The Goods and Services Tax (GST) was implemented in India on 1st July, 2017. It has been four years since the GST unified most of the indirect taxes laws in India. As it subsumed multiple taxes such as service tax, central excise and value added tax with aims to eliminate the cascading effect of taxes at supply chain, in order to achieve one nation one tax ideology.
GST, A multi stage levy and destination based tax depending upon the place of consumption, is required to be paid at each phase of value addition while allowing the credit of the taxes paid at the earlier stages, therefore, eliminating the cascading effect of taxes prevailing in the erstwhile indirect taxes regime. Thus, finally reducing the cost of the goods and services benefiting all the stakeholders. In current scenario, due to stringent input tax rules, the seamless credit has been a matter of litigation & further a question of debate on account of various issues involved in availment/ utilization of the input tax credit (“ITC”) at the first instance.
Is Seamless credit a fairy tale?
The following practical issues as summarized herein below enacted in legislation seems to be hurdle in enablement of the intent behind the seamless flow of ITC with introduction of Goods & Services Act.
Non-compliance with the e-invoicing provision by the supplier can have severe impacts the ITC eligibility of the recipient/customer
In year 2020, India has embarked on the biggest digital reform in form of E-invoicing. E-invoicing is a system of interoperable electronic invoices generated by taxpayers but authenticated by the government through the e-invoice registration portal (“IRP”).
Pursuant to rule 48(5) of Central Goods & Services (“CGST”) Rules’2017 (as extracted herein below):
“Every invoice issued by a person [to whom sub-rule (4) to rule 48 applies i.e. notified class of registered persons (whose aggregate turnover in any preceding financial year from 2017-18 onwards, is more than prescribed limit of INR 50 crores] have to prepare invoice by uploading specified particulars of invoice (in FORM GST INV-01) on Invoice Registration Portal (IRP) and obtain IRN in this regard,
Now every invoice issued by a notified taxpayer in any manner other than the manner specified in the said sub-rule, shall not be treated as an invoice i.e. a valid document or invoice. Thus, if a supplier is required to issue invoice in the manner specified in rule 48(4) but the supplier issues the invoice without obtaining IRN, the document will not be treated as a valid invoice.
As per rule 36(1) CGST Rules, the recipient can claim credit basis the tax invoice issued by the supplier. In case the document issued by the supplier is not treated as valid invoice, the recipient will not be able to take credit basis that document.
Further, proviso to rule 36(2) CGST Rule states that if the document referred in rule 36(1) does not contain all the specified particulars but contains the details of the amount of tax charged, description of goods or services, total value of supply of goods or services, GSTIN of the supplier and recipient and place of supply in case of inter-State supply, ITC may be availed by such registered person. However, as the document in the present case is not a document as per rule 36(1), the benefit of the proviso cannot be taken.
With introduction of the above-mentioned provision, the recipient / customer would now be required to check whether the e-invoicing provisions are applicable to its suppliers and if the provisions are applicable, whether the supplier is issuing the invoice in the manner prescribed under rule 48(4). This will be an additional burden in the hands of the recipient.
Now, the invoice issued by the notified supplier without being registered at the IRP portal will be considered as an invalid invoice and ITC is not available to the recipient on an invalid invoice. Thus, the consequences of non-compliance by the supplier will cost the recipient their ITC.
The tax authorities should take cognizance of the same and ensure further steps to remove genuine hardship in this case.
Restriction cast on availment of ITC by insertion of Rule 36(4) of the CGST Rules’ 2017
As per the extant provision of Section 16 (2) (c) of the CGST Act’2017, the requirement relates to payment of tax to the government treasury by supplier for the purpose of credit availment. However, Rule 36(4) of the CGST Rules ultra vires the substantive provision of 16 (2) (c) stipulates that the supplier is required to file GSTR-1 (instead of GSTR-3B as per Section 16 (2) (c) of the CGST Act) and therefore, the said rule faces challenge on its constitutional validity before various High Courts from its inception.
However, this Rule provides for another line of compliance which needs to be complied with while availing the ITC. In view of this provision, any availment in excess of specified limit (5% currently) can also be questioned by the authorities.
