1.1 Dawn of GST started with a proposed system of undertaking transaction-level matching in the form of GSTR 1, 2 & 3 to check the claim of input tax credits (ITC). Further, the provisions in the law were also drafted keeping the proposed system in mind. However, due to the reasons best known to the Government, the proposed system in its full glory did not see the light of the day. Instead, a stop-gap arrangement in the form of GSTR 1 (statement of outward supplies) coupled with GSTR 3B (return) was made operational with the hope of someday returning to the originally proposed system. Alas, the stop-gap arrangement started to become a permanent feature. In the meanwhile, the menace of fake invoicing became rampant with the media covering the scandals running into crores of rupees on regular basis. Also, the Government was firm in reintroducing the matching of the ITC perhaps in a new avatar. Clearly, something had to be done. It was then proposed in the 27th GST Council meeting (held in May 2018) to introduce a new return filing system (going by acronym ANX & RET) which essentially was a modified version of GSTR 1, 2 & 3 in terms of allowing only the unidirectional flow of data while permitting the ITC on missed invoices in the initial phase. Law was also amended by way of introducing Sec. 43A to the CGST Act, 2017 to cater to the new system.
1.2 However, in the 42nd GST Council Meeting, the thinking of the Government again changed. In the press release issued post the given meeting, it was stated that the Council approved the future roadmap by making several enhancements in the present system of GSTR 1 coupled with GSTR 3B to provide for auto-population of data (liability as well as ITC) in times to come. In the meanwhile, a new form GSTR 2B was introduced to facilitate static viewing of the details of outward supplies declared by the vendors. Hence in a nutshell the original system (GSTR 1, 2 & 3) and the new system (ANX & RET) were effectively scrapped.
1.3 It was hence decided to continue with the stop-gap arrangement (GSTR 1 coupled with GSTR 3B) with suitable modifications as we go ahead. It is in light of the said decision that a new clause (aa) has been added to Sec. 16(2) of the CGST Act, 2017 to provide for a new condition to determine the eligibility of ITC.
1.4 However, the provisions of law as of date are still not completely harmonized with the given decision. The same also does not seem to consider the interest of the genuine recipients. Hence we at many places are seeing a conflict inter-se between the provisions. Further, the conflict also exists between the provisions and the Constitutional framework within which the former ought to have complied. In the present paper, we shall discuss the given conflicts that have arisen on account of the introduction of a new condition for determining the eligibility of ITC. The present paper is written with a view to urge the lawmakers to harmonize the provisions in accordance with the intent or else we shall see a spate of litigation in coming times. The paper is also written with a view to urge the lawmakers to protest the interest of the genuine recipients. The harmonization and at the same time protection of the interest of the genuine recipients shall result in reducing the litigation and shall also bring certainty in the minds of the taxpayer as well as the revenue. Certainty is, without doubt, the most important pillar of any good tax system in the world.
1.5 Now before we discuss the issues, let us first see the text of the provision under deliberation. Vide the Finance Act, 2021 the following clause has been added to Sec. 16(2) of the CGST Act, 2017:
“(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;”
1.6 Although the aforesaid clause is yet to be notified, it shall be worthwhile to appreciate several issues arising therefrom. Now before adverting to the issues, it is important to understand the background which leads to the aforesaid amendment.
1.7 The aforesaid amendment was first put before the GST Council at their 39th Meeting as part of the agenda[i]. The referred agenda item was also discussed at the given meeting (para 13.7 of the minutes) wherein as it was explained to the GST Council to insert an explicit condition in Section 16 to the effect that ITC on the invoices or debit notes may be availed only when the details of such invoices have been furnished by the concerned suppliers. It was also explained that the proposed amendment u/s 75(12) shall permit recovery of the tax liability declared in GSTR 1 in situations where GSTR 3B is not filed. It was also further discussed the suggested amendments shall encourage the filing of GSTR 1 since it has also been proposed to link GSTR 1 with GSTR 3B.
1.8 Now seen in the above light we can deduce that the basis for the amendment is to (a) encourage the filing of GSTR 1 and recovery of tax basis thereon if GSTR 3B is not filed and (b) check the fraud of fake invoices.
