Ankita Prakash & Manish Rastogi
The Indirect Tax regime existing in India underwent a landmark reform with the introduction of Goods & Services Tax (“GST”) w.e.f. 01.07.2017. GST is recognised internationally as a destination-based consumption tax. One of the main reasons behind implementation of GST in India was to replace multiple indirect taxes levied at different points of the value chain with one single tax on ‘supply’ of goods and services and to provide seamless flow of taxes paid on inputs in order to prevent cascading effect of taxes. Consequently, introduction of GST replaced several indirect taxes which were being levied and collected by the Union and the States viz., Sales Tax, Excise Duty, Entry Tax, Service Tax etc.
It is relevant that the First ‘Discussion Paper on Goods and Services Tax in India’ was released by the Empowered Committee of State Finance Ministers wherein, it was emphasized that seamless flow of input tax credit is a key mechanism to avoid cascading effect of taxes. Further, the Seventy-Third Report of the Standing Committee on Finance on the Constitution (115th Amendment) Bill, 2011 also emphasized that a consistent and essential objective of the introduction of GST is to eliminate cascading effect of taxes and tax only the portion of value addition in the supply chain.
The statement of objects and reasons of the Central Goods and Service Tax Bill, 2017 proposed that “the proposed legislation will simplify and harmonise the indirect tax regime in the country. It is expected to reduce cost of production and inflation in the economy, thereby making the Indian trade and industry more competitive, domestically as well as internationally. Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an in-built mechanism in the design of goods and services tax that would incentivise tax compliance by taxpayers. The proposed goods and services tax will broaden the tax base, and result in better tax compliance due to a robust information technology infrastructure.1” Thus, it was clarified that the Bill aimed to broad base the Input Tax Credit (“ITC”) by making it available in respect of taxes paid on any supply of goods or services or both used or intended to be used “in the course or furtherance of business”.
LEGAL FRAMEWORK AND AMENDMENTS:
Value added tax regimes have existed in India
in the past in different forms both as part of the Central as well as State taxation and have had similar features as the present GST. Both statutory as well as judicial precedents of the past would, therefore, have a bearing in interpreting the GST statutes.
Position prior to 09.10.2019
The scheme of ITC in the GST regime is provided under Chapter V of the Central Goods and Services Tax Act, 2017 (“CGST Act”). However, it is subject to certain conditions which are prescribed under Section 16 of the CGST Act which needs to be complied by a registered person to become eligible for ITC. One of the conditions is that the GST charged in respect of such supply has been actually paid to the Government by a supplier. The said Section reads as follows: –
“INPUT TAX CREDIT2
Eligibility and conditions for taking input tax credit.
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 on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,––
he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;
he has received the goods or services or both.
Explanation.-For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services––
where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;
where the services are provided by the supplier to any person on the direction of and on account of such registered person.
subject to the provisions of section 41 or section 43A, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and
he has furnished the return under section 39:
Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:
Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed:
Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.
Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961 (43 of 1961), the input tax credit on the said tax component shall not be allowed.
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 4[****] debit note pertains or furnishing of the relevant annual return, whichever is earlier.
Provided that the registered person shall be entitled to take input tax credit after the due date of furnishing of the return under section 39 for the month of September, 2018 till the due date of furnishing of the return under the said section for the month of March, 2019 in respect of any invoice or invoice relating to such debit note for supply of goods or services or both made during the financial year 2017-18, the details of which have been uploaded by the supplier under sub-section (1) of section 37 till the due date for furnishing the details under sub- section (1) of said section for the month of March, 2019.”
A perusal of the above discloses that Section 16 of the CGST Act entitles every registered person to take ‘credit of input tax charged on any supply’ of goods or services or both to him which are ‘used or intended to be used in the course or furtherance of business’ and the amount of ITC claimed shall be credited to the electronic credit ledger of such person. However, the claim is to be made in the manner specified in Section 49 of the CGST Act and is subject to conditions and restrictions as may be prescribed. It is relevant for the present purpose that Section 16 (2) mandates, inter alia, that no ITC can be claimed by a registered person unless: –
The recipient is in possession of a tax invoice, debit note or any other prescribed tax paying document issued by the supplier;
The recipient has received the goods or services or both;
Subject to the provisions of Section 41 or Section 43A, the tax charged by the supplier in respect of the supply has been ‘actually paid’ to the Government. In other words, the amount claimed as ITC by the recipient should have been deposited by the supplier with the exchequer in accordance with law; and
The recipient has furnished a return under Section 39 of the said Act.
Therefore, in terms of aforementioned Section 16, the two essential substantive conditions which enable the eligibility of the recipient to avail ITC are that the recipient should be in possession of tax invoice/debit note or any other tax paying document issued by the supplier and he should have received the goods or services. Section 16 (2) (c) of the CGST Act further provides that no ITC can be claimed by a registered person unless tax charged by a supplier in respect of the supply has been actually paid to the Government by the supplier.