Basis aforesaid discussion, it is required that the intent of law must be such that it safeguard the assessee who complies with the substantive provision in case there is a disagreement between the Act and Rules. Further, a plea can be restored that since the matching procedure as envisaged in Section 41 of the CGST Act is not operationalized yet and the case is a bonfire one [principle laid down by the Supreme Court in the case of Arise India TS-2-SC-2018- VAT], the ITC can be availed basis in terms of Section 16 (2) (c) of the CGST Act and compliance with basic provision of Section 16(c) can be ensured by an assessee by regularly following up with vendors etc. in the absence of no matching mechanism.
It is important to note that Rule 36(4) draws power from section 16(1) of CGST Act. As per section 16(1), every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged. Thus, it can be said that rule 36(4) is supported by the legislative provisions.
Considering the fact that Apex Court, in case of Arise India, had dismissed the appeal filed by the Revenue wherein Hon’ble High court of Delhi held that credit cannot be denied due to mismatch. However, Hon’ble Supreme Court, in case of Mahalaxmi Cotton and Ginning Mills, had dismissed the appeal filed by the taxpayer (in that case Bombay High Court held that credit can be denied in case of mismatch). Also, the argument that matching has not been operationalized may not sustain post October 2019 in view of specific provision of rule 36(4).
Thus, Rule 36 (4) restricts the ITC claim in excess of stipulated limit (5% currently) of matched credit is not in line with the provisions of law, considering the fact that it is not practically feasible for a trade & business / recipient to conduct due diligence of each & every supplier and therefore, the procedures of denying the ITC on genuine purchases would always be a Pandora box of litigation, on ground of them being unconstitutional.
The government should take obligation / burden of identifying the fake suppliers instead of casting the responsibility on the taxpayers.
ITC for the invoices not reflected in GSTR-2A i.e. default on part of supplier(s) in reporting the records on which tax has been collected from the recipient(s)
In relation to the entries on which ITC has been booked by the recipient in his books of account but not reflecting in GSTR-2A, a reference can be made to 16 (2) (c) of the CGST Act which specifies that the tax charged in respect of the supply for which ITC is to be claimed, has been actually paid to the Government. Hence, it carries a risk of litigation, if ITC is claimed on the invoice not appearing in GSTR-2A of the recipient(s).
Since, the matter is prone to litigation the tax payer remedy not available at adjudication/revenue level and only relief in this case is available at a higher appellate level on the ground that ITC should not be denied to the recipient when the recipient is in compliance with all other ITC conditions, and is in possession of a valid document, basis which payment has also been made to the vendor in good faith i.e. bonafide assessee should not be penalized on part of non-compliance of the vendors which is not in control of the recipient of supplies.
Accordingly, it is expected that Government should amend the said provision to provide remedy for the genuine buyers.
Restriction on claiming ITC for the invoices pertaining to financial year for which time limit under section 16(4) has been expired
As per Section 16(4) of the CGST Act, 2017:
“A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier. ……………”
Basis the above-mentioned legal provision, government has fixed the time limit to avail ITC for a particular financial year. Accordingly, any credit availed in violation of provisions of Section 16(4) is inadmissible and litigative.
Government should take note of the issues faced by the taxpayers due to imposition of such restriction and further step forward to ease off said restriction on claiming of ITC of a particular year till the due date of filing September Return of the next Financial Year and further, as matter to safeguard the revenue as well, such restriction may be linked with the date of filing of annual return of the concerned financial year as certain unclaimed/ short claimed ITC come to knowledge only at the time of finalizing the annual return and audit return.
India has witnessed the unprecedented time in view of ongoing COVID-19 pandemic. In these times, the trade & industries are also facing tremendous pressure with respect to business and tax compliances. On business front, the taxpayers are going through liquidity crunch on account of COVID-19, disrupting the sales and market segments and therefore, questioning their utmost survival.
In view of the difficulties faced by the businesses the government should ensure that the seamless flow of input tax credit, as envisaged in the legislative intent behind the “One Tax One Nation” slogan, must be carried out and safeguard the indispensable right of the taxpayer as a whole.
Going forward, the government’s efforts to further liberalize GST norms and simplify policy & procedures, are expected to build a business friendly environment.
The views expressed herein are the views of the author and cannot be used in framing of opinions or for the purpose of compliance without an independent evaluation.
The author can be reached at: [email protected]