1.9 With the above background let us now examine the issues emanating from the amendment in question.
2. Validity of Rule 36(4) – pre-notification of clause (aa)
2.1 It is a settled law that the rules cannot be formulated in excess of the provisions of the Act or contrary to the Act. One may refer to the leading decision of the Hon’ble Supreme Court in the case of Babaji Kondaji Garad Nasik Merchants Co-operative Bank Ltd.[ii] wherein it has been held as under:
“Now if there is any conflict between a statute and the subordinate legislation, it does not require elaborate reasoning to firmly state that the statute prevails over subordinate legislation and the bye-law, if not in conformity with the statute in order to give effect to the statutory provision the Rule or bye-law has to be ignored. The statutory provision has precedence and must be complied with.”
2.2 The aforesaid principle was reiterated in CIT S. Chenniappa Mudaliar[iii] holding that a rule which comes in conflict with the main enactment has to give way to the provisions of the Act. Further, it is also an established principle as held in CIT, Andhra Pradesh v. Taj Mahal Hotel[iv] that “the Rules were meant only for the purpose of carrying out the provisions of the Act and they could not take away what was conferred by the Act or whittle down its effect.” One may also refer to the decision in the case of Union of India v. Intercontinental Consultants and Technocrafts Pvt. Ltd.[v] to the same effect.
2.3 Now Sec. 164 of the CGST Act, 2017 deals with the power of the Government to make the rules. Sec. 164(1) of the said Act grants power to the Government to make the rules for carrying out the provisions of the Act. Further Sec. 164(2) of the Act grants power to make the rules for all or any of the matters which are by the provisions of Act are required to be prescribed or are to be made by rules. Now in purported exercise of the said powers that the Government issued Notification No. 49/2019 – Central Tax dt. 09.10.2019 inserting Rule 36(4) which presently reads as under:
“Rule 36(4) Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been [furnished] by the suppliers under sub-section (1) of section 37 [in FORM GSTR-1 or using the invoice furnishing facility], shall not exceed [5 per cent.] of the eligible credit available in respect of invoices or debit notes the details of which have been [furnished] by the suppliers under sub-section (1) of section 37 [in FORM GSTR-1 or using the invoice furnishing facility].]”
2.4 It may be noted that the aforesaid rule provides for the cap of 5% for the registered person to avail the ITC in respect of which the details have not been furnished by the vendors. In other words, the rule presumes that the availment of the ITC is based on the condition of furnishing the details by the vendors and hence provides for the cap of 5% in this regard for the missing invoices (i.e. invoices for which details have not been furnished by the vendors).
2.5 Now based on the earlier discussion, the aforesaid Rule can be considered to be valid only if the provisions of the Act envisages such restriction. Sec. 16(2) of the CGST Act, 2017 as presently applicable provides that a registered person shall not be entitled to ITC unless he satisfies the given four conditions. A perusal of the said provisions shall reveal that none of the conditions provides for the furnishing of the details of the invoice in GSTR 1 by the vendors. It may be noted that the actual payment condition under clause (c) cannot be inferred to include the condition of the furnishing of the details in GSTR 1. It is for the simple reason that the furnishing of the details of outward supplies is u/s 37 of the CGST Act, 2017 which is distinct and at present legally not linked with the furnishing of the return and payment of tax u/s 39 of the said Act. In fact, an amendment made u/s 75 by virtue of Finance Act, 2021 to the effect that the expression “self-assessed tax” shall include the tax payable in respect of details of outward supplies furnished under section 37, but not included in the return furnished under section 39 and shall permit the direct recovery of the said tax so declared also confirms that the declaration of the details u/s 37 in GSTR 1 do not confirm the payment of tax. Hence it can be stated that in absence of any provisions in the Act enabling the formulation of Rule 36(4), the same has to be declared as invalid.
2.6 The aforesaid view has also been recognized as evident from the rationale for the amendment under discussion (i.e. clause (aa)) as expressly stated in the minutes of the GST Council meeting. The agenda note (supra) clearly has recognized the said gap between the Act and the Rule by stating that the proposed amendment is aimed to “to complete this linkage of outward supplies declared by the supplier with the tax liability, by also limiting the credit availed in FORM GSTR-3B to that reflected in the GSTR2A of the recipient, subject to the additional amount available under rule 36(4)”.
2.7 Hence the amendment by way of clause (aa) leads to a conclusion that the provisions of Rule 36(4) shall not be valid till the said clause is notified.
