Purchaser denied Input Tax Credit when any seller in supply chain fails tax payment under Section 16(2)(c) CGST Act

The AAR Punjab ruled that a purchaser cannot claim Input Tax Credit on purchases where the immediate seller discharged tax liability but preceding sellers in the transaction chain failed to discharge their obligations. Under Section 16(2)(c) of CGST Act, ITC eligibility requires actual tax payment by all sellers in the supply chain, either through cash or input tax credit utilization. Despite the purchaser possessing valid invoices, making payments through banking channels, and having no collusion with sellers, the non-payment of tax by any seller in the chain disqualifies ITC claim. The application was disposed of accordingly.

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Issues Involved:
1. Entitlement to Input Tax Credit (ITC) when the preceding seller has not discharged its tax liability.
2. Mechanism for ensuring tax liability discharge by all sellers in the transaction chain.
3. Eligibility for ITC in the absence of government-provided infrastructure to ensure tax liability discharge by sellers.
4. Entitlement to ITC when the immediate seller has not paid tax, despite the purchaser having all relevant documents and no collusion.

Issue-wise Detailed Analysis:

Issue 1: Entitlement to Input Tax Credit (ITC) when the preceding seller has not discharged its tax liability:
The applicant sought to determine whether they could claim ITC on purchases from a seller who discharged its tax liability, but the preceding seller did not. According to Section 16(2)(c) of the CGST Act, 2017, and PGST Act, 2017, a registered person is not entitled to ITC unless the tax charged on the supply has been actually paid to the government. This implies that if the preceding sellers have not deposited the tax, the purchaser cannot claim ITC. The ruling concluded that the purchaser is not entitled to claim ITC if the preceding seller has not discharged its liability, even if the immediate seller has.

Issue 2: Mechanism for ensuring tax liability discharge by all sellers in the transaction chain:
The applicant questioned how they could ensure that all sellers in the transaction chain have discharged their tax liabilities. However, this query was deemed outside the purview of Section 97(2) of the CGST Act and PGST Act, which lists the scope of questions for Advance Ruling. Therefore, no ruling was provided on this issue.

Issue 3: Eligibility for ITC in the absence of government-provided infrastructure to ensure tax liability discharge by sellers:
The applicant raised concerns about the lack of infrastructure provided by the government to ensure that all sellers in the transaction chain discharge their tax liabilities. Similar to Issue 2, this query was also found to be outside the scope of Section 97(2) of the CGST Act and PGST Act. Consequently, no ruling was issued on this matter.

Issue 4: Entitlement to ITC when the immediate seller has not paid tax, despite the purchaser having all relevant documents and no collusion:
The applicant sought clarity on whether they could claim ITC if the immediate seller had not paid tax, provided the purchaser had all relevant documents and there was no collusion. This query, like Issues 2 and 3, was outside the scope of Section 97(2) of the CGST Act and PGST Act. Thus, no ruling was made on this issue.

Conclusion:
The Authority for Advance Ruling, Punjab, concluded that the purchaser is not entitled to claim ITC on purchases if the preceding seller has not discharged its tax liability, as per Section 16(2)(c) of the CGST Act and PGST Act. The other queries raised by the applicant were not addressed as they fell outside the scope of Section 97(2) of the CGST Act and PGST Act.

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