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.

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    If your above interpretation is true then there is no need to check rule 36(4) applicability i.e. 105% of ITC reflecting in GSTR 2B, because mostly when a purchaser claim itc for a particular purchase or product he/she has purchase bill of that product and as per your contension as he/she has purchased the product and having a purchase bill ,he /she has right to claim ITC on that product without checking Rule 36(4), but I am very much doubtful that we can win legal battle with GST department on the grounds/arguments which you have mensioned in this article.

    1. Binita Panddey says:

      Mr. Kumar

      You have misunderstood the contents of the article.
      In my article, I have stated that ITC cannot be rejected on the grounds that the tax has not been paid by the supplier. Rule 36(4) of the Rules read as follows :
      “ Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 5 per cent of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37.]”
      Vide Notification No. 94/2020-Central Tax dated 22nd December, 2020, w.e.f. 01.01.2021

      Nowhere this sub-rule refers payment of tax by the supplier as a condition to ITC.
      GSTR-1 i.e. details of outward supply is filed before payment of GST and GSTR-1 is not linked with GSTR-3B i.e. payment.
      The provisions of Section 16(2) (c ) of the Act is subject to the provisions of Section 41 or Section 43A.
      The provisions of Section 41 of the Act are an inoperative provision, since, till today conditions and restrictions for claim of input tax credit and provisional acceptance thereof has not been prescribed and administrative facility for claim of input tax credit and provisional acceptance thereof has not been provided in the common portal. Section 43A is yet to be notified.
      Therefore, the provision of Section 16(2) (c) of the Act is non-operative. The validity of provision of Section 16(2) (c) and Rules 36(4) has been challenged before the High Courts.
      The Hon’ble Delhi High Court in W.P.(C) 2106/2015 vide Order dated 26-10-2017 at Para 54 held
      “ The result of such reading down would be that the Department is precluded 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 selling dealer who has issued a tax invoice reflecting the TIN number. In the event that the selling dealer has failed to deposit the tax W.P.(C) 6093/2017 & connected matters Page 40 of 40 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 the ITC. Where, however, the Department is able to come across material to show that the purchasing dealer and the selling dealer acted in collusion then the Department can proceed under Section 40A of the DVAT Act”
      The provision of Section 16(2) (c) of the Act is applicable without differentiation between bona fide registered person receiving the supply under legally valid transaction and from those that were not, hence, it is violative of Article 14 of Constitution of India.
      In this context reference may be made to the following decisions of the Hon’ble Apex court:

      In Shri Ram Krishna Dalmia v. Shri Justice S.R. Tendolkar [1959] 1 SCR 279,

      1. vswami says:

        wrt, – “In this context reference may be made to the following decisionSof the Hon’ble Apex court:

        In Shri Ram Krishna Dalmia v. Shri Justice S.R. Tendolkar [1959] 1 SCR 279,”
        FONT < what are the other decisions , if any, you have in mind ?
        As regards the one of the SC referred, fail to see the contextual appropriateness or relevance there of ?!

        Otherwise, the points made in your reply are found to be with merits , hence makes for quite a fitting rejoinder !
        NOTE: see the comment posted on another write-up @…carrying the like viewpoints as yours !!!


        1. Binita Panddey says:

          Mr. Vswami

          Thanks for your comment, as required other case laws are:
          K.T. Moopil Nair v. State of Kerala , the Supreme Court was faced with a situation where an absence of classification led to a violation of Article 14 of the Constitution. The statute under challenge was the Travancore Cochin Land Tax Act, 1955 (‘TCLT Act’). Section 4 of the TCLT Act laid down that a uniform rate of tax would be levied on all lands in the State “of whatever description and held under whatever tenure”, i.e. 2 paisa per cent which worked out to Rs. 2 per acre per annum. This uniform rate of tax was challenged on the ground that all lands in the State did not have same productivity quality; some were waste lands and others were in varying degree of fertility. The tax therefore weighed more heavily on owners of waste lands than the owners of fertile lands.
          In Budhan Chaudhary v. State of Bihar – [1955] 1 SCR 1045, the Supreme Court had explained that while Article 14 forbids class legislation, “it does not forbid reasonable classification for the purposes of legislation.” What, however, had to be fulfilled were the two tests: (i) “that the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group” and; (ii) “that differentia must have a rational relation to the object sought to be achieved by the statute in question.”

          Hope this suffice.

  2. vswami says:

    “Will GST ITC be Reversed if Supplier Makes any Non-Compliance”
    As reiterated and terminably accepted, – also amply supported by case law, the legal position according to the underlying scheme of things, is no longer open to any doubt or impeachable; in that, reversal ( through a book entry otherwiuse) of ITC is not a requirement , but a non-starter, in a B2B2C situation. For a dilation of the stated proposition, do mind and refer the Pr. POsts !
    KEY note: There is no logic or valid reason why the EXecutive AUthorities – also the GST CEntral COuncil still remain muted and feel shy of clarifying the indisputable proposition ?!?

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