[Opinion] Input Tax Credit – A Seamless Maze under GST

Jay Jain – [2023] 156 taxmann.com 660 (Article)

The subject matter of the composition is the all-time debatable and burning topic of GST i.e., Input Tax Credit (‘ITC’). Since, roll out of Good and Services Tax legislation and with the efflux of time, various amendments in the law as well as in the administrative framework has been introduced to cater to the needs of the economic and business environment. One of the centric objectives of GST has been to ensure the seamless flow of credit and to unchain from the effect of cascading and other complexities encountered under the erstwhile laws. However, on exploration of current scenario, various litigative matters denying the ITC has been elevated. So, let us take a sight over various nuances of ITC under GST.

Section 16 of Central Goods and Services Tax Act, 2017 (hereafter referred as CGST Act, 2017) is one of the maximus section, [which spans from ‘every registered person…………till claiming ITC on or before 30th November]’ as it provides numerous aspects and stringent conditions to be satisfied by a registered person to claim ITC. Cognizant to the prior, the Section 155 of the said Act, enunciates that, ‘Where any person claims that he is eligible for ITC under this Act, the burden of proving such claim shall lie on such person’. In legal parlance, claiming of ITC is a ‘Factum Probandum‘, giving rise to the mandatory conditions of Section 16(2).

Recently, various pronouncements has been elaborated on reversal of ITC on account of non-payment of tax by the supplier and time limit for availing ITC. Let us have a focal point on each of the embroiling re materias.

Clause (c) of section 16(2) – 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 ITC admissible in respect of the said supply.

In respect of the re materia certain judicial pronouncements has rolled out as follows-

• In case of M/s D.Y. Beathel Enterprises (recipient), the supplier’s failure to pay taxes led to the recipient being asked to reverse the ITC with interest. The Madras High Court ruled that the buyer should not be required to reverse the ITC, for supplier’s defaults, and action should be taken against the supplier instead.
• Similar matter was debated in case of M/s Pinstar Automotive Private Limited (recipient), wherein Madras High Court emphasized for fulfilling all the necessary conditions to avail ITC. Simultaneously, the primary liability is of the supplier and directing recipient for reversal can be a protective measure for safeguarding revenue’s interest. Even, an appropriate mechanism should be setup for refund or re-availment of ITC to the recipient on payment of tax by supplier to the Government.
• However, vide Finance Act, 2022, section 41 of CGST Act, 2017 was amended w.e.f., from 01 October 2022 directing for reversal of ITC by the recipient, where supplier has not paid the taxes.
• Similar matter was briefed in case of M/s Suncraft Energy Private limited (recipient), demanding reversal of excess ITC claimed, due to non-auto population in Form GSTR 2A owing to non-disclosure of transactions by supplier in Form GSTR 1. Hon’ble Calcutta High Court ruled that reversal demand from recipient can’t be sustained without any investigation on part of supplier, except in case of connivance between recipient and supplier or where supplier is untraceable.
• Recently, Patna High Court in case of M/s Aastha Enterprises held that where supplier has not deposited the tax with the Government, the recipient cannot avail ITC. Even the burden of proof that tax collected by the supplier has been deposited to the Government lies on the recipient. Hence, the recipient is not eligible for such ITC.

One of the latin maxim ‘Impotentia excusat legem‘ (which lays that where any duty or obligation has been vested upon, which is a mandatory part and the party is disabled from performing it without any default on his part, shall be excused in general) certainly manifests the matter, as none of the legislation would require to do something impossible. Aligning with the GST law, yet no mechanism is in place to inform the recipient about the supplier’s unpaid tax. In absence of tracking mechanism, recipient cannot keep tabs on such information. However, with effect from 1st October 2022 the provision for reversal has been plotted down, binding to which genuine taxpayer will also have to reverse the ITC if their supplier defaults in paying taxes to the Government exchequer.

Now, considering the provisions of Section 73 and 74 of CGST Act, 2017, which explicitly grants the authorities a power to initiate legal proceedings against non-compliant parties. Given this conferred authority, in accordance with clause (c) of section 16(2), the supplier should be the initial focus in cases of default. Even, section 76 provides the proper officer to serve show cause notice to the person who as collected tax but not paid the said amount to the Government.

Also, a Press release by CBIC dated 4th May 2018 stated that

‘In case of default in payment of tax by the seller, recovery shall be made from the seller. However, reversal of ITC 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.’

Going through the legislation, it becomes evident that there are numerous provisions and deliverances conferring power to initiate legal actions against the supplier. Considering the same, the genuine taxpayer (recipient) should not face any hardships in form of denial of credit, unless any contrary situation exists.

The taxpayers (recipient) should also take a note of Rule 37A which was inserted vide notification no. 26/2022 dated 26 December 2022, as a preliminary measure to safeguard their interests.

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