2.8 Without prejudice to the above, the provisions of Rule 36(4) can also be tested against Article 14 of the Constitution which provides for equality before the law. The agenda of the 39th GST Council Meeting as discussed earlier refers to the need for the amendment by way of clause (aa) to encourage the filing of GSTR 1 as well as to curb the menace of fake invoicing. Clearly, the intent behind encouraging the filing of GSTR 1 is intending to weed out fake invoicing. The press note issued by the GST Council dated 23.12.2020 also clearly states that the rationale for further curtailing the limits of Rule 36(4) to 5% is with an aim for curbing fake invoicing. Hence we submit that the rigours of Rule 36(4) need to differentiate between a genuine transaction and a fraudulent transaction. Both the transactions cannot meet the same fate on mismatch as that would be a violation of Article 14 by way of creating discrimination. Further Courts in the pre-GST era have read down a similar restriction with regard to the actual payment condition by virtue of Article 14 so as to apply it only if the department disputes the genuineness of the transaction and not otherwise. Hence we submit that even on this ground the provisions of Rule 36(4) shall not be valid.
3. Validity of clause (aa) after its notification
3.1 Post the notification of clause (aa) one may have to still consider whether the said condition can be held to be valid considering the provisions contained in the Constitution of India.
3.2 Article 14 of the Constitution provides that the State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India. Courts have applied the said Article with mainly two perspectives viz. (a) whether the classification made in the Statute is reasonable or not so as to avoid discrimination and ensure equality and (b) whether the provisions of the Statute are manifestly arbitrary. Let us apply the said two perspectives in the context of clause (aa).
3.3 Provisions in the Statutes can be struck down by applying Article 14 if the given provisions make an unreasonable classification or fail to make a reasonable classification where warranted. Hon’ble Supreme Court in the case of T. Moopil Nair v. State of Kerala[vi] 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. 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 the same productivity quality; some were wastelands and others were in varying degree of fertility. The tax, therefore, weighed more heavily on owners of wastelands than the owners of fertile lands. The Court concluded by a majority of 4:1 that the failure to make a classification between a productive and non-productive land for the purposes levy of such tax rendered the statute unconstitutional.
3.4 Similarly Hon’ble Supreme Court in the case State of Kerala Haji and Haji [vii] held that mere adoption of the floor area of the building as the basis of tax irrespective of all other considerations shall not be a rational classification and hence shall be violative of Article 14.
3.5 It may be noted that the vendor may (a) purposefully not furnish the details to avoid the liability or (b) face technical issues in furnishing the details (GSTIN wrongly cancelled, etc.) or (c) avoids furnishing the details despite the acknowledgement of the liability on the invoice by way of charging and recovering the tax from the recipient on account of financial crises or genuine business failure. Now in such circumstances, the provisions of clause (aa) will apply with equal rigour if the same is not read down to apply only in situations of type (a). Hence even on the said basis, it can be contended that in absence of any reasonable classification under Article 14, the provisions in clause (aa) will be up for the challenge.
3.6 Let us now look at the issue from the perspective of manifest arbitrariness. Application of the doctrine of arbitrariness to invalidate a Statute in the context of Article 14 was first propounded in the case E P Royappa v State of Tamil Nadu[viii] wherein it was held as under:
“Equality is a dynamic concept with many aspects and dimensions and it cannot be ‘cribbed, cabined and confined’ within traditional and doctrinaire limits…equality is antithetic to arbitrariness…Where an act is arbitrary it is implicit in it that it is unequal both according to political logic and Constitutional law and is therefore violative of Article 14.”
3.7 In the aforesaid case, therefore, it has been reasoned that arbitrariness is the enemy of equality under Article 14 and hence the provisions of the Statute if found to be arbitrary can be declared as invalid. Much judicial history has thereafter evolved on the said doctrine. One school of thought suggests that the doctrine of arbitrariness has no role to play since it deals with the motives of the legislators and the judiciary cannot attribute to the legislators that the laws made are without reason. Therefore the Statute can be struck down in the context of Article 14 only based on the test of discriminatory classification or unreasonable non-classification. Another school of thought suggests that the principle of arbitrariness stands included in Article 14 and hence a Statute if found to be arbitrary will not promote equality and hence can be liable to be struck down. In the case of Shayara Bano Union of India[ix] the said principle has been evolved by holding that the Statute can be declared as invalid if the same is “manifestly arbitrary” as under:
“The test of manifest arbitrariness, therefore, as laid down in the aforesaid judgments would apply to invalidate legislation as well as subordinate legislation under Article 14. Manifest arbitrariness, therefore, must be something done by the legislature capriciously, irrationally and/or without adequate determining principle. Also, when something is done which is excessive and disproportionate, such legislation would be manifestly arbitrary. We are, therefore, of the view that arbitrariness in the sense of manifest arbitrariness as pointed out by us above would apply to negate legislation as well under Article 14.”
