A Critical Study with Reference to GSTR2A, 2B & Circumstances Under Which Reversal of Input Tax Credit Arises

Input tax credit – a critical study with reference to GSTR2A, 2B and circumstances under which reversal of input tax credit arises

When the Goods and Services Tax was introduced, the primary projection was to make GST a progressive tax. In this article we are going to discuss GSTR2B details.

GSTR 2B means a auto-drafted statement for regular tax payers (monthly). On the same lines, GST Input Tax Credit is one of the most rewarding and justified feature that makes GST as a  ‘Progressive’ and a ‘Uniform’ rate of tax system.

To claim ITC, taxpayers have to rely upon GSTR2B heavily. Therefore, in this comprehensive article, we will be looking at all the critical facets of GSTR 2B Form. We will also look at the eligibility, the GST rules and GSTR 2B due dates in detail.

Is GSTR 2B is Mandatory?

Recently, government has scraped 5% provisional Input tax credit rule. Thus tax payers have to avail only eligible ITC as per GSTR2B. You should always check mismatches between eligible ITC amount in GSTR3B and GSTR 2B. If you spot any difference in those values, you may consider the transactions reported in credit notes and debit notes, and recalculate it.

What is GSTR2B Form in GST?

 GSTR-2B was introduced after the GSTR-2A form, but the intention was not to completely replace the GSTR-2A form. Although they may look alike, there are some significant differences between GSTR2A and GSTR2B. In the later sections, we have highlighted ‘the differences between GSTR 2A and 2B’.

Understanding GSTR2B in detail:

• GSTR2Bis an auto-generated statement generated every month.
• Recipient’s GSTR-2B is generated based on the details furnished by the suppliers in their GSTR-1, GSTR-5 or GSTR-6.
• GSTR-2B, as compared to the GSTR-2A form, is a read-only statement and cannot be edited by the taxpayers.
• GSTR-2B is available only after the 12th of every month.
• GSTR 2B download is available in Excel and JSON

When is GSTR-2B generated?

GSTR-2B is generated after the 12th day of every month.

If your suppliers have completed their GSTR 1 return filing accurately and before the 12th day, your ITC for the month will reflect in the GSTR2B auto-generated statement.

One of the objectives of GST was to eradicate cascading effect of taxes which existed under excise, VAT and service tax. Under GST Input Tax Credit can be claimed irrespective of place of supplier, thus making accessibility for sales and purchase of goods easier.

What is Tax Credit? Tax credit is the amount of tax paid on receipt of goods or services or both which is not expensed /capitalised but debited in the financial statements as current asset and used to discharge the liability of tax except tax payable RCM. It cannot be used for the discharge of payment of interest, penalty, fee or any other sum due under the Act. Credit available in the month in which invoices are received.

> Non-claim of tax credit for which the supplier is entitled to, shall result into loss of credit not claimed less reduction in income tax liability, if any due to claim of expense or depreciation.

> Excess claim of credit shall result in denial of concessional rate of tax where non claim of credit is a condition, otherwise amount of credit wrongly claimed along with interest and penalties.

> Claim of tax credit is undoubtedly less than the profit of business in most of the businesses, though it may vary depending on the activities carried out by the supplier. In this

> Competitive world if claim of credit is not used judicially, survival of the business can be jeopardized.

The following requisites are mandatory for claiming input tax credit under GST

1. One must be registered under GST Law

2. A tax invoice or debit note issued by the registered supplier showing the tax amount

3. Goods or services must have been received

4. Supplier should have filed returns and paid such tax thereon to the government

5. Where goods are received in parts or in installments, ITC maybe claimed on receipt of last lot or installment.

6. Where input tax credit is included in the cost of capital goods and depreciation on such tax is claimed, no input tax credit is allowed.

