On going through the amendments to the GST Act and GST Rules that have been brought in during the last 50 months, since the inception of GST in the country, one may feel that ardent research is going on regarding curtailment of Input Tax Credit to the recipients and NOT on methods of recovery of the tax due from the faulty suppliers.

When the present state of affairs with regard to availing or enjoying of Input Tax Credit by the recipient is considered, one is reminded of the verdict proclaimed by Portia, in the very famous Drama, ‘Merchant of Venice’ by William Shakespeare. The actual wording is like this:

“The words expressly are “a pound of flesh.” Take then thy bond, take thou thy pound of flesh, But in the cutting it, if thou dost shed One drop of Christian blood, thy lands and goods ……………………………………………………..”

You may take ‘a pound of flesh’ as per the bond, but in the act of doing so, not a drop of blood shall be spilled. If we compare the same with the Input Tax Availment scenario, the recipient may take the Input Tax Credit on satisfying improbable and impossible conditions attached to it, which is beyond the limit and control of the recipient.

Input Tax Credit - Calculator and an empty Notepad page on the office Desk with financial indicators and charts

When the original GST Act was promulgated, every businessman in the country was enthused to know that there will be a seamless flow of Input Tax Credit, based on the Tax Invoices issued by the supplier and in possession of the recipient, the goods or services received by the recipient pan India.

This article is not intended into dwell into the contours of the legalities with regard to Input Tax Credit. This article tries only to explain various provisions in the Act and Rule of GST, from a layman’s viewpoint.

Section 2(62) defines “Input Tax” as:

“input tax” in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes—

It is crystal clear from the definition of “Input Tax” as per Section 2(62) that Input Tax is a tax ‘charged’ on any supply or goods or services, and it does not mention regarding collection or payment of the said Tax.

CGST ACT 2017 – Section 9 – Levy and Collection

(1) Subject to the provisions of sub-section (2), there shall be levied a tax called the Central Goods and Services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person.

Normally, GST is payable by ‘taxable person’ who is supplying goods and services. Taxable person means a person who is registered or liable to be registered under section 22 or 24 of CGST Act. Sections 22 and 24 of CGST Act requires every supplier of goods or/and services to register under CGST Act 2017.

SECTION 22 OF GST ACT- PERSONS LIABLE FOR REGISTRATION

(1) Every supplier shall be liable to be registered under this Act in the State or Union territory, other than special category States, from where he makes a taxable supply of goods or services or both, if his aggregate turnover in a financial year exceeds forty lakh rupees:

Hence it is evident from Section 9 (1) and Section 22 (1), that the right or power to collect tax and duty to pay the collected tax to the Government rests with the supplier.

Section 16 of the GST Act says:

Sec. 16 (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

The words used in this Section goes to say that “every registered person shall be entitled to take credit of input tax charged on any supply of goods…”, which means it is a mandatory clause, by the use of “shall”.

The intention of the legislation is clear from the word used “entitled”, which means “having a right to certain benefits or privileges”

But adding sub-sequent sub sections, the essence of Section 16(1) is paralyzed. If gone through in detail, Section 16 (1) goes to say that the recipient is “entitled to take credit of input tax charged”. The Sub Section does not say “input tax paid”. Such liberal was this Sub Section on introduction of the Act.

On the strength of the words used in Sec. 16(1) of the Act, subject to such conditions and restrictions as may be prescribed”, so many conditions and provisions have been brought in or later added on, denying the legitimate right of the recipient to enjoy the Input Tax Credit, the tax which he had actually paid to the exchequer, through the registered dealer.

Section 16 (2) reads thus:

(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,––

(c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and

Section 41 of CGST Act 2017: Claim of Input Tax Credit in Returns and Provisional Acceptance thereof:

(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to take the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited on a provisional basis to his electronic credit ledger.

Section 16 (2) (c) cannot be taken in consonance with Section 41 of the Act. While Section 41 mentions about the entitlement of Input Tax Credit, sub-section (c) is injected into Section 16 of the Act, with a provision coming under Section 9 (1), which clearly mentions about Levy and Collection of Tax and also payment to the Government. Even if one accepts, for the sake of argument, that subject to the provisions of the Section 41 in Section 16 (c) of the Act, by no stretch of imagination, can Section connected with the Levy and Collection of Tax, i.e. Section 9, be intruded into the sub section 16, which is separately mentioned for taking Input Tax Credit.

