Seamless Flow of Input Tax Credit (ITC) in letter and Seamless Block of Input Tax Credit in Practice

The Executive Summary (Report of Task Force on Implementation of GST dated 30th December 2009, paragraph 2.16 reads as follows:

vii. The Computation of the CGST and SGST liability should be based on the invoice credit method i.e., allow credit for tax paid on all intermediate goods or services on the basis of the invoices issued by the supplier.  …………”

The Model GST Law published by the Empowered Committee of State Finance Ministers in June 2016, Section 16 (1) read thus:

“Every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in Section 35, be entitled to take credit of input tax admissible to him and the said amount shall be credited to the electronic credit ledger of such person.”

Every stakeholder thought at that time, that once the purchasing dealer is in possession of a Tax Invoice issued by a Registered Person, with the tax component separately mentioned in the Tax Invoice, the Input Tax Credit will automatically flow to the purchasing dealer.

When the GST Act was introduced, to be effective from 1st July 2017, several sub-sections were introduced as 16(2) to 16(4).

Eligibility and conditions for taking input tax credit:

(1) 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.

 (2) 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,––

1. 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;

2. he has received the goods or services or both

3. Explanation.- For the purposes of this clause, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

4. 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 utilisation of input tax credit admissible in respect of the said supply; and he has furnished the return under section 39:

Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:

Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:

(3) Where the 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, the input tax credit on the said tax component shall not be allowed.

(4) 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.

It is evident from the introduction of Sections 16(2) to 16(4) that the intention was to curtail the enjoyment of Input Tax Credit by the purchasing dealer.

Especially, Section 16(4) is draconian in nature. The burden of payment of Tax collected by the selling dealer has been thrust upon the purchasing dealer and the purchasing dealer also has the duty to confirm that he has filed his GSTR 1, GSTR 3B promptly.

On the basis of the provisions of Section 16 of the Act and the words contained in Sec. 16(1) of the Act, viz., “subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49”, numerous provisions were embedded into the GST Rules, which, to the utter dismay of a dealer, deny the legitimate Input Tax Credit of the purchasing dealer.

First of all, vide Notification No. 49/2019 dated 09-10-2019, Sub Rule (4) to Rule 36 was introduced thus:

“(4) Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 20 per cent of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37.” 

The said restriction was later tightened as “not to exceed 5 per cent of the eligible credit.”

For the fault of the Selling dealer, the purchasing dealer, who paid the tax against a valid Tax Invoice issued by the selling dealer, is denied the legitimate Input Tax Credit due to him.

Vide Notification No. 94/2020 dated 22nd December 2020, Rule 86B was introduced thus:

86B. Restrictions on use of amount available in electronic credit ledger:- Notwithstanding anything contained in these rules, the registered person shall not use the amount available in electronic credit ledger to discharge his liability towards output tax in excess of ninety-nine per cent. of such tax liability, in cases where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees:

By the Rule 86B, even if the purchasing dealer has sufficient and more credit in his Electronic Credit Ledger, he has to pay 1% of the Input Tax available to him in cash, in effect, unnecessarily enhancing the Electronic Credit Ledger balance.

It is pointed out that Rule 86B applies only to registered persons having more than Rs. 50 lakhs per month.  Lakhs of such dealers, who fall under such category, working on very minimum margin, varying from 1% to 3%, area forced to once again invest on making payment of Tax, which has already been paid by them.

For availing the Input Tax Credit, the matching of Invoices received by the Purchasing Dealer with the Forms 2A and 2B, provided by the GST Portal, is a must, which adds to the burden of compliance of the purchasing dealer.

It is claimed that all these amendments to Act and Rules have been brought in to arrest the availment of Input Tax Credit by fraudulent and fictitious persons and entities.  It should be borne in mind that all these alleged fictitious and fraudulent persons and entities are registered with GST Department.  For the fraudulent activities of a few hundreds, millions of law-abiding and genuine assessees are denied their legitimate Input Tax Credit and are put to undue harassments. Instead of confirming the authenticity of the applicants, before granting registration, the poor genuine dealers are put to trouble unnecessarily.  It is like a cat being let lose by its owner and asking the neighbours to run behind the cat which has run away with the cake; the poor neighbours who do not even know the identity of the cat have to catch hold of it, if they need a peaceful sleep.