Further, as per the second proviso to Section 16 (2), the recipient is required to reverse the ITC availed along with interest thereon in case of non-payment of the value and tax to the supplier within 180 days from the date of issue of invoice. Thus, it is significant to note that even as per the said proviso, the statutory mandate is that if payment is made by the recipient to the supplier within 180 days, ITC can be availed by the recipient.
Section 155 of the CGST Act further imposes burden of proof to establish eligibility to avail ITC on the person claiming the ITC. Therefore, where recipient is claiming ITC, the statutory burden is on the recipient who will be required to establish the satisfaction of all the statutory conditions specified above.
Section 37 of the CGST Act provides that every registered person should furnish details of outward supplies effected during the tax period on or before 10th of the succeeding month and such details such details shall be communicated to the recipient in a prescribed manner. Further, as per Rule 59 of the Central Goods And Service Tax Rules, 2017 (“CGST Rules”), these details are required to be furnished in Form GSTR-1 and once filed, these details will be auto-populated for the recipient in Form GSTR-2A on his GST web portal.
Section 38 of the CGST Act provides that every registered person should either verify, validate, modify or delete, if required, the details relating to outward supplies or credit or debit notes communicated under Section 37 (1) of the CGST Act through GSTR-1 by the supplier of taxable goods and services. It is also pertinent that the recipient can also include the details of inward taxable supplies received by him to claim ITC where the said details have not been declared by the supplier for any reason. Further, Rule 60 of the CGST Rules provides that the registered person should report details for inward supplies in Form GSTR-2 including for invoices and debit notes not reflecting in Form GSTR-2A. However, it is relevant to state at this stage that the GSTR- 2 utility has not been implemented till date on account of GSTN limitations and therefore, no compliance is warranted for the same.
Section 39 of the CGST Act provides that every registered person shall furnish monthly return of inward supplies and outward supplies, input tax credit availed, tax payable and tax paid in prescribed manner. As per Rule 61 of the CGST Rules, every registered person is required to furnish return in Form GSTR-3 on monthly basis as required under Section 39. However, it is pertinent that the Form GSTR-3 utility has not been implemented till date because of GSTN limitation and therefore, Form GSTR-3B has been prescribed as an alternate measure to operationalize the payment of taxes, which tax- payers are required to file on monthly basis.
Section 41 of the CGST Act provides for claim of ITC and provisional acceptance thereof. a registered person, on self-assessment, can take eligible ITC on a provisional basis subject to conditions and restrictions as may be prescribed.
Further, such provisional ITC can be utilized only for payment of self-assessed output tax as per return furnished by the registered person. Thus, the aforesaid Section merely enables a provisional claim of ITC and its finalization after matching the details of inward supplies (purchases) furnished by the recipients with the details of outward supplies (sales) furnished by the suppliers.
Section 42 of the CGST Act relates to the matching, reversal and re-claim of ITC. It provides that the details of every inward supplies furnished by a registered person (recipient) shall be matched with the corresponding details of outward supply furnished by the corresponding registered person (supplier) and in this regard detailed procedure for compliance with the provision have been prescribed in the CGST Rules.
Thereafter, on 01.09.2017, the CBEC Circular No. 07/07/2017-GST was issued in respect of System based reconciliation of information to be furnished in FORM GSTR-1 and FORM GSTR-2 with FORM GSTR-3B. The re-
conciliation procedure set out in the Circular No. 07/07/2017-GST dated 01.09.2017 was kept in abeyance vide C.B.E. & C. Circular No. 26/26/2017-GST, dated 29.12.2017. Thus, it can be seen from the above that the matching mechanism including Form GSTR-2, Form GSTR-1A and Form GSTR 3 set out under the Act and Rules framed thereunder as explained in the Circular No. 07/07/2017-GST dated 01.09.2017 could not be operationalized because of technical limitations and due to this reason, the matching of ITC in the system itself was not enabled. Accordingly, only Form GSTR-1 and Form GSTR-3B were being furnished and considering the minutes of 39th GST Council Meeting held on 14.03.2020, it appears that the existing system of furnishing Form GSTR-1 and Form GSTR-3B continued till September, 2020. Thus, the statutory framework which provided for a system-based reconciliation of the invoices issued and reported by the vendors in their
returns with the ITC claimed by the recipients based on these invoices was not enabled during the period up to September, 2020.
There was thus no fool proof mechanism available with the recipient who had already paid the GST to its vendor to categorically determine whether the vendor had reported all its invoices in its returns or had correctly paid the GST, which it had already collected from the recipient to the GST department.
