Reversal/ Recovery of Input Tax Credit (ITC) Due To Time Limit Under Section 16 (4) of CGST Act, 2017 – A Possible View In Favour of The Department

 –Dr. Ashok Saraf, Senior Advocate

Recently advisories have been issued to the various registered dealers for the inadmissibility/ reversal of input tax credit on the strength of the provisions of sub-section (4) of section 16 of the CGST Act which puts a restriction on the availing of credit in respect of any invoice or debit note,  if the said registered person has filed the GSTR 3B return in respect of the tax periods July 2017 to March 2018 after 30.04.2019 and/ or the tax periods April 2018 to March 2019 after 20.10.2019 respectively. I have read many articles on the said issue wherein the authors of the articles have expressed their views that such a provision is arbitrary and illegal mainly on the following grounds:

1. That there is no mandate under Section 16 (4) about availing of Input tax Credit in the GSTR 3B within the time limit specified therein.

2. That there is clear conflict between the provisions of Section 16 (1) and Section 16(4) inasmuch as Section 16 (4) being a non obstante provision, Section 16 (4) cannot be enforced when the same is in conflict with Section 16(1).

3. That the due date of filing of Return u/s. 39 for the month of September of the year following the financial year to which it relates was never notified and the taxpayer carried a bona fide belief while complying the said provision.

4. That demands based on the strength of retrospective amendment of Rule 61(5) which is triggering Section 16(4) and making it a harshly provision is the most barbaric allegation and needs to be read down.

5. That delay in filing is subject to late fees in terms of Section 47 and taxpayer cannot be penalized again manifold for the sole reason of delay in filing of return or any other form.

 I have carefully read the articles and the points raised therein are in support of the tax payers. No doubt the arguments put forth in support of the tax payers, on a plain reading, appears to be very attractive but one cannot say that the department has got no case and/ or the advisories issued to the various registered dealers for the inadmissibility of input tax credit on the strength of the provisions of sub-section (4) of section 16 of the CGST Act which puts a restriction on the conditions for taking any credit in respect of any invoice or debit note are unconstitutional and arbitrary.

 Section 16 of the CGST Act, 2017 deals with the eligibility and conditions for taking input tax credit. Sub-section (1) of section 16 of the Act provides that every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person. Sub-section (2) of section 16 of the Act provides the conditions to be fulfilled before a registered dealer is entitled to credit of any input tax in respect of any supply of goods or services or both. Sub-section (3) of section 16 also provides for a situation where input tax credit shall not be allowed where a registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961. Sub-section (4) of section 16 which is in conformity provides that a registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.

A conjoint reading of sub-section (1), (2), (3) and (4) of section 16 of the CGST Act, 2017 clearly reveals that sub-section (1) entitles a tax payer to take credit of input tax subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49. As such, the input tax credit shall be available to a tax payer only when he fulfils the conditions laid down therein and does not fall in the restrictions prescribed and the same has to be availed in the manner as prescribed in section 49. Sub-section (2) is clearly a non-obstante provision to sub-section (1) and provides for a situation when a registered dealer shall not be entitled to any tax credit in respect of the supply of goods or services. Sub-section (3) also puts restriction on the availment of input tax credit under a particular situation. Sub-section (4) also puts a condition to be entitled to take credit of input tax and the same is that a registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.

The question which arises for consideration is as to whether the provisions of section 16 (4) is contrary to the provisions of section 16 (1) and as to whether the said provision is so arbitrary and harsh that the same should not be given effect to or in other words, the same is arbitrary, illegal and unconstitutional.

It is a well settled law by now, by various judicial pronouncements, that input tax credit is in the nature of benefit/ concession extended to a dealer under statutory scheme and the said concession can be received by the beneficiary as per the scheme of the Statute. The Apex Court in ALD Automotive Pvt. Ltd. vs. Commercial Tax Officer, (2019) 13 SCC 255, clearly laid down that if the statute provides and stipulates conditions for availment of input tax credit, that credit of input tax is not an absolute but a restricted or conditional right and is subject to the fulfilment of conditions as laid down in the said statute.

