GST: Input Tax Credit and its challenges faced by taxpayers

CA. Parth Nagda

Goods and Services Tax (‘GST’) was brought in as a revolutionary change in the indirect tax regime. The rationale behind the implementation of GST is to bring more transparency to the system and to avoid cascading effect of taxes and seamless flow of Input Tax Credit (‘ITC’). India has reached the fourth year of implementation of GST and it can be seen that a lot of difficulties are being faced by the taxpayers including professionals. 

One of the major quandaries under GST is the process of matching and reconciliation of ITC claimed in GSTR-3B (i.e., self-declared tax summary) with data reflecting in the auto-generated GSTR-2A. At one part, the GST Law encourages the seamless flow of ITC and whereas on the other part the Government/Department is making efforts to break this chain by being vigilant and issuing notices for mismatches of ITC to taxpayers. Recently, a large number of taxpayers have received notices under Form GST ASMT-10 in case of mismatch between ITC claimed in GSTR-3B and auto-populated ITC reflected in GSTR-2A wherein they are asked to rectify the discrepancy otherwise proceedings would be initiated against them to pay the differential amount with interest and also may be subject to penal action.

This article tries to throw some light on the legal aspect/remedies that need to be taken care of by the taxpayers who are facing genuine hardships from the issue of notices from the Department. Let us analyze the legal positions and bring out the possible resolutions for the difficulties faced by the taxpayers.

Denial of ITC merely on the ground of mismatch between ITC claimed in GSTR-3B and reflected in GSTR-2A?

GSTR-3B is the self-declared tax summary to be mandatorily filed by the taxpayer on a monthly basis providing the summary of tax paid on outward supplies and ITC claimed on inward supplies.

GSTR-2A is a purchase-related dynamic tax return that is automatically generated by the GSTN portal for each recipient. When a seller files his GSTR-1, the information gets auto-populated in the recipient’s GSTR-2A. It takes the information of goods and/or services that have been purchased in a given month from the seller's GSTR-1.

In the early stages of GST enactment, the recipient in order to claim ITC was supposed to file invoice wise purchases along with related ITC in GSTR-2 by accepting, rejecting, modifying the details of ITC auto-populated in its GSTR-2A as per Section 42 of the Central Goods and Services Tax Act (‘CGST Act’). Section 42 of the CGST Act provides the mechanism for matching, reversal, and reclaim of ITC.  As per the mechanism specified under Section 42(2), the ITC claimed by the recipient is required to be matched with the invoices uploaded by the supplier and the ITC claimed is to be allowed to the extent the same matches or is lower than the amount reported by the supplier. 

Per Section 42(3) discrepancies, if any, are required to be communicated by the GST authorities through the common portal to both the supplier and the recipient and subsequently, in case the supplier fails to accept the same, the ITC so allowed earlier will be disallowed and the recipient will have to pay the same along with interest. However, the Government has temporarily suspended the process of uploading GSTR-2 and GSTR-3 from August 2017 till further notice, and that no further notifications/directions have been issued to override the procedure mandated under Section 42(3) of the CGST Act.

Thus, it can be inferred that the notice issued by the department for any demand of ITC along with interest and penalty is premature in so far as it seeks to recover amounts from the recipient before the filing of FORM GSTR-3, in a case where FORM GSTR 2 and FORM GSTR 3 are not even operational.

Supplier erred in not uploading/delay in filing/incorrectly filing returns

  1. Section 16(2)(c) read with Section 41 and Section 43A:

As per Section 16(2)(c) of the CGST Act, credit can be availed subject to payment of tax by vendor, the extract of the relevant provision is as under:

Subject to Section 41 and 43A of CSGT Act 2017, 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.

Section 16(2)(c) is subject to Section 41 and Section 43A. Section 41 of the CGST Act provides for provisional availment of credit and Section 43A provides for the procedure of availment of credit in a prescribed manner. The extract of Section 41 is as under:

Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to take the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited on a provisional basis to his electronic credit ledger.”

As per Section 41 of the CGST Act, every registered person shall subject to such conditions and restrictions as may be prescribed, be entitled to take the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited on a provisional basis to his electronic credit ledger. However, since the process of uploading of data in GSTR-2 has been suspended the process envisaged under Section 41 is not practically possible. Further, section 43A of the CGST Act is not yet notified to be effective.

  1. Denial of ITC on the default of the supplier is in violation of Article 14 of the Constitution

Section 16(2)(c) of the CGST Act treats the recipient as a defaulter and on the same footing as defaulting supplier, Section 16(2)(c) is totally in contradiction with the mandate contained under Article 14 of the Constitution of India which inter alia provides that the equals are to be treated equally, but also lays down that the unequal should not be treated equally. 

A similar stance was taken by the Delhi High Court in the case of Arise India Limited v CTT., 2017 (10) TMI 1020 under Delhi VAT Law wherein, the Court held that ITC cannot be denied to a bonafide and diligent purchaser where the seller did not deposit tax in the Government account. The Court also accepted the petitioner’s contention that such a provision is in violation of Article 14 of the Constitution in as much as it treats both ‘guilty purchaser and the innocent purchaser’ at par.

