Learn about the challenges recipients face when their suppliers fail to remit collected taxes to the government, leading to Input Tax Credit (ITC) reversal. This overview covers relevant legal provisions, recent judicial precedents, and essential actions recipients should consider to address this issue.
Issue in brief:
> ITC reversal in the hands of recipient of goods or services in case of default made by supplier by not depositing the tax collected with the Government.
Relevant Provisions Governing Input Tax Credit (ITC) and Reversal:
The Central Goods and Services Tax Act, 2017 (CGST Act) includes critical provisions and rules that govern the eligibility, availment, and reversal of Input Tax Credit (ITC) for registered taxpayers. Understanding these provisions is crucial for taxpayers to ensure compliance and avoid ITC reversal risks.
1. Conditions for Availment of ITC (Section 16 of CGST Act):
Section 16 of the CGST Act lays down the conditions that a registered person must fulfill to avail Input Tax Credit. Subsection 2 of Section 16, marked by a non-obstante clause, outlines these conditions:
a) Possession of Tax Invoice: The registered person must possess a valid tax invoice issued by the supplier for the goods or services received.
aa) Matching of Invoice Details: The details of the invoice must be furnished by the supplier in their GSTR-1 return, and the same details must appear in the recipient’s GSTR-2B (an auto-generated statement reflecting input tax credit).
b) Receipt of Goods or Services: The registered person must have actually received the goods or services for which the ITC is being claimed.
ba) Absence of Restriction in GSTR-2B: ITC should not be restricted in the GSTR-2B statement. GSTR-2B is a statement that provides a summary of eligible ITC based on the details furnished by suppliers in their GSTR-1.
c) Payment of Tax to Government: Subject to the provisions of Section 41, the tax amount charged by the supplier for the supply of goods or services must have been actually paid to the Government, either in cash or through the utilization of eligible ITC.
d) Furnishing of GSTR-3B Return: The registered person must have filed the GSTR-3B return, which is a monthly self-declaration of summarized outward and inward supplies along with ITC.
2. ITC Reversal for Non-Payment by Supplier (Section 41 of CGST Act):
Sub-section 2 of Section 41 of the CGST Act addresses situations where the credit availed by a registered person is liable for reversal. This reversal is accompanied by interest in cases where the supplier has not paid the corresponding tax amount to the Government.
3. Blocking of Credit through Rule 86A of CGST Rules:
Rule 86A of the CGST Rules provides the scenarios under which an officer can block the credit available in the electronic credit ledger for utilization. These scenarios include:
a) Credit Availed on Tax Invoices: The credit availed based on tax invoices issued by a registered person who is found to be non-existent or not conducting business from the registered place.
i. No Receipt of Goods or Services: The credit availed without the actual receipt of goods or services.
b) Credit Not Paid to Government: The credit of tax charged by the supplier has not been paid to the Government.
4. Burden of Proof (Section 155 of CGST Act):
Section 155 of the CGST Act establishes that in cases where a person claims to be eligible for input tax credit, the responsibility of proving this claim lies with that person.
Challenges Faced by Recipient in ITC Reversal Scenarios:
The implementation of the Goods and Services Tax (GST) was intended to facilitate a seamless flow of input tax credit (ITC), mitigating the cascading impact of taxes within the supply chain. However, achieving this objective has proven to be more complex than initially envisioned. Recipients of goods and services are encountering a range of challenges in the context of ITC, particularly when suppliers fail to remit collected taxes to the government. Below are the key challenges faced by recipients in this regard:
1. Stringent Norms and Continuous Changes: With the passage of time, the norms for availing ITC have become increasingly stringent. This trend requires recipients to exercise greater caution right from the outset, beginning with the selection of suppliers from whom goods or services are to be procured. The recipient’s responsibilities also extend to meticulously tracking the compliance status of the chosen suppliers and matching the details reported by these suppliers. The process of availing credit through matching with supplier-reported details has evolved significantly, marked by the introduction of continuous changes. Consequently, ITC reconciliation has transformed into a routine compliance activity for taxpayers.
