Input Tax Credit Protection For Honest Buyers Under GST: A Dream, A Proposal And A Possibility
When the Goods and Services Tax was introduced on 1 July 2017, it was described as a historic reform in India’s indirect tax system. One of its most attractive promises was the seamless flow of Input Tax Credit, commonly known as ITC, throughout the supply chain.It was expected that the GST paid by one business would be available as credit to the next business, thereby eliminating the cascading effect of tax on tax. However, the experience of nearly nine years indicates that this dream of seamless ITC has not been fully realised. On the contrary, ITC has emerged as one of the most disputed areas under GST, leading to notices, interest demands, tax recovery proceedings and prolonged litigation. The most unfortunate aspect of this problem is that, in many cases, an honest buyer has been penalised for a default that was not committed by the buyer at all.
The Buyer Complied with Everything, Yet ITC Was Denied
Consider a normal business transaction.
A buyer purchases goods or services from a supplier registered under GST. The buyer receives a valid tax invoice, takes delivery of the goods or services, records the purchase in the books of account and pays the supplier the full value of the supply, including GST.
The supplier’s GST registration was granted by the Government. The GST portal was available to the buyer for verifying whether the supplier was registered. The buyer exercised all reasonable precautions that were practically available.
Thereafter, it was the supplier’s responsibility to report the invoice in the GST return and deposit the tax collected from the buyer with the Government.
However, if the supplier failed to pay the tax, filed an incorrect return, delayed filing the return or had its GST registration cancelled retrospectively at a later stage, the tax authorities often proceeded to deny or recover the buyer’s ITC.
In other words, the buyer received the goods, paid the tax to the supplier and complied with the law. The supplier committed the default, but the tax was demanded again from the buyer.
This situation has never appeared fair or reasonable.
Can a Buyer Compel the Supplier to Deposit Tax?
For several years, the GST framework has proceeded on the basis that a buyer’s ITC would remain protected only if the corresponding tax was deposited by the supplier with the Government.
This raises a natural and important question: does a buyer have any legal or practical power to compel the supplier to deposit the tax?
The answer is no.
A buyer may ask the supplier whether the return has been filed. The buyer may make a telephone call, send an email or warn that future payments may be withheld. However, once the complete payment has already been made, the options available to the buyer become extremely limited.
The buyer cannot independently verify whether the supplier has actually discharged the tax relating to a particular invoice through GSTR-3B. The appearance of an invoice in GSTR-2B indicates that the invoice details have been uploaded by the supplier, but it does not always conclusively establish that the tax relating to that invoice has reached the Government.
The Government, on the other hand, has access to the supplier’s registration records, returns, e-invoices, e-way bills, electronic ledgers, banking details and other business information. It also possesses extensive legal powers to recover tax from a defaulting supplier.
Despite this, in several cases, blocking or recovering ITC from the buyer has been treated as an easier option than recovering tax from the person who actually committed the default.
Insensitivity towards the Rights of Buyers
In practice, GST has become excessively supplier-dependent.
A buyer’s ITC is affected by whether the supplier uploads the invoice correctly and within time, files the return, deposits the tax and continues to hold a valid registration in the future.
The buyer has no effective control over any of these actions.
Yet, buyers have been expected not only to maintain their own books and ensure their own tax compliance, but also to monitor the tax behaviour of every supplier with whom they deal.
A large business may have hundreds or even thousands of suppliers. Can it verify the tax payment of every supplier every month? Can it obtain a certificate for every invoice confirming that the related tax has been deposited? Even if such a certificate is obtained, how can the buyer independently verify its correctness?
In practical business conditions, such an obligation is almost impossible to discharge.
A tax system can be considered fair only when a person is held responsible for matters that are reasonably within that person’s control. The deposit of tax by a supplier is not under the control of the buyer. Therefore, penalising the buyer for the supplier’s default goes against the basic principles of fairness and natural justice.
A Problem Continuing for Years
This issue has affected thousands of businesses.
Many genuine buyers have received notices several years after the transaction, stating that their supplier did not deposit the tax, that the supplier’s registration was cancelled retrospectively or that the supplier was not found at the registered address.
On this basis, the buyers were asked to reverse the ITC. Interest was also demanded, and in some cases penalty proceedings were initiated.
The buyer was left with two choices: either pay the tax for a second time or remain involved in appeals and litigation for several years.
This adversely affected the working capital of businesses. To establish the genuineness of transactions, buyers were required to submit tax invoices, proof of bank payment, transport documents, stock registers, e-way bills, correspondence with suppliers and several other records. Even after producing such evidence, relief was sometimes denied solely because the supplier had not deposited the tax with the Government.
A Proposed Relief Has Now Emerged
A positive development has recently been reported.
It is being considered that the GST framework may be amended so that the ITC of a genuine and honest buyer is not denied merely because the concerned supplier failed to deposit the tax with the Government.
