Proving Input Tax Credit under GST

Input Tax Credit (ITC) is a mechanism to avoid cascading effect. This unique feature of ITC has made itself perhaps one of the most controversial and litigated features in the erstwhile indirect tax regime and under GST regime, no doubt it will continue. While the registered persons fight tooth and nail to defend this credit, the tax authority, always and almost without exception, views it suspiciously and leaves no stone unturned to cancel it.

This article tries to focus on the method of proving of ITC by a registered person within the purview of the Act.

Relevant provision

Chapter V of the CGST ACT’17 contains the provisions of ITC. The eligibility, conditions, apportionment, ineligibility and distribution of ITC, apart from recovery of credit distributed in excess, have been provided in different sections (Sec. 16 to Sec. 21) of this chapter.

Section 41 provides that every registered person is entitled to take the credit of eligible input tax, as self-assessed, in his return, subject to such conditions and restrictions as may be prescribed.

Sec 155 casts burden on the registered person to prove this claim and it should not be taken lightly by the registered person, because if failed to prove, he will certainly lose his right of claiming ITC which may amount to Corers of money.

The present discussion mainly is an endeavour to explain Section 155.

For ready reference Section 155 is reproduced below:-

155. Where any person claims that he is eligible for input tax credit under this Act, the burden of proving such claim shall lie on such person.

Analysis

What is meant by the phrase ‘burden of proving’? It has not been defined in the GST Act. Before explaining the term, one should know what is meant by the term ‘prove’. Again this is not defined in the Act, but we can take the help of The Indian Evidence Act, 1872 for apprehending the meaning of the term ‘prove’, though this Evidence Act is not directly applicable to the GST Act [except Section 111(2) (d) and Section 158(2) of the CGST ACT, 2017]. In the interpretation clause in Sec 3 of The Indian Evidence Act, 1872, ‘proved’ is defined as “A fact is said to be proved when, after considering the matters before it, the Court either believes it to exist, or considers its existence so probable that a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it exists.” And fact is defined as

(1) any thing, state of things, or relation of things, capable of being perceived by the senses;

(2) any mental condition of which any person is conscious

Basically, ‘prove’ means to establish a fact by appropriate and sufficient evidence. ‘Burden’ legally means responsibility, onus, obligation etc. Hence, ‘burden of proving’ means a responsibility, an obligation to prove a fact. It is the statutory duty. Whenever law requires a person to prove the existence of a fact, it is said that the ‘burden of proof’ lies on that person. It (burden of proof) means the obligation to prove a fact. The strict meaning is that if no evidence is produced by the person on whom the burden rests, the issue must be established against him.

As per section 155, the burden lies on the person who asserts the claim of input tax credit; this claim is the principal fact i.e. factum probandum to be proved. He must prove the fact that he is eligible for that ITC and the burden does not lie upon the GST officer who denies it.

Then, how to prove the claim of ITC by a person? In order to prove the claim, he has to prove certain other set of facts from which this legal right necessarily arises; he must demonstrate the evidentiary facts from which this right follow immediately or by inference i.e. factum probands. Following are the set of facts which a registered person must prove:-

I. The first and foremost thing a person has to prove is that he has a genuine transaction with his supplier, resulting the supply of goods or services or both. It should not be a sham, bogus or fake transaction

II. The said supply of goods or services or both are used or intended to be used in the course or furtherance of business.

III. The goods or services or both must be used by “him” only in the course or furtherance of “his own business”

IV.He has received the goods or services or both

V. He has paid the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier

VI. He has not taken input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.

VII. He has not taken ITC on the statutorily excluded goods or services or both u/s 17(5). Some of them are as follows:-

1. motor vehicles and other conveyances except under specified circumstances.

2. goods and/or services provided in relation to:

i. Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, except under specified circumstances;

ii. Membership of a club, health and fitness center;

iii. Rent-a-cab, life insurance, health insurance except where it is obligatory for an employer under any law;

iv. Travel benefits extended to employees on vacation such as leave or home travel concession;

3. Works contract services when supplied for construction of immovable property, other than plant & machinery, except where it is an input service for further supply of works contract;

4. Goods or services received by a taxable person for construction of immovable property on his own account, other than plant & machinery, even when used in course or furtherance of business;

5. Goods and/or services on which tax has been paid u/s 10 (composition scheme)

6. Goods and/or services used for private or personal consumption, to the extent they are so consumed;

7. Goods lost, stolen, destroyed, written off, gifted, or free samples;

8. Any tax paid in accordance with the provisions of sections 74, 129 and 130

This burden of proving the claim remains on the person who claims ITC. It never shifts.

But what documentary evidences must a person produce to prove his claim of ITC. As the burden of prove lies on the registered person, the burden of adducing evidence also rests on the person who claims ITC. If no evidence is produced, he will lose his right. This is termed as onus of proof i.e. onus probandi. He has to produce before the authority appropriate and sufficient evidence. Whereas appropriateness refers to the relevance and reliability of the evidence, sufficiency refers to the quantum of evidence. Sufficiency is related to the volume of evidence and appropriateness is related to the quality of evidence. Relevance means pertinence or aptness. It is concerned with what type of evidence is apt to confirm an assertion of a transaction, leading to the proving of the claim. The CGST RULE, 2017 itself stipulates what documents are necessary for this claim and those are provided in Rule 36. As per rule 36, the input tax credit shall be availed by a registered person, including the Input Service Distributor, on the basis of any of the following documents, namely,-

(a) an invoice issued by the supplier of goods or services or both in accordance with the provisions of section 31;

(b) an invoice issued in accordance with the provisions of clause (f) of sub-section (3) of section 31, subject to the payment of tax;

(c) a debit note issued by a supplier in accordance with the provisions of section 34;

(d) a bill of entry or any similar document prescribed under the Customs Act, 1962 or rules made there under for the assessment of integrated tax on imports;

(e) an Input Service Distributor invoice or Input Service Distributor credit note or any document issued by an Input Service Distributor in accordance with the provisions of sub-rule (1) of rule 54.

