Summary: Input Tax Credit (ITC) under GST, while an entitlement, presents a complex landscape for taxpayers. Section 16 of the CGST Act outlines conditions for ITC availment, but judicial pronouncements and practical challenges complicate the process. Tax authorities are increasingly scrutinizing ITC claims, alleging that some are based on mere book entries rather than actual transactions, often due to fraudulent activities by suppliers. This puts bona fide businesses in a difficult position, especially MSMEs lacking resources for extensive supplier verification. While the law specifies conditions like invoice possession, goods/services receipt, tax payment by the supplier, and return filing, the introduction of Rule 36(4) and Section 16(2)(aa) added further layers, requiring invoice details to be uploaded by the supplier. Taxpayers face challenges when suppliers default on tax payments, even for genuine transactions. Court rulings have varied, with some initially favoring taxpayers by requiring action against defaulting suppliers, while others, like the Madras High Court in M/s Devi Traders, emphasize the need for comprehensive documentation beyond just invoices, including e-way bills and proof of genuine business purpose. This necessitates meticulous record-keeping and corroborative evidence for taxpayers to substantiate ITC claims and avoid penalties.
Introduction
Input tax credit (‘ITC’) is an entitlement available to the taxpayer-but but but…. of course, upon fulfillment of certain conditions. However, the question which is eagerly seeking an answer is that how long does this list of conditions extend? How many conditions are required to be fulfilled to be eligible to claim the ITC? This question surfaces due to multiple reasons.
On the one hand, there is a list of conditions specified in Section 16 of CGST Act and rules made thereunder. Whereas, on the other hand, there exists various judicial pronouncements, which states that mere fulfillment of specified conditions is not necessary, the recipient should be able to substantiate through corroborative evidences whether the transactions actually took place or transactions recorded in books of accounts and returns are mere book entries undertaken to evade payment of taxes.
Key issues
The taxpayers are now-a-days flooded with notices from GST Authorities questioning the eligibility of ITC availed by the taxpayers alleging that taxpayer has not fulfilled one of the key conditions required to be fulfilled for availment of ITC i.e. the recipient taxpayer has not received goods and services and therefore the availment of ITC is in violation of provisions of Section 16(2)(b) of Central Goods and Services Tax (CGST) Act 2017.
In simple words, the Tax Authorities are alleging that such purchases are not actual transactions but merely book entries designed to defraud revenue and evade taxes by availing ITC exceeding amount actually eligible to the taxpayer. This issue has gained significant attention after implementation of GST due to the reason that certain ill elements of society have devised a complete set up to defraud revenue. They have incorporated fake firms, have raised fake invoices and have not deposited the tax collected on invoices with the Government. Due to this reason, the nation has also witnessed special drives to catch such rackets and take necessary actions to prevent evasion of taxes.
In the above scenario, the recipient of Invoice claims actual purchase, whereas the seller goes untraceable and revenue is unable to substantiate with complete set of evidences as to who is the actual culprit. Whether the buyer and seller have colluded or buyer and Government both have been deceived by the seller.
However, the actual pain here are the firms which are engaging in both kind of activities. i.e. they are making actual supply also to certain set of taxpayers and are taking up bogus transactions also with another set of taxpayers. In such setup, the bonafide taxpayers feels stranded and deceived as they are denied benefit in respect of actual transactions undertaken by them due to the malafied intentions of the supplier despite of entering into bonafide transactions.
The real challenge before any business enterprise nowadays is that they have to deal with multiple number of suppliers and recipients in the course of business transactions on daily basis and they cannot verify the authenticity of such suppliers and recipients before undertaking business transactions. Specifically micro, small and medium enterprises who do not have a set up to take up KYC of each buyer and seller they engage with face this issue. Therefore, they desire that law should provide for reasonable conditions which are convenient to fulfill and enable them to avail ITC in a relatively smoother manner.
Legal provisions under GST law.
Section 16 of CGST Act contains enabling provisions and provide for availability of ITC in respect of goods or services or both which are used or intended to be used in the course or furtherance of the business of the taxpayer. At the time of introduction of GST, Section 16(2) provided for fulfillment of following conditions for availment of ITC:
1. Recipient should be in possession of a tax invoice or debit note issued by a supplier registered under CGST Act.
2. Recipient should have received the goods or services or both.
3. 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.
4. Return has been furnished under Section 39.
Further, w.e.f. 09 October 2019, Rule 36(4) was inserted to prescribe that the taxpayer shall not be eligible to claim ITC 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 beyond a prescribed percentage. Gradually, this percentage was reduced to allow only ITC to the extent of Invoices and Debit notes uploaded by the supplier as per Section 37(1).
However, this Rule was subjected to challenge before various courts in the absence of power from the Act to frame such Rules. Considering this forthcoming issue, Section 16(2) (aa) was inserted through Finance Act 2021 which provided as follows:
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
Therefore, an additional condition was imposed on the recipient to avail ITC on goods and services received by the taxpayer in the course or furtherance of business, taking aggregate no. of conditions to be fulfilled for availment of ITC to five. But this list does not end here. The supplier needs to establish with additional corroborative evidences that the specified conditions have been met by the taxpayer.
Challenges faced by the taxpayer
The key challenges which the taxpayers faced in the entire scheme was that on the basis of data available with the Tax Authorities, they were able to figure out that whereas the recipient has availed the ITC, the tax amount collected by the supplier has not reached to the exchequer thereby causing losses to the exchequer.