By way of Section 183 dated 29.08.2018, a new provision Section 43A was introduced in the CGST Act which provides the procedure for furnishing return and availing ITC. Section 43A (4) specifically provides for the procedure to be followed to avail ITC for unreported transactions on the GSTN portal. Further, Section 43A (6) empowers to make recipient of goods and services jointly and severally liable for payment of ITC claimed for unreported transactions by the suppliers. The procedure to recover such ITC is to be prescribed in accordance with sub-section (7) of this Section. Further, Section 43A (4) enables restricting the ITC available to the recipients on the basis of details furnished by the suppliers. In other words, it seeks to put a limitation on the ITC that can be availed by the recipients solely on the basis of details furnished by the suppliers. It is important to note that vide Notification No. 2/2019-C.T. dated 29.01.2019, various Sections of the Central Goods and Service Tax (Amendment) Act, 2018 were operationalized from 01.02.2019. However, Section 18 by virtue of which Section 43A was inserted has not been operationalized/notified till date.
It appears that on account of certain issues regarding purported wrongful availment of ITC, the GST Council in its 37th Meeting held on 20.09.2019, decided to impose certain restrictions on availment of ITC by the recipients. In exercise of power conferred under Section 164 of the CGST Act, the CGST Rules including Rule 36 were notified which provided for documentary requirements and conditions for claiming ITC. Rule 36 (1) and Rule 36 (2) provides for the list of eligible documents and particulars to be mentioned in these documents subject to which ITC can be claimed.
Position w.e.f 09.10.2019
Rule 36 (4) vide Para 3 of the Notification No. 49/2019-CT dated 09.10.2019 was introduced without implementing/notifying the enabling Section 43A of the CGST Act, in exercise of power under Section 164 of the CGST Act imposing a restriction on the ITC that can be availed by a tax-payer. Therefore, with the insertion of sub clause (4), Rule 36 has imposed a restriction that a taxpayer can avail ITC pertaining to outward supplies not declared by his supplier in Form GSTR-1 only up-to the extent of 20% of the eligible ITC available in respect of invoices declared by his supplier in Form GSTR-1. The limitation of 20% has been further reduced to 10% of the eligible ITC available in respect of invoices or debit notes reflected in Form GSTR-2A w.e.f. 01.01.2020 vide Notification No. 75/2019-CT dated 26.12.2019. Further, recently by Notification No. 94/2020 dated 22.12.2020, w.e.f. 01.01.2021, the limitation of 10% has further been reduced to 5%. Therefore, with the insertion of Rule 36 (4), the eligibility of the recipients to claim ITC has been made dependent on the timely filing of GSTR-1 by the suppliers. As per Circular No. 123/42/2019-GST dated 11.11.2019 it was clarified that the restriction under Rule 36 (4) is to be applied by the taxpayers on a self- assessment basis. However, the restrictions under Rule 36 (4) are only applicable on invoices on which ITC is availed after 09.10.2019 and is not applicable to invoices on which ITC was availed prior to 09.10.2019. Thereafter, another clarification was issued vide Circular No. 142/12/2020-GST, dated 09.10.2020, wherein application of Rule 36 (4) for the months of February, 2020 to August, 2020 was explained inter alia Rule 36 (4) is being implemented February, 2020 onwards and ITC is being restricted to 110% (105% w.e.f. 01.01.2021) of the cumulative value of the eligible ITC available in respect of invoices or debit notes, the details of which have been furnished by the supplier in Form GSTR-1. It also transpires that the Rule is sought to be implemented even though Section 43A of the CGST Act containing the substantive provision for such restriction has not been notified.
At this juncture, it is imperative to point out that Rule 36 (4) was introduced only from 09.10.2019 and thus, cannot be applied for the period July, 2017 to September, 2019 and even if the said Rule has been made effective from October, 2019, it cannot be applied to past period and will only be operative prospectively. On a combined reading of the aforesaid provisions of Section 43A and Rule 36 (4), it is evident that prior to 09.10.2019, there was no provision under the CGST Act or CGST Rules which restricted the registered person from claiming ITC even for the transactions not reflecting in GSTR-2A.
This amendment appears to be contradictory to the clarification provided by the Press Release dated 18.10.2018 wherein, it was categorically accepted that entitlement of ITC was not dependent on reconciliation of Form GSTR-2A and actual claim made in GSTR-3B.
Position introduced by the Finance Act, 2021
The Finance Act, 2021 was enacted on 28.03.2021
for the Financial Year 2021-2022 and vide Section 109 of the said Act, clause (aa) has been inserted after clause (a) of Section 16 (2) of the CGST Act i.e., “(aa) the details of the invoice or debit note
referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;” A reading of the above clause (aa) inserted in Section 16 (2) discloses that ITC will not be available to the recipient if the supplier fails to furnish the required details in its statement of outward supplies and if the said details are not communicated to the recipient in the specified manner.
Accordingly, availment of legitimate ITC by a recipient has been made dependent on furnishing of required details by a supplier despite possessing tax-invoice and paying applicable GST charged on the same to the supplier. Section 16(2) (aa) has been made effective w.e.f. 01.01.2022.
