Flip-side of Seamless Input Tax credit Vis a Vis GSTR-2A

[niranjan gupta]

Introduction:

Goods and Service Tax (GST) was the biggest indirect tax reform in the history of India. The reform mandated integration of entire nation’s diverse tax portfolio into a single taxation system. Goods and Services Tax Network (GSTN) has built Indirect Taxation platform for GST to help taxpayers in India to prepare, file returns, make payments of indirect tax liabilities and do other compliances. It provides IT infrastructure and services to the Central and State Governments, taxpayers and other stakeholders for implementation of the Goods and Services Tax (GST) in India.. Under  GST regime ,  invoice level information details are provided to the system, which results into monthly, quarterly and yearly based compliance. Once, the invoice level information is provided to the system, naturally each entry is to be reconciled between supplier and recipient .This was a big challenge to implement as the crumbling GST network has been in the spotlight from the very beginning. Now, let us discuss in brief the contentious issues under the input tax credit mechanism in  GST.

Tax invoice is a standard format required under the GST system. Sec 31 of the CGST Act 2017 mandates the issuance of an invoice or a bill of supply for every supply of Goods or Services.  Further, the registered person is required to furnish details of Invoices & revised invoices issued in relation to supplies made by him to registered & unregistered persons during a month in GSTR-1. GSTR-1 is a statement of the details of outward supplies (i.e. sales of goods or provision of services) of goods or services or both. The details filed in table of this statement are to be communicated through GSTN portal to the respective recipients of the said supplies for the purpose of matching, reversal and reclaim of input tax credit under Sec 42 of CGST Act, 2017.According to this section , the details of every inward supply furnished in GSTR 2 shall be matched with corresponding details of outward supply furnished in GSTR 1 of the corresponding supplier. . The procedure of reconciliation and matching of GST returns is not new for taxpayers as it was prevalent in the previous VAT and excise regime.  Reconciliation was done through  issuance of respective forms like Form ‘C’, ‘F’ specified under VAT and CST Laws. However, under GST, reconciliation has gained much significance as it is associated with ITC claimed by businesses, which is again regularly monitored by the tax authorities.Now, GST law is asking to reconcile through GSTN portal.

GSTN portal is supposed to be very robust to give correct information to reconcile and business should also have very good IT system to match with GSTN system. This was not an easy task for the Government as well as business community. GSTN is still in its nascent stages and continues to face several challenges. Uninterrupted and seamless chain of input tax credit(hereinafter referred to as, “ITC”) is one of the key features of Goods and Services Tax. ITC is a mechanism to avoid cascading of taxes  In layman language, B2B transaction tax is passed on to recipient and B2C transaction tax is given to the Government. . Any loss of ITC, is the cost to consumers. The most prominent issue  being faced is matching of supply and receipts between supplies and recipients, popularly known as 2A/2B reconciliation.  It means ITC claimed in GSTR- 3B should match with the GSTR-2A/2B statement, which is auto reflection of the supplies been reported by the Supplier in its GSTR-1.

The authority is continuously issuing notices to taxpayers for reconciliation differences between 2A and 3B statements. The Proper Officer is asking taxpayers to reverse the input tax credit availed on the purchases which are not appearing in GSTR-2A statement. This is  one major challenge to address.

Relevant provisions:

Central Goods and Service Tax Act, 2017 (the Act):

Section 16 of the Act:

Eligibility and conditions for taking input tax credit-(relevant portion) 

 (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;

[(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;]

(b) he has received the goods or services or both.

¹[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.]

(c) subject to the provisions of ²[section 41 or section 43A], the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation 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 installments, the registered person shall be entitled to take credit upon receipt of the last lot or instillment:

……………………

              …………………

³[Provided that the registered person shall be entitled to take input tax credit after the due date of furnishing of the return under section 39 for the month of September, 2018 till the due date of furnishing of the return under the said section for the month of March, 2019 in respect of any invoice or invoice relating to such debit note for supply of goods or services or both made during the financial year 2017-18, the details of which have been uploaded by the supplier under sub section (1) of section 37 till the due date for furnishing the details under sub-section (1) of said section for the month of March, 2019.]