Sub-section (4) of Section 16 cannot be read in isolation and has to be read along with sub-section (1), (2) and (3) of Section 16 of the Act. In Kailash Chandra Vs. Mukundi Lal, (2002) 2 SCC 678, the Apex Court held as under:

“A provision in the statute is not to be read in isolation. It has to be read with other related provisions in the Act itself, more particularly, when the subject matter dealt with in different sections or parts of the same statute in the same or similar in nature”

As to when the input tax credit is to be allowed and when it is to be disallowed, is clearly elaborated in Section 16 of the CGST Act, which is a self contained scheme and the benefit of ITC can be claimed when the conditions enumerated in Section 16 are fulfilled. The Apex Court in Godrej & Boyce Mfg. Co. (P) Ltd. Vs CST, (1992) 3 SCC 624 while examining the question as to whether the Rule making authority can provide the curtailment of the benefit of concession to a dealer by way of input tax credit, held as under:

“We fail to understand how a valid grievance can be made in respect of such deduction when the very extension of the benefit of set-off is itself a boon or a concession. It was open to the rule-making authority to provide for a small abridgement or curtailment while extending a concession. Viewed from this angle, the argument that providing for such deduction amounts to levy of tax either on purchases of raw material effected outside the State or on sale of manufactured goods effected outside the State of Maharashtra appears to be beside the point and is unacceptable. So is the argument about apportioning the sale-price with reference to the proportion in which raw material was purchased within and outside the State.”

Again in India Agencies Vs CCT, (2005) 2 SCC 129, the Apex Court was examining the provisions of Rule 6(b)(ii) of the Central Sales Tax (Karnataka) Rules, 1957 which required furnishing of original Form C to claim concessional rate of tax under Section 8(1), the Court held that the requirement under the Rule is mandatory and without producing the specified documents, the dealers cannot claim the benefits.

In State of Karnataka Vs M.K. Agro Tech (P) Ltd, (2017) 16 SCC 210 the Apex Court held that taxing statutes are to be interpreted literally and further it is in the domain of the legislature as to how much tax credit is to be given and under what circumstances.

It is a trite law that whenever concession is given by a statute, the conditions thereof are to be strictly complied with in order to avail such concession. It is not the right of the dealers to get the benefit of input tax credit but it is a concession granted by virtue of Section 16 of the Act. As a fortiori, conditions specified in Section 16 including sub-section (4) must be fulfilled.

Another issue which requires examination is as to whether sub-section (4) of Section 16 can be held to be directory so that non-compliance of the said provision cannot be a ground for denial of input tax credit. The conditions under which input tax credit is to be given are enumerated in Section 16 of the Act. The conditions under which the concession and benefit is given is always to be strictly construed. If it is accepted that the registered dealer shall be entitled to input tax credit even after the due date of furnishing of return under Section 39, it shall make the provision of Section 16 too flexible and shall give rise to large number of difficulties including verification of input tax credit. The Apex Court in ALD Automotive Private Limited Vs Commercial Tax Officer, (2019) 13 SCC 225 in a similar situation held as under:

“The conditions under which input tax credit is to be given are all enumerated in Section 19 as noticed above. The condition under which the concession and benefit is given is always to be strictly construed. In event, it is accepted that there is no time period for claiming input tax credit as contained in Section 19(11), the provision becomes too flexible and gives rise to large number of difficulties including difficulty in verification of claim of input credit.”