Section 16 (2) (c) is contrary to the objective behind the introduction of the GST regime and is ex-facie unconstitutional
It appears that Section 16 (2)(c) imposes an unreasonable and onerous condition where the said provision gives an unequal treatment to bona fide recipients of goods and services and thereby violating Article 14 of the Constitution of India. By way of Section 16 (2) (c), burden of ensuring actual payment of tax by the supplier of inputs and input services to the Government has been placed on the recipient and by denying the bona fide recipients the credit of the input taxes paid to registered suppliers, Section 16(2)
(c) of the CGST Act violates Article 14 of the Constitution of India where the principles of Article 14 requires that the Section 16 (2) (c) ought to have adequately protected bonafide purchasers and their substantive rights of claiming ITC.
In our view, Section 16 (2) (c) imposes a disproportionate burden on those recipients who have availed the ITC in accordance with the provisions of Section 16 by making the entire payment towards the inputs/input services within the time frame prescribed under Section
16. The said provisions have the effect that a bona fide recipient who has already made the entire payment to the supplier of inputs/input services will be denied with the ITC merely because of the supplier not having ‘actually paid’ the tax collected from the recipient to the Government. Therefore, ensuring such actual payment by the supplier is an onerous burden on the recipient.
The Hon’ble Supreme Court 4has held that bona fide taxpayers stand on a different footing as compared to willful defaulters and these two unequal categories cannot be equated and by denying credit to the recipient, in case of default on the part of the supplier in payment of tax collected from the recipient, treats a bona fide recipient and mala fide recipient in a similar manner which is completely illegal and unconstitutional. As per Section 16(2)(c) although the bona fide recipient and mala fide recipient represent two different classes, the formers stands to lose out on credit despite being diligent and otherwise, compliant with the provisions of the CGST Act and the Rules. Whereas a guilty recipient in collusion with a guilty supplier enters into a tacit agreement or understanding or arrangement to falsely claim ITC and cause loss of revenue to the Government, an innocent recipient pays his taxes and adheres to all the requirement of the laws yet is penalized in the form of loss of ITC and resultantly, suffer higher tax costs. Thus, the same treatment afforded to both categories of recipients does not have any reasonable basis and results in hostile discrimination against the bonafide recipients.
Denial of ITC to a recipient of goods and services would tantamount to treating both the “guilty recipients” and the “innocent recipients” at par whereas they constitute two different classes. A “guilty recipient” entering into a tacit agreement or understanding or arrangement in collusion with the “guilty supplier” to falsely claim ITC and cause loss of revenue cannot be treated at par with a bona fide recipient.
One can understand the denial of ITC in those cases where the recipient dealer has not acted with caution or without obtaining the documents prescribed under the provisions of Act for availing credit. However, denying the ITC to a recipient who has acted in a bona fide manner and has taken reasonable steps for verifying the credentials of suppliers and received the inputs/input services under competent invoices is clearly violative of Article 14 of the Constitution of India. However, in those cases where the vendors from whom the inputs and input services are received are paid the entire amounts as per the tax invoices which includes both the value of the inputs/ input services as well as the tax and in such circumstances, denying the ITC solely by relying on Section 16 (2) (c) is completely unwarranted and any such interpretation would render the said section as unconstitutional.
It is relevant that even under the erstwhile law, it has been held in various judgments by the Hon’ble Courts that in cases where the purchasing dealer establishes the genuineness of the invoices issued by the selling dealer, ITC cannot be denied5. Even while the said decisions were rendered in the context of the Karnataka VAT Act, 2003, principle that bona fide recipients cannot be subjected to onerous and unwarranted liabilities for the fault of the vendors, will still be applicable to GST regime.
Significantly, Hon’ble Delhi High Court has held that such a provision which fails to make a distinction with regard to purchasing dealers who have bona fide transacted with the selling dealer by taking all precautions, is vulnerable to invalidation on the touchstone of Article 14 of the Constitution of India and had accordingly, struck down the said provisions6. The said judgment of the High Court has since been upheld by the Supreme Court by way of Order dated 10.01.20187. It is imperative to point out that Section 16 (2) (c) is also similar to the provisions of the Delhi Value Added Tax Act which were dealt with by the Hon’ble Delhi High Court and fails to distinguish between case where the recipient has acted bona fide and has made the payment of tax to the supplier and the supplier has failed to make the payment to the Government and other cases where there is a collusion between the defaulting supplier and the recipient. Clubbing both these categories together amounts to clubbing two unequals together and is not a reasonable classification.
