As the economy recovers from the COVID-19 pandemic and Goods and Services Tax (GST) collections soar, the government has sought to plug the gaps in the GST statute as regards credit availment.
At the time of its enactment, the Central Goods and Services Tax Act, 2017 (CGST Act) envisioned an interactive return system, wherein the invoice details would be communicated to the recipients in real time and the latter could accept, delete or modify the details. This would have meant that credit availment was undertaken after a due process of matching. It would have also meant that the recipient had the opportunity to highlight within the GSTN ecosystem, when a supplier has failed to report an invoice or reported an incorrect invoice. Such visibility would have also given the tax authorities ready data to first go after the suppliers instead of asking genuine recipients to reverse their credits.
However, technological limitations did not allow for this interactive system to be implemented and its provisions continued to sit in the statute book while the hopes for implementation of such system dwindled with each passing year. Meanwhile, the government introduced several measures to ensure that recipients get credit only to the extent of tax which has flowed into government coffers from the suppliers. These measures were implemented by way of insertion of rules such as Rule 36(4) of the CGST Rules along with statements such as GSTR-2A and GSTR-2B.
By the proposed amendments in the Finance Bill, 2022, the intention appears to be removal of the provisions pertaining to matching and the interactive system originally envisaged. Instead, the aim seems to be codification of the various measures taken by the government for curtailing credit availment to the extent of tax paid by the suppliers. The Finance Bill seeks to insert a condition as clause (ba) under Section 16(2) of the CGST Act, requiring that credit can be availed only if such credit has not been restricted under Section 38 of the CGST Act.
The erstwhile Section 38 of the CGST Act has been substituted with a provision for communication of an auto-generated statement (i.e. GSTR-2B) to the recipient, which will specify supplies where the recipient can take credit and those where the supplier cannot take credit. Read with Section 16(2)(ba), this would mean that the recipient will now be statutorily bound by the unilateral communication in GSTR-2B as regards availability of their credits. It leaves no scope for the recipient to ‘self-assess’ their credits as envisioned in the newly substituted Section 41 of the CGST Act.
In addition to the above, the amended Section 38 lists several cases where it will be communicated to the recipient that credit cannot be availed due to various defaults of the supplier. For example, credit of a supply received from:
A registered person who has defaulted in payment of GST and the default continues for the prescribed period.
A registered person whose GST payable as per his GSTR-1 exceeds GST paid by him as per GSTR-3B during the prescribed period and such excess is beyond the prescribed limit.
A registered person who has availed credit as per GSTR-3B in excess of credit that can be availed by him as per GSTR-2B and such excess is beyond the prescribed limit.
A registered person who has defaulted in discharging his GST liability by utilizing excess credit than the permissible limit.
These provisions essentially enforce a policing system, where recipients have to constantly monitor their supplier’s compliances to ensure their credits remain intact instead of the authorities pursuing defaulting suppliers.
Moreover, the defaults mentioned in the proposed change are no longer limited to non-payment of tax liability or non-declaration of supplies in GSTR-1 by the supplier, but also include excess availment of credit by the supplier or payment of tax liability by the supplier using credit beyond the permissible limit. Notably, the amending provisions seek to restrict credit on defaults of the supplier which do not even have a direct nexus with the supply received. This means that post amendment, recipients could be denied credit on factors beyond their control and for which they have no visibility. In absence of this visibility, it begs the question whether recipients can now rely on declarations from the suppliers, as was being done thus far.
In the past, there has been sustained jurisprudence where courts have held that the tax authorities are to pursue the defaulting sellers and not the bona fide recipients. For instance, in the case of Arise India Ltd, the Supreme Court upheld the Delhi High Court’s decision to hold a similar restriction under the Delhi VAT Act unconstitutional. Even under the GST regime, the Calcutta High Court in the case of LGW Industries Ltd held that benefit of credit should be given to genuine recipients having valid documents.
The proposed amendments in the Finance Bill, 2022 cast impractical obligations and restrictions on recipients, which may open them to challenge before the courts of the country. Here it remains to be seen whether the abovementioned judgments could aid in a challenge to these provisions.
Another restriction proposed under Section 38 is to restrict credit in the hands of the recipient if the GST payable as per GSTR-1 of its supplier exceeds the tax paid in GSTR-3B by the supplier beyond permissible limits. GSTR-3B is a summary document and does not allow for invoice-wise bifurcation of the payment. The supplier may have paid some liabilities (including the supply to the relevant recipient) but not others or may have paid part of liability on the supply to the recipient. However, on a strict reading of Section 38, if the supplier has defaulted, none of his recipients would be able to take credit.
Further, a pertinent question that arises is regarding availment of credit in case of payment of tax under reverse charge or on imports. Presently, Section 16(2)(ba) categorially allows credit only in cases where the details of input tax have been communicated and not restricted under Section 38. This would entail that credit where no such details are communicated is automatically disallowed to the recipient. Notably, the prescribed statement for communicating these details, namely GSTR-2B, does not include self-invoices for reverse charge. A recipient is statutorily required to raise self-invoices in case of reverse charge supplies received from unregistered suppliers/foreign suppliers.
Further, even though GSTR-2B has a facility to provide details of bills of entry filed by the recipient within the tax period, it has been the practical experience of many taxpayers that the list of bills of entry is often incomplete. One may contend that the provision has to be read down to this extent to allow for credit of such procurements. However, this does not prevent litigation due to mismatch between GSTR-2B and GSTR-3B credits.
Leakage of credits has been a grave concern for the government and efforts have been made to link the credit eligibility of the recipient with the payment of taxes by the suppliers since the erstwhile VAT regime. However, without a methodology in place to segregate genuine recipients from fraudulent charlatans, the proposed provisions will aggravate the plight of the former. In the present state of affairs, where any mismatch between GSTR-2A or GSTR-2B with credits availed in GSTR-3B leads to issuance of notices, these changes will set the stage for a new wave of litigation in the GST regime.
Anshul Mathur and Nitum Jain are Partner and Principal Associate respectively at Lakshmikumaran & Sridharan