Reversal of ITC in case where Supplier has not remitted the tax

Issue in brief

• ITC reversal in the hands of recipient of goods or services in case of default made by supplier by not depositing the tax collected with the Government.

Relevant provisions

• Section 16 of Central Goods and Services Tax Act, 2017 (herein after referred to as ‘CGST Act’) lays down the conditions for availment of ITC. Sub section 2 of Section 16 starts with a non-obstante clause, stating that the registered person shall not be eligible to avail ITC unless the following conditions are fulfilled:

a. He is possession of a tax invoice

(aa) Details of invoice has been furnished by supplier in its GSTR-1 and the same is appearing in GSTR-2B of the recipient

b. He has received the goods or services

(ba) ITC has not been restricted in GSTR-2B

c. subject to provisions of Section 41, the tax charged in respect of such supply has been actually paid to Government, either in cash or through utilisation of ITC admissible in respect of said supply

d. He has furnished return in form GSTR-3B

• Sub-section 2 of Section 41 of CGST Act provides that the credit availed by the registered person shall be liable for reversal along with interest in case where supplier has not paid the corresponding tax amount to Government.
• Rule 86A of CGST Rules provides the scenarios under which the officer can block the credit available in electronic credit ledger for utilisation. The same are as below:

a) Credit has been availed on the basis of tax invoices-

1. Issued by a registered person who has found to be non-existent or not conducting business from the place for which registration has been obtained
2. Without receipt of goods or services or both

b) Credit of tax charged by the supplier has not been paid to the Government
c) …….
d) …….

Section 155 of CGST Act provides that where any person claims that he is eligible for input tax credit, the burden of proving such claim shall lie on such person.

Challenges faced by recipient

• With the introduction of GST, it was foreseen that there will a free flow of input tax credit to avoid any cascading effect of the taxes in the supply chain. However, the said objective seems to be far from being achieved.
• Norms for availment of ITC are made stringent with every passing day. The recipient of goods or services needs to be more cautious beginning from the selection of supplier from whom goods or services are to be procured, tracking the compliance status of supplier and matching of details reported by the supplier.
• Availment of credit pursuant to matching of the same with the details reported by the supplier in his return has been an evolving exercise wherein continuous changes are introduced. However, ITC reconciliation has become a routine compliance for taxpayers.
• The issue which is now gaining the heat is cases where supplier collects the payment including GST from recipient but doesn’t remit the same with the Government. Further, in cases wherein the registration of supplier is being cancelled. In these scenarios, availment of credit by recipient has been disputed and department is seeking reversal of the same along with interest.
• Under pre-GST regime, Courts had taken a position that the credit of tax charged on sale of goods or provision of services, is a right of the recipient which shall not get impacted in case of default made by the seller or service provider. However, in light of stringent provisions in GST with respect to availment of credit, it is no more a right which can be demanded by the recipient.
• As can be seen from the provisions stated above, specifically conditions envisaged by Section 16(2)(c), Section 41(2) of CGST Act and Rule 86A of CGST Rules, recipient needs to ensure that the supplier is duly remitting the tax charged on supply of goods or services with the Government on timely basis.
• Further, section 155 of CGST Act is a silent weapon which if invoked by the officer over and above Section 16 of CGST Act, by placing a reliance on the prominent ruling of Supreme Court in case of The State of Karnataka Vs Ecom Gill Coffee Trading Private Limited, the burden of proving that ITC has been correctly availed by the recipient shall lie upon him. Therefore, the recipient may to submit additional details/documents for substantiating his claim of ITC.

Judicial precedents

• In case of M/s Aastha Enterprises [Civil Writ Jurisdiction Case No.10395 of 2023- Patna High Court], High Court in this case has held that the claim of ITC shall not sustain if the supplying/selling dealer has not paid the tax charged and collected by him from the recipient, to the Government. Further, HC held that the statutory levy and the further benefit of ITC conferred upon the recipient doesn’t only depend upon the collection of tax by the supplier but also due payment of the same by him to the Government.
• In case of M/s Jai Balaji Paper Cones Versus The Assistant Commissioner, Sales Tax, Tiruchengode, Raghav Industries [2023 (8) TMI 573- Madras High Court], High Court in this case held that recipient being the registered person is not entitled to ITC if tax charged in respect of supply of goods or services has not been paid to the Government. In this case, the supplier issued the invoices after cancellation of his GST registration, hence the tax collected in respect of the supply made by him could not be paid to the Government. Hence, ITC cannot be claimed in light of Section 16(2)(c) of CGST Act. Further, HC held that recipient is entitled to recover the amount from supplier in the manner know to law.
• In case of Suncraft Energy Private Limited And Another Versus The Assistant Commissioner, State Tax, Ballygunge Charge And Others [2023 (8) TMI 174 - Calcutta High Court], High Court in this case held that the department should have first taken the action against the supplier who has neither reported the transaction in its GSTR-1 nor has paid corresponding tax on the same. Department cannot instruct the recipient at the first instance to reverse the ITC unless and until it is able to bring out the exceptional case where there has been collusion between the recipient and the supplier or where the supplier is missing or he has closed down its business or does not have any assets and such other contingencies.

In this case, HC has relied upon the press release dated 18 October 2018 and held that department has not conducted any enquiry on the supplier more particularly when there is clarification that details appearing in GSTR-2A is in nature of facilitation and doesn’t impact the ability of tax payers to avail the ITC on self-assessment basis in consonance with the provisions of Section 16 of CGST Act.

• In case of 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], High Court in said case held that if the tax has not been remitted with the Government then liability may have to be eventually borne by one party, either seller or buyer. Also, HC in the said case made an observation that department has not taken any recovery action against the seller. Further, it was held that when it is amply clear that seller has collected the tax from the purchasing dealer, omission on the part of the seller to remit the same with Government must have been viewed very seriously and strict action should have been initiated against him.
• Apart from the above-referred judicial precedents, there are many cases which are pending before High Court of different States for adjudication. Further, it can also be seen that High Courts have taken divergent view in case where the supplier has collected the tax on supply of goods or services but have not remitted the same with the Government. In few cases recipient is being directed to reverse the ITC in light of the above-referred provisions or in other cases HC has directed department to take action against the supplier.

Key action points for the recipient

• Agreement with the supplier should be suitably amended in order to safeguard against any contingency wherein the supplier has collected the tax but has not remitted the same with the Government
• Compliance status of the supplier should be regularly monitored to check whether they are filing their GSTR-1 and GSTR-3B on timely basis
• Validate the GST registration status of the supplier before entering into any engagement with him and even validating the same on periodical basis
• Validating whether the supplier is required to issue an e-invoice for the supply of goods or services and he has accordingly issued the same
• Pursuant to monthly ITC reconciliation exercise identify the cases where there is difference in details uploaded by the supplier and non-reporting of invoice in GST return of the month in which the same is issued, and take timely action towards the same