7. Input tax credit will not be allowed if the same has not been claimed within the prescribed time limit.

 Documents on which Input Tax Credit may be claimed:

A registered dealer can claim input tax credit on the basis of following documents –

1. A tax invoice issued by registered supplier

2. A debit note issued in respect of earlier issued tax invoice by the registered supplier.

3. An invoice issued by the recipient of goods or services who has paid tax under reverse charge mechanism

4. A bill of entry or similar document in case of imports.

5. An invoice or credit note issued by an Input Service Distributor.

 How To Avail Credit Where Tax Has Been Paid Under Reverse Charge Mechanism (RCM)

Where tax has been paid under reverse charge basis, input tax credit may be availed in the same month in which the payment is made, provided the following condition is satisfied –

• Liability has been discharged through cash
• Goods or service has been used for business purpose
• Self-invoicing is done on such purchases as no tax invoice can be issued by unregistered supplies  for claiming Input Tax Credit (ITC)

Input tax credit can be claimed against an invoice/ debit note or credit note before the end of the following dates, whichever is earlier –

1. Due date of  GST return filing for the month of September of the next financial year

2. Date of filing annual return for that financial year. For the FY 17-18, period to be claimed ITC was extended to March 2019.

However, if no credit has been claimed till filing return of March 2019, any such credit will lapse and cannot be claimed even through GSTR 9 annual return.

Thus, it can be understood that no Input tax credit can be claimed through GSTR 9 annual return if the same is not claimed through other GST returns.

 Special Circumstances in which ITC may be claimed: 

As per Section 18 of the CGST Act, Input Tax Credit may be claimed in certain special circumstances –

a. Availability of Input Tax Credit in case of compulsory registration.

b. Availability of Input Tax Credit in case of voluntary registration

c. Availability of Input Tax Credit when the registered person ceases to be applicable for GST composition scheme.

d. Availability of input tax credit in case exempted supplies become taxable

e. Availability of input tax credit in case of change in constitution

Ineligible Input tax credit or items where ITC is not allowed 

> ITC on purchase of Motor vehicles and conveyances (for personal use, and for motor vehicles with seating capacity up to 13 persons, purchase of aircraft & vessels

> Any expense including insurance of motor vehicles or conveyances mentioned above.

> ITC on food, beverages, outdoor catering services, beauty treatment, health services, cosmetic and plastic surgery

> Sale of membership of health and fitness center, clubs

> ITC on rent a cab, life insurance, health insurance

> Travel benefits extended to employees

> ITC on works contract services availed for construction of immovable property,  including goods and services used for construction for immovable property (except plant and machinery).

> ITC on purchases by registered person opting for composition scheme.

> Goods or services used for personal consumption

> ITC on goods stolen, lost, destroyed, written off or given as free samples.

> ITC on tax paid due fraud cases.

> No ITC on account of detention, seizure, and release of goods and conveyances in transit. (Section 129.)

> No ITC on tax paid on account of confiscation of goods or conveyances and levy of penalty (section 130).

> No ITC allowed on payment of late fees, penalties, interests, etc

> Goods & Services purchased for exempted supplies.

> Membership of a club, Gym, Beauty club, health, and fitness center

> Life & Health insurance

> Travel for personal or business purposes, vacations, holidays, etc. where LTA is provided to the employees (unless obligated)

> Free Samples, gifts, lost stolen and destroyed goods

>Working Contract (for construction of properties)

> Leasing, Renting, Hiring Vehicles for other than specified purposes.

> Construction of immovable property for personal use

> Purchase from Composition Scheme

> Good & Services received by a Non-resident

> Goods & Services for Personal Consumption.

Important Note:

Taxpayers must note that CBIC has cleared the confusion on whether GST Input Tax Credit should be claimed based on GSTR-2B or GSTR-2A?

CBIC has re-iterated that GSTR2B statement will be the definitive and authoritative source to identify your eligible ITC for the month.

Input Tax Credit Set-Off Rules

From 1^st July 2019, GSTN portal has been updated with new system of ITC utilization. ITC can be utilized in the manner described below.

• IGST credit should be fully utilized first.
• In case of CGST liability, CGST credit is to utilized first and then IGST credit. However, one must take into consideration that no IGST credit is pending
• In case of SGST liability, SGST credit is to utilized first and then IGST credit. However, one must take into consideration that no IGST credit is pending
• CGST credit cannot be utilized against setting off SGST liability and vice versa, SGST credit cannot be utilized to set off CGST liability.
• The main aim while setting off input tax credit against tax liability is to have minimum tax pay-out after complying with all provisions of the act.

Time limit for claiming ITC under GST;

♦ GSTIN has specified a time-limit to claim the Input Tax Credit.

