pri Input Tax Credit Dilemma: Analysis of 14th Amendment to CGST Rules, 2017 Input Tax Credit Dilemma: Analysis of 14th Amendment to CGST Rules, 2017

I. Introduction

Cases of tax evasion and frauds have significantly increased under the GST regime since its implementation and especially the cases of fake invoicing to wrongfully avail the Input Tax Credit (ITC) are rising rapidly, which has become a major cause of concern for the government. Alone in the month of November, 2020, hundreds of arrests were made and thousands were booked, for illegally availing ITC by using fake invoices without actually supplying goods or services, thereby causing heavy losses to the government.

In this backdrop, the Central Government in pursuance of its powers under s.164 of the CGST Act, 2017 (hereinafter the “Act”) amended the CGST Rules, 2017 (hereinafter the “Rules”) by notifying the Central Goods and Services Tax (Fourteenth Amendment) Rules, 2020 (hereinafter the “Amendment Rules”) in Notification no. 94/2020- Central Tax (hereinafter the “Notification”) on 22nd of December, 2020. Far reaching amendments have been made to the Rules by the said Amendment Rules with the purported aim to tackle the menace of fake invoicing. However, under the guise to improve the system and to reduce the frauds, these rules confer arbitrary powers to the tax officials/ government to bring a halt to the businesses merely on some anomalies which are not even in the nature of fraud without instilling enough checks and balances in the system. This article discusses and highlights the draconian nature of the amendments made in the provisions dealing with ITC, i.e. Rules 21, 21A, 36(4), 59 and 86B.

II. What is Input Tax Credit?

In simple words, ITC means the credit of input taxes paid on the purchase of inputs like raw materials, capital goods and services. This input tax is credited to the electronic credit ledger (defined under s.2(46) of the Act) under s.49(2) of the Act, and the balance under this account is known as ITC. The person may use, either this balance of ITC under the electronic credit ledger or the amount available under the electronic cash ledger (defined under s.2(43) of the Act), to pay his output tax liability under s.49(1) of the Act. Thus, ITC significantly aids in maintaining the liquidity of the business by reducing the net tax liability of the person payable in cash and thereby, ensures that taxpayers do not end up paying taxes on the taxes which they have already paid on the inward supply.

III. The Amendments

a) Rules 21 and 21A

R.21 is amended and three new sub-rules, i.e. 21(e), 21(f) and 21(g) are added to it. Wide powers have been granted by virtue of the said new provisions, to permit the suspension of registrations in cases where a person avails ITC in violation of the law laid down in s.16 of the Act or declare the outward supplies in GSTR-1 for one or more periods in excess of the outward supplies declared in GSTR-3B or fails to pay the tax of at least 1% by cash (R.86B).

Further R.21A(2) has also been amended to permit the officer to suspend the registration without affording the said person a reasonable opportunity of being heard. Hence, it is only after the suspension of the registration that an opportunity will be afforded to the concerned person to submit his reply and seek the revocation of the suspension.

A new sub-rule (2A) has been inserted in R.21A to permit the suspension of registration in situations where the comparison of data between GSTR-1 of the person in question and GSTR-1 of the vendors of such person show “significant differences or anomalies indicating contravention of the provisions of the Act or the rules made thereunder”. Again the subjective language used, without affording an opportunity to the taxpayer (before suspending the registration) to explain the anomalies, is harsh. Further, as per the new R.21A(4), the suspension can be revoked only if the officer deems fit. In other words, the suspension will lead to cancellation if the officer is not satisfied with the justifications. Moreover, as per the new R.21A(3A) no refund shall be granted to the taxpayer under s.54 of the Act, whose registration has been suspended.

Thus, extremely harsh provisions are introduced by the said Amendment Act which may adversely affect even the genuine taxpayers on account of honest and bona fide errors. Therefore, all the taxpayers must now take extreme caution to avoid breaching the new rules, for the tax officials are conferred tyrannical powers under the newly amended R.21 and R.21A. These two rules provide teeth to the said Amendment Act, by empowering tax officials to put a complete halt on the business in case of non-compliance of rules like 36(4), 59 and 86B which themselves, in turn, are capricious and unreasonable. These rules are hereinafter discussed in the article.

b) Rules 36(4) and 59

R.36(4) was originally inserted in October, 2019 in the CGST Rules, to restrict the utilisation of ITC relating to the invoices not uploaded by the suppliers in GSTR-1 beyond 20% of the eligible ITC, which was reduced to 10% just after 2 months of the introduction of this provision, w.e.f. January, 2020. However, R.36(4) has been amended by the said Amendment Rules to the effect that the registered person is now restricted from availing the ITC in excess of 5% of the eligible ITC for which the concerned suppliers have furnished the invoices under R.37(1). Therefore, an assessee can now avail only 105% of his suppliers’ filed invoices in GSTR-1 as opposed to the original limit of 120%.