Similar provisions under the Haryana Value Added Tax Act, 2003 were under challenge8 and it was held by the Hon’ble Punjab & Haryana High Court that “In legal jurisprudence, the liability can be fastened on a person who either acts fraudulently or has been a party to the collusion or connivance with the offender. However, law nowhere envisages to impose any penalty either directly or vicariously where a person is not connected with any such event or an act. Law cannot envisage an almost impossible eventuality. The onus upon the assessee gets discharged on production of Form VAT C-4 which is required to be genuine and not thereafter to substantiate its truthfulness by running from pillar to post to collect the material for its authenticity. In the absence of any malafide intention, connivance or wrongful association of the assessee with the selling dealer or any dealer earlier thereto, no liability can be imposed on the principle of vicarious liability. Law cannot put such onerous responsibility on the assessee otherwise, it would be difficult to hold the law to be valid on the touchstone of Articles 14 and 19 of the Constitution of India. The rule of interpretation requires that such meaning should be assigned to the provision which would make the provision of the Act effective and advance the purpose of the Act. This should be done wherever possible without doing any violence to the language of the provision. A statute has to be read in such a manner so as to do justice to the parties. If it is held that the person who does not deposit or is required to deposit the tax would be put in an advantageous position and whereas the person who has paid the tax would be worse, the interpretation would give result to an absurdity. Such a construction has to be avoided”
Thus, Section 8(3) of the Haryana Value Added Tax Act, 2003 was read down and it was held that no liability could be fastened on the purchasing dealer on account of any non- payment by the selling dealer except in cases of fraud, collusion etc. The Hon’ble Court read down the provision in order to carve out a distinction between genuine cases as opposed to cases of fraud, collusion etc. Accordingly, it is submitted that Section 16 (2) (c) fails the principle of reasonableness in order to carve out distinction between bona fide recipients and mala fide recipients.
Identical view was taken by the Hon’ble Jharkhand High Court9 wherein it was held that no punitive steps could be taken where the recipient had discharged its VAT liability by paying the supplier and timely filing its return claiming the applicable ITC. It was further held that the fault on the part of the supplier could not be held against the recipient especially when there was no mechanism available with the recipient to compel the supplier to furnish its return within the stipulated time frame and deposit tax from the recipient with the government.
The cases of forgery and collusion stand on a different footing and a taxpayer/dealer cannot be expected to establish what is beyond his control10. Section 16 (2) (c) treats bona fide and mala fide recipients with the same yardstick and further, requires the recipients to ensure payment of tax by the supplier which is beyond the control of the recipient and almost impossible to comply with. Section 16(2)(c) of the CGST Act creates a further classification between (1) a bona fide recipient whose supplier pays the tax to the Government and (2) a bona fide recipient whose supplier, despite such bona fide recipient exercising due caution, defaults in making payment of tax. Thus, in such a case, where there are two recipients both of whom have paid the tax to their respective suppliers on the strength of valid GST invoices, yet one stands to lose out on ITC while the other is allowed to claim the same. Thus, Section 16 (2) (c) creates invidious discrimination between similarly situated assesses which is completely contrary to the principle that equal protection under Article 14 means right to equal treatment in similar circumstances, both in privileges conferred and liabilities conferred and therefore, if the two persons or two sets of persons are similarly situated/placed, they have to be treated equally11.
The Hon’ble Madras High Court12 has quashed Orders demanding entire liability from recipients in similar cases where consideration along with applicable GST had been duly paid by the recipients to the suppliers through banking channels. Thus, it is clear that coercive action should not be taken against bona-fide recipients who have duly paid the invoice amount along with the GST charged therein.
Although the constitutional validity of the Impugned Section 16 (2) (c) was not in question in the said case, the said Section is liable to be read down in view of the well settled legal position which has been reiterated by the Hon’ble Madras High Court.
The test of manifest arbitrariness can be applied to in respect of delegated legislations as well as parliamentary legislations and further, any legislation which is excessive, disproportionate, irrational, capricious and without adequate determining principles is liable to be struck down as being manifestly arbitrary and contrary to Article 14 of the Constitution of India. Section 16(2)(c) imposes onerous condition on the recipients but fails to lay any guidelines to comply with the same. While the mandate of the said Section is to ensure that the tax collected is deposited by the supplier with the Government, it fails to provide any procedure or methodology for the recipient to ensure the same. Therefore, prescription of onerous condition on the recipient and complete absence of determining principles renders Section 16(2)(c) of the CGST as manifestly arbitrary and violative of Article 14 of the Constitution of India.
The Hon’ble Supreme Court13 has laid down legal principles to be applied for striking down taxation statutes which suffer from the vice of manifest arbitrariness. In Author’s view the restriction contained under Section 16(2)(c) is manifestly arbitrary as it is impossible for a recipient to ensure that its suppliers comply with the provisions of the statute. Although as per the condition laid down under Section 16(2)(c), a recipient is not entitled to avail ITC if the tax has not been paid to the Government by the supplier, yet the mechanism stipulated is beyond its control and is an unnecessary hardship for the recipients. Further, the matching provisions have undisputedly not been implemented due to GSTN limitations. In view of the same, Section 16(2)(c) of the CGST Act fails to meet the requirement of reasonableness contained under Articles 14 and 19(1)(g) of the Constitution of India.
