Eligibility of ITC on procurements from suppliers not filing their returns post January 2022

by | Dec 5, 2022 | Outlook

This update is in reference to eligibility of ITC post introduction of Section 16(2)(aa) of the CGST Act vide the Finance Act, 2021. As per this provision, taxpayers cannot avail ITC in GSTR-3B against any tax invoice / debit note not reflecting in their GSTR-2B. This provision was made effective from January 1, 2022. Importantly, the GST Council in its 39th Council Meeting discussed that reason behind this change was to curtail increase in fake invoicing.

Notably, Section 16(2)(aa) has been challenged before the Gauhati High Court in the case of Mcleod Russel India Limited v. UOI, WP(C)/5725/2022.

Further, in erstwhile tax regime, similar condition in the Delhi VAT Act, 2004 (‘DVAT’) was held as unconstitutional in the case of Arise India Limited v. CTT, 2017-VIL-544-DEL. The High Court observed that statute does not create rational distinction between bona-fide purchasing dealers vis-à-vis fraudulent dealers which renders this provision invalid under Article 14 of the Constitution of India. The above ruling was also affirmed by Supreme Court. Further, many other High Courts have either struck down provisions in respective State VAT laws denying ITC on mis-matched credit or applied Doctrine of Reading Down in favour of bonafide taxpayers where constitutional validity of concerned provisions was challenged. The Courts held that a purchaser who acted in a bona-fide manner cannot be penalised for default made by its supplier.

NITYA Comments: Similar to provisions in various State VAT laws, Section 16(2)(aa) also fails to distinguish bona-fide buyers with fraudulent buyers. Basis above, taxpayers are legally entitled to claim ITC on procurements from suppliers who do not file their GST returns despite Section 16(2)(aa) of the CGST Act. As revenue will dispute this, taxpayers can challenge this provision through Writ Petition. Taxpayers can also claim such ITC and keep it unutilized till issue attains finality after duly intimating the revenue.

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