♦ As per Section 16(4) of the CGST Act 2017, taxpayers can claim any pending ITCs for any particular month, till the September of the subsequent year or while filing the annual return GSTR-9 for the financial year in which the Input Tax Credit has been availed.

♦ Any pending ITC post this period will collapse & you will not be allowed to utilize it in any way to release any tax liabilities.

♦ However, it is recommended to claim the ITC in real-time that is to claim ITC on a monthly basis via form GSTR 2B Reconciliation & GSTR 3B filing.

♦ The ITC claiming time limit must be kept in mind by the accountants especially while dealing with complex transactions such as Imports & SEZ transactions.

♦ There are a few rules & conditions that taxpayers need to keep in mind while claiming ITC under GST.

180 Days Rule:

√ The buyer of the goods who is claiming the ITC must make the complete payment to the supplier within 180 days from the date of supply in order to claim ITC.

√ If the buyer fails to do so, then their credit availed will be added to their outward tax liability.

√ Time Limit of claiming ITC

ITC can be claimed by the taxpayer EITHER till the GSTR 1 returns filing of September of the subsequent year OR in the filing of form GSTR 9 annual return. 

Possession of Documents

The taxpayer who is willing to take ITC must possess the invoices & other supporting documents with him, such as Debit & Credit Notes under GST.

The receiver of the goods & services must have received the same within 180 days from the date of the invoice.

ITC on Capital Goods: You cannot claim ITC on Capital Goods if you have already claimed depreciation on the same. You can opt for either of the two but not both.

Goods Received in Installments. In case you are receiving the goods in lots or installments, then you will only be eligible for ITC when the last & final installment is received by you.

ITC on Debit Notes Customers can claim ITC based on Debit Notes created against an Invoice.

ITC, in case of Credit Note Generation Using a Credit Note, the supplier can reduce their tax liabilities.

In this case, the recipient will have to reverse the ITC that they have claimed as Credit Notes nullify the transactions.

ITC on Import of Goods:

♦ While claiming ITC on imports, you must furnish- The bill of entry & The IGST payment challan.

♦ Deposition of Taxes to the government

♦ You must ensure that the GST that you have paid to the supplier reaches to the Government via GST returns.

♦ If the tax doesn’t reach the Government, you may not be able to claim full ITC of the same

♦ Common Credit of ITC under GST

Common Credits can only be claimed in the following 2 cases-

• Effecting exempted and taxable supplies
• Business and non-business related activities

What is meant by ineligible ITC?

√ There are certain cases Where Input Tax Credit under GST Cannot Be Availed, this is called ineligible ITCunder GST.

√  We have listed down the cases that are ineligible for claiming Input Tax Credit under GST, if taxpayers claim the credits of these items/services they can be liable –

Input Tax credit on Capital Goods

There are four types of Capital Goods in businesses & here is how ITC works on them-

Capital Goods only for Personal Use: No ITC available

Capital Goods only for Exempted Sales: No ITC available

Capital Goods only for Normal Taxable Sales- ITC available per usual

Capital Goods for both personal/ exempted AND for Normal Sales:

Calculate proportionate ITC depending on the ratio in which the goods are used for personal & business purposes.

Note–

ITC can only be claimed on Capital Goods, when depreciation has not been claimed on them. Meaning you can either claim ITC or depreciation on Capital Goods.

Here is an Example of how Input Tax Credit Mechanism under GST works-

Mr. A buys processed & dyed silk material worth INR 50,000 at a GST rate of 5% (Total cost paid- 52500 including GST) for his Silk business.

Since Mr. A is using the material for his business, he can claim the credit of INR 2500 by mentioning the same in their GSTR 3B Return and adjust the same with his outward tax liability & reduce it.

He then sells his finished goods for INR 80,000 at a tax rate of 12%, his total tax liability for the same tax period becomes INR 9600.

Now since he already paid INR 2500 as input tax, he can utilize his credit & reduce the outward tax amount while paying the tax liability at the time of filing his GSTR-3B for that tax period.

Meaning he will only have to pay an adjusted amount of INR 7100 as his outward tax liability.

Working- Now, the major question here is how does ITC work while filing the GST returns?

Here is a simple explanation- First, Mr. A as a supplier will file their GSTR-1 & declare the details of the sale he made to Mr. A in the same.

The details filed by the supplier in their GSTR-1 will reflect in Mr. A  GSTR-2A/2B as well as GSTR-2 for that tax period.