Section 39 of CGST Act 2017: Furnishing of Returns:

(1) Every registered person, other than an Input Service Distributor or a non-resident taxable person or a person paying tax under the provisions of section 10 or section 51 or section 52 shall, for every calendar month or part thereof, furnish, a 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, in such form and manner, and within such time, as may be prescribed:

This Section is relevant for taking Input Tax Credit, unless one furnishes the Returns of Output and Input Taxes, he cannot avail the Input Tax Credit.

Sec. 39 (7): Every registered person who is required to furnish a return under sub-section (1), other than the person referred to in the proviso thereto, or sub-section (3) or sub-section (5), shall pay to the Government the tax due as per such return not later than the last date on which he is required to furnish such return:

Provided that every registered person furnishing return under the proviso to sub-section (1) shall pay to the Government, the tax due taking into account inward and outward supplies of goods or services or both, input tax credit availed, tax payable and such other particulars during a month, in such form and manner, and within such time, as may be prescribed:

Even if we take into account, Section 39, as per sub section (7), it is the duty of the supplier to furnish his returns and pay the tax due to the Government.

Sec. 39 (9): Subject to the provisions of sections 37 and 38, if any registered person after furnishing a return under sub-section (1) or sub-section (2) or sub-section (3) or sub-section (4) or sub-section (5) discovers any omission or incorrect particulars therein, other than as a result of scrutiny, audit, inspection or enforcement activity by the tax authorities, he shall rectify such omission or incorrect particulars in such form and manner as may be prescribed, subject to payment of interest under this Act:

Provided that no such rectification of any omission or incorrect particulars shall be allowed after the due date for furnishing of return for the month of September or second quarter following the end of the financial year to which such details pertain, or the actual date of furnishing of relevant annual return, whichever is earlier.

As per Section 39 (9), an opportunity is extended to the Supplier, to rectify the mistakes, if any, and remit the tax with interest thereon as mentioned in the Act.

Such be the fact, it is overstepping the statute and intention of law to demand the recipient to suffer for the fault of the supplier, in either furnishing his Returns on time or making payment to the Government.

Section 49 of CGST Act 2017: Payment of Tax, Interest, Penalty and Other Amounts:

(1) Every deposit made towards tax, interest, penalty, fee or any other amount by a person by internet banking or by using credit or debit cards or National Electronic Fund Transfer or Real Time Gross Settlement or by such other mode and subject to such conditions and restrictions as may be prescribed, shall be credited to the electronic cash ledger of such person to be maintained in such manner as may be prescribed.

(2) The input tax credit as self-assessed in the return of a registered person shall be credited to his electronic credit ledger, in accordance with section 41 or section 43A, to be maintained in such manner as may be prescribed.

Though Section 49 (2) mentions about Section 43A, and though the said Section 43A has been notified, the effective date of operation of the said Sub section has not been notified till date, adversely affecting the right to Input Tax Credit by the recipient.

Latest amendment to Sec. 16

Recently, the Government has brought in an amendment to Section 16 as follows:

“16 (2) (aa): the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;”

This sub section has been introduced to legalise Rule 36 (4), which was brought about in October 2019, without the backing of a legal provision, and is under judicial scanning. Here also the effective date of this amendment is yet to be notified.

Rules curtailing the seamless flow of Input Tax Credit:

Rule 86A: Conditions of use of amount available in electronic credit ledger.-

(1) The Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as

a) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36-

i. issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or

ii. without receipt of goods or services or both; or

b) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or

c) the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or

may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount.

Rule 86A (1) (a) (i) makes it necessary for the recipient to confirm that the business firm, from whom a Tax Invoice and goods have been received by the recipient, exists and runs the show, for whom Registration has been awarded by the GST authorities, for the recipient to claim his Input Tax Credit, which is practically impossible.

Similarly Rule 86A (1) (b) also is an impractical clause, since there is no mechanism for the recipient to find whether the supplier has paid the taxes due from him. Maximum data available to the recipient from GSTR 2A and GSTR 2B is that whether the supplier has furnished his GSTR 3B. It cannot ascertain whether the supplier has paid his due tax, and even if paid, whether it covers the Tax Invoices received by the recipient.

