Input Tax Credit (ITC) Regulations: Insights and Legal Perspectives

1. Introduction to Input Tax Credit (ITC)

A registered person is eligible to claim Input Tax Credit (ITC) on the supply of goods or services used or intended to be used in the course or furtherance of business. This eligibility is subject to conditions and restrictions prescribed under the Central Goods and Services Tax (CGST) Act.

Key Points:

• Eligibility: ITC can be claimed by registered persons for goods or services used for business purposes.
• Conditions and Restrictions: Specific conditions and restrictions under the CGST Act must be met to avail of ITC.
• Exclusions: Certain goods or services specified in Section 17 of the CGST Act are excluded from ITC claims.
• General Availability: Except for the exclusions mentioned, ITC is generally available for all goods and services to registered persons.

2. Conditions and Eligibility for Input Tax Credit (ITC) – Section 16

For claiming Input Tax Credit (ITC) under Section 16, the following conditions and eligibility criteria must be met:

• Possession of Tax Invoice or Debit Note: The recipient must have a valid tax invoice or debit note.
• Invoice/Debit Note Details Furnished in GSTR 1: The details of such invoice or debit note must be furnished by the supplier in their GSTR 1 and should be reflected in the recipient’s GSTR 2B.
• Receipt of Goods or Services: The recipient must have received the goods or services.
• No Restriction as per Form GSTR 2B: The ITC must not be restricted according to the auto-generated statement in Form GSTR 2B.
• Tax Paid to Government: The tax charged by the supplier must have actually been paid to the government.
• Filing of GSTR 3B: The recipient must have furnished their GSTR 3B return.

3. Burden to Prove Eligibility

Section 155 of the CGST Act stipulates that:

“Where any person claims that he is eligible for input tax credit under this Act, the burden of proving such claim shall lie on such person.”

This means that the recipient availing Input Tax Credit (ITC) is liable to prove the genuineness of the transaction.

A. The Hon’ble Supreme Court, in the case of State of Karnataka Versus Ecom Gill Coffee Trading Private Limited Civil Appeal No. 230 of 2023, examined a similar provision under the Karnataka VAT Act and held:

• The dealer claiming ITC must prove beyond doubt the actual transaction.
• Proof can be established by furnishing:
  • Name and address of the selling dealer.
  • Details of the vehicle that delivered the goods.
  • Payment of freight charges.
  • Acknowledgment of taking delivery of goods.
  • Tax invoice and payment particulars.
• This information is required in addition to the tax invoice and payment details.
• The dealer/purchaser must prove and establish:
  • The actual physical movement of goods.
  • Genuineness of the transaction through the details mentioned above.
  • Mere production of tax invoices is insufficient to claim ITC.

It is essential for taxpayers to maintain comprehensive documentation to substantiate their ITC claims, ensuring compliance with the stipulations outlined by the CGST Act and as interpreted by the Supreme Court.

B. Shiv Trading v. State of UP: Allahabad High Court Upholds GST Proceedings

In the landmark case of Shiv Trading v. State of UP, the Hon’ble High Court of Allahabad delivered a pivotal judgment. The court ruled that the petitioner, Shiv Trading, failed to meet its burden of proof regarding several critical aspects:

• Actual Transaction: The petitioner could not conclusively demonstrate the occurrence of the transaction.
• Physical Movement of Goods: There was a lack of evidence to confirm the actual movement of goods.
• Genuineness of Transactions: The authenticity of the transactions was not established beyond doubt.

Given these deficiencies, the court upheld the initiation of proceedings against the petitioner under Section 74 of the GST Act. This ruling also underscores the stringent requirements for taxpayers to substantiate their claims and the rigorous enforcement mechanisms under the GST framework.

4.  Proving the Authenticity of Transactions

In recent rulings, the Hon’ble Supreme Court and various High Courts have emphasized the importance of establishing the genuineness of transactions. To substantiate the legitimacy of a transaction, taxpayers must provide the following, in addition to invoices and payment proofs:

• Name and address of the selling dealer
• Actual movement of goods
• Details of the vehicle used for transportation
• Proof of freight payment
• Acknowledgment of goods delivery

It is crucial to note that this list is not exhaustive; additional evidence may be required on a case-by-case basis.

Government’s Stance The Government mandates that recipients must be able to trace their suppliers and hold them accountable for the payment of GST. Challenges arise particularly in situations where:

• The recipient has had limited transactions with the supplier, and only those transactions are under scrutiny.
• Transactions were facilitated through a broker, making both the broker and the supplier unreachable. For regular suppliers, recipients generally should be able to meet these requirements without difficulty.

Key Concerns

 1. What if the supplier fails to deposit GST despite the recipient’s follow-up efforts?

2. What if the supplier’s registration certificate is cancelled or they are deemed a non-existent taxable person?

5. Department Clarifications on Tax Recovery Procedures Press Release (04th May 2018):

• Specifies that in cases of default in tax payment by the supplier, recovery shall primarily be pursued from the supplier.
• Recovery from the recipient will be considered only under exceptional circumstances.

