The supply chain's seamless flow of Input Tax Credit ('ITC') is the basic foundation of GST. Under GST, the credit of tax paid at every stage is available as a set-off for payment of tax at each subsequent stage. The buyer of goods/services is entitled to claim ITC of tax charged by the supplier subject to conditions in terms of Section 16 of Central Goods and Services Tax Act, 2017 ('CGST Act').
The Scheme of GST is such that once the supplier furnishes its outward supply details, the buyer's Form GSTR 2A/2B (which reflects its inward supply details) is auto-populated, basis which the buyer can claim ITC of such invoices as appearing in its Form GSTR 2A/2B. However, many times, sellers do not file Form GSTR-3B and accordingly the tax remains unpaid to the government exchequer. There is no mechanism provided to check the status of payment of tax by the supplier which is a major detriment for genuine recipients since one of the conditions to avail ITC under the GST laws is the payment of the tax by the supplier. Such a situation creates a problem for the recipient of goods or services or both, who have made payment of invoices raised by suppliers which include the applicable tax amount. However, on account of default in the discharge of tax so collected by the suppliers, ITC for such recipients many times gets blocked by jurisdictional authorities. Thus, owing to a lack of mechanism providing information on payment of tax by the supplier, the bonafide recipients facing issues of ITC blockage by department, often take the recourse of directly approaching the courts to avoid lengthy litigation process as per the GST Act.
Also, another problem faced by buyers is in relation to the purchases made from such sellers whose registration would have been canceled suo moto by the Department due to reasons such as non-existence, or non-filing of returns, etc. The Department tends to block ITC of the buyers who have purchased goods from such sellers whose registration has been canceled alleging non-receipt of goods or non-availment of services from such sellers.
The Central Board of Indirect Taxes and Customs ('CBIC') vide press release dated May 4, 2018, provides that no automatic reversal of ITC is required to be done from the buyer on non-payment of tax from the seller. It further provides 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 only be done in exceptional situations like missing dealer, closure of business by the supplier, or no adequate assets of suppliers, etc. The CBIC vide Press Release has although carved out specific exceptions in which tax may be recovered from the buyer, but unfortunately, the Department tends to use these exceptions and put a general perception around all purchases which are made from sellers either who have failed to deposit the tax, or whose registrations have been canceled, as a result of which the genuine buyers are made to suffer. In a way, the Department blocks the ITC in all such so-called exceptional situations, which are rather the only situations in which ITC is blocked.
Such are the cases in which the judiciary has come to the rescue of genuine buyers. The Hon'ble Madras High Court in the matter of the DY Beathel Enterprises1 held that ITC cannot be denied to the buyer without proceeding against its suppliers on account of non-payment of tax to the government exchequer. Further, it has been held that since the Department has argued non-receipt of goods by the Petitioners, it was more necessary that suppliers were examined. In such cases, it is imperative for the Department to examine the seller to correctly identify where misappropriation of tax has happened.
Further, the Hon'ble High Court of Calcutta, in the writ petition of M/s Sanchita Kundu & Anr.2, has remanded the matter to the Department for checking the genuineness of the ITC availed by the Petitioner. A similar ruling was passed by the Hon'ble High Court of Calcutta in the matter of M/s LGW Industries Limited and Others Vs UOI3.
In both the aforesaid decisions, the Hon'ble Court has directed the Department to consider the issue of availability of ITC to the respective Petitioners by considering the documents which they intend to rely on in support of their claim of the genuineness of the transactions in question. The Court also directed the Department to check whether payments along with tax have been made by the Petitioner to the suppliers and whether the purchases were made before or after the cancellation of registration. If it is found that the purchases and transactions in question are genuine and supported by valid documents and such transactions were made before the cancellation of registration, the petitioners shall be given the benefit of the ITC in question.
It is noteworthy to mention that a similar provision existed under the erstwhile VAT regime regarding the non-availability of ITC to buyers due to non-deposit of tax by sellers. Such a situation was dealt by various Courts, passing judgments in favor of the genuine buyers and allowing them ITC of purchases made.
Accordingly, it follows that where the buyers have exercised sheer due diligence at the time of onboarding their suppliers, they cannot be held liable for default on the part of the suppliers. Having said that, it is impossible for the buyers to stretch beyond a point and keep an eye on the activities of the sellers, whether the sellers have filed their returns, or whether they have made the payment of tax, etc.
Hence, in view of the above ruling and discussions, it can be concluded that ITC cannot be blatantly denied to the buyer without proper investigation against its suppliers on account of non-payment of tax to the government exchequer.
The judgments passed by High Courts under GST regime provides ray of hope for the honest and bonafide buyers against the draconian provision on law, which leads to unnecessary harassment by departmental authorities. Though the Government is taking adequate measures to grab culprits who are involved in the practice offake/bogus invoicing, the honest and genuine buyers cannot be made to suffer. As a genuine and prudent buyer, the best that one can do is to check registration certificate of suppliers and appearance of credit in Form GSTR-2A/Form GSTR-2B. It is imperative that the government must bring mechanism so that the honest buyers are not made liable for the default of the sellers.
1. WP (MD) No.2127 of 2021, Order dated February 24, 2021
2. WPA No. 7231 of 2022, Order dated May 5, 2022
3. WPA No. 23512 of 2019, Order dated December 13, 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.