Challenges in Availing ITC Under GST & Relief Under Notification 183/2023

Challenges in Availing Input Tax Credit (ITC) Under GST & Relief Under Notification 183/2023

The GST Department has issued numerous amendments and notifications to address litigation and compliance issues. However, Input Tax Credit (ITC) remains a significant challenge, especially for genuine recipients who, despite making payments for their purchases, face hurdles in claiming credit. A legitimate purchaser is already dealing with intense market competition and other trade difficulties, making the complexities surrounding ITC a major burden on businesses.

Legal Framework Governing ITC

Under the GST law, particularly Section 16(4) of the CGST Act, a recipient can avail of Input Tax Credit (ITC) only if certain prescribed conditions are met. One crucial condition is that the supplier must furnish details of outward supplies in GSTR-1, which must then reflect in GSTR-2B of the recipient. Additionally, the supplier is required to discharge their tax liability in GSTR-3B.

Liability When Supplier Fails to File GSTR-3B & Pay Tax

1. Primary Liability – Supplier:

• The supplier is responsible for filing GSTR-1 & GSTR-3B and remitting the tax collected from the recipient.
• If the supplier fails to do so, penalties, interest, and recovery actions under Sections 73 & 74 of the CGST Act will be initiated against them.
• The tax department may issue notices to the supplier, initiate recovery proceedings, and even suspend their GST registration in extreme cases.

2. Impact on the Recipient – ITC Reversal & Interest:

• If the supplier does not file GSTR-3B, the recipient’s ITC may be denied under Rule 37 & Rule 86A.
• The recipient will be required to reverse the ITC along with 18% interest (as per Section 50 of the CGST Act).
• In some cases, recipients are forced to repay the tax amount already paid to the supplier, leading to double taxation.
• If the recipient is found to have fraudulently availed ITC, they may also face penalties under Section 122.

Who is Punished?

• The supplier is primarily liable for non-payment of tax.
• However, the recipient may also be penalized if they availed ITC without ensuring the supplier’s compliance.

This raises a crucial question: When the recipient has already paid for the supplies, should they also bear the responsibility of tracking whether the supplier has filed their return? Is this not an additional burden that contradicts the idea of ease of doing business?

Challenges Faced by Recipients

To safeguard their ITC claims, recipients must:

• Regularly check GSTR-2B to verify ITC eligibility.
• Follow up with suppliers to ensure they file GSTR-3B and pay tax.
• Maintain proper documentation to defend against ITC reversal notices.
• Consider withholding payments to non-compliant suppliers until they meet their filing obligations.

Practical Difficulties in Compliance

• These compliance requirements are time-consuming and resource-intensive, making it difficult for businesses to focus on core operations.
• Large organizations may manage compliance internally, but for small businesses, additional compliance costs may become a financial burden.
• Even after taking precautions, if a supplier discontinues their business or absconds, the recipient is left helpless.
• How can a recipient monitor whether a supplier has properly filed their returns? The recipient has no control over the supplier’s actions, yet they are penalized for non-compliance that is beyond their reach. This creates an unfair disadvantage for businesses that rely on external suppliers.

Relief Under Notification No. 183/2023

To address the ongoing disputes regarding ITC, Circular No. 183/2023-Central Tax, dated 31st October 2023, provides relief to recipients facing issues due to suppliers failing to file GSTR-3B or pay taxes.

Key Provisions of Notification 183/2023

1. Conditional Relief to Recipients:

• • ITC shall not be denied merely because the supplier failed to pay tax.
  • This is applicable only if the recipient has fulfilled all conditions under Section 16(2) (i.e., possession of a tax invoice, receipt of goods/services, tax appearing in GSTR-2B, etc.).
  • This ensures that genuine businesses are not penalized for supplier non-compliance.

2. Protection Against Excessive Litigation:

• • Many recipients were receiving notices under Section 16(4) & Rule 86A, forcing ITC reversals.
  • With this notification, tax authorities cannot arbitrarily deny ITC to the recipient if their transaction is genuine.
  • This provides a strong legal ground to contest unjustified ITC denials in case of litigation.

3. Supplier Remains Liable for Non-Compliance:

• • The primary liability remains with the supplier to file GSTR-3B & pay tax.
  • If the supplier defaults, the government will recover the tax from them instead of reversing ITC from recipients.
  • This mechanism shifts the burden back to the defaulter rather than punishing compliant businesses.

4. Requirement of CA Certification for Large ITC Claims:

• • If the disputed ITC amount exceeds ₹5 lakhs, the recipient must obtain a Chartered Accountant (CA) or Cost Accountant certificate.
  • If the ITC amount is below ₹5 lakhs, a self-declaration along with supporting documents (like invoices, GSTR-2B, payment proofs, etc.) is sufficient.

Limitations & Practical Difficulties

While Notification 183/2023 provides much-needed relief, it does not completely eliminate the problem.

• What happens if a supplier absconds after receiving payment? The recipient still has no recourse.
• There are still many unresolved litigations where recipients have paid tax on their purchases but later had to reverse ITC with 18% interest.
• Some tax officers may still demand additional documentation despite this notification, leading to compliance headaches.

Conclusion & Way Forward

Despite paying taxes, recipients face unfair consequences if their supplier does not file returns. This situation is not conducive to business growth and goes against the principles of ease of doing business.

To truly resolve this issue, the government must introduce a more robust mechanism to:

• Automatically track and adjust ITC based on supplier compliance.
• Reduce litigation risks for genuine buyers.
• Provide alternative solutions, such as a government-managed system to collect tax from defaulting suppliers without impacting buyers.
• Encourage better compliance from suppliers through stricter enforcement measures.

The introduction of Notification 183/2023 is a step in the right direction, but further reforms are necessary to protect businesses and ensure fair tax compliance.

This article highlights the challenges surrounding ITC under GST and how Notification 183/2023 offers partial relief. However, long-term solutions are needed to eliminate undue hardship on genuine taxpayers. What are your thoughts on the current ITC mechanism? Should the government introduce additional reforms?