Introduction:
The Goods and Services Tax (GST) is a transformative indirect tax system implemented in India in July 2017. GST replaced multiple indirect taxes and aimed to simplify the tax structure, eliminate cascading effects, and create a unified market. However, certain provisions within the GST law have raised challenges and controversies. One such provision is Section 16(4) that pertains to the eligibility to claim input tax credit. This article aims to provide a comprehensive analysis of the conundrum surrounding Section 16(4) and its implications for businesses.
Understanding Section 16(4):
Section 16(4) of the Central Goods and Services Tax (CGST) Act, 2017, states that a registered person shall not be entitled to take input tax credit (ITC) in respect of any invoice or debit note for supply of goods or services or both after the thirtieth day of November following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier. The provision of ‘thirtieth day of November’ was substituted for “due date of furnishing of the return under section 39 for the month of September” by the Finance Act, 2022, w.e.f. 1-10-2022. Further the words ‘invoice relating to such’ w.r.t. debit notes was omitted by the Finance Act, 2020, w.e.f. 1-1-2021. It may be noted that the provision was relaxed for the FY 2017-18, the details of which had been uploaded by the supplier under sub-section (1) of section 37, till the due date for furnishing the details under sub-section (1) of section 39 for the month of March, 2019 instead of September, 2018.
In simple words, provisions of section 16(4) means that all invoices and debit notes for which ITC has to be availed should be incorporated and filed in the GSTR 3B within the thirtieth day of November following the end of financial year to which such invoice or debit note pertains. It also means that GSTR 3B for all months of a financial year should be filed within thirtieth day of November, or else ITC for the entire month shall be denied and will not be available. Please note that the provision of availing ITC for returns filed till thirtieth day of November was available w.r.t. FY 2021-22 onwards. The time limit was 20th day of October (due date for filing of return for September for regular taxpayers) for FYs 2017-18 to 2020-21.
Notices from the Department:
Assessee’s have been receiving Notices from the Department for availment of ITC in GSTR 3B, which has been filed after due date for filing of return for September or till 30th November (as the case maybe). This has created genuine hardship for the taxpayers as one could not have been able to file GSTR 3B within time because many reasons e.g. financial constraints, as tax has to be paid which filing GSTR 3B.
Let us understand these provisions with a simple case. Let us assume that in case of an assessee, the returns for Jan – Mar 2019 were filed in November/ December 2019 as the assessee was facing financial constraints. The Department has now sent a Notice to the assessee mentioning contravention of the provisions of section 16(4) and that ITC availed for Jan – Mar 2019 now needs to be reversed/ paid alongwith interest and penalty (if any).
Defences available to as assessee:
Various defences are available to an assessee w.r.t. such Notices. Let us see some of the important ones that can be taken in such cases:
1. Section 16(4) is procedural in nature and cannot take away the substantive right of a taxpayer: Input Tax Credit (ITC) is the core concept of GST as it avoids the cascading effect of taxes and ensures that tax is collected in the State in which goods or services or both are consumed. The provision of Section 16(4) is procedural in nature and cannot take away the substantive right of a taxpayer who has availed input tax credit as per the provisions of the Central Goods and Services Tax Act, 2017 and the Rules prescribed thereunder.
2. Filing of return with late fees cures the defect of late filing: Once a return has been filed with a late fee, the provision of Section 16(4) should not defeat a substantial claim of ITC which is otherwise allowable under the provisions CGST Act, 2017. Though the returns are filed belatedly, the assessees can claim that they have paid late fees and by paying late fee, the delay in filing return has been regularized. The case law of Mr Rashmikant Kundalia vs Union of IndiaP. 771 of 2014 (Bom.) and Howrah Taxpayers’ Association Vs. The Government of West Bengal and Anr. 2010 SCC Online Cal 2520 comes handy in such submissions. Thus, it can be contented that once the delay has been regularised, such returns have to be construed to be filed within the due date. In fact once the returns have been filed after payment of applicable late fee under Section 47 of the CGST Act, 2017, which in fact allows the taxpayer to file the returns beyond the due date, such a return should have been accepted without applying the provision of Section 16(4) of the CGST Act, 2017.
3. GSTR 3 was the prescribed Return and not GSTR 3B prior to the retrospective amendment: Section 39(1) of the CGST Act, 2017 (before it was amended by the Finance (No. 2) Act, 2019, w.e.f. 10-11-2020 vide Notification No. 81/2020 – Central Tax dt. 10th November, 2020), provided that every taxpayer, except a few special categories of persons, shall furnish a monthly return, electronically, of inward and outward supplies of goods or services or both, input tax credit availed, tax payable, tax paid and such other particulars as may be prescribed, in such form and manner as may be prescribed. Rule 61 of the CGST Rules, 2017 prescribed the form and manner of submission of monthly return. Sub-rule 1 of Rule 61 of the CGST Rules provided that the return required to be filed in terms of Section 39(1) of the CGST Act was to be furnished in Form GSTR-3.
