Draft reply to show cause notice under section 16(4) of CGST Act, 2017

The article delves into the complexities surrounding GST Section 16(4) and its impact on Input Tax Credit (ITC). We examine the allegations received through a SCN (Show Cause Notice) in form DRC 01, discussing the disallowance of ITC for a specific case. This sets the stage for a comprehensive analysis of Section 16(4) and its legal implications.

Format of Draft reply to show cause notice under section 16(4) of CGST Act, 2017

1. We have received a SCN in form DRC 01 from your office on Dated Reference No.____ for the allegation of wrongly availed and utilised ITC in violation of Section 16(4) of GST Act, the extract of the allegation is below.

M/s. ______________ for the month of _______ in the GSTR 3B filled in month of__________, hence same is disallowed as per the Section 16(4) as the return is not filled and ITC is availed after Sept               …

2. For the purpose of the clarity, the extract of the Section 16(4) is reproduced below for reference.

Section 16(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier.

Provided that the registered person shall be entitled to take input tax credit after the due date of furnishing of the return under section 39 for the month of September, 2018 till the due date of furnishing of the return under the said section for the month of March, 2019 in respect of any invoice or invoice relating to such debit note for supply of goods or services or both made during the financial year 2017-18, the details of which have been uploaded by the supplier under sub-section (1) of section 37 till the due date for furnishing the details under sub-section (1) of said section for the month of March, 2019

Provision is inserted by Order No. 02/2018 Central Tax Dated 31-12-2018

3. The concepts of filing of returns and the statutory provisions governing the same. The Scheme of filing of returns as envisaged by the CGST Act is explained herein below:

4. a) Section 37(1) of the CGST Act provides that a registered person is required to file a return (Form GSTR- 1) containing details of his outward supply for the tax period i.e., a month. These details of outward supplies of a registered person are communicated to the recipients in an auto-populated return (Form GSTR-2A) under Section 37(1) read with Section 38(1) of the CGST Act.

b) Section 38(1) of the CGST Act provides that a registered person shall verify, validate, modify or delete such details of inward supplies communicated under Section 37(1) of the CGST Act in the Form GSTR-2A. Thereafter, under Section 38(2) of the CGST Act the recipient files a return (Form GSTR-2) containing details of his inward supplies based on Form GSTR 2A. These details are then communicated to the suppliers under Section 38(3) of the CGST Act and suppliers can accept or reject the details under section 37(2) and Form GSTR-1, shall stand amended accordingly. It is important to note that the details of inward supplies provided in Form GSTR-2 are auto-populated in the ITC ledger of the recipient of such supplies on submissions of this form.

c) Section 38(5) of the CGST Act and 39(9) of the CGST Act provide that details that have remained unmatched shall be rectified in the return to be furnished for the month during which such omission or incorrect particulars are noticed.

d) Section 39 of the CGST Act provides that every registered person shall furnish a return (From GSTR-3) of inward and outward supplies, ITC, tax payable, tax paid and such other particulars as may be prescribed

it clearly emerges that the statutory scheme, as envisaged under the Act provided a facility for validation of monthly data through the IT System of the Government wherein the output of one dealer (Form GSTR-1), becomes the input of another dealer and gets auto-populated in Form GSTR-2 (Inward Supplies).

These details had to be electronically populated in Form GSTR-3 (Monthly Return) and tax had to be paid based on this return. The CGST Act and the CGST Rules as envisaged provided for verification, validation, modification and deletion of information for each period by interaction, over the IT System, between the supplier and the recipient so as to reflect the correct details pertaining to the tax period in that particular tax period itself (i.e., a month). In short, the CGST Act contemplated a self-policing system under which the authenticity of the information submitted in the returns by registered person is not only auto-populated but is verified by the supplier and confirmed by the recipient in the same month. The statutory provisions, therefore, provided not just for a procedure but a right and a facility to a registered person by which it can be ensured that the ITC availed and returns can be corrected in the very month to which they relate, and the registered person is not visited with any adverse consequences for uploading incorrect data

5. While the GST regime envisaged the filing process and recording of ITC and payment of taxes as above, admittedly, due to system issues and under preparedness with regard to the extent of data to be processed, Form GSTR-2, and 3 were not made operational; and have been now completely done away with. Form GSTR-2A was made operational only in September 2018 by the Government.