Section 41 of the Act:

Claim of input tax credit and provisional acceptance thereof

“(1) 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.

(2) The credit referred to in sub-section (1) shall be utilised only for payment of self-assessed output tax as per the return referred to in the said sub-section”.

CGST Amendment Act, 2018 is notified vide Notification no. 02/2019, dated 29^thJanuary, 2019, wherein some of the relevant provision got notified except section 18 of the CGST Amendment Act, 2018, which states, “Section 43A ‘Procedure for Furnishing return and availing input tax credit’ of CGST Act, 2017”.

For eligibility of credit, there are four conditions as specified in section 16(2) of the Act.

1. The invoice or debit note should be in possession of the recipient.
2. The recipient has received the goods, or services or both, as the case may be.
3. The tax charged by the supplier in the invoice has been deposited by the supplier.
4. The recipient has furnished the returns as specified.

According to newly inserted clause (aa) of sub section  (2) of section 16 of the Act by the Finance Act, 2021, which is still not effective, the details of the invoice or debit note referred to in clause (a) is to be 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. This proposed Section has been amended to provide legal Sanctity to Rule 36(4). Presently as per Rule 36(4) Input Tax Credit can be availed up to 105% of GST paid on inward supplies the details of which are uploaded by Supplier on GSTN Portal and reflected in GSTR 2A of the recipient in a tax period. However, various Writ Petitions have been filed by taxpayers to challenge this condition on one of the grounds that the said condition is imposed through Rules only and is not provided under the CGST/SGST Act.

 With this amendment, which is still to be made effective, the legislature wants that invoice should be reported to the recipient to make ITC eligibility of credit against such invoice to the recipient. In case, the invoice is not reported by the supplier to the recipient, the recipient shall not be eligible to input tax credit against that invoice.

Section 42 of the Act:

Matching, reversal and reclaim of input tax credit

Sub-section (2) of Section of the Act states that the claim of ITC  in respect of invoices or debit notes relating to inward supply that match with the details of corresponding outward supply or with the IGST paid under section 3 of the Customs Tariff Act, 1975  in respect of goods imported by him shall be finally accepted and such acceptance shall be communicated, in such manner as may be prescribed, to the recipient.

Sub-section (3) of section 42 of the Act states that where the ITC claimed by a recipientin respect of an inward supply is in excess of the tax declared by the supplier for the same supply or the outward supply is not declared by the supplier in his valid returns, the discrepancy shall be communicated to both such persons.

Sub-section (5) of Section 42 of the Act states that the amount in respect of which any discrepancy is communicated under sub section (3) and which is not rectified by the supplier in his valid return for the month in which discrepancy is communicated shall be added to the output tax liability of the recipient, andsuch manner as may be prescribed, in his return for the month succeeding the month in which the discrepancy is communicated.

From the above provisions, it can be understood that , there should not be reversal of ITC until matching is done between both the supplier and the recipient of goods/ services. The department is bound by Section 42 itself so as not to automatically reverse ITC.

It can safely be argued that there were no provision under the GST Laws till  the supra mentioned clause (aa) is made effective with regard to matching of invoices for eligibility of input tax credit. It is substantiated that, there is no provision which makes ITC not reflected in GSTR-2A as ineligible nor is it one of the mandatory conditions to avail ITC in terms of Section 16 of the CGST Act till the clause (aa) of sub section  (2) of Section 16 is made effective and section 42 of the Act. As the charge of GST is on the supplier, the authorities need to first proceed against the supplier for recovery of GST before seeking credit reversal at the recipient’s end.

Central Goods and Service Tax Rules:

Rule 36(4) : Restriction on availment of Input Tax Credit

“Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 20 percent of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37.”(Inserted vide Notification No. 49/2019 dated 9^thOctober, 2019)

CBIC vide Notification no. 75/2019- Central tax dated 26^thDecember, 2019, the limit of “20 per cent” has been substituted “10 per cent” “w.e.f. 1st January 2020 onwards.

