Constitutional validity of this tyrannical notification No. 49/2019 dated 9-10-2019 capping the ITC to 20%

The point of contention in this latest Notification No. 49/2019 dated 9-10-2019 wherein revenue placed the 20% as maximum cap for availing ITC on Invoices not uploaded by the supplier. Isn’t this notification is just a vice versa scenario of the 234E. How many of us remember the famous case law of Mr Rashmikant Kundalia and another v/s Union of India and others in the bench of honourable High court of Bombay wrt 234E. The Petitioners have challenged the constitutional validity of section 234E of the Income Tax Act, 1961. Unless until we read the few line stated by Additional Solicitor General appearing on behalf of the Union of India, we wont be able to understand the effect of this notification and what would be next course of action.

Then that 234E decision of the Honourable Bombay High court was in favour of Union of India. During the court trial, the learned Additional Solicitor General appearing on behalf of the Respondents i.e. Union of India, submitted that TDS is one of the modes of collection of taxes. At the time of making / crediting payment to a payee (the deductee), the payer (the deductor) was required to deduct a certain percentage as and by way of TDS and deposit the same with the tax authorities within the prescribed time period. Thereafter, the deductee got credit of the amount so deducted against his tax liability on the basis of the information furnished by the deductor in the TDS return/statements. He submitted that TDS, as the very name implies, aims at collection of revenue at the very source of income. It is essentially a method of VRD 4 of 19 WP771/14 collecting tax which combines the concepts of “pay as you earn” and “collect as it is being earned”. Its significance to the Government lies in the fact that it prepones the collection of tax, ensures a regular source of revenue and provides for a greater reach and a wider base for tax. At the same time, to the tax payer, it distributes the incidence of tax and provides for a simple and convenient mode of payment.

Keeping this object in mind, the learned Additional Solicitor General submitted that timely submission of TDS statements containing the details of persons on whose behalf tax is deducted, becomes very crucial because unless and until the Revenue receives the details of the tax deducted (through the TDS statements), timely processing of income tax returns of assessees seeking credit of TDS is not possible. In case the Department goes ahead and processes the income tax return of the assessee without giving credit for TDS due to non-filing of TDS return/statements by the deductor, then the grievance of the deductee would be multiplied in as mush as instead of issuing a refund to the assessee (in a given case), infructuous demands would to be raised. Hence non-filing of the TDS return/statements by the deductor in a timely manner has multitude effects eroding the credibility of an efficient tax administration system, was the VRD 5 of 19 WP771/14 submission of the learned Additional Solicitor General.

The learned Additional Solicitor General further submitted that the title of section 234E per se indicates that the section is regarding collection of a fee. This was not a penal provision but a fee for not furnishing the TDS return/statements within the prescribed time frame as the late submission of TDS statements creates additional work for the Income Tax Department. In many cases, due to late submission of the TDS return/statements, the Department has to revise the assessment order already passed in the case of the deductee for determining his correct tax liability. Moreover, in case of an income tax return having a refund claim, the Department has to pay extra interest due to delay in determining the correct amount of refund for want of information of tax deducted, which in turn results in delay of issue of refund. The fee under section 234E is levied to address this additional work burden forced upon the Department by the deductor by not furnishing the information in time which he is statutorily bound to furnish within the prescribed time. The learned Additional Solicitor General submitted that looking at it from this perspective, it cannot be said that section 234E of the Act is either ultra vires the Constitution or in any way violates Article 14 thereof. He VRD 6 of 19 WP771/14 therefore submitted that there is no merit in the Petition and the same ought to be dismissed with costs.

Now My main point of contention on the latest Notification No. 49/2019 dated 9-10-2019 placeing the 20% as maximum cap for availing ITC on Invoices not uploaded by the supplier. Isn’t this notification is just a vice versa scenario of the 234E verdict stated supra. The many question that need to be answered and I am not surprised that the WRIT in the suprement court is on its way challenging the constitutional validity of this tyrannical notification The question that required answer are

  • Why on the default of non filing of one party, the honest one is required to pay extra tax?
  • As long as the purchasing dealer has verified the GST of the supplier from the tax invoice issued to him and paid for it, he cannot be expected to keep track of whether the selling dealer has, in fact, deposited the tax collected with the Government or has lawfully adjusted it against his output tax liability.
  • Purchasing dealer would have no access to the return filed by the supplier. Even the primary GST Act and Rules provided that if the supplier have not shown the transaction, the recipient could also update the GSTR 2 to get it rectified/ ratified but that rights was taken in away in the very first quarter of the launch.
  • The Revenue is not helpless if the selling dealer commits a default in either depositing or lawfully eating away the GST collected from the recipient dealer. There are provisions in the GST Act which empower the Revenue to proceed to recover the tax in arrears from the supplier.
  • As per the notification, the recipient of could not be able to avail 80% of the ITC.

1. Does it mean, revenue won’t recover that 80% from output supplier as well.

2. And If they will recover, whether they will pass that 80% once collected to this input recipient?

3. Whether we have that notification in place for passing of that 80% collected latter by revenue?

4. Whether 80% of the interest and penalty collected latter will also be passed to recipient for the harassment, cash flow issues, penalty for ITC wrongly availed be passed?

5. If not, does not that account for double taxation and unjust enrichment by the revenue.?

  • What about the cash flow issue to recipient that gonna arise out this autocratic notification?

Well  I understand, revenue is far away from the ground reality and once the Late Arun Jaitley, the Ex Finance Minister said  that “ Vodafone retrospective tax decision was erroneous”. Then how come taxing lakhs of supplier in SME is good by making this retrospective amendment vide notification.

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    Honourable GST Council should make generation of invoices from GST Website mandatory for all registered dealers regardless of turnover . Software should be made available free of cost printable on any stationery. Such bills generated should be updated automatically in GSTR1 of seller and GSTR2A of purchaser. Nearly all GST dealers have billing software installed in their premises. Hence such billing system should not put any extra burden. Setoff process will become smooth.


    Honourable GST Council should roll back GSTR2 and allow the purchasing dealer to enter missing bills in it. What about GST dealer having quarterly frequency whose bills will not appear in GSTR2A of dealer who files returns in monthly frequency. This frequency mismatch cannot be overcome. How and when can the rest 80% setoff be claimed. This amount for some dealers can be huge. Honourable GST Council will have to force defaulting dealers to file GSTR1 on time. If the suffering dealer thinks of harsh steps like withholding payment to defaulting dealer etc. liquidity problems arise immediately which quickly becomes a vicious circle giving rise to a chain reaction

  3. k s srinihi says:

    sir very nice interpretation. As suggested in the article, can u please share the details of WRIT petition, if any, filed in supreme court ? Should we consider only 20% if the supplier has not filed his GSTR 1 ?

    Kindly reply

    1. periwalpawan says:

      I stated “….. and I am not surprised that the WRIT in the suprement court is on its way ” which means it will be filed very soon by someone who is extreme aggrieved with huge monetary value.

  4. V Balaji says:

    As indicated why can’t the Government roll back the GSTR2 which was temporarily withdrawn. This would ensure honest tax payer benefit by reporting receipt of actual supply of goods or services based on the invoices instead of making GST payment on behalf of supplier who is not filing his returns timely and wait for adjustment at a later date. It is sad to note that the GST Council is finding short cut methods in boosting their monthly revenue instead of finding permanent solution on implementing GST law as decided in the beginning.

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December 2020