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The article explains the Meaning of Input Tax, Eligibility and Condition of Taking input tax credit, what is Blocked Credit under GST, and the Legality of block credit

Introduction

"input tax" in relation to a registered person, means the Central Tax, State tax, Integrated Tax, or Union Territory Tax charged on any supply of goods or services or both made to him and includes-

(a) the integrated goods and services tax charged on import of goods;

(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9;

(c) the tax payable under the provisions of sub-sections (3) and (4) of section 5- (Levy and Collection) of the Integrated Goods and Services Tax Act;

(d) the tax payable under the provisions of sub-sections (3) and (4) of section 9- (Levy and Collection) of the respective State Goods and Services Tax Act; or

(e) the tax payable under the provisions of sub-sections (3) and (4) of section 7- (levy and collection) of the Union Territory Goods and Services Tax Act, but does not include the tax paid under the composition levy;

As per Sec 16 of the CGST Act 2017, every registered person shall be subject to such conditions and restrictions as may be prescribed and in the manner specified and will be entitled to the credit of input tax charged on the supply of goods and/ or services which are used or intended to be used in the course or furtherance of his business.

Sec 17 of the CGST Act 2017 deals with the Apportionment of Credit and Blocked Credit. As per subsection 5 of the Sec 17 of the CGST Act 2017, the Input Tax Credit cannot be availed for a certain class of supply of goods and services. In other words, it can be interpreted that Sec 17(5) of the CGST Act 2017 deals with the items on which credit is not allowed under GST.

Legality Status of ITC Block by GST Department

Eligibility and Condition of Taking input tax credit

16. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed3 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.

(2) 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, - 

(a) 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 prescribed4;

(b) 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.]

(c) 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 the utilization of input tax credit admissible in respect of the said supply; and

(d) he has furnished the return under section 39:

Provided that where the goods against an invoice are received in lots or installment, the registered person shall be entitled to take credit upon receipt of the last lot or installment:

  • 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 a 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

(3) 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, the input tax credit on the said tax component shall not be allowed

(4) A registered person shall not be entitled to take the input tax credit in respect of any invoice or debit note for the 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 the financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.

 

Rule 86A- Blocked Credit under GST

Rule 86A was introduced by the government vide Notification no. 75/2019 dated 26.12.2019 to block fraudulently availed ITC. The main purpose behind the introduction of this Rule was to block the use of fraudulently availed ITC. As per this Rule, a Commissioner or any officer authorized by him can block the ITC available in the electronic credit ledger of the taxpayer if he has ‘reasons to believe that he has fraudulently availed ITC.

Conditions under which ITC in the electronic credit ledger can be blocked

The commission or any officer authorized by him, not below the rank of an Assistant Commissioner, can block a taxpayer’s ITC provided he has reasons to believe that the ITC is claimed fraudulently or the ITC is ineligible as follows-

The tax invoices basis that ITC is being claimed has been issued by a registered person who is found to be non-existent or is not conducting business from the place for which the registration has been obtained. The ITC is available on an invoice for which supply has not been received.

ITC is availed on an invoice on which tax has not been paid to the government.

ITC is availed by a registered person who is found to be non-existent or is not conducting business from the place for which the registration has been obtained.

The registered person does not have the invoice or debit note basis on which he is claiming ITC.

The Commissioner may allow the use of credit if he finds that the conditions for disallowing the credit no longer exist.

The legality of ITC blocking

As per section 16(1) of the CGST Act, all registered taxpayers who have paid tax on their inward supplies used to further their business can claim ITC on such taxes paid. Certain conditions for availing of ITC and restrictions on claiming ITC are mentioned under sub-section (2), (3), and (4) of Section 16 and Section 17 of the CGST Act. A taxpayer shall claim ITC after considering such conditions and restrictions.

Claiming ITC for discharge of the output tax liability is a legal right of the taxpayer, and it can be blocked only through specific powers of the Law. Thus, a taxpayer has a legal right to avail of ITC and use the same for discharging his output tax liability.