3.8 Recently Hon’ble Supreme Court in the case of Deputy Commissioner of Income Tax v. Pepsi Foods Ltd.[x]upheld the Hon’ble Delhi High Court’s verdict of partially striking down the third proviso to Section 254(2A) of the Income Tax Act, 1961 which did not permit extension of a stay on tax assessment beyond 365 days even if the assessee is not responsible for delay in hearing of appeals by terming it as “arbitrary and discriminatory”.
3.9 Hence we need to now consider whether the provisions of clause (aa) can be said to be irrational or excessive and disproportionate or said to be lacking adequate determining principle so as to be declared as arbitrary.
3.10 In the above context, one may also refer to the decision of Punjab and Haryana High Court in the case of Gheru Lal Bal Chand State of Haryana[xi] wherein it has been held that recovery of the tax from the registered purchasing dealers in absence of fraud, collusion or connivance will not do justice to the parties nor will it achieve the purpose of the Act i.e. realization of tax by the revenue by legitimate methods.
3.11 One may also refer to the recent decision of Hon’ble Madras High Court in the case of DY Beathel Enterprises State Tax Officer[xii] wherein it has been held that the ITC cannot straight away be recovered from the recipient on failure in paying the tax by the supplier without (a) allowing the recipient to examine the supplier as a witness and (b) initiating recovery action against the said supplier.
3.12 Now Article 265 of the Constitution provides that no tax shall be levied or collected except by authority of law. Hence not only the levy but even the collection of the tax shall be only by authority of law.
3.13 Now as per Sec. 9(1) of the CGST Act, 2017 provides as under:
“Subject to the provisions of sub-section (2), there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person.”
3.14 The above provisions, therefore, provides that the tax levied on the supply of goods or services or both shall be paid by the “taxable person”. The term “taxable person” has been defined under clause (107) to Sec. 2 of the said Act as under:
““taxable person” means a person who is registered or liable to be registered under section 22 or section 24;”
3.15 Hence the term “taxable person” does not refer to the fact as to whether the said person who has made the supply has furnished GSTR 1 or not. It merely refers to the person who is registered or liable to be registered. In other words, the tax can be collected only from the vendors in question. In such a situation, it shall not be just to deny the ITC on the failure to furnish the details.
3.16 Further clause (aa) does not take into consideration situations wherein the Government eventually recovers the tax from the vendors even in absence of vendors furnishing the details in GSTR 1.
3.17 Therefore it can be contended that the provisions of clause (aa) are irrational, excessive and disproportionate as it does not seek to do justice to the genuine recipients. It can also be contended that the same also lacks clear determination principles as it does not provide for a remedy for the genuine recipients in cases where the tax stands eventually collected from the given vendors.
3.18 The aforesaid stand can also be considered from another perspective. Now clause (aa) seeks to make the furnishing of the invoice details by the vendors a mandatory condition to enable the recipient to avail of the ITC. On the other hand Sec. 38(1) of the CGST Act, 2017 provides as under:
“SECTION 38. Furnishing details of inward supplies. — (1) Every registered person, other than an Input Service Distributor or a non-resident taxable person or a person paying tax under the provisions of section 10 or section 51 or section 52, shall verify, validate, modify or delete, if required, the details relating to outward supplies and credit or debit notes communicated under sub-section (1) of section 37 to prepare the details of his inward supplies and credit or debit notes and may include therein, the details of inward supplies and credit or debit notes received by him in respect of such supplies that have not been declared by the supplier under sub-section (1) of section 37.”
3.19 Therefore the aforesaid provisions mandate for filing of GSTR 2 by incorporating the details of the invoices not declared by the vendors. Further, the ITC so declared is required to be matched and confirmed as per provisions of Sec. 42 and 43 of the CGST Act, 2017. Hence we submit that on one hand the law allows the recipient to even claim ITC in respect of the invoices for which the details have not been furnished by the vendors. On the other hand Rule 60 of the CGST Rules, 2017 which deals with the procedure for filing of GSTR 2 in fact does not provide for its filing at all but only provides for the auto-population of the data filed by the vendors in GSTR 2A/2B. The same therefore clearly runs contrary to Sec. 38 discussed above.
3.20 Now the newly inserted clause (aa) providing for the condition of furnishing of the details by the vendors as the basis for determining the eligibility of the ITC clearly runs contrary to the express provisions of Sec. 38 by permitting the genuine recipients to declare the missing invoices and claim the ITC thereof. Further the conditions stipulated u/s 16(2) override only provisions of Sec. 16 by virtue of non-obstante clause but do not override the provisions of Sec. 38.