Mr. A will then file their GSTR-3B using their GSTR-2A/2B & GSTR-2 where he will calculate his actual tax liability, his input tax credits as per GSTR-2A/2B, & then the final adjusted tax liability payable.

Reversal of Input Tax Credit under GST

> Payment the supplier within 180 days from issue of invoice

> Inputs and capital goods must not be used for personal purposes

> Inputs and capital goods must not be used for providing exempt supplies

> Credit Notes issued by seller to ISD (Input service distributor)

> When the reversed ITC is less than required

> This reversed ITC needs to be furnished in the recipients GSTR-2. Additionally, the reversed ITC will add up to the total outward data.

> Note- ITC can be declared in Table 11(2) of Form GSTR-2

> Note- the recipient will have to pay these reverse charges & their taxes for the ITC availed earlier Claim up to 100% Input Tax Credit. 

Reversal of Input tax Credit (ITC)

Input tax credit may be reversed under certain circumstances as mentioned below –

a) Failure to pay supplier within 180 days from the date of invoice.

b) Goods and services whether inputs or capital goods used for personal purpose.

c) Goods and services utilized for producing or supplying exempted goods or services.

d) Sale of capital goods or plant and machinery on which input tax credit was claimed.

e) Credit note issued by input service distributor.

f) Supplies ineligible under section 17(5) of the Act.

g) Transition from registered regular dealer to composite dealer

 Where input tax credit (ITC) is reversed,

♦ The amount reversed may be added to output tax liability in the month in which it is reversed,

♦ Interest shall be paid from the date of availing credit till the date when the amount is reversed and paid

♦ No time limit shall be applicable for reclaiming the reversed credit. 

THE REVERSAL OF ITC IS TO BE DONE IN THE FOLLOWING SCENARIOS:

• The recipient fails to pay consideration to the supplier (whether fully or partly) for a particular (Rule 37 of CGST Rules)
• ITC has been availed on ‘blocked credits’ as per Section 17(5) of CGST
• Inputs have been used to make a full or partial exempt supply or supply which is not for business purpose or used for personal consumption. (Rule 42 of CGST Rules)
• Inputs used in goods that were given out as free samples or used in goods that were lost, destroyed, stolen, etc.
• Cancellation of GST registration or switches to Composition (Rule 44 of CGST Rules)
• Inputs taken on Capital Goods for supply of wholly exempt goods or taxable and exempt (Rule 43 of CGST Rules)
• Depreciation under the Income Tax Act has been claimed on the GST component of capital goods
• Reversal of 50% of ITC by banking and other financial companies under special
• Credit note issued to Input Service Distributor (ISD). (Rule 39 of CGST Rules).

Reversal of ITC under Rule 37:

You being a recipient, if you fail to pay the invoice amount to the supplier within 180 days the ITC have to be reversed. If part of the invoice is paid the ITC will be reversed on a proportionate basis.

Rule 37A: Context Rule 37A of CGST rules applies when a supplier fails to file GSTR-3B. The receiver must then reverse the ITC claimed on such invoices.

In these cases, Supplier has filed GSTR-1/IFF and credit is visible in GSTR-2A/2B but the Supplier fails to pay taxes to Government as Tax is paid through GSTR-3B.

If the supplier doesn’t file GSTR-3B up to 30th September of Next Financial Year then Recipient is advised to reverse the ITC claimed earlier. However this reversal is temporary and this can be availed later.

Under Rule 37A, if a supplier doesn’t file GSTR-3B, the recipient must reverse the ITC claimed, impacting cash flows. Compliance checks are key and here not only your compliance, but also your vendor’s compliance too.

Reclaiming ITC reversed earlier: The recipient can reclaim ITC once the supplier files GSTR-3B and the tax along with interest are paid. Timely reversal saves Interest: The registered person will be required to reverse such ITC on or before 30th November of FY following the FY in which such ITC has been availed otherwise interest u/s 50 will get attracted.

