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Being investigated by India’s tax department? Know your rights and options

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Taxpayers can mitigate litigation by being vigilant and proactive during the investigation stage

Raghavan Ramabadran, Sahana Rajkumar and Derlene Joshna of Lakshmikumaran & Sridharan explain how taxpayers can mitigate litigation by being vigilant and proactive during the investigation stage.

Four years have lapsed since the introduction of GST in India and the last date for filing annual returns for financial years 2017–18, 2018–19 and 2019–20 is already over. The time limit for issuance of show-cause notices (SCNs) have kicked in and taxmen are busy on their heels investigating taxpayers. Recent court rulings or circulars issued on various interpretational points and practical issues faced industry wide have also set in motion increasing audits and investigations.

The GST legislation does vest taxmen with a wide range of powers to apprehend tax evaders. These powers extend to audits, enquiries, summoning officials, search, seizure, provisional attachment, arrest, confiscation, issuance of SCNs and imposition of penalties.  

While the necessity of these processes cannot be doubted, the complexities that any tax legislation poses in interpretation and compliance must also be given due weightage. Over the years, the government and the courts have ushered in many taxpayer-friendly reforms such as detailed guidelines on the procedure to be followed during investigation, rights of taxpayers, etc. Despite these reforms, some taxmen take coercive steps during investigations.

One such step which is presently in vogue is the practice of demanding payment of tax by filing ‘DRC-03 challan’ during the investigation period itself, often under the promise of abatement of all proceedings or threat of arrest or threat of attachment of properties. Many a time, taxpayers end up making such payments under duress and are often unaware of the fact that such payments are made under protest and that such protest must be explicitly lodged with the department officials. 

Taking note of this practice in a writ petition filed by a taxpayer who had paid GST and later lodged his protest, the Karnataka High Court in Bundl Technologies has held that mere payment of tax cannot be construed to be a payment towards self-ascertainment as contemplated under Section 74(5) of the CGST Act. Unlike the erstwhile regime which explicitly recognised payment under protest, GST law provides for abatement of proceedings if a taxpayer makes voluntary payment of self-ascertained tax under Section 74(5). Therefore, this judgment comes as a relief to taxpayers who are compelled into making such payments. 

It is vital for taxpayers to promptly record that their payment was made under protest to secure their right to a refund and written communications with the department is essential for maintaining a record of the investigation process. 

Other intimidating practices include raids at odd hours combined with prolonged detention of employees for interrogation, etc. In such a scenario, taxpayers have rights against physical assault and deprivation of their liberty. 

There is no doubt that proper handling of the investigation process is important for mitigating avoidable litigations. In this context, taxpayers may take note of the following basic rights:

  • Right to seek legal representation;

  • Right to seek a copy of the statement recorded by the investigating officer;

  • Right to retract statements;

  • Right to seek cross-examination of a statement; and

  • Rights against physical assault.

Tax investigations entail interplay of business facts with tax laws and procedures. It is important to remain vigilant and develop strategies for mitigating risks and undesirable outcomes during investigation proceedings. 

Every communication with the department is crucial to defend the case and to obtain appropriate relief at different stages of the proceedings. Therefore, it is not enough if taxpayers are aware of their rights; they also need to be aware of their responsibilities, duties, and the best practices to be adopted during tax investigations. A brief list of such responsibilities and best practices are noted below:

  • Co-operate with the taxmen;

  • Attend summons/seek genuine adjournments;

  • Make an informed decision on who should attend the summons, who can accompany the person summoned and understand the effect of non-appearance;

  • Provide correct information/do not mislead officials;

  • Do not delete/dispose-off data;

  • Explain facts and avoid legal interpretations;

  • Rely on legal opinions for interpretation issues and expert opinions for technical matters as evidence;

  • Refrain to comment on what is not known;

  • Sign only true statements;

  • Make timely objections to any procedural irregularities committed by tax officials;

  • Assess the bonafide of the taxmen and weigh the option of remitting tax to mitigate litigation or opt to challenge the action before a court of law; and

  • Decide on the future course of action regarding the disputed tax position adopted by the assessee. 

The above list is merely illustrative, and the duties involved or strategies to be adopted vary depending on the facts unique to each taxpayer. Taking note of the popular proverb, ‘cross the stream where it is shallowest’, taxpayers can mitigate litigation by being vigilant and proactive during the investigation stage. 

 

Raghavan Ramabadran

Executive partner, Lakshmikumaran & Sridharan

E: raghavan.r@lakshmisri.com

 

Sahana Rajkumar

Principal associate, Lakshmikumaran & Sridharan

E: sahana.r@lakshmisri.com

 

Derlene Joshna

Associate, Lakshmikumaran & Sridharan


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