3.21 Hon’ble Supreme Court in plethora of cases[xiii] has applied the following principle of harmonious construction in case of conflict between two provisions of the Act:
“Interpretation of Statutes — Harmonious construction.–When there are two conflicting provisions in an Act, which cannot be reconciled with each other, they should be so interpreted that, if possible, effect should be given to both. This is the essence of the rule of “harmonious construction”. The Courts have also to keep in mind that an interpretation which reduces one of the provisions as a “dead letter” or “useless lumber” is not harmonious construction. To harmonise is not to destroy any statutory provision or to render it construction.”
3.22 We hence submit that a harmonious interpretation shall be to allow the genuine recipients to avail the ITC in respect of missing invoices as per Sec. 38 and apply the provisions of clause (aa) only in situations where the transactions are fraudulent and the concerned vendors do not admit and discharge the liability. Therefore even on this ground the provisions of clause (aa) is required to be read down.
4. The doctrine of supervening impossibility
4.1 There is a well-known legal maxim “Lex non cogit ad impossibilia”, which means that law cannot compel a man to do what he cannot possibly do. Supreme Court of India recognized the said principle in the case of Cochin State Power & Light Corporation Ltd. v. The State of Kerala[xiv] wherein it has been held as under:
“The performance of this impossible duty must be excused in accordance with the maxim, lex non cogitate ad impossible (the law does not compel the doing of impossibilities)”
4.2. Further Hon’ble Gujarat High Court in the case of State of Gujarat v. S. A. Himnani Distributors Pvt. Ltd.[xv] applied the said principle to allow the ITC under the VAT Law in respect of goods destroyed in flood by holding that the ITC cannot be denied for the want of the disposal of the said goods by way of sale or otherwise as the dealer couldn’t do so on account of the destruction.
4.3. As stated before, Sec. 38(1) of the CGST Act, 2017 permits the recipient to declare the details of the missing invoices in GSTR 2 and claim the ITC thereof subject to eventual matching. Clause (aa) on the other hand seeks to allow the ITC only if the details are furnished by the vendors. Hence it can be contended that the law is asking the recipient to do the impossible by (a) not making the provisional claim of ITC by filing GSTR 2 and asking the vendors to accept the liability and (b) determining the eligibility solely based on filings done by the said vendors which are not in the control of the recipient. Hence it can be contended based on the doctrine of supervening impossibility that the ITC of the genuine recipient cannot be denied by virtue of the provisions of clause (aa).
5. The interplay between clause (aa) and clause (c)
5.1 Post the notification of the clause (aa) one has to also consider an interesting interplay between the said clause and clause (c) which deals with the actual payment condition.
5.2 Normally vendors shall first furnish the details of the outward supplies and then file their return by making the payment of tax. Now conjoint reading of clause (aa) and clause (c) shall suggest that the recipient shall be entitled to ITC only if the concerned vendors have declared the supplies and have also paid the tax thereof. In fact addition of an Explanation to Sec. 75 vide Finance Act, 2021 to the effect that the expression “self-assessed tax” shall include the tax payable in respect of details of outward supplies furnished under section 37, but not included in the return furnished under section 39 shall permit the direct recovery of the said tax declared. Now conjoint reading of clause (aa) with Explanation to Sec. 75 shall suggest that the recovery of the unpaid tax in respect of the declared supplies in GSTR 1 can be made from the concerned vendors. In such a situation will it be just to deny the ITC to the recipient if the vendors have furnished the details but have not paid the tax?
5.3 We submit that the arguments discussed earlier in the context of Article 14 shall apply to resolve the issue and a view can be taken that the ITC cannot be denied on the failure in making the payment of the tax as long as the details of the supplies have been declared by the vendors in their GSTR 1. One may also refer to the decision of Hon’ble Delhi High Court in the case of Arise India Limited and others Vs. Commissioner of Trade & Taxes, Delhi and others[xvi] wherein it has been held in the context of similar conditions in the DVAT Act, 2004 that such payment condition for determining the eligibility of ITC is required to be read down and the same can be applied only if the transactions are not genuine. One may also appreciate that in the facts of petitioner ‘Arise India Limited’, the department had not questioned the genuineness of the transaction but had denied the ITC merely on the non-payment of tax by the vendors. Hence in the case of the given petitioner, the department filed an SLP before the Hon’ble Supreme Court which came to be dismissed[xvii]. A similar view has also been taken by Hon’ble Rajasthan High Court in the case of S. Infra-Transmission Ltd Vs State of Rajasthan[xviii]. Hence we can submit that the actual payment condition in clause (c) shall have to be applied only in situations where the bonafide of the transaction are questioned by the department on cogent grounds.
