Prajakta Bawaskar
GST Compliance Challenges: Purchaser’s ITC Loss Due to Seller’s Non-Filing of Returns
Under the Goods and Services Tax (GST) regime, one of the key pillars of Input tax credit (ITC) entitlement for purchasers hinges on the seller’s compliance—
particularly the timely filing of GSTR-1. As per current GST norms, a seller issues a tax invoice and must file the corresponding invoice details in GSTR-1. Once filed, these invoice details reflect in the buyer’s GSTR-2A/2B, allowing the purchaser to claim ITC in their GSTR-3B return.
However, this mechanism becomes problematic when the seller fails to file GSTR-1 or omits specific invoices. In such cases, although the purchaser has paid the full invoice amount including GST, they are unable to claim the ITC because the invoice is not auto-populated in GSTR-2A/2B. This creates a substantial burden on the buyer, who must then pay the tax liability from their own pocket—leading to cash flow challenges, increased working capital needs, and potential compliance issues.
Case Illustration: Shree Ganesh Enterprises and City Motors
Take the example of Shree Ganesh Enterprises, which purchased motor parts worth ₹2,50,000 from City Motors on 2nd January 2025, with GST @18% amounting to ₹45,000. The total invoice value was ₹2,95,000. As per GST compliance, City Motors was obligated to file GSTR-1 by 11th February 2025, ensuring the invoice reflects in Shree Ganesh’s GSTR-2A.
However, City Motors failed to file their GSTR-1 in time. Consequently, Shree Ganesh Enterprises was unable to claim the ₹45,000 ITC while filing their GSTR-3B return. This left them with a shortfall of approximately ₹45,000 in their liability, which they had to pay in cash. Filing the return without the eligible ITC not only caused financial strain but also left Shree Ganesh vulnerable to show cause notices (SCNs) from the GST Department if they attempted to claim the ITC without invoice reflection.
Moreover, if the seller eventually files the return after significant delay, the purchaser may have already filed their GSTR-3B and cannot retroactively claim the ITC without the risk of penalties or interest. In some cases, the delayed ITC entitlement may even lapse due to the time limit prescribed under Section 16(4) of the CGST Act.
Need for Policy Reform: Ensuring Equitable Relief for Purchasers Currently, GST laws are disproportionately harsh on the recipient, despite the fact that the fault lies with the supplier. The purchaser not only bears the financial burden but also risks penal consequences due to no fault of their own.
To address this imbalance, a mechanism should be introduced whereby interest liability is imposed on the defaulting seller, compensating the purchaser for the delay in claiming ITC. For instance:
Interest @ 9% (half of standard GST rate) should be calculated on the GST amount of the delayed invoice.
The interest period should cover the number of days between the due date and actual filing date of GSTR-1 by the seller.
In the above example, City Motors would be liable to pay interest on ₹45,000 @ 9% for the period of default. This amount could be either credited directly to the purchaser or adjusted as relief through the GST system.
Conclusion: Strengthening the GST Ecosystem
By making sellers more accountable for timely return filing, such a reform would:
Encourage better GST compliance across the supply chain.
Protect the legitimate rights of purchasers.
Minimize working capital disruptions and ensure smoother tax credit flow.
The GST Council and policymakers should actively consider mechanisms to address such recurring issues and ensure that honest taxpayers are not unfairly penalized due to the non-compliance of others.
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