It can be submitted that the amendment that GSTR 3B was the valid return and not GSTR 3 came only in 10-11-2020, much after GSTR 3B was filed in Nov/ Dec 2019 in the instant case. The Tax payer was under the genuine impression that GSTR 3B was only a summary form and that the timelines, as applicable to a return i.e. GSTR 2 and GSTR 3 would be made applicable only when these forms are operational and notified. If it would have been known that GSTR 3B would be notified as returns for the purposes of section 39, thus applicable to 16(4), the assessee would have been more attentive and careful to the timelines for availing input Tax Credit.
4. GSTR-3B was only a temporary stop gap arrangement till due date of filing the return in Form GSTR-3 was notified: Assessees can content that initially it was decided by the Government to have three returns in a month, i.e. return for outward supplies i.e. GSTR-1 in terms of Section 37, return for inward supplies in terms of Section 38, i.e. GSTR-2 and a combined return in Form GSTR-3. However, considering technical glitches in the GSTN portal as well as difficulty faced by the taxpayers it was decided to keep filing of GSTR-2 and GSTR-3 in abeyance. Therefore, in order to ease the burden of the taxpayer for some time, it was decided in the 18th GST Council meeting to allow filing of a shorter return in Form GSTR-3B for initial period. It was not introduced as a return in lieu of return required to be filed in Form GSTR-3. The return in Form GSTR-3B was only a temporary stop gap arrangement till due date of filing the return in Form GSTR-3 was notified. Notifications were being issued from time to time extending the due date of filing of the return in Form GSTR- 3, i.e. return required to be filed under Section 39 of the CGST Act. It was notified vide Notification No. 44/2018-Central Tax, dated 10th September, 2018, serial 2, that the time limit for furnishing the details or return, as the case may be, under sub-section (2) of section 38 and sub-section (1) of section 39 of the said Act, for the months of July, 2017 to March, 2019 shall be subsequently notified in the Official Gazette.
Further, the Notification No. 10/2017-Central Tax, dated 28th June, 2017 which introduced mandatory filing of the return in Form GSTR-3B stated that it was a return in lieu of Form GSTR-3 (Rule 61(5)). However, the Government, on realising its mistake that the return in Form GSTR-3B was not intended to be in lieu of Form GSTR-3, rectified its mistake retrospectively vide Notification No. 17/2017-Central Tax, dated 27th July, 2017 and omitted the reference to return in Form GSTR-3B being return in lieu of Form GSTR-3.
5. Section 16(2) is beginning with a non-obstante clause to the entire Section 16: Assessees can submit that section 16(2) is beginning with a non-obstante clause to the entire Section 16 which means that the same prevails over all other sub-sections in Section 16. The conditions of section 16(2) are as follows:
- Assessees are in possession of tax invoice/ debit note/ other documents prescribed under Rule 36 of CGST Rules, 2017;
- Assessees have received the goods or services or both;
- The condition to track whether the tax charged in respect of the inward supply has been actually paid to Government seems impossible as there is no invoice level linkage with GSTR-3B of the supplier as it is a summary return. However, the Assessees would have made payment of tax to the suppliers in respect of which they have availed the input tax credit; and
- Assessees have filed the return under Section 39 of CGST Act, 2017. Even though they had filed returns belatedly they have paid late fees and by paying late fee, the delay in filing return has been regularized – Mr Rashmikant Kundalia vs Union of India W.P.. 771 of 2014 (Bom.), Howrah Taxpayers’ Association Vs. The Government of West Bengal and Anr. 2010 SCC Online Cal 2520 (supra). Hence, once the delay has been regularised such returns have to be construed to be filed within the due date.
From the above submissions, it is clear that the Assessees have satisfied all the conditions specified under sub-section (2) to Section 16. Therefore, they are rightly eligible for ITC availed in the return.
6. Provisions of section 16(4) of the CGST Act, 2017 are arbitrary in nature and violation of the provisions of the Constitution of India: Assessees can contend that the provisions of section 16(4) of the CGST Act, 2017 are manifestly arbitrary and violative of Articles 14, 19(1)(g) and 300A respectively of the Constitution. It can be, inter alia, contended that the assessees cannot be made to suffer by not allowing the ITC on account of the failure on the part of the Department to notify the Forms GSTR – 2 and GSTR – 3 respectively. It can also be submitted that the retrospective amendment to Rule 61 of the CGST Rules, 2017 is also unconstitutional being violative of Article 14 of the Constitution. It can also be submitted that the retrospective amendment to Rule 61(5) of the Rules is unconstitutional being violative of Article 279A of the Constitution. Assessees can rely on the judgement of Surat Mercantile Association v. Union of India [2021] 124 taxmann.com 342 (Gujarat) wherein Notice has been issued to the Department and the matter is still pending.
