Legal Gap in GST Provisional Release flagged by Delhi HC: Section 67(6) vs Rule 140(1) Explained

The Delhi High Court, in its recent ruling has flagged the legal gap in the Section 67(6) of GST ( Goods and Services Tax ) and Rule 140(1). The court found that the same needed to be addressed at the policy level. It said that policy decisions are required, not just judicial interpretations. Therefore the same was referred to the GST council.

The rule, as per law, is considered as subordinate to the act and whenever there is any inconsistency, the act prevails. In the present case, the Section 67(6) is comparatively flexible and taxpayer friendly. It covers all situations of the release of goods in the pre-adjudication stage. It was drafted for fitting all types of situations that may come in the future.

However, Rule 140(1), which should pave the way for the Section, was drafted in even more stringent and strict terms. It limits the release of goods in the suspected GST evasion cases, where the quantification of the goods was not done to fix the liability, which is a complete contradiction to the Section 67 and it does not fit for all types of circumstances.

What is the Legal Gap?

At prima facie, Section 67(6) and its Rule Section 140 seems good and well. However, the issue is in the case of Section 130 cases, where the goods were seized on ‘suspicion’ of tax evasion, then quantification of the value of goods will take some time. To be more precise, the adjudication time will be longer. Therefore, the statute itself has arranged a provisional release of goods on certain conditions.

And now comes the interplay between the Section and the Rule. The Section is more taxpayer friendly and flexible. On the contrary, the Rule is more rigid and precise.

Section 67(6) reads as follows:

“The goods so seized under sub-section (2) shall be released, on a provisional basis, upon execution of a bond and furnishing of a security, in such manner and of such quantum, respectively, as may be prescribed or on payment of applicable tax, interest and penalty payable, as the case may be.”

Rule 140(1) reads that :

“Bond and security for release of seized goods.-(1) The seized goods may be released on a provisional basis upon execution of a bond for the value of the goods in FORM GST INS-04 and furnishing of a security in the form of a bank guarantee equivalent to the amount of applicable tax, interest and penalty payable."”

The Section 67(6) of the CGST Act, from its terms like “bond and furnishing of a security”, “in such manner and of such quantum… as may be prescribed”, and “or on payment of applicable tax, interest and penalty”, it is clear that there is a space for the department. This is more applicable to situations where goods were seized due to suspected tax evasion and tax amount is not quantified.

The term ‘Security’ without restricting to ‘bank guarantee’ itself made it clarified that any security could be used for furnishing the security. It is open ended. Additionally, with regards to the term ‘quantum’, it says that the amount of security can be proportional to the facts of each case, and not equivalent to the entire alleged tax liability.

On top of that, the term "or" establishes two separate and independent ways to obtain a provisional release: either by executing a bond and providing the necessary security, or by paying the relevant tax, interest, and penalty in full.

When taken as a whole, these words show an obvious legislative purpose to provide realistic and different options for provisional release, particularly during the pre-adjudication stage when liability has not yet been determined.

The Section was created to prevent decay or expiration of perishable or time-sensitive goods, to make sure that seizure of goods does not cause business paralysis. It also tries to achieve a balance between protecting government revenue and at the same time sustaining taxpayers' economic freedom during the pre-adjudication stage.

Coming to the Rule 140(1) of GST Rules, the terms or phrases of the rule are more rigid. The provisional release mentioned in Section 67 could be made though the manner prescribed under Section.

In this rule, the provisional release of seized goods shall be allowed only upon execution of a bond for the value of the goods and furnishing of security specifically in the form of a bank guarantee, which contradicts with the intention of the Section 67(6) which did not specify any specific security.

Additionally, when we check the amount to be furnished through to the security, the rule prescribes that it must be equivalent to the entire amount of applicable tax, interest and penalty payable. This again is not possible to the matters in the pre-adjudication stage. This requirement fixes 100% payment of the liability even in situations where no demand has been quantified or where the liability itself is under serious issue.

Because Rule 140(1) of the CGST Rules demands strict security demands, it frequently makes temporary release financially impossible, especially when high-value products are involved. The provisional release, which was incorporated into the statute as a relief itself, became a punishment for the taxpayers.

When analysing both Section and the Rule, the rule dimmed the intention of the Section 67(6) making this option empty rather than realistic.

Therefore, the GST council has to take up this gap and fill it with the best mechanism to protect the taxpayers and their business. In the meantime, this will provide the GST department with more clarity regarding the provisional release of the non-quantifiable goods.

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