GST Show Cause Notice Reply – Strategy | Procedure

A GST Show Cause Notice reply is a formal, structured written response submitted by a taxpayer to a notice issued by the tax authorities, explaining and justifying the tax position adopted, rebutting allegations made, and addressing facts, evidence, and legal provisions relied upon by the Revenue in accordance with the prescribed GST law and due process.

Table of Contents

1. Overview
2. Test the Notice
3. Scrutinise Allegation and Supporting Evidence
4. Construct of Allegation
5. Allegations by Presumption
6. Contradictory Allegations
7. Rejection of Taxpayer’s Records
8. Merits of Rejecting Taxpayer’s Books
9. Taxing Ingredients

Check out Taxmann's How to Deal with GST Show Cause Notices with Pleadings which  is a litigation-oriented GST practice manual that treats a show cause notice as the formal commencement of adjudicatory proceedings, not a routine compliance exercise. It underscores that a taxpayer's earliest written response can have irreversible evidentiary and strategic consequences, including the creation of implied admissions and the curtailment of appellate remedies. The book explains how notices set the law in motion, why replies must clearly contest allegations, and how due process under the Act–Rules–Forms framework governs every stage of the demand and recovery process. Updated for the post–Finance Act 2025 landscape, it integrates GST Appellate Tribunal procedures, filing discipline, and updated appeal forms, offering a complete notice-to-tribunal roadmap for GST litigation.

1. Overview

Taxpayers often launch into their reply (to notice) without first attending to the preparation needed to determine the approach necessary to optimise the outcome in adjudication. Taxpayers also operate under a misconception that adjudication is to readily accept tax position adopted by taxpayer and to even find ways around any inadvertent slips and allow relief sought. This is a significant burden of expectation from process of adjudication that taxpayers need to overcome right away. Taxpayers are overcome by alarm and dismay that their tax position is being challenged. And blinded by their innocence, taxpayers rush to parade their innocence or bemoan the injustice on learning of the ‘view’ canvassed by Revenue. All these aspects lead to an impoverished approach that is devoid of any strategy in their reply.

Taxpayers often look to find someone to blame for this turn of events whether their own internal team or some experts who were engaged to advise when time to take that tax position had come up. Long-standing relationships with advisors and experts can turn sour when notices are issued.

It is most important for taxpayers to accept that Revenue has a duty not to leave any tax position unchallenged, especially, where another ‘view’ is possible. Everyone would agree that GST is not free from plurality of tax positions. Nearly no provision of this law is free from an ‘alternate view’. Not because this other view is more accurate or the one adopted by taxpayer is flawed, but because there is doubt about finality of interpretation, nearly no tax position can go unchallenged

Mischievous tax positions and evasion of tax are not the sole reasons for notices to be issued. Notices is the ‘due process’ in law to clear any doubts about the validity of given tax position. GST is a self-assessment tax regime. As such, there is no ‘Assessing Officer’. Assessment of tax liability is by taxpayer and Revenue must follow ‘due process’ to put forward their challenge and get satisfied that self-assessed liability is valid and proper. And for this reason, tax Officers are called “Proper Officers” and for each provision of law there are different Officers designated as Proper Officers. Proceedings initiated in accordance with law by an Officer who is not the one designated will not be ‘proper’. Proper proceeding must be initiated by a Proper Officer to be valid and proper.

Divergent AARs too have exposed the ‘other view’ that is possible. Circulars issued have attempted to clarity common misunderstanding. Nearly everyone is confident about the correctness of their ‘view’. And only when alternate views are exposed, will it illuminate the mind about the alternative that is possible.

Unlike earlier tax regime, limitation in GST puts Revenue ‘on a clock’ to issue notices and conclude adjudication. And there is no time to be unsure about the correct tax position. If notice is not issued, demand cannot be raised. When notice is issued, adjudication must be completed within limitation. Finality of tax position is not doing to emerge privately or swiftly. And pursuit of finality demands notices be issued.

Example

Taxpayer ‘A’ has adopted a tax position that GST is not payable on lease of land but all other taxpayers ‘B’ to ‘Z’ have admitted and discharged tax. It  would be unconscionable for Revenue to remain a silent spectator when ‘A’ derives windfall gains being able to sell cheaper or for earn better margins compared to ‘B’ to ‘Z’.

Entire society of diligent taxpayers look to Revenue to exercise every power available in the law to ensure that not even a single taxpayer gets away with an unjust advantage, or at least not without a challenge. Jus in rem demands that tax positions adopted not be left unchallenged, certainly not when there is a real possibility that an ‘alternate view’ can be canvassed. Jus in personam is not absolute that taxpayers are assured of uncontested acceptance of their tax positions. And self-assessment is not immune from challenge.