None of the provisions under Section 16 or Section 17 of the CGST Act empowers the government to block ITC. Also, no other provision under the CGST Act allows the government to restrict ITC. However, Section 164 of the CGST Act empowers the government to make rules for carrying out the provisions of the CGST Act. By using this right, the government has introduced Rule 86A, which empowers the Commissioner to block ITC.

Scope of Rule 86A: Rule 86A was introduced to provide the Department with a legal right to block ITC by the Tax Officer if the said ITC has been availed fraudulently. The invocation of Rule 86A requires the existence of reasons to believe that the ITC has been wrongly availed, along with supporting documents. In the absence of proper reasons to believe, the invocation of Rule 86A would be malafide.

In the pre-GST regime, the Input tax credit could be claimed based on the majority of two conditions that the buyer should have received the goods or services or both and he should have possession of valid documents as prescribed under relevant laws. Further in the pre-GST regime, if any such type of condition ever introduced in previous laws then it is criticized by the judiciary. Below mentioned are instances of judicial stands regarding this issue:

Jharkhand High Court decided as under in case of Tarapore & Company Vs. State of Jharkhand dated 17.12.2019

We are satisfied that the petitioner had discharged its liability under the VAT Act, and there being no mechanism under the JVAT Act, by which, the petitioner could compel the seller also to discharge their duty, it was not within the competency of the petitioner to compel the selling dealer to file the return within the stipulated time, and deposit the tax collected from the petitioner in the Government Treasury.

In the backdrop of these facts, we do not intend to enter into the challenge to the vires of Section 18(8) sub-clause (xvii) brought by way of amendment, or into the questions of limitation, or defect in the notice, if any, as we are satisfied that due to the bona fides on part of the petitioner, no punitive action was required to be taken, or warranted against the petitioner.

Delhi High Court in case of Arise India Limited vs. CTT dated 26.10.2017

There is a failure by the legislature to make a distinction between the purchasing dealer who has bona fide transacted with the selling dealer by taking all precautions as required by the DVAT Act and those that have not. Therefore, there was a need to restrict the denial of ITC only to the selling dealers who had failed to deposit the tax collected by them and not punish bona fide purchasing dealers.

Article 14 of the Constitution of India states that "The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India." Restricting the input tax credit to the bonafide buyer due to the fault of the seller, which is not under the control of the buyer and there is no mechanism under present GST law to cross-check such fault, is discriminatory and violative to the provisions of article 14 of the constitution of India.

Suppose, if a buyer Mr. A has made purchases of Rs. 118000/- incl. IGST of Rs. 18000/- from Seller Mr. B in June 2021. However, Mr. B has paid the tax on the same through GSTR-3B but has not disclosed the invoice under GSTR-1. In this case, Tax has been actually paid to the government by the seller but since it will not appear in GSTR -2B and consequently Mr. A cannot claim the credit of such input tax even though the tax has been paid to the government. Notices to reverse such input tax credit if taken are creating double taxation on buyers.

Delhi High court in the case of Bharti Airtel Limited Vs Union of India has also admitted that the government has failed to fully enforce the scheme of the Act due to lack of technical infrastructure and cannot take benefit of its own wrong of not providing the facility for matching ITC and on account of this statutory right of taxpayers to claim ITC cannot be defeated.

 

LGW Industries Limited & Ors. Vs. Union of India & Ors. (Calcutta High Court) W.P. No. 23512 (W) of 2019, dt 08.01.2020

wherein the petitioner has challenged the constitutional validity of Section 16(2)(c) of the CGST Act/WBGST Act, which seeks to deny ITC to a buyer of goods or services, if the tax charged in respect of the supply of goods or services has not been actually paid to the Government by the supplier of goods or services • the ground that denying ITC to a buyer of goods and services would tantamount to treating both the ‘guilty purchasers’ and the ‘innocent purchasers’ at par whereas they constitute two different classes • shifting the incidence of tax from the supplier to the buyer, over whom it has no control whatsoever, is arbitrary and irrational & therefore violative of the Article 14, Article 19(1)(g) and Article 300A of the Constitution of India.