This Form is also valid in respect of the past periods commencing July 2017. The Respondents do not dispute that the statutory scheme envisaging the filing of return GSTR-2 and 3 could not be put into operation and has been indefinitely deferred. This makes it abundantly clear that neither the systems of the Government were ready, nor were the systems of the suppliers all across the country geared up to handle such an elaborate electronic filing and reconciliation system introduced for the first time

6. Since Forms GSTR-2 and 3 could not be operationalized by the Government, the Government introduced Rule 61(5) (which was amended vide Notification No. 17/2017-Central Tax, dated 27.07.2017) and the Rule 61(6) in the CGST Rules, and provided for filing of monthly return in Form GSTR-3B which is only a summary return

7. Acknowledging the fact that manual filling of forms can result in errors, CBIC permitted rectification by way of the Circular No. 7/7/2017– GST issued by CBEC, relevant portion whereof reads as under:

“3. As per the provisions of sub-rule (5) of rule 61 of the Rules, the return in FORM GSTR-3B was required to be furnished when the due dates for filing of FORM GSTR-1 and FORM GSTR-2 have been extended. After the return in FORM GSTR-3B has been furnished, the process of reconciliation between the information furnished in FORM GSTR-3B with that furnished in FORM GSTR-1 and FORM GST-2 would be carried out in accordance with the provisions of sub-rule (6) of rule 61 of the Rules.

• x x x
• x x x

Correction of erroneous details furnished in FORM GSTR3B:

In case the registered person intends to amend any details furnished in FORM GSTR3B, it may be done in the FORM GSTR1 or FORM GSTR-2, as the case may be. For example, while preparing and furnishing the details in FORM GSTR-1, if the outward supplies have been under reported or excess reported in FORM GSTR-3B, the same maybe correctly reported in the FORM GSTR-1. Similarly, if the details of inward supplies or the eligible ITC have been reported less or more than what they should have been, the same maybe reported correctly in the FORM GSTR-2. This will get reflected in the revised output tax liability or eligible ITC, as the case may be, of the registered person. The details furnished in FORM GSTR-1 and FORM GSTR-2 will be auto-populated and reflected in the return in FORM GSTR-3 for that particular month.”

8. It is submitted that Section 16(4) restriction apply only for the take/availment of the ITC after the Sept of next financial year and as per the above discussion, there is no facility of availment of ITC in GSTR 3B which is summary return itself, when there is no take/availment of ITC in the GSTR 3B, then the time limit of Section 16(4) is not apply as per the Act, Hence your SCN is illegal and beyond the provision of the Act, infect, still there is no facility for take/avail ITC in the GSTR 3B.

9. Reliance is placed on the Hon’ble Jharkhand High Court in case of Shri Kumaran Construction Co., a proprietorship Firm, District-East Singhbhum W. P. (T) No. 2582 of 2020, the Section 16(4) constitutional validity is challenged before the high court in this case, the interim order is issued as below on Dated 13-10-2020.

Mr. Sumeet Gadodia, learned counsel appears for the petitioner, Respondent-Union of India is represented by Mr. Neeraj Kumar, A.C to Mr. Rajiv Sinha, learned A.S.G.I and Mr. Ratnesh Kumar appears for respondent nos. 2 to 5- officials of Central Goods and Service Tax & Central Excise Department through Video Conferencing.

Petitioner has questioned the vires of Section 16(4) of the Central Goods and Services Tax Act, 2017, which imposes a time limit for availment of Input Tax Credit, as being violative of Articles 14, 19(1)(g) and 300A of the Constitution of India as also the basic structure of the Central Goods and Services Tax Act, 2017. Petitioner has also sought a declaration that amendment to Rule 61(5) of the Central Goods and Services Rules, 2017 inserted vide Notification No. 49/2019 dated 9th October, 2019 (Annexure-6), whereunder GSTR-3B has been declared to be a valid return under Section 39 of Central Goods and Services Act, 2017 with retrospective effect from 1st July, 2017, is also violative of Articles 14, 19(1)(g) and 300A of the Constitution of India as it affects the right of the petitioner availing tax credit. Petitioner has also questioned the demand letter dated 12th February, 2020, asking it to pay the amount of Rs. 97,324/- availed as Input Tax Credit for discharging its output tax liability, as being arbitrary, unreasonable and de-hors the scheme of the Central Goods and Services Tax Act, 2017 and the Rules prescribed thereunder.

Since the vires of provisions of the Act and Rules are under challenge herein, the subject matter of which is not assigned to this Bench, the instant writ petition be listed before the appropriate Division Bench as per the present distribution of roster.

10. It is submitted that now the many more petition was filed for challenge the Section 16(4) before the high court and Hon’ble court clubbed all the petition, the details of the petition are as below for Section 16(4).

W.P.(T). No.2570 of 2020, W.P.(T). No.2582 of 2020, W.P.(T). No.2625 of 2020, W.P.(T). No.3403 of 2020, W.P.(T). No.4373 of 2020, W.P.(T). No.744 of 2021, W.P.(T). No.746 of 2021, W.P.(T). No.1030 of 2021, W.P.(T). No.1100 of 2021, W.P.(T). No.1657 of 2021, W.P.(T). No.1735 of 2021, W.P.(T). No.2111 of 2021, W.P.(T). No.3407 of 2021, W.P.(T). No.3832 of 2021, W.P.(T). No.4006 of 2021, W.P.(T). No.4106 of 2021, W.P.(T). No.4163 of 2021, W.P.(T). No.4182 of 2021, W.P.(T). No.4306 of 2021, W.P.(T). No.4686 of 2021, W.P.(T). No.5118 of 2021, W.P.(T). No.5633 of 2021, W.P.(T). No.1440 of 2022, W.P.(T). No.2829 of 2022, W.P.(T). No.2835 of 2022 and W.P.(T). No.3141 of 2022.

