One of the fundamental principles of GST is seamless credit of ITC across the value chain and country. If seamless flow of ITC is broken in this chain, then same would lead to increase in cost of doing business.

In order to claim the ITC, one of the primary and important condition, apart from other as enlisted in S.16 of the CGST Act, is that the “tax charged in respect of such supply has been actually paid to Government, either in cash or through utilisation of input tax credit”

With onset of GST, it was enacted that the ITC would auto populate in GSTR 2A on basis of sales summary filed by selling dealer in GSTR 1. In order to claim ITC, purchasing dealer was supposed to file purchase summary in GSTR 2 by accepting, rejecting, modifying the details of ITC auto populated in its GSTR 2A. In case of any missing details of invoice, he was also allowed to add the details of missing invoice in GSTR 2A and was allowed provisional claim of ITC subject to acceptance of same by the selling dealer. In case selling dealer fails to accept the same, the ITC so allowed earlier will be disallowed and purchasing dealer will have to pay the same along with interest.

However, the process of filing GSTR 2 never started and the same was suspended by the Government. Fallout of suspension of the above process of GSTR 2 & 2A was mismatch in ITC claimed by the purchasing dealer in 3B and GSTR 2A. one of the reasons of mismatch being non-filing of return by the seller. As the return were not filed and payments were not made, Department started issuing notices for payment of difference between ITC claimed as per 3B & ITC as reflecting in GSTR 2A to the purchasing dealers.

Although, S.16 cast onus on the purchasing dealer to ensure that selling dealer makes the payment. Law wants purchasing dealer to do impossible of ensuring that selling dealer makes the payment. Without any mechanism available with the purchasing dealer, it is unreasonable to expect it of ensuring the payment of tax by selling dealer. Wherein, the department has all machinery at its command to effect recovery from the defaulting selling dealer.

High Courts in various judicial decision has held the similar provisions in erstwhile laws to be arbitrarily and unconstitutional.

Apex court dismissed the petition filed by the revenue against the order of Delhi High Court in case of Arise India Limited (TS-314-HC-2017). Wherein Delhi High Court has held that similar provision of Delhi VAT act being arbitrary and unconstitutional. Court also held that purchasing dealer cannot be expected to keep track of whether the selling dealer has in fact deposited tax. Further, court also held that department is not helpless if selling dealer commits a default.

Also, Punjab & Haryana High Court in case of Geru Lal Bal Chand V. State of Haryana has held that “In legal jurisprudence, the liability can be fastened on a person who either acts fraudulently or has been a party to the collusion or connivance with the offender. However, law nowhere envisages to impose any penalty either directly or vicariously where a person is not connected with any such event or an act. Law cannot envisage an almost impossible eventuality”.

Similar view has been held by Karnataka High Court in case of M/s. Onyx Designs, wherein it was held that “the benefit of input tax cannot be deprived to the purchaser dealer, if the purchaser dealer satisfactorily demonstrates that while purchasing goods, he has paid the amount of tax to the selling dealer. If the selling dealer has not deposited the amount in full or a part thereof, it would be for the revenue to proceed against the selling dealer”.

Even though, the above judgements are pronounced in VAT laws but the same holds good under the GST laws also. Intention of the legislature is not to punish the honest purchaser but to punish the purchaser who is hand-in-glove with fraudulent seller in entering frivolous transaction.

Furthermore, recently inserted rule 86A empowers the authorities to block the credit in electronic credit ledger if they have reason to believe that credit of ITC available in electronic credit ledger has been fraudulently availed or ineligible. According to R. 86A(1)(b), authorities can block the ITC in case where the ITC has not been paid to government treasury.

The above arbitrary power will only increase difficulty in doing business for honest purchase dealer and will have impact on his working capital.

The government should issue necessary direction to officer to use the power entrusted in rule 86A in cases where purchasing dealer is hand-in-glove with selling dealer in fake invoicing and not in genuine cases.

The necessary clarification and directions to the tax authorities will only go long in achieving Government own theme of “Ease of Doing Business”.

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April 2021