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TMI BlogSupplier insolvent through NCLT and not paid gstX X X X Extracts X X X X X X X X Extracts X X X X ..... Supplier insolvent through NCLT and not paid gst X X X X Extracts X X X X X X X X Extracts X X X X ..... epartment and with your Consultant to sort out this matter. In this situation, where the supplier is declared insolvent and your advance payment is stuck, and the GST department is demanding the reversal of ITC on goods purchased, you can consider the following actions under GST laws: 1. Understanding the Situation: * Supplier's GST Compliance Issues: The fact that the supplier has not filed GSTR-3B and other statutory returns indicates non-compliance, which directly affects your ability to retain Input Tax Credit (ITC) under GST law. * Insolvency: Since the supplier has been declared insolvent by the NCLT (National Company Law Tribunal), their business operations and assets are under insolvency proceedings. This often leads to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mplications in obtaining ITC for the goods supplied by them if they fail to fulfill their GST filing obligations. 2. GST Provision Regarding Reversal of ITC (Section 16 and Rule 37): * Section 16(2)(c) of the CGST Act: This section mandates that ITC cannot be claimed if the supplier has failed to file GST returns for the tax period in which the supply was made. In your case, since the supplier has not filed their GSTR-3B, the GST department is entitled to demand a reversal of the ITC you have claimed on those purchases. * Rule 37 of the CGST Rules: This rule specifically deals with the reversal of ITC when the supplier does not pay the tax or file returns. If the supplier defaults on tax payment or GST filings, the purchaser (you) is r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equired to reverse the ITC claimed on those supplies. 3. Potential Solutions for You: Given the complexities of this situation, you can explore the following avenues: a. Appeal to the GST Department: * Explain the Situation: You can write to the GST authorities explaining that the supplier has been declared insolvent and that the advance payment is stuck, which is outside your control. * Show Insolvency Order: Provide a copy of the NCLT insolvency declaration and any related documents to show that the supplier's financial situation is beyond your control. * Appeal for Relief: Based on the insolvency situation, you can request that the GST reversal be waived or delayed until the insolvency proceedings are settled, or at least pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovide a timeline for the reversal. b. Proceeding with Insolvency Resolution Process: * File a Claim with the Resolution Professional: Since the supplier has entered insolvency proceedings, the Resolution Professional (RP) appointed by the NCLT will manage the assets and liabilities of the company. You can file a claim for the stuck advance payment as an unsecured creditor. * Claim Adjustment: If your claim for the advance payment is accepted during the insolvency process, you might be able to recover part or all of the advance. This could help to offset the financial loss caused by the ITC reversal. c. Request for Temporary Relief or Extension: * Since the supplier's failure to comply with GST returns is due to their insolvency, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... you can request the GST authorities for temporary relief or an extension for the reversal of ITC, contingent on the outcome of the insolvency resolution process. d. Legal Opinion or Professional Assistance: * Consult with a GST consultant or legal professional who specializes in insolvency cases. They can help you navigate the situation with the GST department and provide specific guidance on how to address the reversal of ITC. * You can also seek legal recourse under Section 43A of the CGST Act, which deals with the conditions under which ITC may not be reversed in certain cases, like in insolvency proceedings. 4. Case of Unpaid Advances: * If you have made advance payments to the supplier and goods were never supplied, you could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... potentially seek a refund of the unutilized advance in insolvency proceedings, depending on the progress of the insolvency process. However, this could take time. 5. Conclusion and Steps Forward: * Document the facts regarding the supplier's insolvency and your advance payment. * Communicate with the GST department, explaining the situation, and request relief or extension in the ITC reversal. * File a claim with the insolvency resolution professional for the advance payment. * Consider legal or professional help to explore more options under GST and insolvency laws. Insolvency matters involving GST are complex, and while the law may require the reversal of ITC due to non-compliance by the supplier, the fact that the supplier is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n insolvency proceedings may provide some grounds for seeking relief or a postponement. In cases where the supplier fails to file returns and does not deposit the tax with the exchequer, several case laws and provisions under the GST law can provide clarity on the reversal of Input Tax Credit (ITC) and the consequences for the buyer. Below are some relevant case laws and statutory provisions to consider: Relevant Case Laws: * K.K. Rathi v. Union of India (2019): * Issue: This case dealt with the non-compliance of a supplier in relation to filing