Reversal of ITC under Rule 42 & 43:

Both rules pertain to reversal of Inputs utilised for supplies that are exempt or used for personal consumption. If the credit can specifically be attributable to a supply – taxable, non- taxable, or supply consumed for personal use, such ITC amount should be distinguished from the total ITC since it can be easily identified. Taxpayer must reverse that amount of ITC directly attributable to a particular supply that is non-taxable/used for personal consumption, only when wrongly availed. ITC amount that cannot be attributable to a specific supply but   is   used   for   partly making both the taxable and non-taxable supplies/supplies used for personal consumption need to be reversed proportionately to the extent of supplies that are non-taxable/used for personal consumption. The remaining ITC left is eligible for claim.

The calculation differs for:

a) Inputs or input services- covered by Rule

b) Capital goods- covered by Rule

Reversal of ITC under Rule 44:

The aim of this rule is to reverse all the ITC that has been availed by a registered person in the event that he chooses to pay tax under the composition scheme or his registration gets cancelled for any reason. For inputs held in stock or contained in semi-finished goods and finished goods in stock, the ITC which is to be reversed should be calculated proportionate to corresponding invoices on which credit was taken. In case of capital goods, ITC availed will be based on the useful life (in months) and shall be computed on a pro-rata basis.

Reversal of ITC the availment of which is blocked under Section 17(5):

Inputs on goods or services used for personal consumption, inputs on goods which are lost, stolen, destroyed or written off or disposed of by way of gift or free samples, and any ITC availed which is blocked as per Section 17(5) needs to be reversed by the recipient.

GSTN issues advisory on online compliance pertaining to difference in ITC available in Form GSTR-2B and ITC claimed in Form GSTR-3B/3BQ

 Earlier, the CBIC introduced Rule 88B in the CGST Rules, specifying the manner of dealing with the differences in the ITC available in Form GSTR-2B and the ITC availed in Form GSTR-3B, vide Notification No. 38/2023 – Central Tax dated 4 August 2023. In this respect, the GSTN has introduced an online functionality enabling the taxpayers to explain the differences in the ITC.

Levy of Interest on reversal of input tax credit wrongly availed:

Interest is compensatory in nature and thus should not be levied in case ITC is not utilised for payment of output liability

It is a well settled principle that interest is compensatory in nature and can be levied only if there is a loss to the revenue. Further, in case the subsequently reversed ITC has not been utilised by the taxpayer for payment of output tax and the same merely reflects in the electronic credit ledger, then it can be held that the taxes due on the taxpayer are duly paid in full and no revenue loss per se has been incurred by the exchequer.

The Hon’ble Supreme Court in Pratibha Processors Versus Union of India [1996 (10) TMI 88 – SUPREME COURT OF INDIA] held that interest is compensatory in character and is imposed when tax is due and payable and the same has been withheld. The taxpayer does not withhold the payment of tax by subsequently reversing the availed ITC. Hence, the question of payment of interest on account of subsequent reversal of availed ITC does not arise.

Megha Engineering & Infrastructures Ltd. vs. The Commissioner of Central Tax [TS-248-HC-2019 (Tel and AP)]

“31. Therefore, it is clear that the liability to pay interest under Section 50 (1) is self-imposed and also automatic, without any determination by any one. Hence, the stand taken by the department that the liability is compensatory in nature, appears to be correct.”

♦ Commissioner of Central Excise & Service Tax, Bangalore vs. Bill forge Pvt. Ltd. [2011-TIOL-799-HC-KAR-CX]

“21. Interest is compensatory in character, and is imposed on an assessee, who has withheld payment of any tax, as and when it is due and payable. The levy of interest is on the actual amount which is withheld and the extent of delay in paying tax on the due date. If there is no liability to pay tax, there is no liability to pay interest. Section 11 AB of the Act is attracted only on delayed payment of duty i.e., where only duty of exercise has not been levied or paid or has been short levied or short paid or erroneously refunded, the person liable to pay duty, shall in addition to the duty is payable from the date of book entry, showing entitlement of Cenvat credit. Interest cannot be claimed from the date of wrong availment of CENVAT credit and that the interest would be payable from the date CENVAT credit is taken or utilized wrongly.”

♦ Ganesh Dass Sreeram, Etc. A vs. Income Tax Officer, ‘A’ Ward, Shillong And Others Etc [1988 169 ITR 221 (SC)]

“As has been observed earlier, when the amount of tax due had already been paid in the shape of advance tax, the question of payment of compensation by way of interest does not arise and the Income-tax Officer was not, therefore, justified in charging interest. The assessee is, therefore, entitled to get refund of the amount paid by way of interest for the said assessment year. The Income-tax Officer is directed to refund to the assessee the amount paid on account of interest.”

