GST registration cancellation valid but retrospective effect without reasons violates natural justice principles

Delhi HC held that while GST registration cancellation for non-filing returns for six months was valid, retrospective cancellation was improper. The court found violation of natural justice as no reasons were provided for retrospective effect. The cancellation order lacked justification for covering periods when returns were properly filed. The court modified the order to limit cancellation from the date of the impugned order rather than retrospectively, disposing of the application accordingly.

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Issues involved:
1. Cancellation of GST registration with retrospective effect.
2. Proper exercise of power to cancel registration with retrospective effect.
3. Adverse ramifications of retrospective cancellation on taxpayers and purchasers.

Detailed Analysis:
1. The petitioner sought to set aside a Show Cause Notice (SCN) and an order issued by respondent authorities regarding the cancellation of their GST registration due to non-filing of returns for six months. The petitioner did not respond to the SCN, leading to the cancellation of their registration. The petitioner was not contesting the cancellation itself but was concerned about the retrospective effect from 01.07.2017, especially since no tax liability was determined for that period.

2. The authorities relied on Section 29(2) of the Central Goods and Services Tax Act, 2017, which allows for cancellation of registration for various reasons, including non-filing of returns for six months. However, the judges emphasized that the power to cancel registration with retrospective effect must be exercised judiciously and not arbitrarily. The impugned order lacked a rational basis for the retrospective cancellation, as no specific reasons were provided for such action.

3. The judges highlighted the adverse consequences of retrospective cancellation on both the taxpayer and those transacting with them, potentially affecting Input Tax Credit (ITC) for purchasers. While the legal implications of depriving bona fide purchasers of ITC were not fully explored in this case, the judges stressed the importance of considering such ramifications before retroactively cancelling a taxpayer's registration. They directed that the cancellation of the petitioner's GST registration should only be effective from the date of the impugned order, limiting the retrospective impact.

4. The judgment concluded by preserving the rights of all parties involved, allowing for future proceedings if necessary, and clarifying that the petitioner could request cancellation of their registration from the date they ceased business activities. The decision aimed to balance the interests of the taxpayer, the authorities, and other parties affected by the cancellation of GST registration, emphasizing the need for a fair and reasoned approach in such matters.

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