The grant of input tax credit under Section 16 of the Act is a concession or relaxation and nobody can claim it a matter of vested right. It is entirely for the legislature to make a provision and restrict the benefit or concession or relaxation either to a class of persons or even if it extends to all, it can restrict the term or period or limit up to which the concession can be availed of. The provisions of Section 16(4) of the Act appears to be a safeguard against potential misuse of availment of input tax credit and the same cannot be said to be arbitrary and illegal only because  the tax payer cannot avail the benefit of input tax credit for non-fulfilment of the conditions in Section 16(4) of the Act. One has to remember that there is no concept as equity in taxing matters. The classification which has been made between a dealer who has submitted its GSTR 3B return within the time prescribed and one who has not filed GSTR 3B return within the prescribed time, cannot be said to be an arbitrary and unreasonable classification but the said classification appears to be reasonable having nexus with the object sought to be achieved. In my opinion, simply because a person has taken credit of the tax paid when the goods and services or both are received under the valid invoice after passing appropriate entry in the books of account cannot make the tax payer entitled to avail the same if the conditions provided for in the Statute for availing the said input tax credit are not fulfilled. One cannot claim that the input tax credit is unconditional and without any restriction. The right to input tax credit is subject to the conditions and restrictions as provided in Section 16 of the Act and if a dealer has not fulfilled the said conditions including the conditions provided in sub-section (4) of Section 16 of the Act, he cannot be allowed to avail the benefit of input tax credit.

It is a well settled law laid down by the Apex Court including the decision in the case of Kerala Hotel & Restaurant Association Vs State of Kerala, (1990) 77 STC 253 (SC) that though other legislative measures dealing with economic regulation are not outside article 14, it is well recognized that the State enjoys the widest latitude where measures of economic regulation are concerned. The Apex Court held that it is for the State to decide what economic and social policy it should pursue. In view of the larger discretion of the legislature in matter of its preferences of economic and social policies, the Apex Court held that the legislative preference in favour of a particular class cannot be questioned on the ground of lack of legislative wisdom or that the method adopted is not the best or that there were better ways of adjusting the competing interests and claims.

The classification made between a dealer who submitted its return within the prescribed time and one who did not submit its return within the prescribed time cannot be termed as palpably arbitrary and the same has to be left to legislative wisdom to choose the yardstick for classification, in the background of the fiscal policy of the State to promote economic equality as well. It cannot be doubted as held by the Apex Court in Kerala Hotel & Restaurant Association (supra) that if the classification is made with the object of taxing only the economically stronger while leaving out the economically weaker sections of society, that would be a good reason to uphold the classification if it does not otherwise offend any of the accepted norms of valid classification under the equality clause. But one cannot question when the legislature makes a classification between a dealer who fulfills his obligation, i.e., the obligation of submitting the returns within the prescribed time and another who does not submit its return within the specified time as laid down in the Act, inasmuch as the same is a reasonable classification and one cannot say that he has got an accrued right, privilege and obligation as per Section 16 of the Act to avail input tax credit, even though he has not fulfilled the conditions laid down in the said section itself for availing input tax credit. One could have said that the restriction and conditions put in for availing input tax credit to be violative of article 14 of the Constitution if the same are subsequently incorporated in the Act and before such incorporation there was no condition restricting for availing input tax credit and a dealer had acquired a accrued right to claim the same under the existing provisions of the Act.

In my view, if the provisions of Section 16 of the Act itself stipulates conditions for availment of input tax credit, the availment of the said input tax credit is not absolute but a restricted or conditional right and is subject to the fulfillment of conditions as laid down in the said statute and one cannot claim that he has a vested right to claim the concession and benefit of input tax credit even without the fulfillment of the conditions laid down in the statute for claiming the said benefit of input tax credit.

