The payment of taxes during an investigation, audit proceedings, or post adjudication – whether voluntarily to halt the accrual of interest or under compulsion in dealing with tax authorities – warrants discussion under India’s Central Goods and Services Tax Act, 2017 (the GST Law).
This article addresses the concept of payment of taxes without admitting liability and with the aim of challenging the tax demand. Legally, this practice is known as ‘payment under protest’.
Under the GST Law, this issue is litigated because tax authorities treat such payments as ‘acquiescence’ or ‘acceptance of liability’ irrespective of the taxpayers’ intent. The lacuna lies in the absence of any specific/dedicated provision in the GST Law allowing the taxpayer to record and lodge their protest.
However, the courts have judicially recognised the concept of payment of tax under protest with a view to safeguarding the rights of taxpayers to contest the tax liability. Broadly, two modes of protest are recognised, which are discussed below.
Lodging a protest in writing
Whenever taxpayers intend to make a payment under protest and preserve their right to contest the liability, the usual course of action is to file a letter of protest with the tax officers, informing them in writing not to treat such payments as acquiescence or admission of liability.
The Supreme Court of India has long recognised the practice of the payment of taxes under protest by lodging such a letter. For instance, in Mafatlal Industries and Others v Union of India and Others (1997), in the context of the erstwhile central excise regime, the nine-judge bench of the apex court held that once a letter of protest is lodged with the proper officer, all that the officer is empowered to do is to acknowledge the letter of protest, which shall be proof that the amounts have been paid under protest.
This position has been followed consistently by High Courts in various states under the GST Law as well.
In The Union of India and Others v Bundl Technologies (2022), the High Court of Karnataka recognised the concept of payment under protest through written intimations to tax officers. A communication addressed to the Department of Revenue (the Department), stating that the taxpayer reserves its right to claim a refund of the amounts paid during investigation, was treated as sufficient proof of non-admission of liability by the taxpayer.
Similarly, in Khaitan Foods India v State of Uttar Pradesh and Two Others (2025), heard by the High Court of Judicature at Allahabad, the taxpayer’s goods were detained on account of a mismatch in weight. Since the goods were perishable, the taxpayer paid the penalty under protest through a challan and contested the liability in parallel by filing a response to the show cause notice issued to it. The taxpayer was advised to generate Form GST DRC-03, which is used under the GST Law for intimating voluntary payments. While generating the form, the taxpayer consciously made an endorsement that “the amount of penalty is paid under protest and without prejudice to our legal right to appeal”. Under such circumstances, the court recognised that a specific endorsement is sufficient to establish that the payment is made under protest.
Protest by the conduct of taxpayers
In the absence of a proper mechanism, taxpayers may make certain payments during investigations or search/seizure proceedings – more often than not, under compulsion or fear, or due to business exigencies – without lodging a formal protest. In these circumstances, it is highly possible that these payments are treated as voluntary admissions of liability by the tax officers.
One such matter came up for hearing before the Supreme Court of India in ASP Traders v State of Uttar Pradesh and Others (2025), before a Division Bench comprising J B Pardiwala and R Mahadevan, JJ, in which the primary issue was whether the payment of tax and a penalty to secure the release of goods should be treated as payment under protest.
In this case, due to business exigencies, the taxpayer paid the tax and penalty to release the detained goods and contested the liability in parallel by filing a reply denying all the allegations. However, the tax officers treated the payment as an admission of liability and issued a discharge order instead of adjudicating the matter.
Under such circumstances, the Supreme Court held that once liability is contested by filing a detailed response, adjudication is mandatory to safeguard the taxpayer’s right and justify the creation of liability in the first place. The court held that failure to do so would be tantamount to violation of the constitutional mandate under Article 265 of the Constitution of India, which stipulates that no tax can be levied or collected except with the authority of law.
The court further held that mere payment of tax will not result in the taxpayer waiving or abandoning their statutory right to appeal or giving acquiescence to the liability created, especially when the taxpayers actively contest such liability by filing a detailed response. Thus, the Supreme Court recognised the concept of protest by the conduct of the taxpayers.
Furthermore, in Mafatlal Industries and Others v Union of India and Others, the Supreme Court laid down that payment of duty while simultaneously contesting the liability by filing an appeal is required to be construed as payment under protest. More recently, the High Court of Delhi followed this decision in Principal Commissioner of Customs (Import & General) v Cisco Systems India (2023), in which the court held that the very act of filing an appeal against an order imposing duty constitutes a protest against the duty.
It can be seen that the Supreme Court has placed much emphasis on the intention of taxpayers or their conduct during or after investigation proceedings rather than the nomenclature of the payments to decide whether the payments are voluntarily made or are made under protest.
Key takeaways
Judicially, there are two recognised modes of payment of taxes under protest in India: by lodging a formal letter of protest and by the conduct of the taxpayers while making such payments. It is advisable, and also convenient, to choose the first method and communicate to the tax officers that payments are made under protest.
However, failure to do so cannot always be treated as an admission of liability, especially when the taxpayers actively contest the liability. Taxpayers faced with such situations can take recourse to the consistent view adopted by the courts, that protest by conduct is also recognised as a valid mode of payment of tax under protest.
The views expressed in this article are purely personal.