Though no doubt the document(s) mentioned in Rule 36 is one of the most important documents in claiming ITC, but this document(s) will not suffice to satisfy his claim. This is appropriate and relevant document but this is not sufficient document. No authority perhaps will believe those documents to be true at face value. This tax invoice, debit note etc. can be fake or it could be forged at any time. The authority is not concerned about the Tax Invoice, debit note etc, but they are concerned about the content of the documents. If content of the document is not proved, it is mere a piece of paper. Here comes the concept of standard of proof.

Standard of proof means the degree of proof required for any fact in issue in any proceeding/litigation which is established by assessing all the evidence relevant to it. It is the degree of certainty by which an authority must be persuaded. In other words, the term “standard of proof” specifies how difficult it will be for the claimant bearing the burden of persuasion to convince the authority of the facts in its favour.

Three primary standards of proof exist in common law. From lowest to highest degree of certainty required, they are: (1) preponderance of the evidence, (2) clear and convincing evidence, and (3) beyond a reasonable doubt.

Preponderance of the evidence is the standard of proof for most issues in civil litigation. In contrast, proof beyond reasonable doubt is required for conviction in criminal cases. Clear and convincing evidence represents an “intermediate standard” between preponderance of the evidence and reasonable doubt.

In the absence of a statutory enactment, we can say a mere preponderance of the evidence is sufficient to establish the claim of ITC of the registered person. Thus, the Preponderance of Evidence Rule requires a person to persuade the authority by sufficient evidence that the existence of a fact (in this case the claim of ITC) is more probable than its non-existence. The proof is not of certainty, but of greater probability. Therefore, one has to produce sufficient documents to the satisfaction of the authority to establish his claim. Of course satisfaction is a subjective matter.

So, a person requires other documentary evidences, apart from tax invoice, debit note etc. (some are statutorily provided) to prove his claim. For example-

I. A true and correct account under section 35 of –

(a) Production or manufacture of goods;

(b) Inward and outward supply of goods or services or both;

(c) Stock of goods;

(d) Input tax credit availed;

(e) Output tax payable and paid

II. Payment document of the integrated goods and services tax under section 3 of the Customs Tariff Act, 1975 in respect of goods imported

III. Matching of every inward supply with the corresponding details of outward supply furnished by the corresponding registered person in his valid return for the same tax period or any preceding tax period [ Section 42(1)(a)]

IV. Document of payment to the supplier

V. E-way bill, if required

VI. Transport document in case of inward supply of goods

VII. Document of payment to the transporters, whenever required

VIII. Creditor’s ledger

IX. Other statutory returns, Audit report, certificate

The above list is only illustrative and not exhaustive. If an authority has doubt in his mind, he can also cross check with other documents/information like electricity bill, input-out put ration in case of manufacturing concern, physical verification of warehouse capacity etc.

A little analysis of the verification mechanism by the concerned authority by examination of the above mentioned documents must reveal that the standard of proof by ‘preponderance of evidence’ will be shifted to standard of proof by ‘clear and convincing evidence’.

The Clear and Convincing evidence standard is a relatively difficult standard to satisfy as it requires that the evidence be “substantially” more probable to be true. In other words, evidence only needs to be greater than a 50% likelihood of being true under the preponderance of evidence standard. Under the clear and convincing standard, the evidence must be substantially greater than a 50% likelihood of being true.

But one should not forget the fraud-angle or false claim of ITC. If an authority goes for higher degree of proof than clear and convincing evidence he should not be blamed. If ITC is not proved, then the claim is a fake and a fraud is committed by the claimant. This is an offence both under GST ACT and IPC. Therefore basically what the standard of proof is required is the proof beyond a reasonable doubt and here the onus is heavy on the registered person. In this context it is pertinent to mention that though as per section 42(2) if the outward supply of a registered person matches with the inward supply of the claimant, the claim of ITC will be accepted. But this is a rebuttable presumption i.e. the claim can be rebutted by evidence to the contrary. If no evidence is produce against the conflicting findings, the claim will be lost.

The burden to lead evidence first lies on the registered person to prove the case prima facie and if any rebutting evidence is there the burden shifts on the GST authority. As the case continues, onus may shift backs to the claimant again.

Conclusion

The object of every proceeding is the enforcement of some right or liability which invariably depends upon certain facts. Every fact in this world is preceded and followed by a train of other fact which are connected in the one manner or another with the fact in question. It is this sequence or co-existence of facts that makes it possible to reason from known to unknown. If a person has failed to discharge the burden of proof imposed on him, a strong and adverse presumption will be raised against the person.

N.B. — In this article section 18, 19 and 20 of the CGST ACT, 2017 and relevant rules have not been discussed, because the logic and principle are same as discussed above.