returns and payment of tax under GST. The case primarily revolved around the entitlement of ITC to a buyer if the supplier did not comply with the GST obligations. * Ruling: The High Court h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that in the case where the supplier has not filed returns and has failed to deposit tax, the buyer will not be entitled to claim ITC under Section 16(2) of the CGST Act, 2017. The court emphasized that ITC is available only when the supplier has paid the tax and filed returns. * Principle: If the supplier has failed to pay tax to the government or has not filed the necessary GST returns, the buyer is not allowed to claim ITC, as per the provisions of the CGST Act. * State of Gujarat v. I.K. International (2020): * Issue: This case examined whether the ITC could be denied to a buyer if the supplier did not deposit the collected tax with the government. * Ruling: The court upheld the provision that if the supplier does not deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tax with the Exchequer (government) even though it was collected from the buyer, the buyer's claim for ITC would be denied under Section 16(2). * Principle: The court reiterated the importance of tax payment by the supplier to the government as a necessary condition for allowing ITC. Failure to deposit tax by the supplier leads to a reversal of ITC claimed by the buyer. * Union of India v. A.F. Ferguson & Co. (2019): * Issue: This case involved a scenario where the supplier failed to remit tax and file returns, and the buyer had already claimed ITC. * Ruling: The court stated that Section 16(2) of the CGST Act is clear in stating that ITC is not allowed if the supplier has failed to pay the tax to the government, irrespective o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f whether the buyer received the goods and paid the supplier. * Principle: The buyer cannot be allowed to retain ITC in case the supplier has defaulted in paying taxes under the GST Act. * Bharti Airtel Ltd v. GST Department (2020): * Issue: This case involved the situation where a supplier failed to pay the tax but had filed the returns. The department tried to deny ITC to the recipient. * Ruling: The court ruled that even if the returns were filed, the buyer was not entitled to the ITC since the tax had not been deposited with the government. * Principle: The case reaffirmed that ITC is dependent not only on the filing of returns but also on the payment of tax to the government by the supplier. * M/s. Jindal Steel & Power Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Union of India (2021): * Issue: This case involved a scenario where the supplier failed to file GST returns for a particular period, and the buyer had claimed ITC based on the invoices issued by the supplier. * Ruling: The court upheld the ITC reversal on the grounds that the supplier had not filed their returns, and thus, ITC could not be availed under Section 16(2)(c) of the CGST Act, 2017. * Principle: The court reinforced the requirement that the supplier must file returns and pay taxes for the buyer to be eligible to claim ITC. Statutory Provisions under GST: * Section 16(2) of the CGST Act, 2017 - Conditions for availing ITC: * Section 16(2) lays down the conditions under which a buyer can avail ITC. According to Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16(2)(c), ITC cannot be claimed if the supplier has failed to pay the tax to the government, even if the buyer has the invoice. Relevant text of Section 16(2)(c): * * "No ITC shall be available to a registered person unless... the supplier has paid the tax to the Government on the supply." * Rule 37 of the CGST Rules, 2017 - Reversal of ITC: * Rule 37 specifies that ITC claimed by the buyer must be reversed if the supplier fails to pay the tax to the government. The rule requires that if the supplier does not file returns or remit taxes to the government, the buyer must reverse the ITC claimed. Relevant text of Rule 37: * * "Where the supplier of goods or services or both has failed to pay the tax to the Government... the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecipient shall reverse the credit... on such supplies." * Section 43A of the CGST Act, 2017 - Matching of Returns: * This section lays down the concept of matching of returns for the buyer and the supplier. If the supplier has not filed returns or paid taxes, the buyer may be at risk of having their ITC reversed. Conclusion: If the supplier has not filed returns and failed to deposit tax with the exchequer, the GST law mandates the reversal of ITC claimed by the buyer. This is in line with Section 16(2)(c) of the CGST Act, 2017, and Rule 37 of the CGST Rules, 2017. To get out of this situation, the buyer can: * Appeal to the GST authorities explaining the circumstances. * Request temporary relief based on the supplier's insolvenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y or other circumstances.
* Seek to recover the advance payment via insolvency proceedings if applicable.
However, the legal stance under the current framework does not favor allowing ITC if the supplier has failed to fulfill their obligations.
Reply By KALLESHAMURTHY MURTHY:
The Reply:
Sir,
Your client firm must have placed the facts to get remedy before the NCLT before it has passed the order. The department won't let the issue of reversal in terms of Sec. 16 (2) (c). You have to challenge in the Court of Law. X X X X Extracts X X X X X X X X Extracts X X X X
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