On the other hand, the taxpayers went to challenge provision of Section 16(2)(c) of CGST Act on the grounds of inadequacy of information available on the portal and therefore inability and incompetence of the recipient to fulfill conditions prescribed under Section 16(2)(c).
The taxpayers also took a plea that whereas they are bonafide taxpayers and have claimed ITC upon receipt of goods and services from the supplier and making payment to the supplier. However, it is beyond their competence to enforce supplier to make payment to the exchequer.
These issues were faced by the taxpayers across the States and the taxpayers approached respective High Courts by filing writs either challenging the orders issued by the Tax Authorities or challenging the provisions itself.
Pronouncements from the Courts
One of the landmark judgements, in the case of M/s D.Y. Beathel Enterprises vs The State Tax Officer (2021-VIL-308-MAD), the Madras High Court held that recovery from the supplier cannot be held valid in the absence of recovery action against the seller.
Similar view was affirmed by the High Court of Calcutta in case of Suncraft Energy Pvt Ltd and Anr vs The Assistant Commissioner, State Tax (2023-VIL-487-CAL). In both the cases, the matter was remanded to the adjudication authorities for necessary action as per the directions received from the Hon’ble Courts.
Whereas in the above case laws, the constitutional validity of the provisions was not discussed. However, in case of M/s M Trade Links vs Union of India (2024-VIL-559-KER), the Kerala High Court upheld validity of Section 16(2)(c) and Section 16(4) of CGST Act and allowed marginal relief to the petitioner by allowing ITC up to an extended time period.
From the above, it can be ascertained that there have been varied views of different High Courts on validity and operability of Section 16(2)(c) of the Act.
It is pertinent to mention here that the Department filed an appeal against the Calcutta High Court’s judgement in case of M/s Suncraft Energy Pvt Ltd and Anr vs The Assistant Commissioner, State Tax (Supra) before the Apex Court but the same was rejected by the Apex Court due to reasons of lower stake involved without any arguments on merits.
Now comes a turning point to recent developments, whereas the courts earlier allowed the prayers of the petitioners to first initiate recoveries from the seller, but recently the Madras High Court went into discussion of facts and merits of the case.
As discussed above, since the case of M/s D.Y. Beathel Enterprises was remanded to the adjudicating authority, post re-adjudication, the Tax Authorities reconfirmed the demand. Aggrieved, by the said order, taxpayer approached the Hon’ble High Court inter-alia on the grounds that the petitioners have not been allowed to cross examine suppliers and gross violation of principles of natural justice in the adjudication process.
A bunch of petitions filed by the various taxpayers came up for hearing before Madurai Bench of Madras High Court where the grounds on which the petitioner challenged the impugned Assessment orders passed by adjudicating authority were common.
The Hon’ble Bench heard bunch of petitions together in case of M/s Devi Traders vs The State Tax Officer (2025-VIL-133-MAD) wherein after due considerations to the arguments of the petitioners and counterarguments of the respondent, the Court held as follows:
1. Not merely invoices but documents evidencing movement of goods such as E-way bills and books of accounts also form integral part of set of documents required for availment of ITC.
2. The failure of the Department to facilitate cross-examination of the suppliers is not fatal in case where the statements of the suppliers were recorded in the presence of the recipients and recipients are signatories to the statement.
3. The adjudication before the quasi-judicial authority like the respondent under the provisions of the respective GST enactments are not governed by the strict rules of evidence. The Department is only required to come to a conclusion on the facts based on records and the preponderance of probabilities and the documents available.
Hon’ble High Court relied on the settled jurisprudence from the erstwhile laws laid by Hon’ble Apex Court in the cases of Andaman Timber Industries Vs. Commissioner of Central Excise, Kolkata (2015-VIL-102-SC-CE) and State of Karnataka Vs. Ecom Gill Coffee Trading Private Limited (2023-VIL-20-SC) while denying benefit of ITC to the petitioner in the absence of proper documentation.
Now this judgment from the Hon’ble High Court raises another concern for the taxpayers regarding the level of preparedness a taxpayer would require to defend ITC claim by the taxpayer on inward supplies. A taxpayer not only requires to maintain the documentation as prescribed by the law but would also require to substantiate his claim by corroborative evidences.
Conclusion
Section 16 of CGST may require the taxpayer to only maintain prescribed documentation i.e. invoice or proof of payment, reflection of ITC in GSTR 2B etc. to substantiate its claim of ITC. However, reading in between lines and other ancillary provisions would indicate that merely maintaining documentation prescribed under Section 16 of CGST Act may not be sufficient to substantiate claim of ITC.
The taxpayer is also required to maintain the documentation prescribed as per ancillary provisions such as E-way bill etc.
In addition, wherever required the Tax Authorities may also question use of specified inputs and the taxpayer shall be required to provided a reasonable basis for procuring such goods or services for use in course of furtherance of business.
In the upcoming times, maintenance of proper records and documentation would play a vital role in deciding eligibility of ITC to the taxpayers and defending taxpayer’s claim before appropriate forum. In the absence of such documentation, the taxpayer may have to face severe consequences such as rejection of ITC claims along with penalty on claim on ineligible ITC etc.
Therefore, taxpayers shall maintain complete documentation and set of records along with corroborative evidences and complete their homework before claiming ITC in GST returns to avoid rejection of their claims and face heavy penalties.
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