It is pertinent to mention here that, this amendment comes in wake of the recent orders of Delhi High Court in Bharati Telemedia v. Union of India and Calcutta High Court in LGW Industries Ltd. v. Union of India in which the validity of s.16(2)(c) was challenged that ITC can’t be denied to the recipient for default on part of the supplier as the said condition is not under his control, and in both these cases, the Courts while accepting the petitions, issued notice to the Union Government.

S.16(2)(c) of the Act provides that no person shall be eligible to avail ITC, in respect of any supply of goods or services or both, unless tax charged in respect of such supply has been paid to the government by the supplier. Therefore, this provision makes payment of tax by the supplier a condition precedent for availing ITC. Therefore, it wouldn’t be wrong to say that the nature of condition imposed under R.36(4) on the recipient is a lot similar to the one imposed under s.16(2)(c) of the Act, as this condition is also not in the hands of the recipient and thus, impossible to be fulfilled by him.

On similar lines, the Karnataka High Court in a writ petition relating to Karnataka VAT has held that the benefit of input tax cannot be deprived to the purchaser if the purchaser satisfactorily demonstrates that while purchasing goods, he has paid the amount of tax to the supplier. If the supplier has not deposited the amount in full or a part thereof, then revenue authorities shall proceed towards only the supplier. Similarly, the Delhi High Court, in the context of s.9(2)(g) of the Delhi VAT Act, 2004, which is similar to the R.36(4), rendered the decision in favour of assesses. Therefore, in light of the above cases, the condition laid down in R.36(4) can’t be said to be a reasonable one, and thus, must be struck down to protect honest recipients from the adverse consequences of suppliers’ default. Even the law in general, i.e. lex non-cogit ad impossibilia, does not make a person subject to any adverse consequences for non-performance of something which he cannot possibly perform.

Secondly, earlier outward supplies were used to be uploaded in GSTR-1 by the suppliers, and this was auto-populated in GSTR-3 leading to the payment of taxes. Hence, payment of taxes under GSTR-3 and uploading the details of outward supplies in GSTR-1 meant one and the same thing. However, payment of taxes and filing of outward supplies (under GSTR-1) by the supplier have become two different conditions with the introduction of GSTR-3B for payment of tax. Thus, it wouldn’t be wrong to say that a condition which mandates that the utilisation of ITC would be dependent upon the uploading of the details by the supplier in GSTR-1, inadvertently increases the scope of the condition given under s.16(2)(c) of the Act, since the payment of tax under GSTR-3B and uploading outward supplies in GSTR-1 are different forms, requiring different details and disclosures. Therefore, the condition under R.36(4) is an additional requirement and thus, not valid as per the law laid down in Laghu Udyog Bharati and Anr. v. Union of India and Ors., as it unnecessarily and arbitrarily increases the scope of the Act (s.16 of the Act).

This situation has been further worsened by the amendment made in R.59 of the said Rules by adding a new sub-rule, i.e. R.59(5). The said rule proffers wide and arbitrary situations in which taxpayer would be prohibited from filing GSTR-1, thereby further restricting the utilisation of ITC under the already troubled R.36(4). The taxpayer would be prohibited from filing GSTR-1, when:

(a) he has not furnished the return in GSTR-3B for the preceding two months (for a taxpayer filing monthly returns);

(b) he has not furnished the return in GSTR-3B for preceding tax period (for a taxpayer filing quarterly returns)

(c) he is required to discharge the tax liability of at least 1% by cash (see the discussion on R.86B) and he has not furnished the return in GSTR-3B for preceding tax period.

c) Rule 86B

The Amendment Rules have introduced a new rule, i.e. R.86B (applicable from 01.01.2021) to put further restrictions in addition to Rule 86A, on the use of ITC available in electronic credit ledger. As per the said R.86B, a registered taxpayer (where the value of taxable supply other than exempt supply and zero-rated supply exceeds Rs.50 lakhs/month) cannot discharge his liability in excess of 99% by utilizing the ITC. In other words, such taxpayer is mandatorily required by R.86B to discharge at least 1% of the liability only by way of cash. It is pertinent to mention that R.86B has an overriding effect over all the other CGST Rules, therefore, even if any rule permits utilisation of ITC, the mandate under R.86B has to be followed over and above such rule(s).