Persevering taxpayers who find their tax positions being accepted in adjudication or appeal realise their initial angst was misplaced. But this will evade those who are impatient or expect unqualified acceptance of their tax positions and relationships with those who provided advice early on which were allowed to turn sour, was completely unjustified.

Proper Officer is not taxpayer’s enemy. Proper Officer has a statutory duty. Proper Officer is not taxpayer’s friend either. Taxpayers must eschew unholy friendships and awkward proximity with Proper Officers. Keep it polite and respectful, without causing prejudice to taxpayer’s interests or forfeiting rights, remedies and safeguards in this law. Taxpayer’s must face this challenge and remain confident about tax positions adopted. Proper Officers must not hesitate to put up a lawful challenge, confident that the alternate view canvassed is more accurate interpretation of the law.

2. Test the Notice

At the outset, it is unacceptable that taxpayers would proceed with their reply to notice without first understanding the ‘how’ to every ‘what’, contained in a notice. In order words, it is necessary to grasp the origin of proceedings that culminated in a notice. Notice for demand cannot be issued by any Officer, but a Proper Officer. And to know if the ‘Officer is Proper’ it is necessary to complete the following preliminary checklist:

Checklist of Notice (Part A)

With this preliminary understanding of the notice, it will be possible to assess the validity of challenge to self-assessment carried out by taxpayer. Even though section 59 mandates ‘registered persons’ to carry out self-assessment of liability under the Act, determination that registration is not required is also self-assessment as well as claim for exclusion from registration under section 23. While ‘every registered person’ is referred in section 59, determination of (in) applicability of section 22 is no less self-assessed than determination of liability to tax.

Proper Officers of Central or State (or UT) administration having territorial jurisdiction over the location of unregistered persons, can initiate action but only under sections 63 and 73 or 74. But once registered, Proper Officers from Central or State (or UT) administration without even territorial limitations are enjoined with authority to exercise jurisdiction under section 67 but based on prior authorisation granted based on material taken on record regarding three (3) areas involving evasion of tax.

This review beings to clear the air around ‘how’ and ‘what’ relating to notice and adds perspective about ‘who’ and ‘when’ can initiate these proceedings. When legitimate demands are barred for failing to adhere to ‘due process’ of law, entering discussion as to the existence and merits of a demand cannot commence without first establishing if powers invoked were legitimate and ‘due process’ proper.

It is not uncommon that demands are made via a letter or notice without accompanying summary. Failure to adhere to ‘due process’ to issue notice of demand is fatal to demand (discussed earlier).

3. Scrutinise Allegation and Supporting Evidence

After notice for demand or penalty is tested to be lawful and complete, and found to be satisfactory, the next step is to scrutinise the allegations in the notice and evidence used to support the demand (or penalty) made. Allegation is not suspicion. Allegation is not actionable cause. Allegation is the interpretation of acts (or omissions) by taxpayers that affect the correctness of self-assessment made, that is, wrongdoing by taxpayers in exercise of the authority vested in section 59. Allegation is accusation about facts backed up by evidence, if proved reliable, will establish said wrongdoing. Allegation is not a fact. Allegation is an opinion or interpretation of facts as observed. Fact is that which is undeniable by both sides. If it is deniable then it is not a fact.

Taxpayers must enlist ‘facts’ and ‘opinion’ contained in ‘allegations’ in a notice. Omission to separate these will imperil the course of defence because matters of opinion left undisputed become facts that do not require any further proof. And taxpayer’s omission (to object to matters of opinion) become the basis of further course of adjudication (and appellate) proceedings which cannot be withdrawn later, not without prejudice to the case. Very often, opinion may be presented somewhat similar to facts and unless taxpayers lend their expertise to ‘separate the wheat from the chaff’, all subsequent proceedings will be acted upon ‘as if’ alleged facts were true and for leaving them undisputed.

Approach to list all allegations and sort them as ‘facts’ and ‘opinion’ requires the checklist to be expanded further.

Checklist of Notice (Part B)

This differentiation of facts and opinion extend to demand for penalties too. And there are more than one provisions under which penalties may be demanded. Where opinion form basis for demand, it must be referenced with ‘evidence’ adduced in support of such opinion. In order to counter any ‘opinion’, evidence adduced must first be impeached so as to the render the opinion ‘baseless’. Baseless opinion is proof to the contrary. Merely offering disagreement with the allegation is not sufficient. For such disagreement to be substantial, it must be denied unequivocally. Rushing to deny allegations become disorganised and unstructured if it is not point-wise. The denial of allegation may be on account of different factors, that is, it may be due to defective evidence or erroneous understanding of facts or misapplication of law to those facts.