Some authors are of the view that Section 19 (g) is violative of Article 19 (1) (g) of the Constitution of India. Article 19(1)(a) to (g) gives certain freedoms to every citizen. This Article confers various rights to the citizens of the country including the right to practice any profession or to carry on any occupation, trade or business. But sub-section (2) to (6) of the said Article empowers the State Government to make law putting reasonable restrictions. Article 19(6) relates to the power of the State to put restrictions to practice any profession or to carry on any trade or business or occupation: However, this restriction must be reasonable and in the interest of “the general public”. This expression occurs in both clauses (5) and (6). The expression “General Public” may however be sometimes used only with a limited person or group of persons. A legislation may be “in the interests of the general public’‘, even though it affects the interests of a particular individual, or even causes hardship to particular individual or group of persons, owing to the peculiar conditions in which they are placed. This freedom only means that every citizen has right to choose his own employment or to take up any trade subject only to the limits as may be imposed by the State in the interest of public welfare and on the ground mentioned in clause (6). In our Constitution, every citizen has the right to engage in any business which is known to the common law, as of right, and the State has the power to regulate or restrict any business on the grounds specified in clause (6). There are certain activities which are so inherently pernicious that nobody can be considered to have fundamental right to carry them on as a trade or business. Under Article 19 1 (g) the State has the power to impose certain restrictions in the interest of “general public’‘. The expression of” in the interest of general public’‘ is wide enough and may include within its ambit the interests of public health and morals, economic stability of the country, equitable distribution of essential commodities at fair prices, maintenance of purity in public life, prevention of fraud improvement of the conditions of farmers or working class and also implementation of the provisions contained in Part-IV of the Constitution, and smooth realisation of tax. For a welfare State collection of taxes is an important aspect in the governance of a country. With tax, welfare activities are carried on, therefore, the State is required to see that tax is realised so that such tax can be utilised in the welfare activities of the State. While doing so, it has also the right to see that the authorities, who are responsible to collect tax is realising it efficiently without fail. The State should also to make endeavour to prevent tax evasion. If the payment of tax is evaded the State Government will not be able to carry out its activities and thereby the developmental works of the State is halted. In order to realise tax effectively, the State may pass orders imposing obligation on any person carrying on business and such restriction cannot be said to be unreasonable. In the State of Madras vs. VG Row, AIR 1952 SC 196 (Supra) the Supreme Court held that the test of reasonableness, wherever prescribed, should be applied to each individual statute impugned and no abstract standard, or general pattern, of reasonableness can be laid down as applicable to all cases. The nature of the right alleged to have been infringed, the underlying purpose of the restrictions imposed, the extent and urgency of the evil sought to be remedied thereby, the disproportion of the imposition, the prevailing conditions at the time should enter into the judicial verdict. In evaluating such elusive factors and forming their own conception of what is reasonable, in all the circumstances of a given case, it is inevitable that the social philosophy and the scale of values of the judges participating in the decision should play an important part, and the limit to their interference with legislative judgment in such cases can only be dictated by their sense of responsibility and self restraint and the sobering reflection that the Constitution is meant not only for people of their way of thinking but for all and that the majority of the elected representatives of the people have, in authorising the imposition of the restrictions, considered them to be reasonable. In Md Hanif Quareshi and others vs. State of Bihar, reported in AIR 1958 SC 731 (Supra) while considering the nature of restriction imposed under Article 19(1)(g) read with clause (6), the apex Court observed thus:

“Clause (6) of Art 19 protects a law which imposes in the interest of the general public reasonable restrictions on the exercise of the right conferred by sub-cl (g) of CI (1) of Art. 19. Quite obviously it is left to the Court, in case of dispute, to determine the reasonableness of the restrictions imposed by the law. In determining that question the Court, we conceive, cannot proceed on a general notion of what is reasonable in the abstract or even on a consideration of what is reasonable from the point of view of the person or persons on whom the restrictions are imposed. The right conferred by sub-cl (g) is expressed in general language and if there had been no qualifying provision like cl (6) the right so conferred would have been an absolute one. To the person who has this right any restriction will be irksome and may well be regarded by him as unreasonable. But the question cannot be decided on that basis. What the Court has to do is to consider whether the restrictions imposed are reasonable in the interests of the general public.”

In view of the above, the above provisions of Section 16 (4) cannot be said to be violative of Article 19 (1) (g) of the Constitution of India. Even the same cannot be said to be violative of Article 300 A of the Constitution of India as the said provision of Constitution in my opinion is not applicable in the present case.