However, government departments, PSUs, local authorities and other statutory bodies are exempted from following this mandate under R.86B(e). Similarly, the proviso to R.86B provides four more exceptional situations where the assessee would be exempted from following the said condition, for eg. if the registered person has paid more than Rs.1 lakh as income tax in the last two preceding financial years for which the limit prescribed under s.139(1) of the Income Tax Act, 1961, has expired (R.86B(a)), or as per R.86B(c) if the registered person has received a refund amount of more than INR 1 lakh in the preceding financial year on account of the unutilised input tax credit on account of inverted rate structure under s.54(3)(ii) of the Act etc.

V. Analysis

It is submitted that the amended R.21A is violative of the principles of natural justice enshrined under Art.14 of the Constitution as it deprives the registered person of his right to fair hearing and the tax officials have been wrongly conferred with wide discretionary powers to suspend the GST Registration without conducting any hearing, in case there has a reason for him to believe that there is a violation of R.21 or s.29 of the Act. R.21A is also ultra vires s.74 of the Act which mandates issuance of SCN for the demand of ineligible or fraudulently availed ITC. It is also ultra vires s.75(4) of the Act which mandates grant of an opportunity of hearing to a taxpayer where any adverse decision is contemplated against him. Moreover, R.21A(3A) is violative of Art.300A of the Constitution, for it wrongly deprives the taxpayer of his property (refund of unutilised ITC) which was earlier refundable under s.54 of the Act.

Similarly, it’s submitted that R.36(4) is violative of Art.14 and Art.19(1)(g) of the Constitution. Firstly, it is submitted that putting of any “tolerance” limit over utilisation of ITC under Rule 36A, be it 20% or 5%, is a prima facie arbitrary practice under Art.14 as the registered person is the rightful owner of ITC. Secondly, it is submitted that there is no intelligible differentia for treating a guilty purchaser and a bona fide purchaser alike under R.36(4), therefore Art.14 is violated on this point as well. Further, there’s no doubt that the said amendments discussed above would have a drastic impact upon the cash flows of the businesses, as despite possessing intelligible and sufficient ITC, they would be required to pay tax via the electronic cash ledger. Thus, this may lead to unreasonable closure of businesses too. Thereby, R.36(4) violates Art.19(1)(g) of the Constitution. Further, it has been seen on many occasions, like in the case of  Indsur Global Ltd. v. Union of India, that the Courts had held that restriction of ITC on default made by the suppliers cannot be held as a reasonable restriction under Art.19(6). Application of R.36(4) may also lead to profiteering by the Revenue Department for the reason that once ITC hasn’t been utilised by the person due to non-filing of outward supply in GSTR-1 by the supplier and in case if the supplier uploads them in the next FY, there is no provision for re-utilisation of credit by the supplier. This would lead to a double loss of an honest recipient, and profiteering for the Revenue Department.

It is submitted that all the abovementioned amendments, i.e. Rules 21, 21A, 36(4), 59, and 86B, in conjunction, are ultra vires the Art.300A of the Constitution. The unutilised ITC available in favour of a registered person is his property under Art. 300A (as held in M/s Siddharth Enterprises v. The Nodal Officer) and thus, as per Art.300A of the Constitution, no person shall be deprived of his property save by the authority of law. But, the said amendments operate in an arbitrary manner and have a very bright potential to delimit the person from availing the unutilised ITC under s.16 of the Act. Thereby, these amendments violate Art.300A of the Constitution. Lastly, it is also submitted that the abovementioned amendments put extensive fetters on the constitutional objective to avoid cascading effect of taxes as the said new amendments are bound to increase the accumulation of ITC in the electronic cash ledger by at least 1% per month in addition to the SGST accumulations, which will put a significant financial burden upon the businesses by imposing limitations upon their cash transactions.

VI. Conclusion

By the above discussion, one thing is clear, the government, even when the Courts are opposed to putting the additional pressure of default of the supplier upon the assessee, is moving towards a regime where the assessees have to ensure the compliance not only at their end but also at the end of the suppliers in order to avail the ITC. It is shocking that at one hand the government is promoting its centralised agenda of “ease of doing business” and on the other hand, it’s not shying away in rototilling genuine businesses by passing tyrannical laws, which have no full proof of curbing fake invoicing. Therefore, the genuine businesses would become victims of the government’s mad obsession to curb fake invoicing which would further impact the already weeping economy. Hence, it is submitted by the author that if these amendments are brought in force by the government, then the very objective of the GST regime of providing ITC to the registered persons would be annihilated and debauched.

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Company: Vivekananda Institute of Professional Studies
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