Checklist of Notice (Part C)

Over a period of time and with practice, efficiency will set in with respect to scrutiny of allegations in notice and supporting evidence adduces with notice. This checklist will not keep growing but with this extent of scrutiny, fatalities in the notice (discussed earlier as discrepancies and deficiencies) will be exposed and set taxpayer in the right direction to put together the defence.

4. Construct of Allegation

It is very common to find Revenue making allegations and taxpayers running around to disprove the allegations. Taxpayers must investigate ‘how’ has the demand been constructed in the allegation made and canvassed in the
notice, subject to the contours of the provision of law under which it is issued.

Taxpayers reply must ‘put to trial’ the construct of the allegations by examining ‘how’ has the demand been established. Haste in providing an answer, even one that challenges taxability or claims non-taxability, contains an unequivocal admission that the demand is not discharged albeit because it is not taxable or exempt.

Careful analysis of the ‘construct’ of the demand will reveal inherent shortcomings in the notice. Taxpayers must ensure they are truthful in their replies but being truthful is not to leave the notice unquestioned. Very often, taxpayers tend to veer off the track and enter into matters not forming the pith of the notice and conceding to demand on grounds unknown to the notice. At the risk of repetition, taxpayers must be cautioned to grasp the importance of waiting to thoroughly understand the question and how it has come to be established in the notice before launching to furnish their answer.

5. Allegations by Presumption

All too often, allegations appear to be so obvious that precious little is contained in the notice to establish those allegations on firm footing and supported by quality evidence to bring home those allegations. Just like taxpayer, Revenue too can be blinded by incontrovertibility of the demand. In the study of Administrative Law, expert jurists hold divided opinion about the need for a notice when there is nothing new that can be offered by way of defence. This is referred as ‘useless formality’ theory. But the remarkable nature of GST is that Legislature has provided very specific instances where the need for notice is bypassed and permitted demand being determined by a Speaking Order. These exceptions are contained in:

(a) Section 62 where best judgment order is mandated without the need to put taxpayer at notice and supported by taxpayer’s own delinquencies in filing returns;

(b) Section 64 where summary assessment order is permitted based on evidence of liability and oversight by Joint Commissioner; and

(c) Section 121 where certain pre-emptive actions culminating orders based on application of mind to certain transactional facts, are
declared NOT to be appealable (discussed later).

Barring these, it is explicit that no recourse to ‘useless formality’ theory is admissible in GST and every demand (for tax, credit or refund and penalty) must be initiated by serving:

(i) a valid notice

(ii) by a Proper Officer and

(iii) in accordance with prescribed ‘due process’.

As such, there is no occasion for any demand to be based on presumption or conjecture.

Third-party data may not have any motivation to lower tax liability as would be in case of data of Recipient but third-party data may not, for the same reasons, be accurate as it does not concern them directly and even deflects their own liability (to pay tax on forward charge basis). Taxpayer’s enthusiasm to reply on merits focussing on their bona fides often makes refutable evidence (used to support demands and allegations based on presumptions) evade their attention. In the course of preparation (to reply to notice), locating such presumptuous allegations is an important step.

No presumption can be raised without showing taxing ingredients to support allegations and demand for tax. It is irrefutable that demand can be made without establishing taxing ingredients (discussed earlier) in respect of alleged supply transaction. Not even when demand is made for payment of right tax again under section 77 read with under section 19 of Integrated GST Act, citing that tax already paid was wrong, it is still necessary to show taxing ingredients and demonstrate tax discharged was, in fact, ‘wrong’, the burden on Revenue cannot be a discharged by any presumption.

6. Contradictory Allegations

Notices issued with contradictions are self-defeating allegations. Notice is not merely to canvass every possible interpretation to a given set of facts. It is important to consider ‘doctrine of election’ which basically states that to pursue one path, one must elect to abandon all others that may be available. And, by implication, having abandoned other available paths, the chosen path cannot be retraced if outcome anticipate from it (chosen path) does not avail. Singularity of purpose is the essence of this doctrine. This doctrine is captured in the maxim “quod approbo non reprobo” (discussed later).

When it comes to taxation, Revenue is free to canvass any reasonable
interpretation that it believes to be the most accurate treatment on applying the law to given facts (chosen path) keeping in mind the attendant outcome (anticipated outcome or tax consequence). If the desired outcome evades, Revenue cannot go back and try again, as it creates uncertainty in trade. And this is ensured by placing an inalienable limitation.

Likewise, taxpayer too is subject to the consequences of ‘doctrine of election’ in exercising the right to self-assessment. Doctrine of election bars alternative paths to be pursued.

