In recent years, the Goods and Services Tax (GST) authorities have intensified their crackdown on fake invoicing and fraudulent Input Tax Credit (ITC) claims. One of the most concerning developments is the issuance of GST notices to genuine buyers, denying ITC on the grounds that the supplier was later found to be bogus or non-existent.
This article outlines the defence available to genuine purchasers in such cases and explains how businesses can safeguard themselves against these allegations.
1. Department Must Prove Collusion Between Buyer and Supplier
One of the fundamental legal principles is that the burden of proof lies on the department. Merely declaring the supplier as bogus does not justify denying ITC to the buyer.
Key points in buyer’s defence:
- The department must establish with concrete evidence that there was collusion or fraudulent intent (mens rea) between the buyer and the supplier.
- Absence of direct or circumstantial evidence proving such a nexus makes the denial of ITC unjustified.
2. Full Compliance with Section 16 of CGST Act
To be eligible for claiming ITC, the buyer must ensure compliance with Section 16 of the CGST Act. The following documents and records play a vital role in establishing the legitimacy of a transaction:
Checklist for Genuine Purchaser:
- Tax Invoice from a GST-registered supplier
- Valid E-Way Bill issued by the supplier
- Transporter’s Documentation (LR copy, consignment note, etc.)
- Bill of Entry (in case of imports) acknowledged by supplier
- Weigh bill Slip confirming physical receipt of goods
Maintaining these documents ensures transparency and supports the buyer’s claim for legitimate ITC.
3. Adopt a ‘Know Your Supplier’ (KYS) Policy
In the evolving GST regime, businesses must implement a ‘Know Your Dealer’ (KYD) or ‘Know Your Supplier’ (KYS) policy.
Best Practices to Safeguard from Fraudulent Suppliers:
- Verify GSTIN and registration status of suppliers on the official GST portal at the time of transaction.
- Ensure the supplier regularly files GSTR-1 and GSTR-3B, and matches input credits.
- Keep records showing that the supplier was active and compliant at the time of transaction.
Important Legal Observation:
“If the supplier was registered and GST-compliant at the time of transaction, the purchaser cannot be faulted if the supplier is later found to be bogus.”
Hence, there are inherent limitations for purchasers in verifying post-facto supplier legitimacy.
4. Post-Transaction Discovery Cannot Be Used Against the Purchaser
If a supplier is found to be bogus after the transaction has taken place and the buyer has already taken all possible precautions and verifications, then penalizing the buyer is unjustified.
Unless the department can prove collusion, a genuine buyer who complied with all legal requirements should not be denied ITC.
Key Judicial Precedents in Support of Purchasers
1. M/s D.Y. Beathel Enterprises v. State Tax Officer (Madras High Court)
Held that denying ITC without evidence of buyer-supplier collusion is arbitrary and unlawful.
2. Arise India Ltd. v. Commissioner of Trade & Taxes (Delhi High Court)
Emphasized the need to protect genuine buyers from the malpractices of fraudulent suppliers.
3. Bright Star Plastic Industries v. Additional Commissioner of Sales Tax (Orissa HC)
Revoked GST registration cancellation due to the department’s failure to prove misuse of ITC.
4. LGW Industries Ltd. & Ors v. Union of India (Calcutta HC)
Ruled that cancellation of supplier’s registration after the transaction cannot be a ground for ITC denial.
5. Solvi Enterprises v. Addl. Commissioner (UP HC)
Clarified that active GST registration at the time of transaction entitles the buyer to claim ITC, even if later cancelled.
Conclusion
Facing a GST credit denial notice due to a bogus supplier can be distressing for genuine businesses. By ensuring compliance with Section 16, maintaining proper documentation, and verifying supplier status at the time of transaction, businesses can safeguard their ITC claims effectively.
When confronted with such notices, it’s crucial to seek professional advice and respond with factual documentation and reference to legal precedents.
Author Bio
