Legality of audit proceedings of service tax initiated post GST implementation
The legality of audit and recovery proceedings initiated now under the erstwhile service tax laws, has been a debatable issue in recent times. This Outlook is an attempt to apprise the legal intricacies involved on the aforesaid issue and the views taken by various Courts till date.
The instant issue revolves around the application of Section 173 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) which provides for omission of the Finance Act, 1994 (‘Finance Act’). Section 174 of the CGST Act contains repeal and savings clause.
Section 173 of the CGST Act omitted the Finance Act which contained provisions for levy of service tax in the erstwhile regime. Section 174(2) provides that repeal of the Finance Act shall not affect institution, continuation or enforcement of any investigation, enquiry or verification, assessment proceedings, adjudication or any other legal proceeding or recovery of arrears etc. and continue as if the Finance Act had not been so amended or repealed.
The taxpayers have challenged legality of audit proceedings initiated by the revenue in different jurisdictions post implementation of GST. The different Courts have laid down dissenting opinions on the issue.
The High Courts of Delhi and Jharkhand have granted an interim stay on such proceedings. In such cases, the Courts have expressed prima facie view that the expression ‘instituted’ employed in Section 174(2)(e) of the CGST Act covers only the proceedings already initiated under the Finance Act.
It is pertinent to note the Gujarat High Court judgment in case of OWS Services Warehouse LLP v. UOI, 2018 (19) GSTL 27 (Guj.) wherein the Court was examining the tenability of service tax audit by CAG post implementation of GST. It held that Section 174(2)(e) of the CGST Act would not save Rule 5A of the Service Tax Rules (‘ST Rules’), 1994 to enable CAG to initiate fresh proceedings. A similar view was adopted again by the Gujarat High Court in the case of Oil Field Warehouse and Service Limited v. UOI, 2019 (20) GSTL 14 (Guj.).
The Gauhati High Court adopted a contrary view in the case of Laxmi Narayan Sahu v. UOI, 2018 (19) GSTL 626 (Gau.). In this case, the Court relied on the jurisprudence vis-à-vis application of a repeal and savings clause and concluded that saving clause will act as an exception to the omission clause. The High Courts of Calcutta and Rajasthan also refused to grant interim stay on such matters on account of presence of savings clause in the CGST Act under which proceedings under the erstwhile law can be initiated.
NITYA Comments: Though Section 174(2)(e) of the CGST provides for a saving clause for institution of legal proceedings post implementation of GST; it is important to note that the Courts have rendered Rule 5A of the ST Rules unconstitutional. The constitutionality of amended Rule 5A has also been challenged and is sub judice before the Supreme Court. Basis this, the proceedings initiated under Rule 5A can be contested. Any other audit proceedings initiated by the department, will survive under the savings clause under the CGST Act.