The said rule has been inserted in reference to Section 43A which has not been effective as of now.

Relevant judgements of various courts and authorities:

1. Gheru Lal Bal Chand Vs. State of Haryana, 2011 (9) TMI 492, Punjab & Haryana High Court

“Once the law defines the registered dealer and tax-paid goods, the assessee, i.e., purchasing dealer, produced the bill issued by the registered dealer then his burden is discharged and he cannot be held responsible or he cannot be forced to go around from pillar to post to collect the material in order to get the rebate. To conclude, no liability can be fastened on the purchasing registered dealer on account of non-payment of tax by the selling registered unless it is fraudulent, or collusion or connivance with the registered selling dealer or its predecessors with the purchasing registered dealer is established”.

2. ON QUEST MERCHANDISING INDIA PVT. LTD., SUVASINI CHARITABLE TRUST, ARISE INDIA LIMITED, VINAYAK TREXIM, K.R. ANAND, APARICI CERAMICA, ARUN JAIN (HUF) , DAMSON TECHNOLOGIES PVT. LTD., SOLVOCHEM, M/S. MEENU TRADING CO., & MAHAN POLYMERS VERSUS GOVERNMENT OF NCT OF DELHI & ORS. & COMMISSIONER OF TRADE & TAXES, DELHI AND ORS. [2017 (10) TMI 1020 - DELHI HIGH COURT]

“It can be safely concluded in the present case that there is a singular failure by the legislature to make a distinction between purchasing dealers who have bona fide transacted with the selling dealer by taking all precautions as required by the DVAT Act and those that have not. Therefore, there was 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 dealers. The latter cannot be expected to do the impossible. It is trite that a law that is not capable of honest compliance will fail in achieving its objective. If it seeks to visit disobedience with disproportionate consequences to a bona fide purchasing dealer, it will become vulnerable to invalidation on the touchstone of Article 14 of the Constitution”.

Further, Special Leave Petition filed by the Revenue against the decision of the Hon'ble High Court has also been dismissed.

3. INDIAN SEAMLESS STEEL AND ALLOYS LTD. VERSUS UNION OF INDIA [2002 (12) TMI 597 - BOMBAY HIGH COURT]

“It is also a well settled principle of law that the law does not compel a man to do that which he cannot possibly do and the said principle is well expressed in legal maxim "lex non cogit ad impossibilia"which is squarely attracted to the facts and circumstances of the present case”.

4. COLLECTOR OF CENTRAL EXCISE, PUNE VERSUS DAI ICHI KARKARIA LTD. [1999 (8) TMI 920 - SUPREME COURT]

“There is no provision in the rules which provides for a reversal of the credit by the excise authorities except where it has been illegally or irregularly taken, in which event it stands cancelled or, if utilized, has to be paid for. We are here really concerned with credit that has been validly taken, and its benefit is available to the manufacturer without any limitation in time or otherwise unless the manufacturer itself chooses not to use the raw material in its excisable product. The credit is, therefore, indefeasible”.

5. M/S. D.Y. BEATHEL ENTERPRISES VERSUS THE STATE TAX OFFICER (DATA CELL) , (INVESTIGATION WING) COMMERCIAL TAX BUILDINGS, TIRUNELVELI. [2021 (3) TMI 1020 - MADRAS HIGH COURT], the court observed:

“In the said press release, it has been mentioned that there shall not be any automatic reversal of input tax credit from the 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 the supplier or the supplier not having adequate assets etc. section 16(1) and (2) of the Tamil nadu Goods and Services Act, 2017, also makes the position clear.

• If the tax had not reached the kitty of the Government, then the liability may have to be eventually borne by one party, either the seller or the buyer. In the case on hand, the respondent does not appear to have taken any recovery action against the seller.

• Charles and his Wife ought to have been examined. They should have been confronted. I do not understand as to why the respondent did not ensure the presence of Charles and his wife Shanthi, in the enquiry.

