GST officers must prove intent to evade tax before invoking fraud provision: CBIC

The provisions can be used only when there is specific evidence that the taxpayer intended to evade tax, it said.

The CBIC said Section 74(1) and Section 74A(5)(ii) of the CGST Act cannot be invoked without evidence of fraud, wilful misstatement or suppression of facts.

The provisions also cannot be applied automatically during scrutiny proceedings merely because officers find a discrepancy. Scrutiny is meant to examine records and determine the nature of an issue, the board said.

"Accordingly, these provisions may be invoked only where the investigation discloses material evidence of such conduct, which must also be clearly set out in the SCN (show cause notice)," the CBIC said.

The circular follows decisions taken at the 57th GST Council meeting on October 8 to decriminalise provisions of the GST law and rules. The Council decided to remove the arrest powers of tax officers and raise the prosecution threshold to Rs 5 crore from Rs 1 crore.

The changes to the GST law will require Parliament’s approval and are expected to take effect from April 1 next year. Changes related to administrative functioning are being implemented through circulars.

Citing Supreme Court and High Court judgments, the CBIC said show cause notices must clearly state the basis for invoking provisions related to fraud, wilful misstatement or suppression of facts.

Section 74(1) and Section 74A(5)(ii) deal with the determination of tax liability when a taxpayer commits fraud, makes a wilful misstatement or suppresses facts to evade tax.

The law defines suppression as the failure to declare facts or information required in a return or other document, or the failure to provide information specifically sought by authorities.

Penalties under these provisions range from 15% to 100% of the tax amount, depending on when the payment is made in relation to the show cause notice.

The CBIC said the phrase “fraud or wilful misstatement or suppression of facts” inherently includes an intention to evade tax.

"The power to invoke fraud, wilful-misstatement, or suppression of facts for demand is conditional, hinging on proof of intent to evade tax, which is required to be clearly established in the SCN along with evidence," it said.

The board added that suppression or misstatement must be deliberate and aimed at avoiding or reducing tax liability. A mere failure to provide correct information would not amount to suppression unless it was intentional.