Introduction: The issue of GST Input Tax Credit (ITC) reversal due to supplier defaults has garnered significant attention. Many taxpayers face challenges due to notices from GST departments regarding ITC reversal. Understanding the validity of Section 16(2)(c) of the CGST Act, 2017, and related provisions is crucial in addressing these concerns.
In recent times, a lot of notices issued by the GST departments regarding reversal of ITC due to default of Supplier of goods or services or both. Here we shared few points and judgements regarding validity of section 16(2)(c) of CGST Act, 2017.
According to section 16(2)(c) of CGST Act, 2017, 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 utilization of Input Tax Credit admissible in respect of the said supply;
According to section 41 of CGST Act, 2017, the government allowed the purchasers to avail Input Tax Credit on provisional basis and which is required to be reversed by the assesse if “tax has not been actually paid” by the supplier to the Government.
As a recipient, they don’t have a facility or mechanism to verify whether the supplier has paid taxes or not. For this, a new rule 37A of CGST Rules, 2017 was introduced.
Rule 37A of CGST Rules, 2017 requires reversal of Input Tax Credit through GSTR-3B return on or before the 30th day of November following the end of such financial year during which such Input Tax Credit has been availed, in case where “supplier does not file GSTR-3B” for that particular tax period.
Rule 37A not aligned with its parent sections of 16(2)(c) and Section 41 of CGST Act, 2017. Filing of GSTR-3B return by the supplier which doesn’t mean tax paid by the supplier.
Denial of ITC to the Recipient even if they complied with the provisions of Section 16, Section 41, Rule 37A, which violates the main objective of introduction of GST and shifting the incidence of tax from supplier to the buyer.
The objective of the introduction of Goods and Services Tax (GST) was to replace the prevailing complex and fragmented tax structure with a unified system that would simplify compliance, remove cascading effect of tax, seamless flow of credit and promote economic integration. Denial of ITC will lead to cascading effect of tax because GST will again have to be paid on the tax paid stock.
Denying ITC to a buyer of goods or services for default of supplier of goods or services, severely impacts its working capital and therefore substantially diminishes its ability to continue business. Therefore, it is a serious affront to his right to carry on his trade or business guaranteed under Article 19(1)(g) of the Constitution.
According to the press release issued by the central board of GST Council dated 4th May 2018, which clearly stated that there shall not be any automatic reversal of Input Tax Credit from buyer on non-payment of tax by the seller. In case of default in payment of tax by the seller, recovery shall be made from the seller however reversal of credit from buyer shall also be an option available with the revenue authorities to address exceptional situations like missing dealer, closure of business by supplier or supplier not having adequate assets etc.
Reliance may be placed on the minutes (refer page 20) of the 28th GST Council meeting dated 21.7.2018, wherein it was mentioned that “There would be no automatic reversal of Input Tax Credit at the recipient’s end where tax had not been paid by the supplier.
Few Judgements for reference:
1. Rely upon the judgement of Hon’ble Madras High Court in the matter of M/s. D.Y. Beathel Enterprises v. the State Tax Officer, wherein it was held that omission on the part of the seller to remit the tax to the government should have been viewed very seriously and strict action ought to have been initiated against the seller.
2. Rely upon the decision of The Hon’ble Calcutta High Court in the matter of Suncraft Energy Private Limited and Another (supra) v. The Assistant Commissioner (State Tax) has held that before reverting the input tax credit by the assessee, the assessing authority should take action against the selling dealer if it is found that he has not deposited the tax paid by the assessee. Unless the collusion between the assessee and the seller dealer is proved, the input tax credit is not to be denied if the assessee has genuinely paid the tax to the seller dealer.
3. Submit that the Hon’ble Supreme Court in the case of Suncraft Energy Private Limited and Another (supra) v. The Assistant Commissioner (State Tax) has dismissed the Special Leave Petition filed by the authorities against the decision of Hon’ble Calcutta High Court ruling said that Input Tax Credit (ITC) to a buyer cannot be denied on the ground that a seller has not paid tax under the goods and services tax (GST) regime unless there was a proper investigation.
