There is a burning issue in GST since very beginning “Whether the recipient are required to reverse their Input Tax Credit (ITC) due to mismatch of 2A or due to non-submission of GSTR 1 or GSTR 3B by supplier”
As per Section 16 (2)(c) of the CGST Act, Input Tax Credit (ITC) shall be claimed only in case, the tax charged in respect of supply has been actually paid to the Government, either in cash or through utilisation of ITC admissible in respect of the said supply. This is the critical provision for denial of ITC mismatch and has been a point of contention from the point of the tax payer since very beginning.
However it has been held in various cases as well as it has been embedded in the Act only that the reversal of the ITC due to non-compliance of the Supplier cannot be automatic.
If we see both the Sections 42(3) and 42 (5) of CGST Act, it speaks that where the ITC Claimed by a recipient is in excess of the tax declared by the supplier in the valid return, the discrepancy shall be communicated to both the persons in such manner as may be prescribed but till date no such manner is prescribed ….. 42(3)
Section 42(5) speaks that if the discrepancies communicated under section 42(3) and not rectified by the supplier in his return then it shall be added to the output tax liability of the recipient, in such a manner as may be prescribed.
The provisions of Section 41,42, Section 43 and Section 43A are not functional provisions for non-implementation and glitches of the common portal.
Since , the provisions of Section 41 or 43A is not implemented and made effective, the provision of Section 16 (2)(c) of the CGST Act which is subject to the provisions of Section 41 or 43A is not in operation . Therefore, the recipient of supply has no ways and means to ensure that the tax actually charged in respect of supplier has actually been paid to the Government, any provision without administrative mechanism bound to fail, hence, rejection of ITC and recovery thereof is not maintainable
In this regard GST Council on 4th May 2018 came out with a press release, in which it has been clearly mentioned in point ( iv), 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.”
Many time it has been evidenced that in several cases GST department has disallowed the claim of ITC by the recipient due to the non-compliance made by the supplier. This should not be automatic and recently the Madras High Court has passed a judgment in “D.Y Beathel Enterprises Vs. State Tax Officer (Data Cell).” According to the judgement passed by Madras High Court the ITC reversal cannot be automatic, in the instant case it was one Mr. Charles and his wife Shanti who issued invoice and received GST payment from the recipients but on scrutiny it was found that they as not paid tax to the Government and because of their noncompliance the recipient was asked to reverse ITC.
The hon’ble Madras High Court has very clearly held in the instant case that the Charles and his wife Shanti should be first summoned by the GST Department and be asked to pay the GST and no automatic reversal of the ITC should be done.
The similar position was taken by the Supreme Court Judgement in the case of Commissioner of Trade & Taxes, Delhi and others Vs. Arise India Limited and others, laid down two important Doctrines:-
1. Treating both ‘guilty purchaser and the ‘innocent purchaser’ at par is in violation of Article 14 of the Constitution of India;
2. Here in the present case, the purchaser is asked to do the impossible, i.e to anticipate the selling dealer who will not deposit to the Government the tax collected by him which he has collected from the purchaser.
The similar position was held by the Punjab and Haryana High Court in Gheru Lal Bal Chand Vs. State of Haryana, where the need for the law to distinguish between honest and dishonest dealers was acknowledged. In the present case it was held that, the Law cannot envisage an almost impossible eventuality, it clearly speaks that the liability can be fastened on a person who either acts fraudulently or has been a party to the collusion with the offender. However, law nowhere envisages imposing any penalty either directly or vicariously where a person is not connected with any such event or an act, in the absence of any malafide intention, connivance or wrongful association of the assessee with the selling dealer or any dealer earlier thereto, no liability can be imposed on the principle of vicarious liability. Law cannot put such onerous responsibility on the innocent otherwise, it would be difficult to hold the law to be valid on the touchstone of Articles 14 and 19 of the Constitution of India.
Author: CS Binita Pandey , Practicing Company Secretary from Kolkata and can be contacted at: [email protected]
Disclaimer: The entire contents of this document have been based on relevant provisions and as per existing information. Although care has been taken to ensure accuracy, completeness, and reliability of the information provided, I assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws.