Will Recipients Be Obliged to Reverse ITC In Case Suppliers Do Not Pay their taxes:

Critical Provisions for Denial of ITC Mismatch

The following are the provisions for conditions for taking ITC and matching ITC –

1. As per Section 16(2)(c) of CGST Act, ITC shall be claimed only in case, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply.

2. Section 42 (2) of the CGST Act, 2017 states that the claim of ITC that match with the details of corresponding outward supply or with the IGST paid under section 3 of the Customs Tariff Act, 1975 in respect of goods imported by him shall be finally accepted and such acceptance shall be communicated, in such manner as may be prescribed, to the recipient.

3. Section 42 (3) of the CGST Act, 2017 states that where the ITC claimed by a recipient is in excess of the tax declared by the supplier for the same supply or the outward supply is not declared by the supplier in his valid returns, the discrepancy shall be communicated to both such persons.

4. Section 42 (5) of the CGST Act, 2017 states that the amount in respect of which any discrepancy is communicated u/s 42(3) and which is not rectified by the supplier in his valid return for the month in which discrepancy is communicated shall be added to the output tax liability of the recipient.

As it is evident from the above that u/s 42 of The CGST Act 2017, there should be no reversal of ITC until matching is done between both the supplier and the recipient of goods/ services. Hence our legal submission in the matter is that irrespective of any High Court judgement, the department is bound by Section 42 itself so as not to automatically reverse ITC.

Press Release Dated 04.05.2018: GST Council approves principles for filing of new return design based on the recommendations of the Group of Ministers on IT simplification 

Clause (iv) of the Press Release dated 4th May 2018 lays down that there should be no automatic reversal of ITC at the end of the recipient. Reversal of ITC may only take place in exceptional situations like missing supplier, closure of business by supplier or supplier becoming insolvent. The text of the extract of the press release is as below:

(iv) No automatic reversal of credit: There shall not be any automatic reversal of input tax credit from buyer on non-payment of tax by the seller. In case of default in payment of tax by the seller, recovery shall be made from the seller however reversal of credit from buyer shall also be an option available with the revenue authorities to address exceptional situations like missing dealer, closure of business by supplier or supplier not having adequate assets etc.

Various COURT Decisions ON THE ABOVE MENTIONED PRESS RELEASE: 

The recent Madras High Court decision in the case of D.Y.Beathel Enterprises has re-affirmed the above. In the said case the Hon’ble High Court ruled as below –

Madras HC: D.Y. BEATHEL ENTERPRISES Vs THE STATE TAX OFFICER (DATA CELL), (INVESTIGATION WING) COMMERCIAL TAX BUILDINGS, TIRUNELVELI

  • In the said press release, it has been mentioned that there shall not be any automatic reversal of input tax credit from the buyer on non-payment of tax by the seller. In case of default in payment of tax by the seller, recovery shall be made from the seller. However, reversal of credit from buyer shall also be an option available with the revenue authorities to address exceptional situations like missing dealer, closure of business by the supplier or the supplier not having adequate assets etc. Section 16(1) & (2) of Tamil Nadu Goods and Services Tax Act, 2017, also makes the position clear.
  • If the tax had not reached the kitty of the Government, then the liability may have to be eventually borne by one party, either the seller or the buyer. In the case on hand, the respondent does not appear to have taken any recovery action against the seller.
  • Charles and his Wife ought to have been examined. They should have been confronted. I do not understand as to why the respondent did not ensure the presence of Charles and his wife Shanthi, in the enquiry.
  • Therefore, the impugned orders are quashed and the matters are remitted back to the file of the respondent. Charles and his wife Shanthi will have to be examined as witnesses. Parallely, the respondent will also initiate recovery action against Charles and his wife Shanthi.

Apex Court Judgement: Arise India Limited  

In the erstwhile regime, Supreme Court in the case of Commissioner of Trade & Taxes, Delhi and others Vs. Arise India Limited and others laid 2 important Doctrines as under – 

  1. Treating both the ‘guilty purchaser’ and the ‘innocent purchaser’ at par is violative of Article 14 of the Constitution;
  2. In the present case, the purchasing dealer is being asked to do the impossible, i.e. to anticipate the selling dealer who will not deposit with the government the tax collected by him from those purchasing dealers and therefore avoid transaction with such selling dealers.

The Court observed that it is trite that a law that is not capable of honest compliance will fail in achieving its objective.

Punjab And Haryana High Court in The Case Of Gheru Lal Bal Chand Versus State Of Haryana  

The Hon’ble Punjab And Haryana High Court in The Case of Gheru Lal Bal Chand Versus State Of Haryana And Anr. Has held similar to the above as follows –

“Once the law defines the registered dealer and tax-paid goods, the assessee, i.e., purchasing dealer, produced the bill issued by the registered dealer then his burden is discharged and he cannot be held responsible or he cannot be forced to go around from pillar to post to collect the material in order to get the rebate. To conclude, no liability can be fastened on the purchasing registered dealer on account of non-payment of tax by the selling registered unless it is fraudulent, or collusion or connivance with the registered selling dealer or its predecessors with the purchasing registered dealer is established.”

MADRAS HC: DATED 29.01.2013 W.P.Nos.2036 to 2038 of 2013 SRI VINAYAGA AGENCIES Vs THE ASSISTANT COMMISSIONER (CT)

In the erstwhile regime, the Hon’ble High Court of Madras has also held as under –

“The pre-revision notices and the orders clearly stated that the petitioner-dealer had paid the tax to the selling dealer. If that be the case, the petitioner’s case squarely fell under the proviso to section 19(1) of the Act. It was another matter that the selling dealer had not paid the collected tax. The liability had to be fastened on the selling dealer and not on the petitioner-dealer which had shown proof of payment of tax on purchases made. The orders were liable to be set aside. Sub-section (16) of Section 19 states that the input tax credit availed is provisional. It, however, does not empower the authority to revoke the input tax credit availed on a plea that the selling dealer has not paid the tax. Hence, appeal is allowed.” 

Going by the above, the taxpayers have a strong legal defence that in case of a mismatch between GSTR 2A and GSTR 3B, there should be no automatic reversal of ITC at the end of the recipient, especially when the supplier is traceable.

The Video for the above Article can be accessed at the following Link 

LINK FOR THE VIDEO – https://www.youtube.com/watch?v=43Ioh7yBR98 

Author Bio

Qualification: LL.B / Advocate
Company: Tax Connect Advisory Services LLP
Location: MUMBAI, Maharashtra, IN
Member Since: 10 Jan 2019 | Total Posts: 31
Mr. Vivek Jalan is a Fellow Member of the Institute Of Chartered Accountants of India (ICAI) & a qualified LL.B. He is the member of The CII- Economic Affairs & Taxation Committee. He is the Co Chairman of The Indirect Tax Committee of The Bengal Chamber of Commerce and Industry. He is also View Full Profile

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