• Therefore, the impugned orders are quashed and the matters are remitted back to the file of the respondent. Charles and his wife Shanthi will have to be examined as witnesses. Parallelly, the respondent will also initiate recovery action against Charles and his wife Shanthi.”

6. Apex Court Judgement: Arise India Limited , the Court observed: 

• In the erstwhile regime, Supreme Court in the case of  COMMISSIONER OF TRADE AND TAXES DELHI VERSUS ARISE INDIA LIMITED [2018 (1) TMI 555 - SC ORDER] laid 2 important Doctrines as under -
  • Treating both the ‘guilty purchaser’ and the ‘innocent purchaser’ at par is violative of Article 14 of the Constitution ;
  • In the present case, the purchasing dealer is being asked to do the impossible, i.e. to anticipate the selling dealer who will not deposit with the government the tax collected by him from those purchasing dealers and therefore avoid transaction with such selling dealers.
• The Court observed that a law that is not capable of honest compliance will fail in achieving its objective.

The reliance can be put in place on the above mentioned judgements, where it has been held that input tax credit is an indefeasible right and no reconciliation and non-payment by the selling dealer does not constitute ineligibility of ITC and to reverse back the input tax credit.

Following observations/facts for further consideration:

1. Writ petitions challenging the constitutional validity and vires of section 16(2)(c) of the CGST Act, 2017 have also been filed before the Calcutta High Court, 2019 in the case of M/S. LGW INDUSTRIES LTD & ORS., RAJ METAL INDUSTRIES & ANR., VICTORIA GLOBAL & ANR., SURYA ALLOY INDUSTRIES LTD. & ANR., M/S. TASHI AIR PRIVATE LTD. & ANR. VERSUS UNION OF INDIA & ORS. [2021 (4) TMI 280 - CALCUTTA HIGH COURT] and the Delhi High Court in the case of Bharti Telemedia Ltd. Vs. Union Of India WP (C) 6293/2019 whereas, ITC cannot be denied to a buyer of goods or services, if the tax charged in respect of supply of goods or services has not been actually paid to the Government by the supplier of goods or services.

2. Press release no. 62/2018 dated 18.10.2018 which clarifies that “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” inconsonance with the provisions of section 16 of the Act. The apprehension that ITC can be availed only on the basis of reconciliation between FORM GSTR-2A and FORM GSTR-3B conducted before the due date for filing of return in FORM GSTR-3B for the month of September, 2018 is unfounded as the same exercise can be done thereafter also”.

3. In 28^thGST council meeting dated 21^stJuly 2018, it is clearly mentioned that “there shall not be any automatic reversal of input tax credit at the recipient’s end where tax has not been paid by the supplier.The first response of revenue administration in case of default in payment of tax shall be to recover it from seller. In some exceptional circumstances like missing dealer, closure of business by the supplier, recovery of input tax credit from recipient shall be through a due process of service of notice and personal hearing”

4. GST Council approves principles for filing new return design

• Clause (iv) of the Press release issued by GST Council dated 4^thMay, 2018 lays down that there should be no automatic reversal of ITC at the end of the recipient. Reversal of ITC may only take place in exceptional situations like missing supplier, closure of business by supplier or supplier becoming insolvent. The text of the extract of the press release is as below:
  • 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,.

After collective reading of various provisions, case-laws and GST council announcement from time to time, it is very well construed that ITC cannot be denied merely on account of that some of the Invoices have not been furnished or discrepancies by the supplier in its GSTR-1 and accordingly not reflected in GSTR-2A.

The GST department  should understand the system of compliance available as of now in public domain i.e. GSTN portal as well as the business resources available with assesses. An innocent buyer should not be hooked up for status quo which is beyond its control.Going by the above, the taxpayers have a strong legal defense in case of a mismatch between GSTR 2A and GSTR 3B, there should be no automatic reversal of ITC at the end of the recipient, especially when the supplier is traceable.