Sumathi Bhaskar | Bizprout Corporate Solutions Pvt Ltd
Legal Showdown - Constitutional Challenge Throws GST Denial of ITC into Disarray
21 Mar, 2024
Denial of Input Tax Credit - Constitutional Challenge Mounted Against Section 16(2)(c) of GST Over Denial of ITC Due to Supplier Non-Payment of Tax
Case Study-1
The Orissa High Court, in the case of M/s. OSL Securities Limited V/S Union of India, has halted the enforcement of a demand under Section 73 of the OGST/CGST Act. This action follows the petitioner's assertion that despite claiming Input Tax Credit (ITC), their supplier
failed to report the transaction in its Form-GSTR-3B.
M/s. OSL Securities Limited lodged a writ petition challenging the validity of Clause (c) of Sub-section (2) of Section 16 of the Odisha Goods and Services Tax Act, 2017 (OGST Act)/ Central Goods and Services Tax Act, 2017 (CGST Act). This clause dictates that a registered person can only claim input tax credit if the tax charged for the supply has been remitted to the Government.
Disputing an order dated 27.12.2023 by the Assistant Commissioner of State Tax, Cuttack-1, Central Circle, under Section 73 of the CGST/OGST Act, demanding Rs. 11,56,818.00, encompassing tax, interest, and penalty for tax periods July 2017 to March 2018, the petitioner seeks redress.
Pending the writ petition's resolution, the court has mandated the petitioner to deposit 20% of the assessed tax within four weeks. Furthermore, no coercive measures will be taken against the petitioner until the writ petition is adjudicated upon.
Withholding Input Tax Credit from Legitimate Recipients in Cases of Non-Payment of GST by the Supplier
An essential distinction between GST and the pre-GST tax system lies in its commitment to abolishing the "cascading effect of taxes" or "tax on tax" that burdened sellers previously. Input Tax Credit (ITC) stands as a pivotal concept in realizing this objective. ITC denotes the tax paid by a business upon purchasing goods or services, which it can offset against its tax liability upon making a sale. By enabling businesses to claim credit for the GST portion paid on purchases, ITC substantially reduces their tax burden. This mechanism serves as the cornerstone of GST, facilitating smoother transactions irrespective of the seller's location, thus enhancing accessibility in sales and purchases of goods.
However, the Central Goods and Services Tax Act, 2017 (“CGST Act”), under section 16, stipulates specific prerequisites for businesses seeking to avail Input Tax Credit (ITC). One such requirement, outlined in section 16(2)(c) of the CGST Act, mandates that the tax levied on the supply of goods must be duly remitted to the government by the supplier. Consequently, a claimant can only assert their entitlement to ITC when the tax associated with the supply has been remitted to the government. This imposition of responsibility on the claimant appears arbitrary and unfeasible, given the impracticality of verifying whether the supplier has fulfilled their tax obligations. In the event of non-compliance, the claimant faces not only the denial of ITC but also the additional onus of reimbursing reverse ITC along with interest to the government. Such a provision evidently discriminates between genuine claimants and those attempting fraudulent claims of ITC.
The recent verdict from the Madras High Court in Pinstar Automotive India Pvt. Ltd. v. Additional Commissioner (20 March 2023) serves as a notable illustration of this concern. The High Court emphasized the necessity for strict interpretation of the condition delineated in section 16(2)(c) of the CGST Act, placing the onus squarely on the claimant to ensure compliance with the provision, failure of which would result in the denial of Input Tax Credit (ITC). However, the author contends that this ruling is problematic and erroneous as it deprives genuine claimants of their rightful ITC benefits. To substantiate this viewpoint, the author conducts an analysis of the aforementioned ruling in comparison with judicial precedents from both the pre-GST era and the GST regime.
Case Study-2
In the instance at hand, Pinstar Automotive India Pvt. Ltd (the petitioner) operated as an assessee under the CGST Act and received a pre-assessment notice from the respondent concerning the invocation of section 16(2)(c). The petitioner asserted that it had received supplies from three third parties – Techno Rubber Plastic and Co., Techno Rubber and Plastic, and Unique Autoplastics Private Limited – and had duly paid the entire amount, including taxes, to them. However, upon investigation, it surfaced that the suppliers had not filed GSTR 3B, and consequently, no tax had been remitted to the department. As a result, the petitioner suffered a reversal of ITC. Despite providing evidence of fulfilling all statutory conditions, the petitioner's stance was unilaterally dismissed by the respondent, who issued an order confirming the demand outlined in the pre-assessment notice. Discontented with this decision, the petitioner sought redress from the High Court, invoking section 161 of the CGST Act to rectify errors evident on record.
Following a thorough examination of arguments from both parties, the Court ruled that the stipulations outlined in section 16 of the CGST Act for ITC claims must be strictly construed to safeguard the interests of revenue. Notably, the Court emphasized that the CGST Act, drawing upon insights from previous tax regimes, took proactive measures to safeguard revenue interests by mandating that tax liability be settled by either the supplier or the purchaser. Consequently, the Court determined that the department bore no responsibility for the suppliers' failure to remit taxes. Instead, it clarified that compliance with section 16 rested squarely upon the supplier or purchaser, failing which they would forfeit entitlement to ITC.
In summary, the constitutional challenges mounted against Section 16(2)(c) of the GST Act have brought to light fundamental tensions within the GST regime. Cases such as M/s. OSL Securities Limited and Pinstar Automotive India Pvt. Ltd. highlight the intricate balance required between taxpayer entitlements and revenue safeguarding measures. As the judiciary deliberates on these issues, it becomes apparent that a nuanced understanding of the GST framework is crucial to ensure equitable treatment of taxpayers while upholding the integrity of the tax system. The outcomes of these legal battles will not only shape the interpretation of GST provisions but also set precedents that will significantly influence the operational landscape for businesses and tax authorities alike. Moving forward, fostering clarity, coherence, and fairness within the GST framework will be essential to promote compliance and facilitate smooth functioning of India's indirect tax regime.
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Source from studycafe and Indiacorplaw……
Publisher: Sumathi Bhaskar | Bizprout Corporate Solutions Pvt Ltd
