Reversal of Input Tax Credit

Firstly, the present article briefly explains the burning issue which is being faced by the bona fide recipient who is demanded a reversal of input tax credit on the basis of non-payment of output tax liability by the supplier.

Later on, the article briefs various grounds which can be taken up by the bona fide recipient while replying to such show cause notice.

Reversal of Input Tax Credit : Issues

ITC reversal conditions

Provisions of section 16(2) of the Central Goods and Services Tax Act, 2017 lays down crucial conditions that the recipient needs to satisfy prior to availment of the input tax credit.

Let us first brush up ourselves with the essential conditions laid down under section 16(2), along with stage wise applicability of the same.
  • Input Tax Credit conditions as introduced with the implementation of GST [i.e., made effective from 1st July 2017]

Condition 1 – The recipient should be in the possession of a tax invoice/ debit note, in respect of goods or services, which is issued by the supplier.

Condition 2 – The recipient should have received the respective goods or services or both.

Condition 3 – The tax charged in respect of such goods or services is actually paid to the Government. Such tax payment can be done by the supplier via any mode i.e. ‘Electronic Cash Ledger’ or ‘Electronic Credit Ledger’.

Condition 4 – The return under section 39 i.e., Form GSTR-3B is furnished.

  • New Input Tax Credit condition as made effective from 1st January 2022

Condition 5 – The details of the respective tax invoice/ debit note have been furnished by the supplier in Form GSTR-1 [statement of outward supplies]. Further, the said details should have been communicated to the recipient in Form GSTR-2B [auto-populated statement].

  • New Input Tax Credit condition introduced vide the Finance Act, 2022 which is still not effective

Condition 6 – The details of Input Tax Credit as communicated via Form GSTR-2B should not be restricted.

In the present article, we are concerned about only condition 3 which is covered under section 16(2)(c) of the Central Goods and Services Tax Act, 2017. The condition states that the input tax credit is available to the recipient only if the tax charged in respect of the supply is actually paid to the Government by the supplier.

Now, let us figure out the following two situations

Situation 1 – The recipient of goods/ services has not paid the tax amount to the supplier and accordingly, the supplier has not paid the tax to the Government. In such case, the condition of section 16(2)(c) is not satisfied and the recipient will not be able to avail of the input tax credit.

Here, as the tax is not paid by the recipient, the default of non-payment of tax to the Government can be co-related. Accordingly, even after non-payment of tax, if the input tax credit is availed, the recipient has to reverse the same without any doubt.

Situation 2 – The recipient of goods/ services has paid the tax to the supplier. However, the supplier has failed to pay the tax to the Government. In such a case also, the condition of section 16(2)(c) is not satisfied.

Here, as the tax is already paid by the recipient. He will bonafidely avail the input tax credit of the same. The default of non-payment of tax to the Government is on the part of the supplier and obviously, the recipient should not be penalized for the same by demanding a reversal of the input tax credit so availed.

Let us understand both the above situations, with the help of a simple example – Suppose, Mr. A (supplier) has supplied goods of INR 10,000 to Mr. B (recipient) taxable @ 5% IGST. Accordingly, INR 500 IGST is payable on the same. Both the above situations are explained in the table below

Particulars

Situation 1

Situation 2

Total amount paid by Mr. B (recipient)

NIL

INR 10,500

Tax amount paid by Mr. A (supplier) to the Government

NIL

NIL

Amount of input tax credit availed by Mr. B (recipient)

INR 500

INR 500

Reversal of input tax credit to be done by Mr. B (recipient) due to non-payment of tax by Mr. A (supplier) to the Government

INR 500

INR 500

Going through the above table it is pretty clear that in Situation 1 as the tax amount is not paid by Mr. B (recipient) demanding reversal of input tax credit is practical and logical.

However, in Situation 2, the tax amount is already paid by Mr. B (recipient) to Mr. A (supplier). In turn, the tax amount is not paid by Mr. A (supplier) to the Government. Here, demanding reversal of input tax credit will result in a loss to Mr. B (recipient) who has already paid the same to Mr. A (supplier).

In Situation 2, Mr. B (recipient) is a genuine bona fide taxpayer. Whereas, Mr. A (supplier) has defaulted in payment of tax. In such a situation also, the department is issuing notice to Mr. B (recipient) and demanding reversal of input tax credit along with interest and penalty.

Receipt of GST notices and entering the vivacious circle of litigation is becoming a burning issue for the bona fide taxpayer under GST.

Reversal of input tax credit reply

Reversal of Input Tax Credit – Grounds of Defense Reply for Notices

It is a bare fact that the input tax credit condition as covered under provisions of section 16(2)(c) of the Central Goods and Services Tax Act, 2017 stipulates the recipient from availment of the input tax credit as and when the supplier fails to pay the tax to the Government.

But, here, the question revolves around the bona fide taxpayer, who has already paid the tax amount to the supplier and the department is issuing notice to reverse the input tax credit on the failure of payment of tax amount by the supplier.

 It is crystal clear that the defaulter is the supplier and the bona fide taxpayer is being penalized for the same. Hence, the bona fide taxpayer is left with no other option other than entering into the circle of litigation.

