Another hurdle to securing input tax credit

Raghavan Ramabadran |Krithika Jaganathan | Updated on: Mar 30, 2022
Tax wrangles

Tax wrangles | Photo Credit: xpoint

Buyers cannot avail ITC unless sellers are compliant. Now, buyers have to pick their vendors well if invoice matching is dropped

Input tax credit (‘ITC’) was positioned as a utopian undertaking under the Goods and Services Tax (‘GST’) regime — it was to be seamless, uninterrupted, automatic.

Between 2017 and 2022, the provisions governing availment of ITC were tweaked to require a recipient of supplies to oversee even the supplier’s compliance status under GST (see Section 16(2) - CGST Act). It is crucial for a recipient to select a dependable vendor to protect their claim to ITC.

Statutory safeguards

ITC is encased in safeguards to bar the recipient from availing ITC unless:

(a) the supplier has issued a tax invoice/debit note containing requisite details [S 16(2)(a)];

(b) the supplier has captured the details of the invoice/debit note in their outward supplies and then communicated such details to their recipient [S 16(2)(aa) as inserted by Clause 109 of the Finance Act, 2021];

(c) the recipient has actually received the supplies [S 16(2)(b)].

One of the more complicated caveats is that a recipient cannot avail ITC unless their supplier has actually paid the tax in respect to that supply to the Government [S16(2)(c)]. This condition was proposed to be operationalised through an automated ‘matching system’, where returns furnished by the supplier would be matched against the returns filed by the recipient.

The idea was to enable information symmetry by equipping a recipient to identify supplies on which tax had been deposited with the exchequer and avail only the corresponding ITC. The matching system was never fully operationalised and was challenged before various Indian courts, where the matters are sub-judice.

Now, the matching system is set to be abandoned [See Clause 107 of the Finance Bill, 2022] and clarity is awaited on whether the system will be discarded ab initio or if it would be made viable at least for the period prior to the enactment of the Finance Act, 2022.

Thus, a recipient’s obligation to ensure that the supplier had remitted the tax to the treasury or forego the ITC thereof survives despite the proposed deletion of the matching system.

This disbarment is sought to be rehashed and made even more onerous — a recipient is barred from availing ITC in respect of supplies where the supplier has defaulted in payment of tax and where such default has continued for a period [See proposed S 16(2)(ba) as sought to be inserted vide Clause 100 of the Finance Bill, 2022].

In addition to verifying if tax is deposited in respect of supplies made to them, a recipient must also investigate if the supplier is generally and periodically compliant.

Checks and balances

With all these layers of protective bubble-wrap, it is natural and necessary for recipients to shield their claim to ITC at all stages of the transaction. The following suggestions can protect a recipient’s claim to ITC:

(a) Preliminary filtering prior to onboarding a prospective supplier

(i) Screening prospective vendors for existing goodwill and creditability in the open market;

(ii) Soliciting testimonials from prior purchasers of the prospective vendor;

(iii) Seeking ‘compliance report’ from prospective vendors detailing compliance with all aspects of GST and specifically demonstrating present and periodic records of paying GST on all supplies made.

(b) Transactional checkpoints

(i) supply order may clearly capture the transaction and nature of the supplies, along with appropriate classification of the supply;

(ii) supply order may warrant that any loss of ITC occasioned due to supplier’s non-compliance under GST would be borne by that supplier, along with the interest component thereof;

(iii) wherever commercially feasible, recipient may defer payment of the tax element and strive to implement a cut-off date for compliance;

(iv) supply order may document the supplier’s obligation to update any change in the registration certificate;

(v) recipient may require the supplier to divulge all details as required under the proposed Section 38(2) of the CGST Act.

(c) Action during or post completion of supplies

(i) The supplier must update the recipient in the form of a declaration with supporting evidences, once the tax in respect of that supply is remitted to the treasury;

(ii) Recipient may document and maintain all transport documents (lorry receipts, toll receipts and other documents like gate passes, etc.) to sufficiently prove movement and receipt of goods

(d) Winnowing of vendors with past defaults

(i) Recipient may blacklist vendors who have defaulted in payment of GST in prior transactions, if the vendor is unable to validate their actions or prove that GST was paid subsequently;

(ii) Finally, a recipient may be required to monitor the GST portal to identify suppliers wherever their output liability exceeds the output tax so paid so far.

The measures suggested above may seem harsh at a time when e-commerce and remote transactions are all the norm. On the one hand, the basis for a flourishing economy is to engender trade.

At the same time, these measures are justified as a recipient’s claim to ITC is framed around the supplier’s compliance. Hence, they may be seen as a basic threshold while soliciting supplies.

Ramabadran is Executive Partner; and Jaganathan is Principal Associate, Lakshmikumaran & Sridharan Attorneys

Published on March 30, 2022
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