It would also clearly frustrate the underlying objective of removal of cascading effect of tax as stated in the Statement of object and reasons of the Constitution (One Hundred And Twenty-Second Amendment) Bill, 2014 • in the absence of any finding of petitioners mala fide intention, connivance or wrongful association with the suppliers, no liability can be imposed on it on the principle of vicarious liability on account of fraudulent conduct of the suppliers, who have obtained registration on the basis of fictitious documents

Sahil Enterprises v. Union of India - [2021] 129 taxmann.com 233 (TRIPURA)

Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 provides that a registered dealer would be eligible for claiming input tax credit on the goods purchased on the condition that the tax charged in respect of such supply has been actually paid to the Government, either in cash or through the utilization of input tax credit admissible in respect of such supply. In this case, the petitioner paid CGST on the purchases made from a registered dealer. But such dealer didn’t pay tax and it submitted that it has no control over the seller to ensure that such tax is deposited with the Government revenue as it is a statutory obligation of the seller. Denying to the petitioner input tax credit on such purchases on which the petitioner has already paid tax on the ground that the selling dealer did not deposit the tax with the Government revenue would amount to double taxation.

The petitioner filed a writ petition and challenged the vires of Section 16(2)(c) being violative of Articles 14, 19(1)(g), and 300A of the Constitution of India. The Honorable High Court noted that with respect to certain purchases made by the petitioner from another registered dealer after paying full taxes, the selling dealer has not deposited the tax with the Government. The department, therefore, put the petitioner’s input tax credit account under attachment. Since this issue would require consideration and legislation framed by the Parliament is under challenge, notice is issued to the Attorney General.

Infiniti Wholesale Limited Vs Assistant Commissioner (CT) (Madras High Court)

Asstt Commissioner (CT) v. Infiniti Wholesale Ltd. [2017] 77 taxmann.com 372 (Mad.) - The Hon’ble High Court of Madras held that if the sales are not disclosed by a seller either in the monthly returns or the tax collected from the dealer is not made over to the Department by such seller, the action lies against the defaulting seller and not against the buyer.

Sri Ranganathar Valves Private Limited Vs The Assistant Commissioner (CT) (FAC) (Madras High Court)

The present Writ Petitions relate to restriction of the amount of Input Tax Credit (ITC) predominantly on the head of (a) Prior sufferance of Taxes; (b) ITC on reversal on wastage; and (c) Ineligible claim of ITC on goods. The impugned orders are set aside and the issue with regard to restriction of the amount of Input Tax Credit for prior sufferance of taxes is remanded back to the Assessing Officer for fresh consideration. The Assessing Officer shall, before taking a final decision, extend the due opportunity of personal hearing to the petitioner and endeavor to complete the proceedings, at least within a period of twelve weeks from the date of receipt of a copy of this order.

In view of the judgment of this Court in Shri Ranganathar Valves (supra), it is open to the Assessing Officer to issue a show-cause notice to the petitioner calling for his objections with regard to "Input Tax Credit on reversal on wastage" and "Ineligible claim of ITC on goods" are concerned.

CONCLUSION

Government intention behind taking the above-mentioned steps, whether restricting the quantum of input tax credit by rule 36(4) or claim of the input tax credit on the basis of GSTR 2A by insertion of new clause (aa) under section 16, is to curb the practice of claim of the input tax credit through fake invoices, which is highly appreciated and really the need of the hour. But putting the entire burden on a buyer without providing them any facility to cross-check whether the supplier has paid the tax or not is unjustified and creating undue hardships to the bona fide buyer who has received goods or services, paid the tax to the seller, and having possession of valid document to claim ITC.

Recently validity of section 16(2)(c) of the CGST Act challenged cases of M/s Shree Gobind Alloys Pvt. Ltd. Vs. Union of India and others in Orissa High Court dated 05.05.2021 and M/s Surat Mercantile Association Vs. Union of India in Gujarat High court dated 03.12.2020. Hope we will get more clarity and judicial stand on this issue soon.

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