Seemingly Less Credit or Seamless Credit

This article is mainly on Section 16(2)(C) and Section 17(5) of the CGST Act, 2017. Before introduction of GST in India on 01/07/2017, the expectations all over India was on Seamless credit of ITC. Undoubtedly, this is achieved to a larger extent as several curbs on ITC are removed under GST Law. While the trade and industry are benefited on this improvement, it is high time that the legislature may revisit the above two sub sections.

Let us first examine 16(2)(C). The section is reproduced below:

“Subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or though utilization of input tax credit admissible in respect of the said supply”.

While apparently the legislature had very nicely drafted the above provision, it would not have impacted the trade and industry had the provisions been implemented appropriately. What is happening is that the field formation apply this section 16(2)(C) as a tool to deny ITC to genuine buyers. High Court has ruled down this sub section as the parliament has failed to distinguish the difference between genuine buyers and others.

There are cases where receipt of good is established, payment including GST to supplier is made through banking channel and movement of goods are also proved by e way bills and despite all this, the GST officials deny ITC on the sole ground that the supplier did not pay the applicable GST to the Government. This is where the litigation begins and there are several decisions of all jurisdictional high courts in favor the taxpayer, wherever this sub section is applied wrongly.

This situation forces me to think on the following lines, which I thought that I must share with fellow tax professionals.

First of all how it would be possible for a small trader to monitor the GST payments of his suppliers?. The Government has the data on this and can always recover the GST from supplier and in exceptional cases, where it is really impossible to do so, may approach the receiver under exceptional situations. In reality, the receiver is targeted first.

While the receiver of goods for whatever reason fails to make payment of GST to the supplier within 180 days, ITC is denied which is right approach to avoid bogus transactions. However, when the receiver has paid full dues including GST to the supplier through banking channel, section 16(2)(C) should not be applied as the Government has huge powers to recover the GST already collected from customer directly from the supplier. In my view, if the supplier fails to remit GST dues on the appointed date either through cash ledger or credit ledger, even after collecting such GST from the receiver, the Government should monitor such cases and initiate even prosecution but once it is established that transactions are genuine and GST is paid by the receiver, the receiver must be allowed to be free from harassment.

The word harassment is used after careful thought as in several cases, genuine buyers are forced to several consequences once 16(2)(C) is wrongly invoked such as non availability of genuine ITC, reply to show cause notice, personal hearing, get only adverse order in 99 % of the cases and go for appeal under Section 107. As per my personal experience almost around 50 % of the orders passed under Section 107, irrespective of the strong legal basis are decided against the taxpayer which forces taxpayers to file writs in Jurisdictional High Courts. Though, in genuine cases, the taxpayer get relief on tax front, no cost is imposed.

As GSTAT is already functional now, writs may be rejected quoting appeal remedy. Under these circumstances, as already there are several high court orders on wrong invocation of this sub section, which are binding on tax officials, they are expected to be more vigilant in wrong invocation of 16(2)(C) in future, as taxpayers shall be knocking the doors of GSTAT definitely. GSTAT may take a stand that wherever any provision is wrongly applied by tax officials despite clear rulings on identical matters by jurisdictional high courts, passing strictures against the tax officials as well as imposition of cost are the requirements to bring down litigation on settled issues.

This write up is not against any tax officials but only to improve the quality of the orders passed by such tax officials as it should stand the test when tried in GSTAT. The GSTAT is altogether a different fora from High courts in several ways. Based on my experience with CESTAT, the bench may not take more than 15 minutes when it takes a settled issue and pass a simple order that the appeals are allowed. This is going to happen in almost 80% of the cases, wherever sections are applied incorrectly by tax officials on issues already settled by High Courts as GSTAT is a specialized court which deals exclusively on GST issues.

In the like manner all sub sections under section 17 have strong rationale whereas sub section 5 is not having any logic for the denial of credits. The purpose of definition of terms input, input service as well as capital goods in very wide manner is defeated as 17(5) is overriding provision. The GST Council may kindly consider to amend 17(5) at least to allow the views of the Supreme Court in the matter of Safari Retreats to prevail in the coming meeting.

Let us analyse a minimum of five different high court rulings on 16(2)(C) in the next article.