With this understanding of election, every notice alleging a certain tax position, is implicit that all others alternative tax positions are abandoned by Revenue. Here lies the defence for taxpayer to assail the interpretation canvassed (in the notice) not by showing how Revenue’s interpretation is correct but by showing how, at least one other interpretation is more correct, relative to the one canvassed by Revenue. That is, notice bearing self-defeating contradiction.

7. Rejection of Taxpayer’s Records

Not only can such contradiction occur in questions of law but also on questions of fact.

It would be remarkable to reject documents presented by taxpayer and then rely on the very same documents (for the values or place of supply or HSN code) to compute a different (or higher) demand. Adverting to the instructive words in the maxim “quod approbo non reprobo”, it means “that which I approve, I cannot disapprove”. And in this case, either the entire document (presented by taxpayer) must be rejected, and demand arrived at based on some other more reliable (to be shown how) source of information or said documents admitted in their entirety.

Very often, tax already discharged (and consequent tax position) is left
undisturbed in the pursuit of demand for additional tax. The very admission implicit in leaving tax position adopted by taxpayer unchallenged, defeats the tax position canvassed by Revenue in a correlative matter within a connected transaction.

8. Merits of Rejecting Taxpayer’s Books

Books of account and contemporaneous transaction documents (‘records’) presented by taxpayer cannot be rejected by Revenue, not because they are perfect and unassailable but because they bear taxpayer’s assertions. Before that, these records cannot be easily accessed by Revenue except in audit under section 65 and upon seizure when they are secreted and detected in search proceedings under section 67(2). With such limited access to taxpayer’s records, it is impermissible to ‘reject’ them routinely.

It is one thing to determine tax liability based on best judgment under section 62 or 63, or on summary assessment based on evidence in possession and authorisation by Joint Commissioner under section 64. But it a totally different thing to ‘reject’ taxpayer’s records. There is no provision in this law where records presented by taxpayer can be rejected and substituted by information ‘invented’ by Revenue because Proper Officer is NOT the Assessing Officer. Instructive words in CIT v. Motor and General Stores (P.) Ltd. AIR 1968 SC 200 where Apex Court stated that:

“In the present case, however, there is no suggestion on behalf of the appellant of bad faith on the part of the assessee-company nor is it alleged that the particular form of the transaction was adopted as a cloak to conceal a different transaction. It is not disputed that the document in question was intended to be acted upon and there is no suggestion of mala fides or that the document was never intended to have any legal effect. In the absence of any suggestion of bad faith or fraud the true principle is that the taxing statute has to be applied in accordance with the legal rights of the parties to the transaction. When the transaction is embodied in a document the liability to tax depends upon the meaning and content of the language used in accordance with the ordinary rules of construction. In Bank of Chettinad Ltd. v. CIT [1940] 8 ITR 522 (PC), it was pointed out by the Judicial Committee that the doctrine that in revenue cases the ‘substance of the matter’ may be regarded as distinguished from the strict legal position, is erroneous. If a person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown seeking to recover the tax cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.”

It was common, especially in State tax administration under earlier tax regime, to reject taxpayer’s records and furnish values based on ‘logical reasoning’. In GST, rejecting taxpayer’s records imposes a very great burden at the threshold of this adventure to demonstrate, not just imperfections in records presented but fictitious entries recorded which are by themselves the result of falsification of records. And even then, recourse to rules is circumscribed by a mandate and yet in such circumstances, it is not permissible for Proper Officer to ‘invent’ values and impose tax. In fact, taxable value is but one of the several taxing ingredients (discussed later) that are needed to support a demand based on a certain interpretation of this law.

Where there is any doubt about the reliability of taxable value in determining liability on self-assessment basis by taxpayer, Revenue cannot have recourse to the rules without first impeaching the taxable value under section 15(1) and then reach the rules via mandate in section 15(4). Section 15(4) can be entered only after showing that section 15(1) has failed on account of the three (3) criteria listed therein. And in case any notification under section 15(5) is issued, no further debate as to sufficiency of taxable value can be entertained due to the compulsion to use the values declared in such notification. As this is not a deliberation on valuation, suffice to state that ‘rejecting’ taxpayer’s records is not permissible in proceedings under section 73, 74 or 76 and ‘inventing’ taxing ingredients needed to arrive at the demand (proposed in the notice) is alien to GST.

9. Taxing Ingredients

Demand for output tax requires that any enquiry or inquiry to yield
information by way of ‘taxing ingredients’ needed to support demand for output tax:

(a) Investigative description of ‘nature’ of alleged transaction;

(b) Coverage of transaction within definition of ‘supply’;

(c) Object of supply whether goods or services and basis;

(d) Outside any exclusions from supply;

(e) HSN code under applicable tariff notification;

(f) Outside any exemption under applicable exemption notification;

(g) Time of supply, based on facts of transaction;

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