In my view one cannot choose one of the provisions of the Act, alleging that the availment of input tax credit though is conditional, but one of the conditions for availmement of the said input tax credit is unconstitutional, arbitrary or excessive. One cannot claim that a provision of the taxing statute is arbitrary and unconstitutional only because the same is harsh for some of the tax payers who have not fulfilled the conditions for availing the benefit of concession, as given by the Legislature. The argument put forward in support of the claim of the dealers who are claiming Input tax credit that though they have not submitted Form GSTR 3B in time on the ground that for non submission of the return in time, interest is charged and again for the same cause, denial of the Input tax credit would amount to penalizing a dealer twice for the same fault, which is violative of the Constitutional provisions. It must be said that charging of interest is compensatory whereas the denial of Input tax credit for non fulfillment of the said conditions laid down in sub- section (4) of Section 16 of the Act is denial of concession of benefit for non fulfillment of the conditions as laid down in the statute and the same cannot be treated to be same.

Though from my heart and mind, I am with the tax payers and I wish that they become entitled to Input tax credit even if there was a delay of submission of GSTR 3B returns, the aforesaid write up is only with a view that challenging the disallowance of Input tax credit or reversal of the same, shall not be easy and shall be a tough task and if the matter goes to the Court, it shall not be an easy proportion to say that the provisions of Section 16 of the Act are arbitrary, unjust and harsh and thereby the input tax credit should be allowed even without fulfillment of the provisions laid down in Section 16 (4) of the Act.

(Dr. Ashok Saraf is Senior Advocate, Gauhati High Court. Dr Saraf was the former Advocate General of Arunachal Pradesh and Former Taxation Advisor to the State of Tripura.)

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9 Comments

  1. Ganapathy Thanthry says:

    Language used in 16(4) to restrict the ITC even in case of legitimate business transaction needs to undergo the litmus test. However, came across a strange case wherein the supplier amended the GSTR1 and filed it after cut-off date. The entire input originally claimed by the assessee now reversed by the GSTIN system. Finding it difficult to understand where the provision says this is applicable even for amendment of GSTR1. Any amendments of returns should replace the original return and deemed to be have been filed at the original date. By what stretch of imagination the GSTIN network concluded that amendments made is new return in entirety and restrict the ITC by reversing the entire ITC originally allowed

  2. yellappa reddy says:

    when the dealer has filed their GSTR3B belatedly for the months of Feb 19 and March 19 i.e. DEC 19, the authority had refused to pay refund claimed by the dealer as per section 16(4) of CGST, is it correct

  3. Shrinidhi Bharadwaj says:

    Dear sir,

    Two things for consideration :
    1) Double tax whammy for the dealer – The person would have paid the tax amount to his supplier once at the time of making payment. Now if the input tax credit is not allowed then he needs to exhume it either by way of making payment or adjusting his credit ledger by making DRC-03.

    We in India give due credit for the taxes paid outside India by way of DTAA’s and other tax treaties and here we are restricting it solely for delay in filing the return. This discourages people to come forward and take GST registration and do the business out of the system where the loss of revenue would affect government adversely.

    This calls for double taxation for the GST registered person for delay in filing.

    2) Unjust Enrichment :  Is it not an unjust enrichment for Government at the cost/expense of the GST registered person. Government is getting late fees and interest for delay in filing the returns, interest is in the manner of compensating for the loss of revenue. They can increase late fees beyond 180 days of delay in filing rather than taking away the whole of input tax credit itself. 
    It is like not giving credit for advance tax paid by the assessee only because the income tax return is not filed belatedly. 

  4. Swapnil S Bugde says:

    I agree with the view taken. The classification is between a dealer filing his returns in the stipulated time and a dealer not able to file it in the stipulated time, and therefore is a very valid and reasonable classification. The idea behind having such a provision is to inculcate a sense of timely compliance, as well as to have some sort of limit on the time for the distribution of tax between Centre and States. This all however, only if the returns had been filed as per law and not what we are doing at the moment. As for the input tax credit, the said claim can be said to be correct and eligible, only when the seller has shown it in his GSTR 1 and has paid the tax on the same within the prescribed limit. In the absence of that, mere claiming it in GSTR 3B has no value.

  5. Ranjan N P says:

    What an exhaustive and explicit advice. This advice focuses importance more on compliance than indulging in interpretation of law on convenience.

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