Input tax credit availability where ITC is not reflected in GSTR-2A or where the supplier has not deposited GST
One of the major worries occupying taxpayers’ mind these days is the availability of Input Tax Credit (‘ITC’) where ITC is not reflected in GSTR-2A or where the supplier has not deposited GST in the government account.
In this update, we will discuss the legal position around the eligibility of ITC in the aforesaid situations.
Reversal of ITC where ITC not reflected in GSTR-2A
Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) provides that the recipient is not entitled to take ITC if the supplier has not deposited GST in the Government account. This condition is subject to Section 41 of the CGST Act which provides that a recipient can take self-assessed ITC on provisional basis. Section 42 and 43 of the CGST Act provides for matching of the outward tax declared by the supplier in its GSTR-1 with ITC taken by recipient in its GSTR-2 for validating provisional ITC.
The government has kept the mechanism of matching of ITC in GSTR-1 of the supplier vis-à-vis GSTR-2 of the recipient in abeyance since inception of GST. Consequently, there is no mechanism for the recipient to know whether the supplier has deposited GST in the government account or not.
Presently, the taxpayers are receiving notices demanding matching of ITC availed in GSTR-2A and GSTR-3B. The anxiety of taxpayers is multiplied by the fact that the Annual Return (Form GSTR-9) to be filed, mandates taxpayers to specifically state ITC that shall lapse due to mismatch between GSTR-2A and GSTR-3B.
Under GST law, there is no provision which makes ITC not reflected in GSTR-2A as ineligible nor it is one of the mandatory conditions to avail ITC in terms of Section 16 of the CGST Act. Hence, the taxpayers can contest the departmental notices on the ground that no ITC reversal is warranted in such cases and the same is ultra-vires the GST law.
Further, no time limit is prescribed for the enjoyment of provisional credit taken by the recipient under Section 41. As Section 16(2)(c) is subject to Section 41, the department cannot invoke the same to seek reversal of credit. 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.
ITC eligibility where the supplier has not deposited GST
The next important question that arises for consideration is whether a recipient is obligated to reverse ITC where the supplier has not deposited GST in the government account.
It is notable that the provisions similar to Section 16(2)(c) of the CGST Act were existent in several VAT laws as well and came up for consideration before the Courts in various cases.
In the case of Arise India Limited v. CTT, 2017 (10) TMI 1020, the Delhi High Court was dealing with a similar provision under Delhi VAT law. The Court held that ITC cannot be denied to a bona-fide 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 violative of Article 14 of the Constitution in as much as it treats both the innocent purchasers and the guilty purchasers alike.
The Delhi High Court distinguished Bombay High Court’s earlier decision under Maharashtra VAT law in the case of Mahalaxmi Cotton Ginning Pressing and Oil Industries v. State of Maharashtra, 2012 (5) TMI 152. In this case, the Court held that the taxing statute creates entitlement to ITC and can lay out the circumstances under which ITC is not available. Basis this, the Court upheld the denial of ITC in the circumstances where the supplier did not deposit VAT.
It is notable that Supreme Court did not admit the petitioner’s Special Leave Petition (‘SLP’) (SLP Civil No. 010081/2013) against Bombay High Court decision. On the other hand, Supreme Court did not admit the department’s SLP (SLP No. 36750/2017) against the decision of Delhi High Court as well, it stated that ‘we are not inclined to interfere with the impugned order of Delhi High Court’ while dismissing the SLP.
- At a first brush, it may seem that there are contrary rulings on the issue at hand. But a closer look of the provisions of Delhi VAT law, Maharashtra VAT law as well as GST law will make it clear that the inference and intent of the relevant provisions in all these laws are the same. To that extent, the question of law on the matter is still open and yet to be judicially settled. At this juncture, the decision of Supreme Court upholding the decision of Delhi High Court and specifically keeping the issue open for procurements from bogus suppliers, support the cause of bona-fide recipients under GST law.
- Apart from the above, Section 16(2)(c) of the CGST Act is susceptible to challenge on the grounds of constitutionality itself. The first ground is that the provision leads to ‘double whammy’ as it permits the authorities to recover same tax twice, once from the supplier (as output tax) and secondly from the recipient (as ITC denial). The second ground being impossibility at the recipient’s end to verify whether the supplier has deposited tax or not. The third ground is the absence of specific provision under the GST law allowing the recipient to take ITC where the supplier subsequently deposits the tax. Basis above, taxpayers may challenge reversal of ITC in case supplier does not deposit the tax.