4. Also In the matter of LGW Industries Limited vs. Union of India, WPA No.23512 of 2019 dated 13.12.2021 by Calcutta High Court-2021-TIOL-2308-HC-KOL-GST, the petitioner had challenged the constitutional validity of Section 16(2)(c) of the CGST Act. The Hon’ble Calcutta High Court held that if the transactions undertaken by the petitioner were genuine and supported by valid documents and such transactions were made before the cancellation of GST registration of suppliers, then the Input Tax Credit shall be allowed.
5. Further like to place reliance on the judgment of the Hon’ble Kerala High Court in the case of Diya Agencies vs. State Tax Officer, WP(C) No. 29769 of 2023 dated 12.09.2023-2023-TIOL-1199-HC-KERALA-GST, held that where the ITC claimed by the petitioner is bonafide and genuine, the same cannot be denied merely because of the fact that the amount was not reflected in Form GSTR-2A of the petitioner. If the supplier does not remit the amount paid to him by the petitioner, the petitioner cannot be held responsible.
6. Further intend to rely upon the decision of Hon’ble Calcutta High Court in the matter of Gargo Traders v. Joint Commissioner Commercial Taxes (State Tax) [2023] 151 taxmann.com 270 (Calcutta), held that input tax credit cannot be denied to the recipient of goods merely due to retrospective cancellation of the supplier’s registration where the recipient is in possession of the relevant tax paying documents and all other conditions for claiming ITC are satisfied. The High Court noted that, at time of transaction, the name of the supplier was already available with the Government’s record as a registered taxable person and the petitioner had paid the amount of purchased articles as well as tax on same through bank and not in cash. Consequently, the Court concluded that there was no failure on the part of the petitioner to comply with any statutory obligations before entering into the transactions without proper verification.
7. During VAT regime, the Hon’ble Supreme Court in the case of Arise India Limited vs. Commissioner of Trade & Taxes [Special Leave to Appeal (C) No. 36750/2017] has dismissed the Special Leave Petition filed by Revenue against the decision of the Hon’ble High Court of Delhi in the case of Arise India Limited vs. Commissioner of Trade & Taxes. The Hon’ble High Court of Delhi had read down section 9(2)(g) of Delhi Value Added Tax (DVAT), 2004 to preclude the department from invoking section 9(2)(g) of the DVAT to deny ITC to a purchasing dealer who has bona fide entered into a purchase transaction with a registered dealer who has issued a tax invoice reflecting the TIN number. In the event that the selling dealer has failed to deposit the tax collected by him from the purchasing dealer, the remedy for the Department would be to proceed against the defaulting selling dealer to recover such tax and not deny the purchasing dealer ITC.
8. The provisions of section 16(2)(c) have been challenged in following matters –
- Sahil Enterprises v. Union Of India [2021] 129 taxmann.com 233 (Tripura)
- Federation Of Indian Small Scale Battery Associations (Regd.) v. Union Of India [2021] 127 taxmann.com 335 (Delhi)
- Bharat Aluminium Company Ltd. v. Union Of India [2021] 128 taxmann.com 11 (Chhattisgarh)
Conclusion: The issue of GST ITC reversal due to supplier defaults requires a balanced approach that protects taxpayers’ interests while ensuring tax compliance. Legal precedents highlight the need for thorough investigation and accountability. It’s imperative for tax authorities to verify the genuineness of transactions before penalizing recipients. Ensuring fairness and transparency in the implementation of GST regulations is essential for fostering trust and compliance within the taxpayer community.
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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the author whatsoever and the content is to be used strictly for informational and educational purposes. While due care has been taken in preparing this article, certain mistakes and omissions may creep in. The author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.
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