Further, in case of M/s F1 Auto Components P Ltd Vs The State Tax Officer – Madras High Court [TS-339-HC(MAD)-2021-GST], the HC relied on its own decision in the case of Maansarovar Motors Private Limited and set aside the levy of interest in case of reversal made through utilization of ITC. Revenue also agreed on this position in light of the aforesaid decision.

♦ The Hon’ble Madras HC in the case of Maansarovar Motors Private Limited [TS-945-HC-2020(MAD)-NT] set aside the levy of interest and issued a direction to the appropriate authority to compute the interest liability for belated remittances of cash.

In W.P.No.12492 of 2020, learned counsel for the petitioner states that the interest liability relating to belated payment of tax both by cash and reversal of ITC has been coercively recovered. In light of my decision as aforesaid, a direction is issued to the appropriate authority to compute the interest liability for belated remittances of cash and refund the balance of the amount collected from the petitioner within a period of four weeks from date of uploading of this order. 

Case laws regarding input tax credit: 

Pin star Automotive India Pvt. Ltd. v. Additional Commissioner

The Madras High Court ruled that the condition laid down in section 16(2)(c) of the CGST Act needs to be interpreted strictly and the mandate is upon the claimant to ensure compliance with the provision, failing which it would not be entitled to ITC. The high court delivered a judgment in favor of revenue.

CC & CCE v. Juhi Alloys Ltd

“A buyer can take steps that are in their control and he cannot be expected to verify the records of the supplier’s broker (i.e. dealer) to check whether, in fact, the supplier has paid duty on the goods supplied by him or not. Hence, as long as the bonafide nature of the consignee transaction is not doubted, credit should not be denied to the buyer.”

On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi

In this case, with respect to Section 16(2)(c) of the CGST Act, 2017, the court opined that the purchasing dealer cannot be expected to anticipate the default that the selling dealer may incur and avoid transacting with such selling dealers.

M/s D.Y. Bethel Enterprises and Ors. v. The State Tax Officer (Data Cell) and Ors. W.P.(MD) No.2127/2021

– Madras HC held that recovery from the bona fide purchasers cannot be the first remedy for the Revenue. Recovery actions must be taken first against the defaulting suppliers.

Bharti Telemedia Ltd. Vs. Union Of India & Ors. (Delhi High Court) W.P.(C) no 6293/2019,

The Petitioner i.e. Bharti Telemedia Ltd. is engaged in providing Direct-To-Home satellite television broadcast services

Delhi HC issues notice in writ petition challenging Section 16(2)(c), second proviso to Section 16(2)(d) and proviso to Section 16(4) of Central Goods and Service Tax Act, 2017 (CGSTAct); Validity of Section 43A(6) of CGST Act, which hasn’t been notified yet, is also being challenged;

Petitioner’s contention is that the Department has been vested with all the powers to recover any revenue lost owing to non-payment of taxes by erring suppliers and credit cannot be denied to recipient for default on part of the supplier;

Further, As per the verdict of the Hon’ble Gujarat High Court in the case of AAP & Co. Chartered Accountants v/s Union of India [R/Special Civil Application No. 18962 of 2018 dated June 24, 2019], it was held that GSTR 3B was not a return in lieu of GSTR 3 specified u/s 39 of CGST Act, 2017 • Notification No. 49/2019 – Central Tax dated 9th October, 2019 was issued which amended Rule 61(5) of the CGST Rules providing that GSTR 3B shall be a return u/s 39 of CGST Act, 2017 and such rule is amended retrospectively with effect from 1^st July, 2017.

The Bombay High Court bench of Justice K.R.Shriram & Justice A.S. Doctor (16(2)(C)

FACTS OF THE CASE

A show cause-cum-demand notice dated 13th May 2022 was issued by the Deputy Commissioner CGST & CEX, Respondent No.4, is under challenge in this Writ Petition. By the impugned notice, an explanation has been called for from the Petitioner as to why action, as proposed in paragraph 8 thereof, may not be taken Petitioner has also challenged the vires of section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (hereafter ‘the CGST Act’, for short).