6. The interplay between clause (aa) and Rule 36(4) – post notification
6.1 As discussed earlier, the insertion of clause (aa) is aimed to complete the gap which currently exists between the provisions of the Act and Rule 36(4). Therefore post the notification of the said clause it is to be seen whether (a) the validity of the Rule can still be challenged and (b) how shall the said rule operate. Let us examine both issues.
6.2 Post the notification of clause (aa), questioning the validity of Rule 36(4) may get difficult but not impossible. This is so because now the Act itself shall provide the factum of the furnishing of the details of the invoice by the vendors as a condition to determine the eligibility of ITC. Hence unless clause (aa) is held to be invalid, challenging the validity of the Rule may get difficult. Generally in the context of fiscal statutes dealing with complex economic issues, the policymakers have the liberty to take a generalized approach and the Courts shall adjudge the constitutionality of such legislation by the generality of its provisions and not by its crudities or inequities or by the possibilities of abuse of any of its provisions.
6.3 However one will notice that provisions of a Statute or a Rule can be challenged under Article 14 on the grounds of an unreasonable classification or arbitrariness. Supreme Court as seen earlier has held that a classification made without considering the relevant factors shall not be a reasonable classification (see T. Moopil Nair v. State of Kerala). Further, although the Supreme Court has applied a broad test to determine the arbitrariness it broadly consists of situations where the rule makers have formulated the rule without regard to rationality or proportionality. It may be noted that the artificial cap of 5% does not consider other legitimate factors such as (timing differences, technical issues, relative quantum between a small taxpayer and a large taxpayer, etc.) which should have been taken into account to achieve the object. It can hence be contended that the artificial capping of the ITC in respect of missed invoices to 20% at the point of inserting the Rule and then reducing it to 5% may speak of an unreasonable classification as well as irrationality.
6.4 Another issue to consider is whether Rule 36(4) shall become redundant post the notification of clause (aa). The agenda note of the GST Council Meeting states that the insertion of the said clause is “to complete this linkage of outward supplies declared by the supplier with the tax liability, by also limiting the credit availed in FORM GSTR-3B to that reflected in the GSTR2A of the recipient, subject to the additional amount available under rule 36(4).”. Therefore it appears that the benefit by way of allowing an additional claim up to 5% in respect of missed invoices shall continue even after the notification of clause (aa). However the same is with a caveat that the eventual intention seems to be is to phase out even the 5% benefit by auto-populating the ITC claim only based on the furnishing of the details of the outward supplies by the vendors.
6.5 The aforesaid issue may lead to an additional issue as to whether clause (aa) and Rule 36(4) can work harmoniously or not? It may appear that post the notification of clause (aa) the legislators have given no room to the executive to formulate Rule 36(4) and allow the ITC in respect of missed invoices even up to 5%. This is more so as Sec. 16(2) in which clause (aa) has been inserted starts with the “notwithstanding” phrase overriding all other provisions of Sec. 16. Perhaps and as discussed later, the conditions dealing with the matching of the claims (i.e. acceptance of liability as a condition for taking the ITC) under Sec. 16(2) are to be viewed as even permitting a post availment compliance. Hence it appears that Rule 36(4) can be operative at the stage of allowing provisional ITC and may not be in direct conflict with Sec. 16(2). However only time can tell how the same will operate post the notification of clause (aa). Perhaps the legislators must contemplate amendments in Sec. 43A (envisaged to be made operational under the new return filing scheme (ANX & RET) which may not see the light of the day) to gear it for the compliance under evolving GSTR 3B regime with the unidirectional matching as envisaged in clause (aa). The same shall also solve the issues about the conflict with Sec. 41, 42 & 43 (matching mechanism in the present Act) as Sec. 43A overrides the original filing scheme of GSTR 1, 2 & 3.
7. ITC covered under clause (aa)
7.1 For ready reference clause (aa) is again reproduced below:
“(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;”
7.2 The said clause, therefore, states that it shall apply to the invoice or debit notes referred to in clause (a). Now clause (a) reads as under:
“(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;”
7.3 Conjoint reading shall therefore suggest that the condition under clause (aa) shall apply only to the tax invoice or debit note issued by the supplier and not to other documents. Hence the said clause shall clearly not apply to the self-invoices issued under RCM in the case of receipt of supplies from unregistered vendors. This is logical also as the details of the said self-invoice are not furnished u/s 37 of the CGST Act, 2017 for communication to the counterparty.