11. Reliance is also placed on Hon’ble Gujarat High court interim order in case of NIYATI CONSTRUCTION CO. THROUGH AUTHORISED PARTNER KETANBHAI M PATEL R/SPECIAL CIVIL APPLICATION NO. 5268 of 2020 Dated 05/03/2020.

The Opponent Nos.1, 2 and 4 shall be served by Speed Post Registered A.D. The Opponent Nos.3 shall be served directly. Till the next date of hearing, no coercive steps shall be taken. Direct service is permitted.

12. Reliance is placed on Hon’ble Gujarat High Court in case of TIMES HEAVEN CLUB PVT. LTD SPECIAL CIVIL APPLICATION NO. 4031 of 2020 Dated 13-02-2020

Let notice be issued to the respondents, returnable on 18.03.2020. Direct service is permitted

• This is also bring to your kind notice that in case of The Hon’ble Madras High Court in the case of  Kavin HP Gas Gramin Vitrak v. The Commissioner of Commercial Taxes & Ors. [W.M.P. (MD) Nos. 6764 and 6765 of 2023 dated November 24, 2023] held that the Respondents without giving any opportunity to file the returns by notifying the Form GSTR-2, cannot expect the taxable person to file returns. Hence, the Respondents ought to allow the dealers to file returns manually and the writ petitions were allowed without any cost.

• As such By CT NOTIFICATION 19/2022, the form GSTR 2 & GSTR 3 -B has been omitted from 01.10.2022 it doesn’t mean that the GSTR 2 and GSTR 3 is active until 01-10-2022 which it not implemented in the GST portal to upload the details.
• Under the CGST ACT, the text ” entitled to take the eligible ITC” is incomplete, refer the entire Section and finally refer the Marginal Headings to Section 41 of the Act, Claim ITC provisionally acceptance thereof’. Yes, from 01.07.2017 to 30.09.2022 under the CGST ACT, shall read as “entitled to take the ITC for Claim”. From 01.10.2022 onwards shall read as entitled to avail the ITC for Availment. Please refer the Marginal Headings and provisions amended suitably u/s 41 w.e.f 01.10.2022                              
• The intention of Legislature is that for Claim ITC, he shall upload his purchase Annexure u/s 38(2) in his return u/s 39 rw sec.41 for the ITC amount shall credited to his electronic credit ledger provisionally, as like we followed under the CGST ACT, the purchase Annexure is called GSTR 2; capture such ITC CLAIM facility is prescribed in GSTR 3 only, ITC CLAIM in such return due date is prescribed u/ s 16(4) as like sec 13 of APVAT ACT.. Means ITC CLAIM startup u/s38(2) rw Sec.41. Until otherwise opportunity to claim by way of furnish purchase Annexure in GSTR 2 no one AUTHORITY could apply sec.16(4).
• At Present in case of MRITYUNJAY KUMAR v. THE UNION OF INDIA AND ORS. [SLP(C) No. 28270/2023] :

➡ The Supreme Court (SC) has issued a notice in response to a Special Leave Petition (SLP) filed by an assessee challenging a Patna High Court judgment that upheld the constitutional validity of section 16(4) of the CGST/Bihar GST Act, 2017.

➡ Section 16(4) denies Input Tax Credit (ITC) for any invoice or debit note issued after the due date of furnishing returns under section 39, specifically for the month of November following the end of the financial year or the relevant annual return, whichever is earlier.

➡ The petitioner argues before the SC that section 16(4) is confiscatory in nature, as the denial of ITC acts as a forfeiture of property in the form of a financial benefit when returns are filed late. The petitioner points out that the Revenue is collecting late fees for belated returns, which can be regularized, but ITC is permanently lost in the process. The outcome of the case is pending as the copy of the order is awaited from the Supreme Court.

• As per the section 16(4) it is true that we can claim ITC before the time stipulated in the section. But for filing the annual returns the time has been extended, the claiming of itc as per the section 16(4) is September of the succeeding year or December of the succeeding year. When the time for filing of annual returns has been extended directing the assesses to claim ITC before the date as prescribed in the section is legal and arbitrary and unjustified. Hence therefore we request you to keep the matter in the abeyance as it is learnt that the union is going to issue a notification in this regard.

Hence we kindly request you to consider the above facts and request you to not to initiate any further and do the needful for which we are very much grateful to you.