Circular No. 183 (27th December 2022):

• Introduces a provision allowing a certificate from a chartered accountant to be produced, certifying that the supplier has paid the taxes in GSTR 3B.
• Reflects a significant shift in the Government’s stance.

Key Points:

• The new circular indicates a change in the Government’s approach towards tax recovery.
• Emphasizes that the Government now encourages taxpayers to manage GST non-payment issues through commercial means rather than legal avenues.

6.  Legal Implications of Supplier Non-Payment of Taxes

In the realm of tax compliance, the issue of suppliers failing to fulfill their tax obligations raises pertinent legal concerns. Here’s a breakdown of the legal landscape surrounding this issue:

• Violation of Statutory Conditions: The non-payment of taxes by a supplier directly contravenes the statutory condition outlined in Section 16(2)(c).
• Revenue’s Authority: Pursuant to Section 155, the revenue authority reserves the right to withhold or deny tax credit in such instances.
• Constitutional Challenges: The constitutional validity of Section 16(2)(c) has been subject to challenge across various high courts. While awaiting final judicial adjudication, this matter remains unresolved.
• Precedent in VAT Regime: Under the VAT regime, significant legal precedents have emerged. Notably, the Delhi High Court, in cases such as Arise India Ltd. and On Quest Merchandising India (P.) Ltd. v. Government of NCT of Delhi, [2017], has upheld the rights of bona fide purchasers.
• Denial of Input Tax Credit: Courts have ruled against the denial of input tax credit to genuine purchasers due to the non-compliance of selling dealers. Such denial is deemed unjustifiable.
• Constitutional Principle: Equating bona fide purchasers with complicit parties in fraudulent transactions is viewed as a violation of Article 14 of the Constitution, ensuring equality before the law.
• Consistent Verdicts: The Madras High Court, exemplified by the ruling in D Y Beathel Enterprises, has echoed similar sentiments, reinforcing the rights of legitimate purchasers.

In summary, the legal discourse surrounding supplier non-payment of taxes underscores the need for equitable treatment of purchasers and the imperative of upholding constitutional principles in taxation matters.

7.  In case of Registration Certificate Cancellation Supreme Court, in the case of State of Maharashtra v. Suresh Trading Company, [1998] (SC), has made a significant ruling. The Court has underscored the pivotal role of the registration certificate in transactions, particularly highlighting the entitlement of purchasing dealers to rely on it under the law. Key Points:

• Legal Precedent: The Supreme Court’s ruling establishes a legal precedent regarding the reliance on registration certificates in commercial transactions.
• Dealer’s Entitlement: According to the Court, a purchasing dealer is within their rights to depend on the validity of the registration certificate issued to the selling dealer at the time of the transaction.
• Period of Validity: Crucially, the Court emphasizes that this entitlement extends specifically to instances where the certificate of registration was valid during the period of the transaction.

8.  Concerns Over Non-existent Suppliers

In a recent case involving Santosh Kumar and Co, the Orissa High Court tackled the pressing issue of non-existent suppliers, shedding light on the imperative for governmental action and accountability in such matters. The court’s ruling underscores the gravity of the situation, emphasizing the need for stringent measures to combat the prevalence of fictitious dealers in the commercial landscape. Key points from the court’s decision include:

• Governmental Action Urged: The court emphasizes the necessity for the government to take decisive action against fictitious dealers, highlighting that registration cannot be granted to entities that do not exist. It calls for thorough investigations and appropriate measures to address collusion between officials and fraudulent individuals.
• Importance of Registration: Highlighting the significance of registration, the court asserts that certificates issued by public officers carry substantial weight in the commercial realm. However, the issuance of registration to non-existent entities undermines the integrity of the process and erodes trust within the business community.
• Responsibility of Officials: The court admonishes officials for either colluding with dishonest entities or failing to exercise due diligence, thereby enabling fraudulent practices. It stresses the need for accountability and urges the state government to institute inquiries and take decisive action against those involved in such malpractices.
• Ensuring Future Integrity: Recognizing the detrimental impact of fictitious dealers on the commercial landscape, the court calls for proactive measures to eliminate them from the field. It underscores the importance of restoring confidence and trust by eradicating such fraudulent activities and holding perpetrators accountable.

The Orissa High Court’s ruling serves as a clarion call for concerted efforts to combat the scourge of non-existent suppliers and restore integrity to the registration process. It underscores the need for stringent enforcement measures and underscores the importance of governmental accountability in safeguarding the interests of legitimate businesses.

Conclusion: Understanding Input Tax Credit (ITC) regulations is paramount for businesses to optimize tax benefits and ensure compliance with the Central Goods and Services Tax (CGST) Act. From eligibility criteria to burden of proof and legal implications of supplier non-payment, this guide provides valuable insights into navigating the complexities of ITC. By staying informed and proactive, businesses can safeguard their interests and maintain regulatory compliance in the dynamic tax landscape.