P. Venkitarama Iyer

The blocking of funds of genuine dealers, by denying their legitimate Input Tax Credit, may it be in the pretext of curtailing fraudulent activities, is against the basic conceept of GST and natural justice.

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One Comment

  1. Om Prakash Jain says:

    S.16(2), CGST Act starts with notwithstanding clause meaning thereby that it supersedes sub-section 4 of section 16, based on the following cases;
    (2021) 35 J.K.Jain’s GST & VR Government of Kerala & Anr. v. Mother Superior Adoration 402, (2020) 33 J.K.Jain’s GST & VR 9 Synergy Fertichem Pvt. Ltd. v. State of Gujarat (Guj), A.C.T.O. v. Laxmi Misthan Bhandar (Raj) (1989) 74 STC 260, Central Bank of India v. State of Kerala (2009) 4 SCC 9 (SC), Skill Lotto Solutions Pvt. Ltd. v. Union of India & Ors. (2021) 35 J.K.Jain’s GST & VR 167 (SC).
    Beyond this, no more conditions can be put under GST Act by framing rules &/or otherwise.
    ITC is a vested property right under Article 300A, Constitution of India per recent judgment in Union of India & Ors. v. Adfert Technologies Pvt. Ltd. (2020) 33 J.K.Jain’s GST & VR 147 (SC). Previously also, ITC/CENVAT Credit was held to be a vested right, which can not be allowed to be lapsed vide case law─(1999) 106 ELT 3 Eicher Motors Ltd. v. Union of India(SC), (2019) 32 J.K.Jain’s GST & VR 267 Siddharth Enterprises v. The Nodal Officer & Ors. (Guj)*.
    *The review petition filed by the Govt. has been dismissed by the Gujarat High court (2020) 33 J.K.Jain’s GST & VR 160 Nodal Officer & Ors. v. Siddharth Enterprises (Guj)
    The Hon’ble Supreme Court held that “every taxing statue including, charging, computation and exemption clause (at the threshold stage) should be interpreted strictly per SC case (2018) 30 J.K.Jain’s GST & VR 105 Commissioner of Customs v. Dilip Kumar and Company & as per SC case (2017) 28 J.K.Jain’s GST & VR 162 State of Karnataka v. M.K. Agro Tech Pvt. Ltd.. It is settled proposition of law that taxing statutes are to be interpreted literally and nothing could be added to what is stated in the itself per SC case (2011) 16 J.K.Jain’s Vat Reporter 120 Eureka Forbes Limited v. State of Bihar and Ors..
    The court only interprets the law within the four corners of the Act and cannot legislate it under the disguise of interpretation.
    Sub-clause (d) of section 16 stipulates “furnishing of return u/s 39 for entitlement of ITC”. This clause nowhere mentions “timely submission of returns and/or debarring rectification statute of any return belatedly, for being entitled to avail ITC. The “notwithstanding clause”, in the section 16(2) means that it supersedes all the sub-sections of section 16 including sub-section (4). As such, in our view, if a registered person has furnished returns &/or rectified any return belatedly, he is entitled to ITC and his vested right per SC Case (1999) 106 ELT 3 Eicher Motors Ltd. v. Union of India Can not be withdrawn.
    The SLP filed by the Govt. against the decision of High Court of Punjab and Haryana in the case of Adfert Technologies Pvt. Ltd. (2019) 32 J.K.Jain’s GST & VR 485 has been dismissed by the Hon’ble Supreme court on 28.2.2020 (2020) 33 J.K.Jain’s GST & VR 147, making the following ratio decidendi of P&H High Court as Final & binding on the lower courts
    “The right to carry forward the Unutilized credit has been recognized as vested right and property in terms of Article 300A of the Constitution of India”.
    Moreover, the Govt. has no legal authority to retain the amount of credit to which the respondent is entitled to and retention of it by the Govt., cannot be sustained, being violative of Article 265 of the Constitution of India Per Gujarat HC case of Jakap Metind Pvt. Ltd. v. Union of India & Ors. (2019) 32 J.K.Jain’s GST & VR 473 (Guj).
    CA Om Prakash Jain, Jaipur, 9414300730. 0141-3584043

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June 2021