COURT HELD : The facts as recorded held that find no reason to interfere with the show cause notice in view of the decision of the Supreme Court in the case of The Special Director Considering and Anr. Vs. Mohd. Ghulam Ghouse and Anr Issue notice to Respondents, returnable on 15th September 2022. Since the vires of section 16(2)(c) of the CGST Act is under challenge, Petitioner is directed to put the Attorney General for the Union of India on notice.

Restriction on ITC for Tax Component on Depreciation (Subsection 3): If a registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the Income-tax Act, 1961, they are not allowed to claim input tax credit on that tax component.

Time Limit for Claiming ITC (Subsection 4): A registered person cannot claim input tax credit in respect of any invoice or debit note for supply of goods or services after the due date of furnishing the return under Section 39 for every calendar month, following the end of the financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier.

The Hon’ble Calcutta High Court (‘HC’) in the case of M/s Gargo Traders, “the petitioner,” has set aside the order passed by the Joint Commissioner (State Tax), directing the department to pass a reasoned and speaking order after considering the submitted documents. The captioned ruling has been analyzed in this update.

The Kolkata High Court ruled that a buyer can claim input tax credit even if the supplier’s registration was canceled retrospectively. However, the buyer must verify the genuineness of the transaction.

The court said tax authorities cannot reject the ITC claim just based on retrospective cancellation of supplier registration, without considering documents provided by the buyer.The authorities have been directed to consider the buyer’s documents and pass a reasoned order after giving them a hearing, within 8 weeks.

 Experts say this will help many buyers who face problems due to supplier issues. The ruling states buyers must be more vigilant in verifying supplier identity and compliance before transacting, to claim ITC.

Proper invoices, proof of payment, e-way bills, etc can prove the genuineness of the purchase and help the buyer claim ITC. The judgment provides relief to genuine buyers but with greater responsibility to ensure due diligence in vendor verification and compliance monitoring. 

INPUT TAX CREDIT AND FAKE INVOICING:

The investigation results in the issue of a Show Cause Notice (SCN) or any other penal actions, the below-listed steps can be taken by the authorities to prevent entities to continue with the fraudulent activities:

a) An offence database module creation in the GST Application where the GSTIN of each entity that has been charged with fraud, such as fake invoices, etc., will be flagged. This will enable automatic identification of purchasers of such fake invoices from these flagged entities, and automatic alerts could be given in GST Application for further investigation.

b) The GST registration of such entities shall be cancelled, and the re-registration of such cancelled registrations is to be dealt with separately. Any application for re-registration from such entities would be flagged to alert the authorities, and there shall be no deemed registration in such cases. Further, physical verification for registration purposes would be necessary for such cases.

c) The entities that have availed input tax credit with the help of fake invoices need to be identified, and steps for recovery need to be made from them as per law. The previous transactions of such entities with other entities need to be investigated on a sample basis in view of their detected propensity.

d) Provisions contained in Section 83 of the CGST Act, 2017, relating to the provisional attachment of property, including the bank accounts, should invariably be invoked.

e) If there’s prima-facie evidence showing criminal involvement of directors to evade GST, then Section 89 of the CGST Act 2017 can be invoked

f) Blocking of the input tax credit of persons, including beneficiaries of such defrauding entities, to not allow the entities to get away with any undue input tax credit.

M/S BALAJI EXIM VS. COMMISSIONER, CGST AND ORS. IN W.P. (C) – 10407/2022 AND W.P. (C) – 10423/2022 (HIGH COURT – DELHI)

The Hon’ble Court after considering the submissions made and facts of the case, found that the petitioner has a statutory right to appeal the impugned order. However, it is not possible for the petitioner to avail the said remedy as the Tribunal has not been constituted.

It was found by the Hon’ble Court that from the perusal of the impugned order, it is clear that the petitioner’s refund applications were rejected on a mere apprehension that its supplier had issued fake invoices. There is no conclusive finding on the basis of any cogent material that the invoices issued by M/s Shruti Exports to the petitioner are fake invoices.

Further, there is no dispute that the invoices issued by M/s Shruti Exports are reflected in the AIO System and there is no dispute that M/s Shruti Exports had issued the said invoices. It is also clear that M/s Shruti Exports is a dealer registered with the Goods & Services Tax Department. Moreover, there is no allegation that the invoices were not paid by the petitioner.