Strong grounds for defense reply available to the bona fide taxpayers are briefed hereunder

Ground 1 – Basic right of availability of input tax credit cannot be lawfully denied

Availment of the input tax credit is the basic right of the taxpayer under GST. Following are the undisputed facts

  • Specified goods/ services are duly received,
  • The recipient is in the possession of relevant tax invoice/ debit note of the specified goods/ services (a copy of the relevant tax invoice/ debit note should be attached),
  • The amount of tax is duly paid to the supplier (a copy of the document justifying payment of the amount to the supplier should be attached), and
  • The said goods/ services are used in the course or furtherance of the business.

Above undisputed facts, strengthens the right of the recipient to avail of input tax credit. Denying the same is unlawful.

Ground 2 – Failure committed on the part of the supplier and penalizing the bona fide recipient is unsustainable in law

The primary ground for demanding reversal of input tax credit is that the supplier has defaulted in payment of output tax liability. However, it is an admitted fact that the relevant tax amount is paid by the recipient to the supplier.

Notably, the recipient has duly complied with his duties. Simply because the tax is not paid by the supplier to the Government, the bona fide recipient should not be penalized.

 The intention behind the input tax credit condition covered under section 16(2)(c) is to keep a check on the fraudulent recipient or the fraudulent supplier. Penalizing the genuine bona fide recipient can never be the intention of the Government while formulating the condition prescribed under section 16(2)(c).

Ground 3 – Relevant press release and minutes of GST council meeting supporting bona fide recipient

CBIC Press release dated 4th May 2018 states as under –

“There shall not be any automatic reversal of input tax credit from the buyer on non-payment of tax by the supplier. In case of default in payment of tax by the supplier, recovery shall be made from the supplier. However, reversal of credit from the buyer shall also be an option available with the authorities to address exceptional situations like missing dealer, closure of business by the supplier or supplier not having adequate assets, etc.”

The above press release clearly figures out the intention of the Government behind the input tax credit condition. It clarifies that non-payment of tax should be recovered from the supplier. Whereas, reversal of input tax credit from the buyer should only be done under exceptional situations.

Further, 28th GST Council Meeting held on 21st July 2018 states as under –

“There would be no automatic reversal of input tax credit at the recipient’s end where the tax has not been paid by the supplier. Revenue administration shall first try to recover the tax from the seller and only in some exceptional circumstances like missing dealer, shell companies, closure of business by the supplier, the input tax credit shall be recovered from the recipient by following due process of serving of notice and personal hearing”.

 The above recommendation of the GST council also clarifies that recovery of non-payment of tax has to be done from the defaulting supplier. Reversal of ITC from the recipient is to be demanded only under exceptional circumstances.

Ground 4 – Various judicial rulings supporting bona fide recipient

Following are the important judicial rulings strongly supporting the bona fide recipient

  • Hon’ble Madras High Court in the case of M/s. D.Y. Beathel Enterprises Vs. State Tax Officer has held as under –
    “When it has come out that the seller has collected the tax from the purchasing dealers, the omission on the part of the seller to remit the tax in question must have been viewed very seriously and strict action ought to have been initiated against him (seller)”.
  • Hon’ble Madras High Court in the case of Vinayaga Agencies Vs. Assistant Commissioner (CT) has held as under –
    “The authority is not empowered to revoke the input tax credit availed on the plea that the selling dealer has not paid the tax.” “In the present case, the petitioner dealer had paid the tax to the selling dealer and claimed input tax credit and that was accepted at the time when the self-assessment was made. It is, therefore, for the department to proceed against the selling dealer for recovery of tax in the manner known to law”.

Most of the taxpayer are eligible for ITC, we have more brief article on how to claim maximum ITC in 2022 which explain 7 simple steps to claim.

Ground 5 – Recent new amendments vis-à-vis restriction on prior period demand

Provisions of section 41(2) of the Central Goods and Services Tax Act, 2017 are substituted vide the Finance Act, 2022. Notably, the substituted provisions of section 41(2) states that the input tax credit availed by the registered person should be reversed if the tax payable thereon has not been paid by the supplier.

Importantly, the said substitution is still not made effective. The provisions of newly substituted provisions of section 41(2) will be effective from the prospective date which is yet to be notified by the Government.

Accordingly, demanding reversal of input tax credit availed by the recipient, prior to the date the provisions of section 41(2) get notified, is simply baseless and untenable in law.

Reversal of Input Tax Credit : Reply against Notices

Reversal ITC reply

The recipient who has already paid the tax to the supplier and availed input tax credit which is being demanded to be reversed by the department can defend the same on the following grounds

  1. Basic right of availability of input tax credit cannot be lawfully denied;
  2. Failure committed on the part of the supplier and penalizing the buyer who acted bonafidely is unsustainable in law;
  3. Press release dated 4th May 2018 and minutes 28th GST Council Meeting held on 21st July 2018 supports bona fide buyer;
  4. Some of the judicial rulings also support bona fide buyer;
  5. Reversal can be demanded only after provisions of section 41(2) get notified.

CA Poonam Gandhi

About the author

Poonam Gandhi is a Chartered Accountant and a Lawyer. She is a Professional Freelance Content Writer/ Editor and an Educator.

She masters in creating result-oriented as well as Search Engine Oriented Content. Currently, she is associated with some of the topmost leading sites of India.

She holds more than 3 years of experience in the content field. Before entering the content writing field, she possessed a wide practice experience of more than 9 years, specifically, in the field of Indirect Taxation.

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