Similar to Rule 86A (1) (a) (i), Rule 86 (1) (c) also makes it necessary for the recipient to confirm that the business firm exists and runs the show, for whom Registration has been awarded by the GST authorities, to avail his Input Tax Credit, which is practically impossible.

The latest introduction is Rule 59 (6), effective from September 2021.

Rule 59 (6): Notwithstanding anything contained in this rule,-

(a) a registered person shall not be allowed to furnish the details of outward supplies of goods or services or both under section 37 in FORM GSTR 1, if he has not furnished the return in FORM GSTR 3B for preceding two months;

(b) a registered person, required to furnish return for every quarter under the proviso to sub-section (1) of section 39, shall not be allowed to furnish the details of outward supplies of goods or services or both under section 37 in FORM GSTR 1 or using the invoice furnishing facility, if he has not furnished the return in FORM GSTR 3B for preceding tax period;

(c) a registered person, who is restricted from using the amount available in electronic credit ledger to discharge his liability towards tax in excess of ninety-nine per cent. of such tax liability under rule 86B, shall not be allowed to furnish the details of outward supplies of goods or services or both under section 37 in FORM GSTR 1 or using the invoice furnishing facility, if he has not furnished the return in FORM GSTR 3B for preceding tax period.

On general reading of Rule 59(6), one may feel that it affects the supplier. But actually it affects the Input Tax Credit of the recipient. If the supplier fails to file his GSTR 3B for two consecutive months, he will be barred from filing GSTR 1. By doing so, the recipient is the adversely affected one. For any reason, if the supplier is barred from filing his GSTR 1, the Input Tax Credit of the recipient shall get blocked. This is a more serious turn of event. Till date, the recipient had to look into GSTR 2A and GSTR 2B, for claiming his Input Tax Credit. Now he has to follow up with the supplier and see that he files his GSTR 3B and GSTR 1 on time. That means, the recipient has to take care of the tax administration of the supplier as well. If the recipient happens to be a businessman, purchasing stocks from a huge number of suppliers, he will be put to undue hardships in ascertaining the tax compliances of all these suppliers.

It is paradoxical to note that all these are affecting the registered businessmen. If one is unregistered and the supplier fails to comply with the provisions of the Act, the unregistered recipient is not at all affected, since he is not worried about Input Tax Credit, as his purchase is being considered as B2C. This can be taken as discriminatory in nature.

Suppose a supplier supplies goods to a consumer or an unregistered dealer and fails to furnish his GSTR 3B and GSTR 1 and also fails to remit the tax due from him.  Is it possible for the Tax Authorities to locate the consumer or the unregistered dealer and collect the tax paid by them to the supplier? Only because the recipient is a registered one and is in existence, that the Tax laws are made coercive to see that the recipient has to ensure that the supplier, to whom Registration has been awarded by the Government, complies with the various provisions of the GST Act.

Whatever said and done, for the failure of a person in discharging his duties, another person shall not be punished. Denial or curtailment of Input Tax Credit to the recipient for the fault on the part of the Supplier is exactly penalizing one person for the fault of another, unless connivance among them is proved.

While the Government and Revenue are equipped with a series of weapons to collect the due taxes from a faulty supplier, by acting upon the strength of the various Sections and sub-sections incorporated in the Act,it is not justifiable to penalize and deprive the legitimate entitlement of a benefit or privilege extended vide the provisions of the Act to the recipient. It is to be noted that the hapless recipient has no chance of sneaking into the matters of the supplier, by way of provisions incorporated in the Act or otherwise.

One is yet reminded of the Bollywood and Tollywood movies. For bringing the hero into the custody of the villain, the kith and kin of the hero are taken forransome. Similarly, the registered recipient, who is unfortunately connected with the supplier through business transactions, is put to task, for making the supplier comply with the provisions of the Act.

The last and only resort is judiciary. Let us hope that the suits and writs filed before various Hon’ble High Courts across India, questioning the legality and constitutionality of the various provisions of the GST Act, infringing the legitimate right of enjoying the Input Tax Credit by the genuine recipient, will be judiciously agitated and the poor recipients shall obtain natural justice.

*****

P. VenkitaramaIyer | GST Advisor & Former State President, All Kerala Distributors’ Association | Email: [email protected]

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