The Goods And Services Act, 2017 is historical change in taxation system in India which has came in to force from 1st July, 2017.  But it requires transformation since its impact on all segments like manufacturers, traders, consumers, supply chain, works contracts, information technology system, logistics, service oriented business etc., etc., It is high time to revamp the GST Act, 2017.

As predicted by various experts the GST will reach and achieve its target in GDP by 2-3%. If revamp of GST Act takes place then it will grand success and improve revenue collection abnormally and the mechanism of availing of input tax credit to buyer of products and services while discharging output tax liability.

The GST Act is nothing but ‘Destination Based Taxation’. Hence Tax will be levied and allocated to a State(s) where goods or services are consumed.

In other words GST is also a tax on ‘value addition’ at every stage of transaction. Thus any input tax paid by a recipient to his supplier of goods/services is allowed as a set off while discharging output tax on sale of goods/services. In this regard, the set off of input tax is available against output tax liability and it means tax is levied only on value addition. If such a set off is not available for any reason, then the chain breaks which will lead to create disruption in further business transaction/ activity and may lead to several complications such as parallel transactions.

Keeping in view of the important feature of set off, input tax credit (ITC) mechanism has been specified in GST Act by which credit for input tax will be available to a recipient/buyer while discharging output tax liability. Thus at each stage, a buyer will be leviable to GST only on the ‘value addition’. As for as matching of invoices with both buyer and seller side in GSTN will lead to transparency in the system which is clearly desirable which will also assist in more tax collections.  This can also be done internally by GST administration.

Having such great features in GST Act there is only one provision in GST Act which is unfair, arbitrary and unjust, to a genuine and innocent buyer.

Sections 16(2)(c), 37, 38, 73 of Central GST Act (CGST), a genuine buyer who avails ITC for the amounts paid to his seller (both invoice amount and tax) will be denied credit with a reason that the seller has not remitted tax with the appropriate State / Central Government authorities and disclosed in his GSTR-1 return.

After completion of a quarter, the Input tax credit (ITC) will be reversed automatically in buyers GST Ledger and now it will be Buyer’s responsibility to pay this GST with interest. Now what the buyers has to do? Whether fight with his seller or go for legal battle and increase litigation by spoiling his business activities. Such a hasty provision will hamper the businesses and have to suffer many hardships to genuine buyers.

Whereas the transparency and ITC under GST will lead to better discipline and enhanced tax collections, penalising a genuine buyer will definitely disrupt the entire value chain and will be counter productive to business.

However, in order to address such defaulters (sellers), the GST Council is publishing GST Rating Scores from 1 to 10 which will assist genuine buyers and to take action and giving caution to buyers, not deal with such defaulters.

Further, this is a good protection measure, but it is unfair to penalise a genuine buyer with both tax and interest for no fault.
Government and the GST Council has to penalise the seller and take necessary action with double penalty.

There are numerous judicial precedents such as:

1. In the case of Commissioner Of Trade And Taxes Delhi Versus Arise India Limited (Special Leave to Appeal (C) No(s). 36750/2017) Hon’ble Supreme Court held that of Althaf Shoes (P) Ltd., vs. Assistant Commissioner (CT), Valluvarkottam Assessment Circle, Chennai6 reported in (2012) 50 VST 179 (Mad).

2. Hon’ble Supreme Court in the case of Commissioner of Trade & Taxes, Delhi and others Vs. Arise India Limited and others[TS-2-SC-2018-VAT].

3. The Punjab & Haryana High court has delivered a landmark judgment namely Gheru Lal Bal Chand Vs. State of Haryanaand another

4. Hon’ble High Court of Delhi in the case of Arise India Limited and others Vs. Commissioner of Trade & Taxes, Delhi and others [TS-314-HC-2017(Del)-VAT](“Arise India case”).

5. Hon’ble Madras High Court in the case of State of Madras Vs. Raman & Co. [1974] 33 STC).

6. Sri Vinayaga Agencies vs. Assistant Commissioner (CT), Vadapalani-I Assessment Circle, Chennai and anotherreported in (2013) 60 VST 283 (Mad).

7. Hon’ble Madras High Court In the decision cited on the side of the petitioner in 2016-TIOL-489-HC-MAD-VAT (Britannia Industries Ltd v. the Deputy Commissioner (CT)-III (FAC), Chennai-8).

8. In the case of M/s New Dhiraj Industries Vs. The State of Telangana in TA Nos. 161/2011, 162/2011, 248/2015 & 249/2015 dated 20.08.2018.

Wherein all most of all cases, their lordships held that:

“That no liability can be fastened on the purchasing registered dealer on account of non-payment of tax by the selling registered dealer in the treasury unless it is fraudulent, or collusion or connivance with the registered selling dealer or its predecessors with the purchasing registered dealer are established”.

