in the first place.