Would Purchaser be liable for GST payment to the Government, if the same has not been paid by the supplier

This article is with regard to the one of the boiling issues related to the GST due to which the taxpayers are facing problems on day-to-day basis.

Actually, GST brought so many benefits for the Individual and enterprises, though there are still few provisions for which clarification needed to fulfill the objective of easy tax system. The section which we are taking in this article is 16(2)(C) of the CGST Act, 2017.

As per the section 16(2)(C) of the Act, the recipient of goods and services can avail Input Tax credit only if supplier has deposited the tax to the Government.

Would Purchaser be liable for GST payment, if not been paid by supplier

The relevant provision of the aforementioned section is extracted hereunder: –

Section 16(2) of the CGST Act, 2017 

“Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless, –

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;

(b) he has received the goods or services or both.

[Explanation. >>>> ]

(c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through the utilization of input tax credit admissible in respect of the said supply:”

So, issue is whether credit can be denied in the hands of the buyer of goods and services for the non-payment of taxes by the supplier, even if the same amount of tax already been collected from the buyer?

As per the above section, the government allowed the purchasers to avail input tax credit, provided he should be ensuring that the said payment has been deposited to the Government by the Supplier.

Practically, this seems impossible, as it is difficult for any human being to have a full control over the supplier or to watch him on everyday basis to avail input tax credit. There are many case laws in this respect, few of them are explained here below: –

In this context reliance could be drawn on Judgment of Hon’ble Hight Court in the case of “Commissioner of Trade & Taxes, Delhi & others Vs. Arise India Limited & others”

The Hon’ble High Court in the said case, held that legislature should make a distinction between the bona fide purchasing dealer and others. It has been held that, denial of ITC should be restricted to only those selling dealer who have been failed to deposit the taxes to the Government.

As per the Court, treating bona fide and other dealer as equal is violation of Article 14 of the Constitution of India.

Though the said judgement is related to DVAT Act, so it again a very curious question among us to think that whether this judgement is going to be applicable for CGST Act as well?

In the respect of the said provision of CGST Act, we can refer the Judgment given by single bench of justice Mr. G.R. Swamynathan in the case of M/s. D.Y. Beathel Enterprises v. the State Tax Officer “.

In this case, there was a trader who deals in Raw Rubber Sheets, and like other regular transaction they had purchased goods from one supplier “Charles and his wife Shanti”, and made payment through bank inclusive of tax components. As a result, trader availed input tax credit for the tax amount paid to the supplier.

Later, after knowing the fact that, the seller did not deposited tax to the Government but for the same ITC already been claimed by trader, the department initiated the investigation proceeding against the buyer and told the buyer that ITC cannot be made available to the buyer, as tax has not been deposited in this respect neither by the supplier/ nor by the recipients.

Furthermore, the Department passed the order demanding entire tax liability from the buyer of goods and services.

In the said case, after knowing all the facts represented by the Assessee as well as the department, bench of Justice G.R. Swamynathan quashed the order demanding entire tax liability from the buyer and recommended back to the authority for fresh adjudication.

The two things especially been observed by the Court in this case: –

  • Whether the Department initiated any investigation or inquiry against the supplier?
  • Whether the department initiated any recovery proceedings against the supplier?

“The Hon’ble Court said that, since there was no examination and no recovery proceedings initiated against the supplier, hence the order demanding entire tax liability from the buyer is in contravention of natural justice”

Conclusion: – On the basis of above case law, it can be concluded that, the Department cannot demand any kind of tax liability from the buyer of goods & services, for fault of the supplier, unless proper investigation and recovery proceeding initiated against the defaulting seller.

After analyzing all the above-mentioned facts, we concluded that to avoid any future issues related to the Input Tax credit, it’s always advisable to deal with the registered and reliable supplier. Along with this, on continuous basis we should observe whether the supplier has deposited tax and submitted his return or not. Actually, on the basis of decision given by the Hon’ble court in the above-mentioned case laws, its pretty much expected that in coming month many more cases are going to be in favor of purchaser. But till that time, to avoid any interest or penalty, we are suggesting you to take below mentioned measures: –

  • To take an undertaking from the defaulter supplier in respect of submission of return along with the tax deposit.
  • Take action against the defaulter supplier on time and intimate the same to the Government.

Rakhi Thakur

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Company: Rakhi Thakur and Associates
Location: SOUTH WEST DELHI, Delhi, India
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One Comment

  1. B Jaya kumar says:

    analysis is good regarding payment of GST by seller and buyer. you have dealt with finally by keeping seller as black sheep (as explained in the specific case). what happens when buyer demands the seller to pay GST first and say that will be compensated later on and won’t do that. Then Seller is at loss.

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October 2021