GST: Another Amendment in ITC provisions on charts?

GST - ITC provisions - Taxscan


Till recently we were reading about cases where revenue authorities were issuing notices to recipients when they were unable to trace fraudulent suppliers. Targeting recipients for the mistake of the supplier was a second step in the process; the first being finding and slamming the supplier with notice and recovering dues. However, recently in one of the cases, the revenue authorities took the liberty of issuing show-cause notices to recipients directly without even trying to contact the supplier. The officers ignored the guilty and directly went out and panned the innocent party who was not involved in the scam.

In the case of D.Y. Beathel Enterprises Vs State Tax Officer (Data Cell) (Madras High Court)[2021-TIOL-890HC-MAD-GST], petitions of traders were bunched to be decided by the Madras High Court (HC). The traders purchased goods from a vendor and the majority of payments were done through banking channels including the tax amount. The vendor filed GST returns, the basis of which the petitioners availed Input Tax Credit (ITC). Subsequently, it was discovered that the vendor had not paid the collected tax to the Government. In response to this, the petitioners were served notices to which they replied asking the revenue officers, the presence of the vendor at the inquiry for confrontation. However, the officers did not call upon the vendor and affixed the entire liability upon the petitioners.

The HC held that the orders of the revenue suffer from fundamental flaws and hence were quashed. The HC opined that the revenue has not taken any recovery steps against the supplier, even when they were made aware that the seller collected tax and still did not deposit it. Instead of taking stringent action against the seller, the officers went after the petitioners and issued notices. The HC remitted the file back and ordered a fresh enquiry.

Is an Amendment on charts?

Following the suit of other HC judgments, we are forced to wonder if this specific judgment would invite another amendment in the ITC laws under GST? In the last three years, a consistent practice of the Government is that whenever the judiciary finds a flaw in the law, points it out and asks revenue to not cross the line, the revenue very easily pushes the line to where their actions would not be called illegitimate, by way of amendments in the law. Some instances have been listed below:

  • The Delhi HC in the case of Brand Equity Treaties Limited Vs Union of India decided that the period of 90 days as provided by Rule 117 of CGST Rules, 2017 for claiming input tax credit is directory not mandatory and therefore, period of limitation of three years under the Limitation Act would apply. The Delhi HC also instructed the CBIC to open the portal so that all the taxpayers who have been unable to file Tran-1 can do so till 30 June 2020. The CBIC vide the Notification no. 43/2020 dated 16 May 2020, inserted the words ‘within such time’ in Section 140 of the CGST Act with retrospective effect from 1 July 2017. The intent of this amendment was to fix the lacunae in the law which did not provide for a time limit to file Tran-1 and to put an end to the writ petitions filed across the country.
  • The Gujarat HC had held that the press release dated 10 September 2018, providing that delay in filing of returns in Form GSTR-3B from the due date of furnishing of returns for the month of September following the end of the financial year or furnishing of relevant annual returns, whichever is earlier, would render the claim of input tax credit time-barred, was invalid. This was because the HC noted that Section 39 did not prescribe GSTR-3B as the monthly return. The Government amended Rule 61 of CGST Rules, 2017 to nullify the decision notifying that Form GSTR-3B is the return required to be filed under section 39(1) of the Act.
  • The Gujarat HC issued notices when an association challenged the constitutional validity of Rule 36(4) which restricts the availability of ITC to a specified percentage of ITC getting reflected in GSTR 2A/2B. Vide Union Budget 2021, the Government introduced Section 16(2)(aa) which seems to be the validating provision for Rule 36(4) which was alleged to be ultra vires the act.
  • The Guj. HC noted in the writ petition filed in the case of Alfa Enterprise v. State of Gujarat [TS-945-HC-2019(GUJ)-NT] that blocking of ITC is not as per the statue and hence directed the revenue to unblock the ITC with immediate effect. As a consequence, the GST Council came up with Rule 86A which grants power to proper officer to restrict the use of ITC from Electronic Credit Ledger in specified circumstances.

These are only a few instances where the Government has nullified court rulings by way of amendments to the law. Now, it will have to be seen whether the CBIC also comes up with an amendment that does not mandate the revenue officers to investigate the supplier for not depositing tax, before they reach out to the bonafide recipients for recovery of ITC.

Author’s take

Let’s try to understand the expectation that the CBIC has from taxpayers in the country especially from the ITC perspective. The revenue wants the recipients to know whether their suppliers are genuine, whether they collect and deposit tax timely, whether they file GST returns timely, whether they are a part of a scam for fake invoicing or tax evasion racket, whether the supplier’s registration has been suspended and the list goes just on. From a medium-sized industry’s perspective, which may have an average of 300-500 vendors, conducting this due diligence for availing ITC may itself cost more than the ITC. Putting the industry in a situation like this could lead to adverse effects such as:

  • The industries may prefer making purchases from unregistered dealers as against registered dealers or completely avoid availing ITC for the sake of complexity that the ITC provisions render. This will take us back to the ancient regimes where cascading of taxes was a huge problem and ultimately hamper the economy.
  • The industries may start holding back the tax amount and pay the basic price of goods and/or services till the time the vendor substantiates payment of taxes from his end. This will create working capital crunch for genuine vendors resulting in delayed payment of taxes.
  • This method of denying legitimate credit to buyers is being challenged on grounds of them being unconstitutional which could lead to litigations and disputes across the country and create unrest.

Why the Government should take the onus of identifying fake suppliers instead of passing the baton to the recipients:

  • Diligence while granting GST registration which is ideally the first step to get into the GST chain could go a long way in identifying fraud taxpayers.
  • The data in GST flows almost real time through monthly GST returns as against the erstwhile regime. It is not very difficult to detect any suspicious transaction, especially with the hep of technology.
  • The Government has the means to announce rewards for whistleblowers or persons who would want to report any suspicious organizations or taxpayers. The environment needs to be conducive for people to come forward and inform the authorities of any dubious activities. This is one of the most effective ways to bust scams and rackets. Moreover, rewards like preferential treatment while granting refund, or allowing late payment of tax without interest could seem lucrative.

The idea is that taxpayers have businesses to run, they cannot chase each and every supplier and carry out due diligence on them to check if they are associated with any rackets or scams or have any intent to evade taxes. Nonetheless, collection of tax and avoidance of tax evasion is the responsibility of the Government. They cannot delegate this responsibility to the citizens and expect them to fulfill it or face the music of penalties. Moreover, not every court decision has to be nullified by way of amendments to the law. If that’s the case, the legislators should stop giving the right of appeal to citizens and make the revenue’s decision final and unappealable. The judiciary powers should not be taken for granted. There is a reason that as a democracy we have three legs of the Government – Judiciary, Legislative and Executive. If one leg starts undermining the other, a citizen is bound to suffer!

Mr. Jigar Doshi

Jigar is a Chartered Accountant with over 17 years of work experience in the field of indirect taxation. His domain of expertise includes GST, Customs, erstwhile Indirect Taxes, and UAE VAT legislation.

Mr. Sagar Shah

Sagar is a Chartered Accountant with over 12 years of work experience in the field of indirect taxation. His domain of expertise includes business advisory and tax technology in indirect tax.

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