It is a settled cannon of interpretation, namely “lex non cogit ad impossibilia”, meaning that the law does not compel a man to do that which he cannot possibly perform meaning thereby that ‘where the law creates a duty or charge, and the party is disabled to perform it without any default in him, and has no remedy over, there the law will in general excuse him; and though impossibility of performance is in general no excuse for not performing an obligation which a party has expressly undertaken by contract, yet when the obligation is one implied by law, impossibility of performance is a good excuse14. Further, “Under certain circumstances compliance with the provisions of statutes which prescribed how something is to be done will be excused. Thus, in accordance with the maxim of Law, Lex non cogit ad impossibilia, if it appears that the performance of the formalities prescribed by a statute has been rendered impossible by circumstances over which the persons interested had no control, like the act of God or the King’s enemies, these circumstances will be taken as a valid excuse.15” The GST law requires that the Supplier shall upload its outward suppliers in GSTR-1 and the same shall be reflected in GSTR-2A of the recipient. Furthermore, in case the Supplier does not submit the sales data, the recipient is provided with an option under the GST law to upload the purchase data and then Supplier was required to take action on the same. Thus, the above procedure designed and crafted under the law is a two-way process which ensures that purchaser has complete visibility on the tax payable by the supplier on supply effected to him. However, due to
incomplete implementation of various forms prescribed under the CGST Act, the Government realized fallacy in their claim and changed the procedure to their advantage for collection of taxes without giving a single thought, as to how a taxpayer will meet his compliance obligations and will come to know the fact as to whether his suppliers have really paid the taxes or not. Section 16(2)(c) of the CGST Act provides for a condition wherein the recipient is not entitled to avail ITC if the tax has not been paid to the Government by the supplier. It is the responsibility of Government to develop and implement a machinery for collection of taxes and take action against erring non tax-payers in cases of default, and such responsibility cannot be shifted on the recipient by way of Section 16(2)(c) of the Act, so as to make the recipient liable for enforcing payment of taxes by the supplier. However, the provisions of CGST Act do not equip or empower the recipient for ensuring payment of taxes by the suppliers. In the absence of any machinery provision, it is impossible to prevent the loss of credit on account of default on the part of its supplier in payment of tax.
Once a recipient has paid the entire invoice value along with the tax charged on the said invoices to the vendors, it cannot be subjected to further onerous and irrational obligations in the form of Section 16(2)(c) to further ensure actual payment to the Government. It is relevant to point out in this regard that as originally contemplated, the provisions of Section 16(2)(c) were subjected to Section 43A, which provided for the procedure for furnishing of returns and availment of ITC. Thus, as originally enacted, Section 16(2)(c) provided safeguards for the recipient to check whether the supplier has actually paid tax or not. However, the said provisions were not brought into force and despite the absence of any mechanism, Section 16(2)(c) alone was brought into effect. The absence of mechanism to verify payment of tax by the supplier, makes it practically impossible for the recipient to even cross-check compliance. In these circumstances, initiation of actions against bona fide recipient is completely unwarranted, onerous and manifestly arbitrary. The legislative intent has not been given full effect and instead, based on incomplete mechanism, illegal actions are being initiated.
Section 16 (2) (c) is also violative of Article 19 (1) (g) and Article 300A of the Constitution of India
As evident from the above, Section 16(2)(c) of the CGST Act casts an impossible burden on the recipient of the supply to either ensure payment of tax by the suppliers or stand to lose out on ITC in case the supplier defaults. In fact, Section 16(2)(c) indirectly requires a recipient to assume the role of a parallel collection agency. Despite being diligent and transacting with registered suppliers against the strength of valid invoices, recipient will have to incur loss of ITC for the defaults of others, thereby increasing the tax cost of running business.
It is a settled principles of law that credit which stood accrued to a tax-payer is a vested right and is protected under Article 300A of the Constitution of India and cannot be taken away without authority of law where Article 300A provides that no person shall be deprived of property saved by authority of law and further, while right to the property is no longer a fundamental right but it is still a constitutional right16.
Under the scheme of Section 16, it is evident that the ITC can only be availed of the tax paid
by the recipient to the supplier. Further, the charging provisions require that the supplier of goods and services will be liable to discharge the tax liability and also take registration under section 22 of the CGST Act. Thus, in the mechanism provided under the CGST Act, the tax liability and statutory obligations to pay the tax casts on the supplier of goods. Further, the specific provisions of Chapter XVI of the CGST Act also empowers to recover tax, impose penalty etc. from the person liable to pay the tax. Thus, sufficient machinery has been provided under the CGST Act for the Department to ensure payment. In such circumstances, by relying on the impugned Section 16(2)(c) cannot bypass the entire statutory machinery for recovery, etc. and demand the same amounts from the recipient who has already borne the burden of tax on the inputs and input services received from such suppliers. Even though under the CGST Act, the supplier has been made responsible for collection and payment of tax since the levy of GST is on the supplier, Section 16(2)(c) practically shifts the responsibility on to the recipient, to ensure that the tax payments have been made by the supplier to the Government in order to make recipient avail ITC, which is certainly against the scheme of the CGST Act besides being onerous, impractical and impossible of compliance.
