One of the fundamental features of Goods and Services Tax (GST) is the uninterrupted and seamless flow of input tax credit from the manufacturer of goods till they are consumed.

Input Tax Credit (ITC) is a mechanism to avoid cascading of taxes. Though the intention under the GST regime was to provide seamless availability of credit, the same has become the root cause of litigation.

Claiming input tax credit

As per the provisions of the CGST Act, 2017, ITC means the credit of the tax charged on any supply of goods or services or both made to a registered person. Section 16 of the CGST Act provides the conditions for availing ITC. Sub-section 4 specifically provides that a registered person shall be eligible to avail ITC in respect of the invoices or debit note for the supply of goods or services within the due date of filing of return under Section 39 (furnishing an electronic return of inward and outward supplies of goods or services or both, input tax credit availed, tax payable, tax paid and other particulars) for the month of September following the end of the financial year to which the invoice or debit note pertains or furnishing the relevant annual return, whichever is earlier.

The relevant portion reads as under:

“16(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under Section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.”

Further, by way of the Finance Bill, 2022, an amendment has been made to Section 16(4) of the CGST Act, substituting the time limit to avail the input tax from September to November 30. The said provision is an offshoot of the excise laws where manufacturers were permitted to claim credit on inputs on the basis of duty paying documents, within one year of the date of issue of such document [Rule 4 of the CENVAT Credit Rules, 2004.]

The said Section makes the claim of ITC time-bound. According to the said Section, in respect of any invoice or debit note, ITC must be claimed by the recipient either before the furnishing of returns under Section 39 or the relevant annual return, whichever is earlier. Hence, the period within which ITC is to be claimed depends on the date of the invoice or the debit note. The law is crystal clear in terms of this interpretation.

What is the position with respect to debit notes?

A debit note is a document issued by the supplier under Section 34(3) of the CGST Act, to increase the taxable value of the goods or services or to increase GST charged on an invoice. The said provision with respect to the debit note restricted the time limit to the date of the invoice to which such debit note relates. An amendment, however, was made by way of the Finance Act, 2020 to Section 16(4) of the CGST Act, in order to delink a debit note from the original invoice date while calculating the time limit under the said Section.

Subsequently, the Central Board of Indirect Taxes and Customs (CBIC) by way of a circular, also clarified that the relevant date in case of a debit note for determining the financial year for the purpose of Section 16(4) is the date of issuance of the debit note and not the date of the underlying invoice. As per the clarification provided by the CBIC through its circular, credit claimed in the financial year 2021-22 based on a debit note issued in the financial year 2020-21 for which the supply was made in the financial year 2019-20 was held to be valid.

The ruling in Vishnu Chemicals Limited

Though the law laid down gives ample clarity on how to claim credit, recently, an Appellate Authority for Advance Ruling sought by Vishnu Chemicals Limited held that the assessee was not eligible to claim input tax credit by considering the date of supply instead of the date of invoice. The said claim was declined, on the ground that the supply of services pertained to the previous financial year.

In the present case, the appellant was engaged in the manufacture of chemicals. For storing raw materials as well as finished products, the appellant entered into a lease agreement with Usha Tubes and Pipes Pvt Ltd (UTPL). For the months of April 2018 to March 2019, UTPL issued a single tax invoice specifying the rent for 12 months dated April 1, 2020. The appellant approached the Authority for Advance Ruling (AAR) seeking clarity on whether the invoice dated April 1 is eligible for ITC if claimed before filing the return for September 2021 or the annual return for the financial year 20-21 in terms of Section 16(4) of the CGST Act.

The AAR held that the said invoice pertains to the services rendered in the financial year 2018-19 and hence is hit by limitation for claiming ITC under Section 16(4). It was further held that availing ITC on such invoice amounts to contravention of the condition specified under sub-section (4) of Section 16.

An appeal was filed by Vishnu Chemicals against the said decision of the AAR before the Appellate Authority for Advance Ruling. It was contended that there is no condition under Section 16(4) which indicates that only invoices issued within 30 days of the supply of services are eligible for credit. It was also contended that the restriction under Section 16(4) is not for the supplies made during a financial year, but only for the documents issued during the financial year.

The Appellate Authority took note of the fact that the supply of renting services was provided between April 1, 2018 and March 31, 2019, which pertains to the Financial Year 2018-19, but the invoice was raised on April 1, 2020, which pertained to the Financial Year 2020-21. Hence, irrespective of the date of invoice, the supply of services pertained to the financial year 2018-19. It was further held that the recipient is not entitled to avail ITC of the invoice pertaining to the financial year 2018-19 before furnishing the return under Section 39 for the month of September 2019 following the end of the financial year 2018-19 to which such invoice pertains or furnishing of the relevant annual return for the year 2018-19, whichever is earlier.

The reason for denial of the credit was that it was not claimed in the same financial year in which the said supply of service was made. The date on which the invoice was raised was not considered for the purpose of this ruling, which is the basis for determining the period of limitation for claiming ITC as per Section 16(4) of the Act.

Consequences for the industry

As a consequence of this ruling, a registered person will be denied of the legitimate claim of ITC for the supply of goods or services for which there has been a delay in raising of the invoice. For the goods or services supplied in the previous financial year, if an invoice is raised in the current financial year, the input tax cannot be claimed by the registered persons.

Further, the government will be unduly enriched. On one hand, the supplier of goods will have to pay interest and penalty for the delay in raising the invoice, and on the other hand. the recipient of the supply would also deny ITC on the said goods or services. The CGST Act already provides enough protection to the government in terms of Section 17(5)(i) by specifying certain circumstances where if fraud or suppression of facts or detention or confiscation of goods is involved, assessees are not eligible to claim credit. If ITC is disallowed under the said provision of 16(4) in addition to the already stringent conditions under Section 17(5), the whole purpose of introducing Section 16(4) will be redundant.

An interpretation of Section 16(4) of the CGST Act would indeed render the credit ineligible and the same would go against the objective of GST – to remove the cascading effect of tax. Even if it were to be considered that due to business exigencies or genuine hiccups, the goods or services were provided in instalments and the invoice was raised subsequently, it is unfair to deny an assessee the right to claim credit on a mere technicality of limitation. ITC must flow seamlessly in the supply chain to the next recipient if they are rightfully eligible for the same.

Shradha Rajgiri and Dhanyatha R are Senior Associate and Associate respectively, with Shivadass & Shivadass (Law Chambers).

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