First of all, Proctor is a bible-believing man who is not denouncing God in this statement. He is being sarcastic. What he means is that after all of the injustice and the disregard for honesty he can no longer see God living in these so-called men of God who are judging him.
He also says it in a way that makes him look like he is the witch or possessed person they are trying to get him to admit he is. Just before he said this, Danforth had said to him:
Will you confess yourself befouled with Hell, or do you keep that Black allegiance yet?
Obviously Danforth was trying to coerce a confession. This phrase, God is dead, had two meanings to Proctor. In literature that can be called a pun when there is double meaning, but it can also appear that there is a connotative (understood) and a denotative (literal) meaning.