Section 16 of CGST Act, 2017 marks the genesis of seamless flow of credit in GST regime. It stipulates that every registered person is entitled to take credit of input tax charged on any supply of goods or services or both 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 referred to in section 49(2) of CGST Act, 2017.
The condition attached to such entitlement is also elaborated thereunder which reads as below:-
(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.
(c) subject to the provisions of section 41 or section 43A, 7]the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilization of input tax credit admissible in respect of the said supply; and
(d) 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:
The flow of credit here seems smooth and simple as to fulfill the conditions of eligibility and take the credit, the only small glitch that appears has to be is how to ensure that tax charged has actually paid that to the government?.
To answer this question government brought some phenomenal and never heard before mechanism to make sure that there is no leakage of tax at any stage of supply of goods or services till it reaches its ultimate consumer and the validity of Input Tax Credit remains intact up to the very end.
The very first step towards this was revised system of filing returns and taking input tax credit effect whereby it was ensured that no returns can be filed with an outstanding amount of tax i.e. without payment of taxes.
Next step was introduction of auto drafted Form GSTR – 2A which gets created or regenerated whenever a vendors files their monthly or quarterly return. It is a real time intimation to counter party that tax has been duly paid and reflected in returns by the vendor.
Recent development in this area is launch of Form GSTR-2B w.e.f 12.09.2020 which appears to be an advanced version of previously introduced GSTR-2A. Only difference being that GSTR 2B is a static monthly statement to be generated on 12th of each succeeding month and can help taxpayer in matching of input tax credit periodically due to availability of document wise and supplier wise reports. The new features also include data fetched from the ICEGATE portal in respect of imports and summary of credit that may be reversed & credit that may be not be available to the taxpayers.
In spite of the strong mechanism in place the department unearthed various instances of fraudulent input tax credit on account of issuance of fake invoices, invoices without supply etc.
With a view to curb such cases Rule 86A has been put in place w.e.f 26.12.2019 which empowers Commissioner or Officer authorized in this behalf not below the rank of Assistant Commissioner to restrict the use of input tax credit from electronic credit ledger (“ECL”). An extract of Rule 86 A is reproduced here under:-
“Conditions of use of amount available in electronic credit ledger.-
(1) The Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as :
a) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 –
i) issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or
ii) without receipt of goods or services or both; or
b) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or
c) the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or
d) the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36, may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount.
(2) The Commissioner, or the officer authorised by him under sub-rule (1) may, upon being satisfied that conditions for disallowing debit of electronic credit ledger as above, no longer exist, allow such debit.
(3) Such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.”
Rule 86A does not prescribe any procedure to be followed in such cases of disallowance of credit thus it is unsure whether notice or intimation will be served on taxpayers/vendors prior to blocking or restricting of such input tax credit. Though the phrase used in the rule “reasons to be recorded in writing…….” suggest otherwise which is in contrast to principle of natural justice. Further what will form ‘Reason to believe’ in such cases has not been listed thus a window has been opened for undue hardship on taxpayers who have already disbursed amount of tax to such vendors.
Although theoretically this rule seems like a genuine step to block credit in respect of dummy firms not in existence and credit concerning cases where there is no receipt of goods/services or where taxes are not paid but in practice it is an adversity on taxpayers who will suffer on account of acts of omission and commission done by its vendors. Ultimately if the issue between respective vendor and department is not resolved before one year from date of invoice the credit of honest taxpayers will lapse in view of Section 18(2) of CGST Act.
To address this issue a new facility “Know Your Supplier” is proposed to enable every registered person to obtain basic information about the vendor and their track record in respect of compliances of GST. This will help taxpayers to take an informed decision on whether or not to do business with a particular vendor and thus act as a safeguard from nuisance of Rule 86A.
There is no doubt that “Know Your Supplier “scheme is a welcome step but still the right way would be to punish the one who does not comply with the law and not the taxpayers. In terms of Section 16, the input tax credit is a legal right of taxpayers once the prescribed condition are fulfilled and therefore curtailment of such right by way of a Rule goes against spirit of law wherein there is no provision to restrict or block the use of credit available in electronic credit ledger. Thus Rule 86A is ultra vires to Section 16 of the CGST Act, 2017.
To put in simple words the gateway to deal with instances of dummy firms has to be routed only through Section 74 and Section 76 of the CGST Act, 2017.