Retrospective GST clarification cannot by itself prove fraud or suppression, Gujarat High Court rules in solar-project tax case

The petitioner supplied and installed Solar Power Generating Systems under composite contracts. For FY 2018–19, the respondent issued a show-cause notice under Section 74 of the Gujarat Goods and Services Tax Act, 2017, alleging that the petitioner had wrongly paid tax at 5% rather than applying the 70:30 goods-and-services valuation ratio.

The petitioner challenged the notice dated 30 June 2025 and the subsequent order dated 24 December 2025 in Form GST DRC-07. It argued, among other things, that the 70:30 explanation was introduced only with effect from 1 January 2019 and could not establish fraud or suppression for the earlier period. The respondent relied on a later circular applying the ratio to the period from 1 July 2017 to 31 December 2018.

Whether the respondent could invoke Section 74 for the alleged failure to apply the 70:30 ratio to supplies made before that ratio was prescribed by the explanation effective from 1 January 2019.

Whether the show-cause notice and order under challenge could stand, while leaving open proceedings concerning the applicable tax rates and the period from 1 January to 31 March 2019.

Section 74 of the CGST/GGST Act permits proceedings on grounds including fraud, wilful misstatement or suppression of facts to evade tax; those elements must be assessed against the regulatory framework applicable at the relevant time and cannot be inferred automatically from a later retrospective clarification.

Notification No. 24/2018-Central Tax (Rate), dated 31 December 2018, introduced the 70:30 valuation explanation with effect from 1 January 2019.

Circular No. 163/19/2021-GST dated 6 October 2021 clarified application of the ratio to the earlier period, but the Court held that the retrospective application did not, by itself, establish the ingredients of Section 74.

The Court also left open the authorities’ ability to examine whether the invoices complied with the rates prescribed by the relevant notifications.

The Court noted that the 70:30 ratio was expressly introduced only from 1 January 2019, whereas the impugned proceedings relied on that ratio to allege tax short-payment for FY 2018–19. The later circular’s extension of the ratio to an earlier period could not, without more, establish fraud, wilful misstatement or suppression under Section 74; those elements had to be judged by reference to the rules in force when the petitioner raised its invoices and paid tax.

The Court therefore found the Section 74 action unsustainable, while distinguishing that conclusion from the separate question whether the petitioner’s invoices complied with the applicable rates.

It reserved the parties’ rights and contentions in any subsequent proceedings and permitted the respondent to examine the invoices under the applicable notifications and, if required by law, initiate fresh proceedings for 1 January to 31 March 2019.