It is also important to note that there is no allegation that the goods in question were not exported overseas. Thus, the petitioner has established not only the fact that the goods have been exported but that it had paid for the same including the IGST and Cess.

It is also to be noted that the supplies, as mentioned in the said letter, were for a period prior to August 2020, which is quite evident from the copy of show cause-cum-demand notice 30.11.2022 issued to M/s Shruti Exports, handed over on the behalf of the Petitioner. The said show cause notice indicates that it relates to the period from July, 2017 to Financial Year 2019-20. Thus, it could not possibly cover the supplies made to the petitioner.

It was found by the Hon’ble Court that it is apparent that the petitioner’s refund applications have been rejected merely because of suspicion without any cogent material. There is no dispute that goods have been exported; the invoices in respect of which the petitioner claims the ITC were raised by a registered dealer; and, there is no allegation that the petitioner has not paid the invoices, which include taxes. Thus, the applications for a refund cannot be denied.

It was further found by the Hon’ble High Court that there is merit in the petitioner’s contention that it is not required to examine the affairs of its supplying dealers. The allegations of any fake credit availed by M/s Shruti Exports cannot be a ground for rejecting the petitioner’s refund applications unless it is established that the petitioner has not received the goods or paid for them.

The Hon’ble Court taking reference of decision of Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi & Ors.: 2017 SCC OnLine Del 11286 of the Coordinate Bench of the Court, wherein it was held that ‘Therefore, there was need to restrict the denial of ITC only to the selling dealers who had failed to deposit the tax collected by them and not punish bona fide purchasing dealers. The latter cannot be expected to do the impossible. It is trite that a law that is not capable of honest compliance will fail in achieving its objective. If it seeks to visit disobedience with disproportionate consequences to a bona fide purchasing dealer, it will become vulnerable to invalidation on the touchstone of Article 14 of the Constitution’, found that the petitioner would be entitled to the refund of the ITC on goods that have been exported by it.

Circular cannot override statutory provisions, cumulative ITC adjustment allowed for the period February – August 2020 –Allahabad HC Allahabad HC’s observations and judgement [Writ Tax No. 433/2021; Order dated 5 September 2023]

• ITC is a substantive right that can be availed/utilized provisionally: The HC examined the ITC provisions

and stated that it is a statutory right created by the statute, which can be claimed provisionally without any reconciliation or final payment of tax. However, such provisional ITC is liable to be reversed, along with interest if the tax so collected is not deposited by the supplier in the government treasury. The HC held that prior payment or deposit of tax is not mandatory for provisional availment/ utilisation of ITC. However, the supplier is obligated to deposit the tax on a monthly basis by way of filing a monthly return.

Availment/utilisation of ITC does not depend on filing of returns: The HC opined that although the statutory provisions prescribe a specific date for filing of returns by the supplier, the same cannot be associated to availment/ utilisation of the ITC. The HC drew reliance from the decision of the Calcutta HC in the case of Suncraft Energy Private Limited and asserted that furnishing the details of the tax invoice in GSTR-1 by the supplier is a merely a measure of facilitation.

• Eligible ITC for February to August 2020 shall be computed cumulatively: The HC examined Rule 36(4) of the CGST Rules and observed that it permitted additional 10% of the eligible ITC in terms of GSTR-2A to be claimed as provisional ITC. Further, in terms of the first proviso to the rule, such eligible ITC shall be computed for the period February to August 2020 on a cumulative basis. The HC affirmed that when the first proviso explicitly prescribed such cumulative computation, adopting a month-to-month computation by relying on the pre-existing circular would be violative of the first proviso. The HC explained that the stipulation of the filing of GSTR-1 by the supplier is merely a measure of facilitation and not for grant of provisional ITC. Alternatively, it was explicated that the intention of the legislature was not merely deferment of date, rather it was precisely to allow ‘cumulative adjustment’ for the period February to August 2020.
• Pre-existing circular that conflicts with the amended statutory law is invalid: The HC held that the first proviso superseded the pre-existing month-to-month reconciliation of the eligible ITC, specifically for the period between February and August 2020. Accordingly, the impugned circular, which prescribed the monthly reconciliation, was in conflict to the amended provision and cannot be enforced for the said period. In view of the above, the HC quashed the demand order.