8. Timing aspects
8.1 Another issue to also examine is the point in time at which the recipient is required to comply with the requirements of clause (aa). It may so happen that the concerned vendors may not have furnished the details by the time at which the recipient avails the ITC and furnishes the return in GSTR 3B. However post the said date, the concerned vendors furnish the details and the same are hence communicated to the recipient in GSTR 2A/2B. In such a situation can it still be said that the recipient has not validly availed of the ITC. We presume that the ITC availed by the recipient is otherwise in compliance with Rule 36(4) (i.e. with 5% tolerance for the mismatch).
8.2 Sec. 16(2) of the CGST Act, 2017 provides that “no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless ….” such person satisfies the conditions including the conditions inserted in clause (aa). One will therefore observe that the said provisions have been negatively worded. In other words, instead of saying that the person shall be entitled to ITC only if the given conditions are satisfied, it says that the person shall not be entitled to ITC unless he satisfies the given conditions. It may also be noted that the word used in Sec. 16(2) is “entitled to”. Now one has to understand the scheme of the Act to appreciate the meaning of the term “entitled to” in the context of Sec. 16(2).
8.3 Sec. 41 of the CGST Act, 2017 provides that a registered person is entitled to take the ITC and the same shall be credited on a provisional basis. Thereafter Sec. 42 and 43 envisaged the matching of the said claim with the corresponding declaration of liability by the vendors to confirm the entitlement. It is in the said context that the conditions in clause (c) and (d) of Sec. 16(2) have been mandated. Now the condition in clause (aa) can also be said to be in the said context of matching only as it deals with the furnishing of the details of the outward supplies by the vendors. Hence it can be said that the recipient can avail of the ITC u/s 41 based on the invoice (subject to the receipt of goods/services) and it is only for determining the eventual entitlement that the conditions of clause (aa) are to be seen. One may also refer to the decision of the Hon’ble Supreme Court in the case of K. R. C. S. Balakrishna Chetty & Sons v. State of Madras[xix] wherein it has been held in the context of conditions imposed by law that the intention of the legislator must be appreciated and accordingly the benefit granted must be allowed which may be conditional on the eventual fulfilment of the requirements. One may also apply the analogy prevalent under the CST Act, 1956 wherein the benefit of reduced rate of tax was conditional upon the submission of declaration forms.
8.4 Said view also finds support from the fact that Rule 36(4) provides for taking the ITC on missed invoices with a cap of 5%. Hence if the condition in clause (aa) is seen to be applicable before taking the ITC then even the application of Rule 36(4) becomes redundant. Such cannot be the interpretation and hence we submit that even if the details are furnished by the vendors after the provisional availment of ITC by the recipient, it shall tantamount to compliance with the requirements of clause (aa). Therefore the availment of ITC cannot be denied for the belated furnishing of the details of the outward supplies by the vendors.
8.5 One more issue may arise in the context of timing in respect of inward supplies received from the vendors opting for the QRMP scheme and using the IFF (invoice furnishing facility) to furnish the details of outward supplies for the first two months of a given quarter. Clause (aa) states that the entitlement of the ITC of the recipient shall be based on the “the details…. furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient…. in the manner specified under section 37”. Hence someone may take a myopic view to suggest that since the IFF is not a statement of outward supplies (which is only GSTR 1), the details furnished in IFF shall not be a sufficient compliance under clause (aa) and hence the ITC cannot be availed based thereon but can only be availed when the given vendor files quarterly GSTR 1. We think that the said view is not sustainable. Rule 59 of the CGST Rules, 2017 clearly provides that the statement of outward supplies is required to be furnished in GSTR 1 (for normal taxpayers) and IFF + GSTR 1 for QRMP opted taxpayers. It also provides that the details furnished in IFF are not to be included in GSTR 1. Also, the IFF looked from the structure is part of GSTR 1. Hence we submit that furnishing the details in IFF shall be sufficient compliance in respect of clause (aa) for the recipient to determine the entitlement. We may also add that the use of the word “furnish” in clause (aa) and similar amendment in Rule 36(4) w.e.f. 01.01.2021 in the context of the QRMP scheme is aligned with the aforesaid view.
