Introduction
The introduction and subsequent amendments to Rule 142(1A) of the Central Goods and Services Tax (CGST) Rules, 2017 have sparked widespread discussion regarding the prerequisite procedural requirements for issuing notices under Section 74(1) of the CGST Act, 2017. The debate primarily centres around whether the issuance of FORM DRC-01A is mandatory or discretionary following the October 2020 amendment, questioning the effectiveness and fairness of the adjudication process in GST compliance.
Legislative Framework: Section 74 and Rule 142(1A)
Section 74 of the CGST Act deals with cases involving fraud, wilful misstatement, or suppression of facts with intent to evade tax. Sub-section (5) of Section 74 offers a taxpayer an opportunity to pay the tax, interest, and a reduced penalty of 15% before the issuance of notice, thereby permitting an early resolution of liability and avoidance of heavier penalties that follow formal adjudication.
Rule 142(1A) was inserted via Notification No. 49/2019 – Central Tax (09.10.2019) to bolster this process, formerly stipulating that the “proper officer shall communicate the details of any tax, interest, and penalty as ascertained by the said officer, in Part A of FORM GST DRC-01A.” The rule’s original phrasing ("shall") established an obligatory requirement for the proper officer to issue FORM DRC-01A before proceeding with formal notice under Section 73(1) or 74(1).
Amendment and Impact: “Shall” to “May”
Notification No. 79/2020 (15.10.2020) altered the legal landscape by substituting "shall" with "may" in Rule 142(1A), making issuance of FORM DRC-01A appear discretionary. This amendment has led to divergent administrative and judicial interpretations, with some tax authorities treating it as optional and thereby, skipping the pre-notice intimation process.
Statutory Interpretation: Discretion vs. Obligation
The change from “shall” to “may” in statutory language is conventionally seen as shifting from a mandatory to a permissive action. However, courts have often interpreted “may” as “shall” where statutory intent, taxpayer rights, and fairness principles guard against administrative arbitrariness.
The principle laid down in Bennett Coleman & Co. v. Union of India, AIR 1973 SC 106 dictates that the context, object, and underlying policy of a rule should guide its interpretation, especially when taxpayer rights are at stake.
Judicial Precedents and Administrative Practice
Pre-Amendment Period: Mandatory Nature
High Courts across India have unanimously held that failure to issue FORM DRC-01A during the pre-amendment period (i.e., when the rule used “shall”) vitiates subsequent adjudication proceedings:
- Elesh Agarwal v. Union of India, 2023 151 taxmann.com 538 (Allahabad): The Allahabad High Court emphasized that compliance with Rule 142(1A) before issuing notice under Section 74(1) is a prerequisite, firmly establishing taxpayer right to settle dues before formal notice and heavy penalties.
- Other High Courts, such as those in Gujarat and Punjab & Haryana, have supported this view, setting aside notices issued without the mandatory DRC-01A during the pre-amendment phase.
Post-Amendment: Discretion or Residual Obligation?
With “shall” replaced by “may,” authorities tend to bypass FORM DRC-01A. However, this discretion is actively being challenged:
- Amit Traders v. Union of India, Order dated 20.09.2024, R/SCA 9271 of 2024 (Gujarat HC): The court issued notice regarding whether "may" should be read as “shall” to avoid rendering Section 74(5) redundant and to safeguard the taxpayers’ rights to settle on beneficial terms.
The reasoning in Elesh Agarwal remains relevant, as the very purpose of Section 74(5) is to provide taxpayers a final opportunity to resolve disputes with minimal penalty, which becomes illusory if DRC-01A is not issued.
Practical Impact: Taxpayer Rights and Penalties
The absence of FORM DRC-01A prejudices taxpayers’ ability to pay only 15% penalty under Section 74(5), exposing them to higher penalties under Sections 74(8) and (11) on subsequent notice and adjudication.
Such prejudice undermines both fairness and the legislative objective of encouraging voluntary compliance and prompt settlement of disputes.
Critical Analysis: Should “May” Be Read as “Shall”?
A harmonious and purposive construction of Rule 142(1A) post-amendment is essential. Given that Section 74(5) explicitly allows for tax ascertainment by either the taxpayer or the proper officer and only becomes effective upon intimation via DRC-01A, the legislative intent unmistakably points toward mandatory issuance—discretion should not override the substantive right provided.
The doctrine of “reading down” suggests that where exercise of discretion frustrates the statutory purpose, courts may interpret “may” as “shall.” The Gujarat High Court's ongoing scrutiny in Amit Traders signals willingness to protect taxpayer interests and preserve legislative intent.
Conclusion
The debate regarding the mandatory nature of FORM DRC-01A prior to issuing notice under Section 74(1) of the CGST Act, 2017 represents a crucial intersection of procedural fairness, taxpayer rights, and legislative intent. Both the statutory framework and judicial precedents underscore that pre-notice intimation via DRC-01A is an indispensable step—one that, despite the linguistic change from "shall" to "may", should be treated as mandatory to protect taxpayer interests and uphold the purpose of the GST dispute resolution process.