Will non-compliance of suppliers lead to ITC reversal by the recipient?

Reversal of input tax credit by the recipient due to non-compliance by the supplier is one of the biggest issues faced by the taxpayer since the implementation of GST.

1st February 2022
Budget 2022 updates-
1. ITC cannot be claimed if it is restricted in GSTR-2B available under Section 38.
2. Time limit to claim ITC on invoices or debit notes of a financial year is revised to earlier of two dates. Firstly, 30th November of the following year or secondly, the date of filing annual returns.
3. Section 38 is completely revamped as ‘Communication of details of inward supplies and input tax credit’ in line with the Form GSTR-2B. It lays down the manner, time, conditions and restrictions for ITC claims and has removed the two-way communication process in GST return filing on the suspended return in Form GSTR-2. It also states that taxpayers will be provided information of eligible and ineligible ITC for claims.
4. Section 41 is also revamped to remove the references to provisional ITC claims and prescribes self-assessed ITC claims with conditions.
5. Sections 42, 43 and 43A on provisional ITC claim process, matching and reversal are eliminated.

29th December 2021
CGST Rule 36(4) is amended to remove 5% additional ITC over and above ITC appearing in GSTR-2B. From 1st January 2022, businesses can avail ITC only if it is reported by the supplier in GSTR-1/ IFF and it appears in their GSTR-2B.

21st December 2021
From 1st January 2022, ITC claims will be allowed only if it appears in GSTR-2B. So, the taxpayers can no longer claim 5% provisional ITC under the CGST Rule 36(4) and ensure every ITC value claimed was reflected in GSTR-2B.

Eligibility conditions to claim ITC

A registered taxpayer can claim an input tax credit on the taxes paid on its inward supplies subject to the below conditions:

1. The taxpayer has a valid tax invoice.
2. The taxpayer has received the goods or services on which he is claiming ITC.
3. The buyer should have paid the invoice value to the supplier within 180 days from the date of the invoice.
4. The supplier should have paid the tax amount collected from the buyer into the government account.
5. ITC is not allowed if depreciation is claimed by the taxpayer on the tax component of a capital good.
6. ITC can be claimed on earlier of the below two dates:
   • Due date of filing GST return for September of next financial year
   • Date of filing the annual return for that financial year
7. The supplier has uploaded the invoice details in its GSTR-1.

ITC reversal and cases of ITC reversal

Reversal of ITC means adding back the credit utilised earlier to the output tax liability. ITC can be reversed under various scenarios as mentioned in the Act. Some of the cases of ITC reversal are:

1. If the inputs are used to make an exempt supply.
2. If ITC is claimed on blocked credits.
3. If ITC is claimed on inputs used for goods that are stolen or destroyed.
4. If ITC is claimed on inputs used for goods supplied as free samples.
5. If ITC is claimed on inputs used for goods supplied for non-business purposes or personal use.
6. The recipient fails to make payment to the supplier within 180 days from the date of issue of the invoice.
7. If the concerned taxpayer applies for the cancellation of GST registration.

What does the GST law say about ITC reversal by the recipient?

Some of the provisions related to claiming of ITC and its reversal are discussed below:

Section 16(2)(c) of the CGST Act: As per this section, ITC can be claimed only if the tax collected by the supplier is paid to the government either in cash or through the utilisation of its admissible ITC in respect of such supply. 

Section 41 of the CGST Act: This section talks about claiming ITC on a self-assessment basis. Such an amount gets credited to the electronic credit ledger of the taxpayer, which can be utilised for payment of self-assessed output tax liability.

Section 42(2) of the CGST Act: This section talks about claiming ITC, which matches the IGST paid under section 3 of the Customs Tariff Act. 

Section 42(3) of the CGST Act: As per this section, if the ITC claimed by the recipient is more than the tax declared by the supplier on that particular sale or has not declared such a sale in his returns, then such discrepancy should be communicated to both the parties.

Section 42(5) of the CGST Act: This section states that if the discrepancy communicated in section 42(3) is not rectified by the supplier in his valid return for the month in which such discrepancy is communicated the such ITC shall be added back to the output tax liability of the recipient.

Thus, Section 42 nowhere talks about the automatic reversal of ITC. There should be no reversal of ITC until matching is done between the supplier and the recipient.

Section 43: This section states the provisions related to matching of ITC, reversal of ITC and reclaims of reduction in output tax liability.

Section 43A: This section deals with filing GST returns and the procedure for claiming the input tax credit.

All the above provisions are not functional provisions related to problems faced by the taxpayer on the common portal.

The recipient of supply has no means to ensure that the tax collected by the supplier in respect of supply has been paid to the government. Moreover, there is no administrative mechanism related to the automatic reversal of ITC. Thus, rejection of ITC and recovery thereof is not reasonable.

In its press release 4th May 2018, Council recommendation: The GST Council has mentioned that there should be no automatic reversal of credit from the buyer on non-payment of tax by the seller. Instead, the recovery should be made from the seller. However, the tax authorities can do ver, a reversal from the buyer’s credit to address exceptional situations like missing dealers, closure of business by the supplier, etc.

What are the latest court verdicts on ITC reversal byrecipients?

D.Y. Beathel Enterprises Vs State Tax Officer- Madras High Court

Facts: The petitioners had purchased goods from Charles and his wife Shanti. The petitioner had made payment for the sale consideration entirely through banking channels. The payments included a tax component as well. The supplier Charles and his wife are also registered under the same assessment circle. However, the suppliers didn’t pay tax to the government. 

Explanation: 

1. The seller had not paid the collected taxes to the government. But, the tax officers didn’t take any recovery action against the seller (Charles and his wife) in the present case. Furthermore, there was no movement of goods which makes it more necessary on the part of the respondents to take a stand that the petitioners have not even received the goods and had availed input tax credits on the basis of generated invoices.
2. Also, as per the GST Council recommendation, there should be no automatic reversal of ITC. The recovery should be made from the seller, and he should be examined. The reversal from buyer’s ITC can be done only in exceptional cases like missing dealers, closure of the supplier’s business etc.

Conclusion: The Madras High Court held that Charles and his wife should be first summoned by the GST Department and should be asked to pay GST and no automatic reversal of ITC. 

The Supreme Court held a similar stand in the case of Commissioner of Trade & Taxes, Delhi and others Vs. Arise India Limited and others. The Supreme Court held:

1. Treating a guilty purchaser and an innocent purchaser equally violates Article 14 of the Constitution of India.
2. The purchaser cannot do the impossible task of anticipating that the seller will not deposit the collected tax to the government.