Readers will appreciate the fact that the aforesaid issues have arisen on account of a lack of efforts in comprehensively harmonizing the provisions of law with the intended system of return filing. Issues have also arisen on account of not considering the rights of genuine recipients and painting all the infractions with the same brush. It is hoped that the issues discussed fall on the right ears to mend the ways in the interest of trade and industry.
[i] LAW AMENDMENT PROPOSALS – CGST Act, 2017
|Sl. No.||Section||Gist of issue||Proposal||Suggested formulation||Consequential changes|
|1.||16||1. One of the key objectives of the GSTR-1/2/3 system was to provide for matching of invoices between the supplier and the recipient i.e. there shall be no credit existing in the system which has not been declared in the respective returns of the supplier and recipient as per section 16 (2) c and 16(2) d of the CGST Act 2017.
2. Available data suggests that the percentage of filing of return in FORM GSTR-1 (details of outward supplies) is far lesser as compared to filing of return in FORM GSTR-3B, through which input tax credit is availed. Further, due to poor filing of FORM GSTR-1, there are large gaps between credit available under FORM GSTR-2A and self-assessed credit under FORM GSTR-3B.
3. A number of cases have been booked by the Central / State authorities where high amount of input tax credit is pumped into the system through fake invoices and the same being availed by many taxpayers.
4. It may be noted that in the 38th GSTC meeting, a one-time amnesty for filing of FORM GSTR-1 was given in order to encourage taxpayers to file their missing FORM GSTR-1s.
5. It is proposed that reasonable restriction may be imposed on self-assessed input tax credit availed in FORM GSTR-3B on the basis of credit reflected in FORM GSTR-2A. Further, Rule 36(4) was notified which stated that credit availed in GSTR3B cannot exceed the credit reflected in GSTR-2A by 20%, from the months of October onwards; and which was further reduced to 10% from December 2019 onwards.
6. Section 16 of the CGST Act provides for conditions and restrictions subject to which the input tax credit shall be credited to the electronic credit ledger. It would be logical to complete this linkage of outward supplies declared by the supplier with the tax liability, by also limiting the credit availed in FORM GSTR-3B to that reflected in the GSTR2A of the recipient, subject to the additional amount available under rule 36(4).
|The Law Committee examined the matter and felt that credit may be allowed that reasonable restriction may be imposed on self-assessed input tax credit availed in FORM GSTR-3B on the basis of credit reflected in FORM GSTR-2A. Accordingly, the Law Committee recommended to amend the provisions of section 16(2)(a) to mandate that ITC on invoices or debit notes may be availed only when the details of such invoices are specified in the details of outward supplies by the supplier.
“(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,–– (a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed and the details of such invoices or debit note in respect of such supplies have been furnished by the supplier in the statement of outward supplies as specified under section 37; ”
[ii] (1984) 2 SCC 50
[iii] (1969) 74 ITR 41
[iv] (1971) 82 ITR 44
[v] 2018 (10) G.S.T.L. 401 (S.C.)
[vi] 1961 AIR 552
[vii] 1969 AIR 378
[viii] (1974) 4 SCC 3 
[ix] 2017 (9) SCALE 178
[x] Civil Appeal Nos. 1106 to 1139 of 2021 decided on April 6, 2021
[xi] Civil Writ Petition No.6573 of 2007
[xii] W.P. No. 2127 of 2021
[xiii] M. Pentiah vs. Veeramallappa Muddala AIR 1961 SC 1107; Gamman India Ltd. vs. Union of India AIR 1974 SC 960 = (1974) 1 SCC 596; Mysore State Road Transports Corporation vs. Mirza Khasim All Beg AIR 1977 SC 747; Vaddeboyina Tulsamme vs. Vaddeboyina Sesha Reddi AIR 1977 SC 1944 = (1977) 3 SCC 99; Punjab Beverages Avt. Ltd. vs. Suresh Chand AIR 1978 SC 995; Commissioner of Income-tax vs. National Tai Traders AIR 1980 SC 485; Calcutta Gas Co. (Proprietary) Ltd. vs. State of West Bengal AIR 1962 SC 1044; J.K. Cotton Spinning & Weaving Mills vs. State of U.P. AIR 1961 SC 1170
[xiv] AIR 1965 SC 1688 and Sultana Begum vs Prem Chand Jain AIR 1997 SC 1006
[xv] (2014) (7) TMI 783 (Guj.)
[xviii] D.B. Civil Writ Petition No. 12445/2016 (Raj.)
[xix] (1961) AIR 1152
(Views are strictly personal)