2. Challenge of Supplier Non-Remittance: One of the most pressing issues gaining attention relates to scenarios where suppliers collect payments, including Goods and Services Tax (GST), from recipients but fail to remit these collected taxes to the government. Moreover, instances where supplier registrations are canceled further complicate matters. In these situations, the recipients’ availed credits are under dispute, and tax authorities are seeking the reversal of such credits, accompanied by interest.
3. ITC’s Evolution from Right to Compliance: Under the pre-GST regime, judicial decisions had established that the credit of tax charged on sales of goods or provision of services was a right inherent to the recipient. This right was considered unimpacted even in cases of default by the seller or service provider. However, with the advent of the GST framework and its stringent provisions governing ITC availment, this perceived right has evolved. Recipients can no longer assert an unequivocal right to ITC when confronted with defaults by suppliers.
4. Compliance with Stringent Provisions: To further compound the challenges, the recipient is required to ensure that the supplier duly remits the tax charged on the supply of goods or services to the government within stipulated timelines. This obligation is stipulated by the specific conditions laid out in provisions such as Section 16(2)(c), Section 41(2) of the Central Goods and Services Tax (CGST) Act, and Rule 86A of the CGST Rules. These provisions necessitate recipients’ vigilance in ensuring that their suppliers meet their tax payment obligations punctually.
5. Burden of Proof and Additional Documentation: Adding to the complexity, Section 155 of the CGST Act empowers tax authorities to place the burden of proving correct ITC availment on the recipient. This onus is underscored by a significant Supreme Court ruling in the case of The State of Karnataka Vs Ecom Gill Coffee Trading Private Limited. Therefore, if invoked, the recipient must provide additional details or documentation to substantiate their rightful claim for ITC.
Judicial precedents:
> In case of M/s Aastha Enterprises [Civil Writ Jurisdiction Case No.10395 of 2023- Patna High Court], High Court in this case has held that the claim of ITC shall not sustain if the supplying/selling dealer has not paid the tax charged and collected by him from the recipient, to the Government. Further, HC held that the statutory levy and the further benefit of ITC conferred upon the recipient doesn’t only depend upon the collection of tax by the supplier but also due payment of the same by him to the
> In case of M/s Jai Balaji Paper Cones Versus The Assistant Commissioner, Sales Tax, Tiruchengode, Raghav Industries [2023 (8) TMI 573- Madras High Court], High Court in this case held that recipient being the registered person is not entitled to ITC if tax charged in respect of supply of goods or services has not been paid to the Government. In this case, the supplier issued the invoices after cancellation of his GST registration, hence the tax collected in respect of the supply made by him could not be paid to the Hence, ITC cannot be claimed in light of Section 16(2)(c) of CGST Act. Further, HC held that recipient is entitled to recover the amount from supplier in the manner know to law.
> In case of Suncraft Energy Private Limited And Another Versus The Assistant Commissioner, State Tax, Ballygunge Charge And Others [2023 (8) TMI 174 – Calcutta High Court], High Court in this case held that the department should have first taken the action against the supplier who has neither reported the transaction in its GSTR-1 nor has paid corresponding tax on the Department cannot instruct the recipient at the first instance to reverse the ITC unless and until it is able to bring out the exceptional case where there has been collusion between the recipient and the supplier or where the supplier is missing or he has closed down its business or does not have any assets and such other contingencies.
In this case, HC has relied upon the press release dated 18 October 2018 and held that department has not conducted any enquiry on the supplier more particularly when there is clarification that details appearing in GSTR-2A is in nature of facilitation and doesn’t impact the ability of tax payers to avail the ITC on self-assessment basis in consonance with the provisions of Section 16 of CGST Act.