  1. CBIC Press Release dt. 18.10.2018 clarifies that GSTR-2A is for taxpayer facilitation:

Furnishing of outward details in FORM GSTR-1 by the corresponding supplier(s) and the facility to view the same in FORM GSTR-2A by the recipient is in the nature of taxpayer facilitation and does not impact the ability of the taxpayer to avail ITC on self-assessment basis.”

  1. CBIC Press Release dt. 04.05.2018 clarifies that no automatic reversal w/o recovery from seller:

(iv) No automatic reversal of credit: There shall not be any automatic reversal of input tax credit from buyer on non-payment of tax by the seller. In case of default in payment of tax by the seller, recovery shall be made from the seller however reversal of credit 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.

Recovery proceedings cannot be initiated against the recipient without first exhausting all remedies against the defaulting supplier and that there are various precedents rulings delivered in the context of VAT, which have a persuasive value even today.

A similar stance was taken by the Chhattisgarh High Court in the case of M/s Bharat Aluminium Company Limited vs Union of India and Others (2021) wherein the High Court has granted relief to BALCO by staying order that denied ITC. The petitioner in this case recalled a decision by the GST Council in its 27th meeting on 04.05.2018 which said that there should be no automatic reversal of credit to the recipient without initiating the recovery proceedings from the supplier. The petitioner also argued that recovery from the buyer on the basis of mismatch can be made only in exceptional situations and relying on the proposition laid down by the Madras High Court in DY Beathel Enterprises vs. State Tax Officer (2021), it was also argued that the input tax credit, claimed by the petitioner cannot be denied for the reason that the seller has not uploaded their invoices on time.

  1. Lex Non Cogit Ad Impossibilia – The taxpayer cannot be compelled to do the impossible

The eligibility and conditions for taking input tax credit are provided under Section 16 of the CGST Act. Section 16(1) states that every registered person is entitled to take credit of input tax charged on inward supplies which are used/intended to be used in the course or furtherance of his business subject to such conditions and restrictions as may be prescribed. Whereas Section 16(2) provides that notwithstanding anything contained in section 16, 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 he is in the possession of tax invoice, received the goods/services, tax has been paid by the vendor to the Government and recipient has furnished return u/s 39.

There should be no obligation cast upon the recipient to pay the liability on account of non-payment of tax by the supplier/vendor to the kitty of the Government unless it is fraudulent, or collusion or connivance with the supplier is established. And thereby it should not be made the responsibility of the recipient to ensure that the tax is deposited by the supplier to the extent transaction is bonafide.

When the recipient has satisfied all the eligibility conditions, the fault of its supplier should not be made as a burden on the recipient to prove his eligibility to claim the credit. Here comes into the picture the principle of Lex Non Cogit Ad Impossibilia i.e. ‘The law does not compel a man to do that which he cannot possibly perform’. Where the law creates a duty or charge and the party is incapacitated to perform it, without any default in him and has no remedy over it, there the law will in general excuse him.

Constitutional validity of Rule 36(4) is questioned

Rule 36(4) was inserted into CGST Rules vide Notification no. 49/2019-Central Tax w.e.f. 9th October 2019 and is applicable on the invoices on which credit is availed after the said date. This amendment in Rule 36 has resulted in mandatory reconciliation of inward supply invoices with GSTR-2A.

Presently as per Rule 36(4) ITC can be availed up to 5% of eligible credit available in respect of invoices or debit notes the details of which have been furnished by the suppliers in GSTR-1 and reflected in GSTR-2A of the recipient in a tax period.

The question that arises as to whether Rule 36(4) is ultra-vires the Statute and that there has to be an enabling section in the Statute for the purpose of making the Rule. Various Writ Petitions have been filed by taxpayers to challenge the condition prescribed under Rule 36(4) on one of the grounds that the said condition is imposed through Rules only and is not provided under the CGST/SGST Act. 

Even clause (aa) of Section 16 (2) of the CGST Act is yet to come into effect. Section 16(2) of the CGST Act provides the conditions to avail the ITC. A new condition is inserted under said Section vide Finance Act 2021, reproduced as under:

(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.

What Taxpayers can do?

In cases where the taxpayer (buyer) has genuinely purchased the goods but either the tax is not deposited by the seller (intentionally or unintentionally), or it is due to some other technical or non-technical reasons not getting reflected in GSTR-2A then in those cases going forward the buyer must ensure to verify the validity of GST Registration number of the seller and obtain GST registration certificate before entering into an agreement with the seller.

At this stage, since the GSTN portal is not offering the required means of filing GSTR-2, the recipient should start using GSTR-2A as a measure to ensure that the ITC claimed in its GSTR-3B is reconciled with the invoices uploaded by its supplier in their GSTR-1. This exercise should be done on a monthly and annual basis both of which will help the recipient to validate the credits claimed by them while filing GSTR-3B and will have a check as to whether its suppliers are compliant under the GST Law or not. Though this exercise will consume cost and a lot of time, it will save the recipient business from substantial losses of eligible credit at a later stage along with interest thereon and the time and cost involved in departmental proceedings later on.

Disclaimer: The views/opinions expressed in the articles are purely of the writers. The readers are requested to take proper professional guidance before abiding the views expressed in the articles. The publisher, the editor and the association disclaim any liability in connection with the use of the information mentioned in the articles.

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