GST Department has been vested with all the powers to initiate recovery proceedings against the erring suppliers and therefore, depriving the bona fide recipients of the credit of input taxes paid by them on account of any failure on the part of the suppliers falls foul of Article 19
(1) (g) and Article 300A of the Constitution of India. Under the various provisions of CGST Act particularly in Chapter XV, the Department has been vested with the powers to not only recover tax but also to issue notices, impose penalties and collect interest in case of default in payment of taxes. Furthermore, the CGST Act under Section 132 provides for punishment, which are in the nature of imprisonment and fine, for offences where tax was collected but not paid to the Government under certain circumstances Further, the officers have been given the power under Section 69(1) of the CGST Act to arrest a person committing offence under Section 132 of the CGST Act. Therefore, there are adequate machinery provisions under the GST Act empowering the department to initiate appropriate proceedings against the registered dealers/suppliers defaulting in payment of taxes and therefore, there are no cogent reasons to deprive the bona fide recipients of the credit of input taxes paid by them in the face of such machinery provisions. On the other hand, it would be unreasonable to expect from the recipients who do not possess any power to compel the defaulting suppliers to make the payment of taxes under the CGST Act. On the contrary, upon the culmination of recovery proceedings against the erring suppliers, there is no mechanism that has been prescribed under the CGST Act to remit the reversed ITC back to the recipient is grossly unjust and arbitrary.
Section 16 (2) (c) can lead to double recovery from the recipients apart from arbitrary levy of interest under Section 50 of the CGST Act
Despite payment of applicable tax to the supplier against a valid tax-invoice, a recipient will be required to reverse the ITC claimed along with interest under Section 50 of the CGST Act in the event its supplier is unable to deposit the tax due by filing its GSTR-3B. Thus, merely on account of a non-payment by the supplier, the recipient will fail to satisfy the mandate of ‘tax charged in respect of such supply has been actually paid to the Government’ prescribed under Section 16 (2) (c) and resultantly, the
recipient will be obligated to reverse the ITC claimed along with interest under Section 50 of the CGST Act. This would lead to a situation where a recipient will be liable to pay GST twice on the supplies procured viz., once to the supplier and subsequently, to the Government by making appropriate reversal along with the interest due. Therefore, in absence of any redressal available under Impugned Section 16 (2) (c) of the CGST Act, a recipient of goods or services or both will get taxed twice for no fault on his part merely on account of any non- payment of tax by its supplier. Therefore, due to the provision contained under Section 16 (2) (c), levy of interest on the recipient under
Section 50 of the CGST Act despite payment of applicable tax by the recipient to the supplier merely on account of any default on the part of the supplier appears to be arbitrary and bad in law. Where the obligation of the recipient can only be limited to payment of applicable tax to the supplier, interest cannot be imposed on the recipient merely on account of any non-payment or delayed payment of tax to the Government by the supplier.
Section 16 (2) (c) is contrary to the Scheme of availment and utilization of ITC under the GST Regime
Section 16 (2)(c) imposing an unreasonable and arbitrary onus on the recipients runs contrary to the scheme of the CGST Act and the Rules wherein, on satisfaction of the substantive eligibility conditions, the recipient is entitled to the ITC and such ITC is not merely in the nature of a concession but instead, is a substantive right under the CGST Act. A perusal of Section 16 discloses that registered person becomes eligible for availing ITC on fulfilment of conditions and restrictions provided in the said section which, inter alia, requires:
Possession of tax invoice or any other tax paying document, and
Receipt of goods or services or both.
Further, in terms of the second proviso to Section 16, if the payment is not made within 180 days, they ITC is added back to the output liability of the registered person. The intention of the legislature of providing seamless credit mechanism has completely been defeated on account of lack of reasonable classification between bona fide and non bona fide recipient in the impugned Section 16(2)(c). In this regard, it is relevant to note that:-
The reason behind the introduction of the GST laws, which subsumed multiple levies, by way of replacement of the multiple indirect taxation levies such as state VAT, Central Excise, Service Tax, Central Sales Tax, Entry Tax etc., was to reduce the complexities that existed in the indirect taxation regime and to reduce the tax costs incurred by the businesses as the cross credit of such levies was not available. Thus, the GST law was introduced to remove the blockage of credit of duty paid on supplies to minimize the cascading effect of the taxes;
The aforesaid objective resounded in numerous reports and papers issued by the Government prior to the introduction of the GST. In the ‘First Discussion Paper on Goods and Services Tax in India’ issued by the Empowered Committee of the State Finance Ministers on 10.11.2009, wherein at Para 3.3 (iii), it was echoed that subsummation of taxes should result in free flow of tax credit in intra and inter- state levels;
The ‘seamless flow of credit’ was clearly stated to be in the ‘Statement of object and reason’ of CGST Act, relevant except of which has been reproduced hereinabove. Accordingly, the provisions dealing with ITC were provided under Section 16 (1) of the CGST Act;
Unlike erstwhile regime, ITC was therefore, not a concession which
was extended to the taxpayers but a substantive right forming the core of the GST legislation and Section 16(1) entitled every registered person to take credit of the input taxes ‘charged’ on any supply to him;
- As per the scheme of the GST law, the supplier is made liable for payment of GST to the credit of the Government under Section 9(1) read with Section 2(107) and Section 22 of the CGST Act. It is very clear from the said provisions that the liability to pay tax has been cast upon the supplier irrespective of whether the price of the goods and services has been paid to the supplier or not.