> In case of M/s Y. Beathel Enterprises Versus The State Tax Officer (Data Cell), (Investigation Wing) Commercial Tax Buildings, Tirunelveli [2021 (3) TMI 1020 – Madras High Court], High Court in said case held that if the tax has not been remitted with the Government then liability may have to be eventually borne by one party, either seller or buyer. Also, HC in the said case made an observation that department has not taken any recovery action against the seller. Further, it was held that when it is amply clear that seller has collected the tax from the purchasing dealer, omission on the part of the seller to remit the same with Government must have been viewed very seriously and strict action should have been initiated against him.
> Apart from the above-referred judicial precedents, there are many cases which are pending before High Court of different States for adjudication. Further, it can also be seen that High Courts have taken divergent view in case where the supplier has collected the tax on supply of goods or services but have not remitted the same with the Government. In few cases recipient is being directed to reverse the ITC in light of the above-referred provisions or in other cases HC has directed department to take action against the
Key Action Points for Recipients in Managing ITC Reversal Risks:
Navigating the challenges associated with ITC reversal due to supplier defaults requires recipients to adopt a proactive and systematic approach. Here are the key action points that recipients can consider implementing to effectively manage these risks:
1. Amend Supplier Agreements for Safeguarding: Recipients should review and amend their agreements with suppliers to include clauses that safeguard against contingencies where the supplier collects taxes but fails to remit them to the government. These clauses can establish clear responsibilities and consequences in such situations, helping to mitigate potential ITC reversal risks.
2. Regular Monitoring of Supplier Compliance: Recipients should establish a system for monitoring the compliance status of their suppliers. This involves tracking whether suppliers are filing their GSTR-1 (outward supply details) and GSTR-3B (monthly summary return) on time. Timely filing indicates a commitment to tax compliance and reduces the risk of ITC reversal.
3. Validate Supplier GST Registration: Before entering into any business engagement, recipients should validate the GST registration status of their suppliers. This validation ensures that the supplier is legitimately registered and authorized to collect and remit GST. Periodic validations should also be conducted to ensure ongoing compliance.
4. Ensure E-Invoice Compliance: Recipients should verify whether their suppliers are mandated to issue e-invoices for the supply of goods or services. E-invoicing is a mechanism designed to enhance accuracy and transparency in transactions. By confirming that suppliers are issuing e-invoices as required, recipients can further mitigate the risk of ITC reversal.
5. Conduct Comprehensive Reconciliation: Implementing a monthly ITC reconciliation process is essential. This exercise involves cross-referencing the details uploaded by the supplier in their GSTR-1 with the recipient’s own records. Any discrepancies or cases of non-reporting of invoices in the GST return of the month in which the transaction occurred should be promptly identified.
6. Timely Action on Discrepancies: When discrepancies are identified during the reconciliation process, recipients should take immediate action. This could involve communication with the supplier to rectify any errors or omissions. Resolving discrepancies in a timely manner helps ensure accurate ITC availment and minimizes the risk of subsequent reversals.
7. Document Verification and Record Keeping: Recipients should maintain thorough documentation of all transactions and relevant communications with suppliers. This documentation can serve as evidence in case of any disputes or challenges related to ITC reversal. Well-organized records contribute to a stronger case in demonstrating correct ITC claims.
8. Continuous Training and Awareness: Keep the internal teams, including finance and procurement, well-informed about the evolving GST regulations and ITC compliance requirements. Continuous training ensures that all stakeholders understand their roles and responsibilities in managing ITC and mitigating risks effectively.
9. Collaboration with Tax Advisors: Collaborate with tax professionals or advisors who possess expertise in GST regulations and compliance. Their insights and guidance can help recipients navigate the complexities of ITC availment, manage risks, and remain up-to-date with changing regulations.
10. Stay Informed and Adapt: The GST landscape is subject to amendments and updates. Recipients should proactively stay informed about changes in regulations, interpretations, and court rulings. This adaptability enables them to adjust their strategies and practices to align with the evolving compliance requirements.
Conclusion: Recipient’s vigilance in ensuring supplier compliance is crucial to avoid ITC reversal due to supplier tax defaults. Understanding legal provisions, recent judicial precedents, and implementing key action points can help recipients mitigate the risks associated with non-compliant suppliers.
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Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement
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