Input tax credit (ITC) is backbone of GST as it ensures the critical feature of taxing on value addition in the supply chain. Any action of denying ITC would lead to Cascading effect and kills the soul of GST. Hence, the success of GST heavily depends on the free flow of ITC across the supply chain.

The GST law was also largely ensuring this feature to be in place. However, there are some provisions that may impair this feature. Among others, invoice matching to avail ITC i.e. ITC is said to be allowed only when the supplier uploads the invoice containing the GSTIN & other details of the recipient & pays the GST thereon to the Government. The last 4 year’s experience has shown the various trajectories in following the said requirement and technical glitches for the Government to implement in its full force albeit the Government was very keen on imposing the same knowing very well that such requirement causes undue hardship to the Taxpayers.

In this article, an attempt is made to analyse the relevant provisions, its legality and the jurisprudence relating to ITC matching.

Original Scheme of GST law:

Section 42 of CGST Act, 2017 specifies the mechanism for matching, reversal and reclaim of ITC wherein it was clearly stated the details of every inward supply furnished by a registered person shall be matched with the corresponding details of outward supply furnished by the supplier in such manner and within such time as may be prescribed. Accordingly, Rule 69 of CGST Rules, 2017 was framed to specify that the ITC shall be matched under Section 42 after the due date for furnishing the return in GSTR-03. Further, the first proviso to Rule 69 also states that if the time limit for furnishing Form GSTR-01 specified under Section 37 and Form GSTR-2 specified under Section 38 has been extended then the date of matching relating to claim of the input tax credit shall also be extended accordingly.

However, due to various numerous challenges in the implementation of GSTR-2 & GSTR-3, the Government has extended the time limits for filing GSTR-2 and GSTR-3 from time to time and later indefinitely . In absence of a requirement to file GSTR-2 and GSTR-3, the ITC matching mechanism prescribed u/s. 42, ibid r/w. Rule 69, ibid will also get differed and become inoperative.

Modified structure (scrapped before launch):

Acknowledging the difficulties in original scheme of returns filing and attached ITC matching, the Government has introduced Section 43A of CGST Act, 2017 inter alia specifying that

♣ ITC would be allowed even on the unmatched invoices also subject to maximum cap of 20% on the matched ITC

♣ Both supplier and recipient jointly liable for the unpaid liabilities in this regard.

♣ Giving overriding effect on Section 42, ibid

This section was introduced in the backdrop of new forms of GST returns replacing the original Idea of GSTR-1, GSTR2 & GSTR-3. later, the Governmetn has dropped this idea of new forms of returns and consequently the newly inserted section 43A, ibid was not made effective.

Tweaking’s in October 2019:

Though the Section 43A, ibid was not made effective but the one arm of such section was introduced vide Rule 36(4) of CGST Rules, 2017 w.e.f. 09.10.2019 as amended i.e. allowing unmatched ITC subject to cap of 20% on the matched ITC (120% of matched ITC).

The introduction of this rule clearly exposes the fact that the ITC matching is not warranted for the period prior to 09.10.2019 and the existing operating provisions in vogue are insufficient to impose the condition of ITC matching. Any contrary interpretation would render the new provisions otiose or redundant which is impressible. Therefore, it is explicitly clear that taxpayers are free to avail the ITC without bothering about the invoice matching as long as other conditions to avail ITC been fulfilled.

Be that as it may, it is also important to note that the Rule 36(4), ibid suffers from various legal infirmities inter alia there is no legal sanction to frame such rule more so when section 42 & 43 of CGST Act, 2017 which requires the invoice matching is kept in abeyance and filing of Form GSTR-2 & Form GSTR-3 which implements the invoice matching to claim ITC was also deferred. Thereby, the rule is travelling beyond the parent statute which is impermissible.

Therefore, it can be safely concluded that the invoice matching to avail ITC is not concretely supported by any of the legal provisions and the rule 36(4), ibid is insufficient to impose such conditions.

Latest amendment:

Firmly aware of the above legal lacuna in implementing Rule 36(4), ibid the Government made an amendment in Section 16(2) of CGST Act, 2017 which reads as follows:

“(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;”

Thus, the invoice matching is now made as one of the conditions to avail the ITC with this amendment (effective date is yet to be notified). The legality of this provision again amenable to challenge, please see the succeeding paragraphs for finer analysis.