Thus, Section 16 (2) (c) appears to impose a manifestly arbitrary condition of ensuring actual payment of tax to the Government by the vendors/input service providers and denying the ITC on this sole basis, defeats the very purpose of the object with which the CGST Act and the provisions of Section 16 were brought in force. The entire purpose of the CGST Act and Section 16 gets defeated on account of the erroneous, irrational and manifestly arbitrary conditions of ensuring ‘actual payment’ on the recipient of inputs/input services.
Rule 36 (4) introduced w.e.f. 09.10.2019 is ultra vires the CGST Act and ex- facie unconstitutional
It seems that in absence of any substantive
provision in the CGST Act enabling restriction on ITC, Rule 36 (4) introduced w.e..f. 09.10.2019 restricts the ITC of the recipients in cases where details of invoices or debit notes have not been furnished by the suppliers under Section 37 (1) of the CGST Act in Form GSTR-1. Thus, purely by way of a delegated legislation, ITC which is otherwise enabled under the CGST Act, has been sought to be restricted merely on account of a mismatch between Form GSTR-3B and Form-GSTR2A. Rule 36 (4) of the CGST Rules is
in the nature of delegated legislation which has been enacted in exercise of the powers conferred under Section 164 of the CGST Act. It is a well- settled principle in law that a subordinate / delegated legislation can be challenged on (1) any ground on which a plenary legislation can be questioned; (2) the ground that it does not conform to the statute or is inconsistent with the statute under which it is made; and (3) the ground that it manifestly arbitrary and unjust.
Thus, instead of enforcing the already existing provisions in place, Rule 36(4) seeks to penalise the recipients for any default by the suppliers which is excessive, unreasonable and also does not serve the object behind its purported introduction viz., possibility of fraud, adverse impact on the revenue and encouragement to suppliers to file FORM GSTR-1. It appears that Rule 36(4) also goes against the very spirit of ensuring seamless availability of ITC to the recipient.
One of the major legislative intents behind introduction of GST was to reduce multiplicity of taxes and ensuring that a seamless flow of credit is available to the recipients to remove cascading of taxes to reduce cost. However, by imposing restriction on ITC that can be availed by the recipients, Rule 36 (4) goes against the very spirit of ensuring seamless availability of ITC to the recipient inasmuch as blocking of ITC would lead to increase in cost of doing business and would ultimately lead to inflation due to cascading of taxes.
In the light of the aforesaid discussion, it can be fairly concluded that Section 16 (2)(c) of the CGST Act imposes an unreasonable and onerous condition and provides an unequal treatment to bona fide recipients of goods and services. In Author’s view, any such condition which
imposes onerous condition on the recipients but fails to lay down any guidelines to comply with the same is completely illegal, arbitrary and falls foul of the constitutional mandate.
ITC is a vested right and the same cannot be taken away without the authority of law and the burden to pay tax cannot be shifted upon the recipient who has already paid the value of goods and services as well as the tax amount to the supplier.
In Author’s view, restriction upon right to claim ITC as provided under Section 16(2)(c) fails on the touchstone of Article 14, 19 as well as Article 300 of the Constitution of India. As far as the author can understand, furnishing of outward details in FORM GSTR-1 by the corresponding suppliers and the facility to view the same in FORM GSTR-2A by the recipient is in the nature of taxpayer facilitation and cannot bear any impact upon the ability of a recipient to avail ITC on self-assessment basis in consonance with the provisions of section 16 of the Act. Further, any procedural requirement cannot deny the substantive right to claim ITC which is otherwise available to a recipient. Furthermore, it is impossible for a recipient to verify that a supplier has paid tax or not. In fact, when it is sufficiently established that the recipient has paid tax and the default is on the part of the supplier, the liability for the same cannot be fastened on the recipient at all.
Thus, it can be concluded that the restrictive condition provided under Section 16 (2)(c) is completely arbitrary, illegal and stands unconstitutional in view of the forgoing discussion.
(Source: Third Prize winner of Padma Vibhushan Nani A. Palkhivala Memorial National Research Paper Competition 2022)
Central Goods and Service Tax Bill, 2017
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