” ITC should not be denied to the bonafide purchasing dealer merely on fault of selling dealer. It should not be made the responsibility of the purchasing dealer to ensure that the tax is deposited by the selling dealer to the extent transaction is bonafide.”.

“Their lordships held that the officers who are passing the orders without following the settled law and the provision of the Act are just creating paper demands which is ultimately creating a mess for the revenue as well as the dealer as in these type of cases the department is not getting any revenue rather the machinery of the department is involved in unnecessary litigation and it has been rightly observed by the Hon’ble Judges of the Madras High Court reported in 92 STC Page No 621 that incompetent officer without knowledge of law are harmful both for the revenue and the state on the one hand and assessee on the other hand, if officers who do not have the knowledge and correct appreciation of the law and the principles upon which power to assess and realize tax is exercised, are appointed and allowed to hold office of responsibility, their such acts bring a bad name to the revenue administration so it is very necessary that while dealing with these situations the assessee should not be denied of his legitimate claim of input tax credit on flimsy grounds”.

“ so long as the vendor is found to be a registered dealer on the files of the Revenue, the claim of the assessee for refund could not be rejected nor delayed. As already pointed out, the Revenue does not deny, as a matter of fact, that the assessee’s vendors are all registered appellants on the files of the Revenue and the assessee had also given the TIN number of these vendors. When such particulars are available, it is for the Revenue to take necessary action against the vendors, who had not remitted tax collected by them to the State. Without taking recourse to that, I do not think that the Revenue could deny the claim of the assessee”.

“4. In the judgment reported in 2013 (60) VST 283 (Mad) [cited surpa], in paragraph No.9, it has been held as follows:- 9. sub-section (16) of section 19 states that the Input Tax Credit availed is provisional. It, however, does not empower the authority to revoke the input tax credit availed on a plea that the selling dealer has not paid the tax. It only relates to incorrect, incomplete or improper claim of Input Tax Credit by the dealer. It is not so in these cases. In the present case, the petitioner-dealer, admittedly, has paid the tax to the selling dealer and claimed Input Tax Credit and that was accepted at the time when the self-assessment was made. Even the pre-revision notices and the orders under challenge fairly state that the petitioner-dealer had paid tax to the dealer. It is, therefore, for the department to proceed against the selling dealer for recovery of tax in the manner known to law. The provision under which the present has been initiated, namely, invoking sub-section (16) of Section19, does not appear to be correct on the admitted facts as above. All the revision orders revising the Input Tax Credit on the admitted case of tax having been paid to the selling dealer, therefore, are found to be totally incorrect, erroneous and contrary to the provisions of the TNVAT Act and Rules. As a result, all the orders are liable to be set aside”.

This is a humble advise and suggestion to the Government authorities to amend this provision which penalises genuine buyer and which will create more confidence and trust of business community at large.

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  1. ISHTIAQ says:

    This problem is hash indeed. But what when seller is from other state, how will officials from one state get the seller from other state comply with the law and proceed against him.

  2. Vithal Prasad loya says:

    I think in gst rule buyer has to focus only on gst filling and don’t do business ,as a business man we have to fight with market volatility after that this is new harrasment for us and we are taking more pain and now govt giving more pain to us by disallow of tax for example sugar trade is 100% advance payment in this case supplier don’t pay gst after getting money our margin below 1% if we have to tax amount with interest it’s better to do fixed deposit in the bank and enjoy the life so there will be no gst headace and loosing money also

    This is really bad rule for genuine business man

  3. Arun agrawal says:

    What action has been taken by Gst department in this context I would like to know.Any relief to genuine buyers who paid gst but not obtained set off since seller not paid gst & also not filed return gstr1.& Cancels gst registration after a year of billing date.This aspect is not clear

  4. Reetika Aggarwal says:

    IF a Buyer does not get the benefit of ITC merely because the seller has not paid or filed the return , he will not be able to do his business as his funds are blocked.
    First he pays to the seller and upon ITC Revoke he will have to pay it with interest. The authorities should catch the seller and not the buyer and that too with a higher rate of interest. With such new amendments only the ease of doing business will be there ; which is the aim of GST.


    A Buyer will not get GST Input Tax Credit only because the seller did not make payment of GST or did not file return with sale bill detailes of the Buyer is the most unjustified condition in GST regime. The Government of India has introduced GST Regime and they should police for any default of seller in not paying tax or filing return as it was in prevoious CST and VAT regime. A buyer is supposed to concentrate on his business without any worry of getting GST Input Tax Credit.

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July 2022