Here again, the introduction of this new provision categorically reveals that the invoice matching to avail ITC was not a mandated under the existing provisions. The rationale explained supra equally applies here.

Certain points to ponder:

In all its avatars, the mandate of invoice matching is amenable to challenge inter alia on many grounds, some of them are briefed below:

♣ The provisions has not made any distinguishment between the bonafide and non-bonafide cases and equally punishes which is violative of Article 14 of Constitution of India .

♣ For the default of the supplier, the recipient shall not be penalized (by way of double recovery of tax – one by supplier and second time by the Government). The series of the decisions delivered under VAT regime in the similar context worth referring. The upshot of the decisions is that the benefit of ITC cannot be deprived to the purchaser, if the purchaser satisfactorily demonstrates that while purchasing, he has paid the tax to the supplier. If the supplier has not deposited the amount in full or a part thereof, it would be for the revenue to proceed against the supplier and shall not punish the recipient qua purchase for wrongdoing of supplier. Some of the decisions are cited hereinbelow:
The decisions in the above cases would be equally applicable to the GST law also.

♣ Section 76 of CGST Act, 2017 provides the recovery mechanism to recovery the tax collected by the supplier but not paid to the government. Further, Section 73 and 74 also provides the recovery mechanism to recover the GST collected by way of issue of demand notices. Similarly, there are various provisions embedded in the GST law for recovery of the unpaid tax from the supplier. Therefore, the law has provided sufficient safeguards for recovery of the unpaid tax from the suppliers. That being a case, the attempt to deny the ITC for mere reason of invoice mis-match/unmatched leads to bypassing the recovery provisions and short circuit method of recovering the tax from the recipient leaving the supplier to enjoy the money of Government. The Hon’ble HC has briefly touched this aspect.

♣ The fact of payment or otherwise of the tax by the supplier is neither known to recipient nor is verifiable by the recipient. Thereby, it can be said that such condition is impossible to perform and it is a known principle that the law does not compel a person to do something which he cannot possibly perform. The legal maxim reads as “lex non-cogit ad impossibilia”. The courts has adopted this principle and done away the requirement which is impossible to perform in pecular facts & circumstances. Thereby, it can be said that the condition, which is not possible to satisfy, need not be satisfied and shall be considered as deemed satisfied.

♣ There is no mechanism to refund or recredit the input tax credit if the supplier subsequently pays to the Government or recovered by the Government. If the earlier denied ITC is unreturned, it leads to double time collection of tax on the single transaction which is impossible owing to the Mandate of Article 265 of Constitution of India.

End note:

The invoice matching causing undue hardship to the genuine Taxpayers. To strike a balance between the interest of Revenue and Taxpayers, the invoice matching & consequential ITC denial can be made applicable only the cases of non-bonafide transactions. This would relieve the Genuine Taxpayers from the undue claims from the department and reduce the large scale of litigation.


The article was originally published in HCA’s August 2021 Journal

(For any other queries & feedback, write to [email protected])

Author Bio

Qualification: CA in Practice
Company: Hiregange & associates
Location: HYDERABAD, Telangana, IN
Member Since: 25 Jul 2017 | Total Posts: 25
Qualified as Chartered Accountant and completed Bachelor of law from Osmania University. He regularly Appears before Customs, Excise and Service Tax Appellate Tribunal (CESTAT) and various tax authorities. He • Is a Faculty for GST training selected by the Indirect Tax Committee of ICAI and re View Full Profile

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  1. Om Prakash Jain says:

    Overlooging various legal infirmities, the CBIC has again put restrictions on acceptance of GSTR-1 for two consequiive default in summission of monthly GSTR-3B by amennding Rule 59(6), which has been implemented on GST Portal w.e.f. 1.9.2021 by issuance of Advisory giving rise to increased incidence of invoice non matching & consequential ITC denial. Whether it is legal.
    CA Om Prakash Jain s/ J.K.Jian, Jaipur

  2. Ravi Raman says:

    Well written. Clearly the GST regime, in the interest of protecting revenue, has put the spirit of the VAT principle at risk. Some pragmatism will definitely help

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