Govt Contract TDS Mismatch in GSTR-7: Madras HC orders Fresh Adjudication of S. 74 Proceedings Considering 23% Tax Recovery [Read Order]

The Madurai Bench of the Madras High Court has set aside an ex parte Goods and Services Tax (GST) assessment order from alleged mismatch in the GSTR-7 with GSTR-1 and GSTR 3B with regards to the Tax Deducted at Source ( TDS ) mismatch in the Government Contracts.

The assessment proceedings were initiated under Section 74 of the Tamil Nadu Goods and Services Tax (TNGST) Act for the financial year 2021-22. The authorities alleged substantial discrepancies in the taxpayer’s output tax reporting.

The GST department flagged a mismatch between the turnover reported by the contractor in their GSTR-1 and GSTR-3B returns and the TDS details filed by government departments in Form GSTR-7.

Based on this, the department proposed hefty penalties under Section 74 with interest under Section 50.

The petitioner, P.Rengasamy submitted the practical realities of executing government contracts. The contractor pointed out that such mismatches are incredibly common, primarily because government departments typically report transactions in Form GSTR-7 only after funds are officially released and TDS is deducted.

The taxpayer said that all executed works had been properly disclosed and the corresponding taxes duly paid. The discrepancy was merely a timing difference in reporting by the government authorities, not a deliberate suppression of turnover.

Furthermore, the petitioner argued that the mandatory ingredients required to trigger Section 74, namely fraud, wilful misstatement, or deliberate suppression with the clear intent to evade tax were entirely absent and had not been established by the tax authorities.

Addressing the ex parte nature of the assessment order, the petitioner provided an explanation for their failure to participate in the proceedings. The petitioner depended on a part-time accountant to handle their GST compliances.

Due to workload the accountant failed to monitor the GST portal and missed the physical notices sent via registered post. Therefore, no replies were filed, leading the department to pass an adverse order without hearing the taxpayer's defense.

The High Court directs taxpayers to deposit 25% of the disputed tax amount as a strict condition. However, the bench made an exception in this case, noting that the department had already recovered approximately 23% of the disputed tax.

Considering this recovery, the Court decided it would be unjust to impose any further financial deposit conditions on the contractor. Therefore, it set aside the impugned assessment order and remanded the matter back to the assessing authority for fresh adjudication.

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