According to the reported proposal, if the invoice appears in the buyer’s GSTR-2B and the buyer is able to establish that the full value of the goods or services, together with GST, was paid to the supplier, the buyer’s ITC may be protected.
In such a situation, the tax may be recovered from the supplier who collected GST from the buyer but failed to deposit it with the Government.
The proposal is certainly welcome.
It appears to recognise the fundamental principle that an honest buyer should not be held responsible for a default committed by the supplier.
A Good Dream, but Still Only a Proposal
It is important to understand that this relief has not yet become law. The existing legal provisions continue to apply at present.
There is a significant difference between the reporting of a proposal and its final enactment into law. The proposal will have to undergo further consideration, be examined at the level of the GST Council and thereafter be implemented through suitable amendments, rules, notifications or procedures.
The extent and conditions of the relief will also become clear only after the proposal is converted into an enforceable legal provision.
Therefore, the news certainly creates hope, but it cannot yet be treated as an available legal remedy.
This is why three words are especially relevant to the present discussion: dream, proposal and possibility.
The dream is that the ITC of an honest buyer should remain protected.
The proposal is that relief may be granted on the basis of the invoice appearing in GSTR-2B and proof of actual payment to the supplier.
The possibility is that GST law may, in the coming years, become more balanced, fair and sensitive to the rights of buyers.
Fake ITC and Genuine Purchases Must Be Distinguished
The Government has a legitimate concern regarding fake invoices and fraudulent ITC claims without the actual supply of goods or services. Strict action in such cases is both necessary and justified.
However, a person claiming ITC on the basis of fictitious transactions cannot be treated in the same manner as a genuine buyer who has actually received the goods or services.
Where a buyer possesses a valid tax invoice, proof of receipt of goods or services, an e-way bill wherever applicable, bank payment records, accounting entries and an invoice reflected in GSTR-2B, the transaction should not be treated as fraudulent merely because the supplier subsequently defaulted.
The law should provide for proper verification, but the purpose of verification must be to distinguish genuine transactions from sham transactions. It should not begin with the assumption that every buyer is dishonest.
The misuse of law by a limited number of persons cannot justify the punishment of all compliant taxpayers.
What Will Happen to Past Cases?
The most important question arising from this proposal is whether, if enacted, it will apply only to future transactions or also provide relief in pending and past disputes.
Since 2017, a large number of buyers have remained involved in notices, tax demands and appeals on this issue. Some businesses reversed ITC under pressure. In many cases, the buyer first paid GST to the supplier and later paid the same amount again to the Government.
If the new framework applies only prospectively, the injustice suffered by genuine buyers in earlier years will continue.
The Government should therefore consider an appropriate solution for past cases where the genuineness of the purchase, receipt of goods or services, tax invoice and bank payment can be established.
A clear and simple mechanism should be created for resolving pending disputes. Otherwise, even after the introduction of future relief, old cases may continue before appellate authorities and courts for many years.
A Clear Procedure Is Equally Necessary
Merely inserting a general relaxation in the law will not be sufficient. A clear procedure must also be prescribed.
The law should specify the documents that a buyer will be required to submit. It must be clarified whether GSTR-2B and proof of payment will be sufficient, or whether evidence of delivery, transport documents, stock records and other supporting documents will also be necessary.
It should also be made clear what recovery action the department must first take against the supplier before demanding ITC from the buyer.
The process should, as far as possible, be technology-driven and automatic, with minimal human intervention and discretionary power.
Another important question is what will happen if tax is subsequently recovered from the supplier after the same amount has already been recovered from the buyer. The treatment of the amount collected from the buyer, together with interest, must be clearly addressed.
Without a transparent and well-defined procedure, even a well-intentioned proposal may create a fresh round of disputes.
A New Beginning of Hope
GST is a technology-based tax system. The Government has access to adequate information and legal powers to identify a defaulting supplier and recover tax from that person.
A buyer can certainly be expected to exercise reasonable caution. The buyer should purchase from a properly registered person, obtain a valid tax invoice, maintain evidence of receipt of goods or services, make payment through banking channels and file returns within the prescribed time.
The buyer’s own conduct must also be beyond suspicion, and compliance with the law must be complete both in letter and in spirit.
However, a buyer cannot be made the private tax officer of the supplier.
An honest buyer should not be punished for the supplier’s default. This is not a demand for any special concession. It is simply a demand for fairness.
Let us hope that this proposal does not remain confined to newspaper reports and is soon converted into law. It should also provide a fair solution to genuine buyers who have been struggling for years without any fault of their own.
The day the GST system accepts that the ITC of a genuine buyer cannot be taken away because of another person’s default, the promise of seamless Input Tax Credit will finally move closer to reality.
Let us hope for a major and meaningful reform in GST.
— Sudhir Halakhandi
Author Bio