7. Merely because of the delay in making entries within the time fixed, denial of benefit cannot be permitted, as had been held in erstwhile Central Excise law: Assessees can place reliance upon a judgment delivered by the Division Bench of The High Court of Madhya Pradesh in the matter of M/s Bharat Heavy Electricals Limited v/s CEC, Bhopal (MP) 2016 (332) E.L.T. 411 (M.P.), para 12, wherein the Division Bench had considered the provisions of Rule 57G(1) of the Central Excise Rules. The Division Bench had found that entries made in the documents were maintained under RG – 23 A Part – I & Part – II. Even though in Part – I the entry was made showing the date of taking availment of MODVAT credit within the stipulated period of six months, but Part – II, as the date was beyond six months, the facility of MODVAT cannot be extended as assessees have not shown availing the benefit in accordance with the requirement of the Rules.
The Division Bench had, inter alia, held that when the assessee was entitled to avail the MODVAT credit under Rule 57A merely because of the time fixed in making the entry in Part – II of RG – 23 A and only because of some error in making the entry, denial of benefit cannot be permitted. It was held in para 13 that the right to the credit under the Modvat Scheme accrued to the assessee on the date when they paid the tax on the raw material or inputs and when such a right gets crystallized in their favour once the input is received in the factory on the basis of the existing scheme. The Court also held, in para 14, that the act of the assessee in making such receipt of input in Part-I of a single comprehensive RG-23A action is evidence enough with regard to crystallization of right to Modvat credit and merely because in second accounting entry of Part-II, there is some inconsistency, the right accrued already to receive the credit cannot be taken away. The Court, inter alia, finally held in para 16 that the assessee was entitled to avail of the credit and all benefits accruing to them thereto should be granted.
Assessees can submit that the same principle applies in GST too. Thus, the assessee admittedly claimed the input of GST and merely because of delay in filing the return under Section 16(4) of the CGST Act, they cannot be held not entitled to take the ITC.
8. Facility of credit is a vested right, as had been held in erstwhile Central Excise law: Assessees can content that the Hon’ble Apex Court in Eicher Motors Ltd v Union of India, 1999 (106) E.L.T. 3 (SC) had recognized the provision for facility of credit as a vested right. Thus, the credit earned under the GST Act is a property of the taxable person and therefore the denial of ITC is in violation of Article 300A of the Constitution of India. Article 300A provides that no person shall be deprived of his property save by authority of law.
9. Substantial benefit cannot be denied due to procedural lapse of mere non-disclosure in GSTR-3B within the due date: Since the details of input tax credit are already available in GSTR-2A which is available with the Department prior to due date prescribed under Section 16(4) and the availment of such ITC would be a mere disclosure in GSTR-3B, therefore, the substantial benefit cannot be denied due to procedural lapse of mere non-disclosure in GSTR-3B within the due date.
10. Lex Non Cogit Ad Impossibilia: Finally asking the tax payers to comply with Section 16(4) is against the principle of Lex Non Cogit Ad Impossibiliae., the law does not compel a man to do that which he cannot possibly perform. Since the law cannot compel the tax payers to comply with impossible conditions, the proposal to denial of ITC under Section 16(4) is not sustainable.
Challenges and Interpretation:
Thus, the conundrum arises due to the strict wording of Section 16(4) and its interpretation. The interpretation of Section 16(4) has been a subject of debate, and several judicial pronouncements, especially in erstwhile laws, have provided different perspectives on its applicability. Courts and tribunals have adopted various approaches, leading to inconsistencies and confusion for businesses. Some decisions have emphasized strict adherence to the provision, while others have considered practical aspects and intent. The conundrum surrounding Section 16(4) has significant implications for businesses operating under the GST regime. It creates uncertainty and additional compliance burdens, especially for large enterprises with numerous suppliers. The risk of ITC denial or delays in credit realization can impact working capital, profitability, and overall business operations. Recognizing the challenges posed by Section 16(4), industry bodies and tax professionals have made several recommendations for its amendment or clarification. The suggestions include providing a grace period for tax payment delays, allowing provisional ITC subject to certain conditions, and introducing a mechanism to address non-compliant suppliers.
Conclusion:
The conundrum surrounding Section 16(4) of GST highlights the complexities and challenges faced in implementing a comprehensive indirect tax system. While the provision aims to ensure compliance and prevent fraudulent practices, its strict interpretation can create significant difficulties for businesses and hinder the seamless flow of credits. Striking the right balance between compliance and practicality is crucial to address the concerns associated with this provision.
Moving forward, it is imperative for the government and industry stakeholders to engage in constructive dialogue and explore viable solutions to mitigate the challenges posed by Section 16(4). This could involve legislative amendments, technological enhancements to facilitate better reporting and reconciliation, or a combination of both. Ultimately, a well-thought-out and balanced approach will contribute to the smooth functioning of the GST regime, ensuring a fair and efficient indirect tax system for all stakeholders involved.
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