GST brought many benefits to the businesses and economy of our country. Among all other benefits, one benefit which was emphasized at the time of its introduction was ‘Seamless flow of credit’. Provision under GST Law has been enacted in such a manner to achieve the said objective. However, there is still a need for clarification or amendment in the law to fulfill the objective of “seamless flow of credit”.

This article is to present a view on the validity of a condition to claiming an input tax credit under GST i.e. section 16(2)(c) of CGST Act, 2017 which is reproduced hereunder:

Section 16(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,––

(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.— For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services––

(i) 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;

(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person;]35

(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: and

(d) he has furnished the return under section 39.

In other words, the Buyer is entitled to claim the input tax credit when the tax paid on purchases made by him is actually paid to the government. In four years of GST Journey, lots of amendments and frequent changes have been made to the GST provisions and its procedures like Government has introduced rule 36(4) under CGST Rules, 2017 which restricts the claim of input tax credit to the extent of 105% of eligible input tax credit appearing in GSTR-2B of a tax period. Further, In Union Budget 2021, a new clause “(aa)” has been introduced in section 16 (2) of CGST Act, 2017 which is reproduced hereunder:

“(aa) The details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37”.

Revenue authorities have initiated to issue notices to taxpayers regarding mismatches between GSTR -2A and ITC claimed in GSTR 3B filed by them. Now, indirectly the burden is on the buyer to prove that tax has been actually paid to the government by the seller.

In the pre-GST regime, the Input tax credit could be claimed on the basis of majorily two conditions that buyer should have received the goods or services or both and he should have possession of valid documents as prescribed under relevant laws. Further in the pre-GST regime, if any such type of condition ever introduced in previous laws then it is criticized by the judiciary. Below mentioned are instances of judicial stands regarding this issue:

Jharkhand High Court decided as under in case of Tarapore & Company Vs. State of Jharkhand dated 17.12.2019

We are satisfied that the petitioner had discharged its liability under the VAT Act, and there being no mechanism under the JVAT Act, by which, the petitioner could compel the seller also to discharge their duty, it was not within the competency of the petitioner to compel the selling dealer to file the return within the stipulated time, and deposit the tax collected from the petitioner in the Government Treasury.

In the backdrop of these facts, we do not intend to enter into the challenge to the vires of Section 18(8) sub-clause (xvii) brought by way of amendment, or into the questions of limitation, or defect in the notice, if any, as we are satisfied that due to the bona fides on part of the petitioner, no punitive action was required to be taken, or warranted against the petitioner.

Delhi High Court in case of Arise India Limited vs. CTT dated 26.10.2017

There is a failure by the legislature to make a distinction between the purchasing dealer who has bonafide transacted with the selling dealer by taking all precautions as required by the DVAT Act and those that have not. Therefore, there was a need to restrict the denial of ITC only to the selling dealers who had failed to deposit the tax collected by them and not punish bona fide purchasing dealer.

Article 14 of the Constitution of India states that “The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.” Restricting the input tax credit to the bonafide buyer due to the fault of the seller, which is not under the control of the buyer and there is no mechanism under present GST law to cross-check such fault, is discriminatory and violative to the provisions of article 14 of the constitution of India.

Suppose, if a buyer Mr. A has made purchases of Rs. 118000/- incl. IGST of Rs. 18000/- from Seller Mr. B in June 2021. However, Mr. B has paid the tax on the same through GSTR-3B but has not disclosed the invoice under GSTR-1. In this case, Tax has been actually paid to the government by the seller but since it will not appear in GSTR -2B and consequently Mr. A cannot claim the credit of such input tax even though the tax has been paid to the government. Notices to reverse such input tax credit if taken are creating double taxation on buyers.

 Delhi High court in the case of Bharti Airtel Limited Vs Union of India has also admitted that the government has failed to fully enforce the scheme of the Act due to lack of technical infrastructure and cannot take benefit of its own wrong of not providing the facility for matching ITC and on account of this statutory right of taxpayers to claim ITC cannot be defeated.

Government intention behind taking the above-mentioned steps, whether restricting the quantum of input tax credit by rule 36(4) or claim of the input tax credit on the basis of GSTR 2A by insertion of new clause (aa) under section 16, is to curb the practice of claim of the input tax credit through fake invoices, which is highly appreciated and really the need of the hour. But putting the entire burden on a buyer without providing them any facility to cross-check whether the supplier has paid the tax or not is unjustified and creating undue hardships to the bonafide buyer who has received goods or services, paid the tax to the seller and having possession of valid document to claim ITC. Recently validity of section 16(2)(c) of the CGST Act challenged cases of M/s Shree Gobind Alloys Pvt. Ltd. Vs. Union of India and others in Orissa High Court dated 05.05.2021 and M/s Surat Mercantile Association Vs. Union of India in Gujarat High court dated 03.12.2020. Hope we will get more clarity and judicial stand on this issue soon.

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September 2021