Recently, the Goods and Services Tax regime in India, which brought transformational change in the country’s overall tax structure, completed four successful years.
By Santosh Dalvi and Kishore Purohit
Recently, the Goods and Services Tax regime in India, which brought transformational change in the country’s overall tax structure, completed four successful years. Though there were some initial hiccups or challenges faced by the industry in adopting the new regime, the government should be lauded for having an open mindset and being receptive to listen and understand the various concerns faced by the businesses and making all attempt to sort out the same ensuring a smooth transition.
One more area that requires immediate attention of government is to build an ecosystem for seamless flow of credit and to sort out various challenges faced by the businesses related to the same. The major concern that the assessees are facing today is that the GST legislation allows availment of credit to the recipient only if the supplier has paid the GST / tax to the government. If the supplier fails or defaults in discharging the GST liability on the supply made by it, then the recipient of such supply is not allowed to avail the credit of such GST charged, even when the recipient has done everything as per the law and borne the tax cost. It is a clear case where for a mistake made by one person (i.e. supplier) the other person (recipient) is penalised or punished for no fault.
It is interesting to note that the judicial administration system across the globe is based on certain fundamental philosophies one of them being that ‘let hundred guilty persons be acquitted but one innocent person should not be convicted’. The said philosophy followed by the judiciary (including Indian judiciary as well) is focused towards protecting the innocent. The Supreme Court and High Courts have at multiple times held that it is the duty of the Court of law to ensure that no innocent should be punished.
Hence, from the above, a clear contradiction can be seen where the Judiciary operates on the principle of protecting the innocent, whereas on the other hand, the GST legislation (enacted by the Legislature) penalises the innocent recipient for the fault of the supplier.
Since last year, the GST department has started issuing notices to assessees (i.e. recipient) seeking reconciliation of the credit availed by them and demanding tax (either in cash or by way of reversal of credit) if the said credit pertains to GST which was not paid by the supplier to the government. With no options available, in order to avoid penal consequences, and incur cash loss, due to the default of the supplier, the buyers have knocked the doors of the Courts with high hopes, and they haven’t been disappointed.
The Madras High Court, in a recent case held that if the seller has collected tax from the buyer and not paid to the kitty of the Government, then the tax department should take strict action against the seller. The court didn’t appreciate the Department’s action, where the recovery proceedings were initiated against the buyer and no action was taken against the seller who was the real culprit. Protecting the innocent buyer, the High Court remanded the matter for fresh inquiry directing the tax department to initiate recovery proceedings against the seller.
In another matter, the tax department issued a recovery notice against a company denying credit on the grounds that credit availed in Form GSTR-3B did not match with the details furnished by suppliers in Form GSTR-2A – such mismatch occurred as seller may not have filed his tax returns on time. Left with no other option, the buyer challenged the recovery action before the Chhattisgarh High Court and as expected, the High Court protected the innocent by staying the recovery action and seeking reply from the department on the said matter.
In another case, the Calcutta High Court, protected the buyer by issuing a notice to Central & State Government in response to the writ petition filed, challenging the department’s action of blocking the credit on account of mismatch in details reported in Form GSTR-3B with details furnished by suppliers in Form GSTR-2A.
Further, in one case, the VAT authorities disallowed the input credit claimed by the buyer in respect of purchases made from some dealers on the ground that the said dealers were non-existent and that the transactions were bogus. In addition to disallowance of credit, they levied interest and penalty on the buyer. The buyer reached before the Karnataka High Court seeking justice, and the Court held that the tax department cannot contend that merely because the selling dealers have failed to deposit the VAT collected from the buyer, the transaction itself is bogus.
The High Court further held that the “bonafide purchaser cannot be put at jeopardy, when he has done all that the law expects him to comply”. The Court stated that the buyer has no means to ascertain and secure compliance provisions of the KVAT Act by the sellers. Finally, the High Court delivered justice by directing the tax department to ensure that the credit amount is re-credited to the buyer.
Though the above ruling of Karnataka High Court relates to erstwhile VAT regime, it is important to note that the buyers were facing hardships even under the erstwhile era, where they were penalised for the fault of the supplier. Even under the erstwhile regime, the Courts have come forward and protected the innocent buyers from the action of the tax Departments. Ruling similar to the above was pronounced by the Delhi High Court, wherein it was held that in the event of the selling dealer failing to deposit the tax collected by him from the buyer, the Department should proceed to take action against the defaulting seller to recover such tax and not penalise the buyer by denying him the credit. The Supreme Court has also upheld similar views.
Surprisingly, the modus operandi of initiating recovery action from the innocent assessee as against the main culprit is not only limited to the Indirect tax legislation but such instances have recently come to light even under the Income Tax legislation also, where the tax department initiated recovery proceedings against the assessee from whose payment the TDS was deducted by the defaulter but was not paid by him to the exchequer. In such matter, the Madras High Court held that the recovery should be made from the actual defaulter and not from the person who has paid the tax to such defaulter, who in turn failed to pay it to government.
It is interesting to note that in May 2018, the government had issued a press release, wherein it was very clearly stated that there shall not be any automatic reversal of input tax credit from buyer on non-payment of GST by the seller. Further, the press release stated that in case of default in payment of tax by the seller, recovery shall be made from the seller. However, reversal of credit from the buyer shall also be an option available with the revenue authorities to address exceptional situations like missing dealer, closure of business by supplier or supplier not having adequate assets etc.
Hence, from the above stated press release, it was clear that the Government and tax department would initiate action against the defaulter, and no recovery proceedings would be initiated against the buyer who is innocent, and has done all that was required from him, under the law. The press release also states that reversal of credit from the buyer would be an option available with the authorities only in case of exceptional situations, as already listed above. However, from an administrative point of view, it seems the tax department have no other option but to follow the optional mechanism as their default plan, and that too in every scenario.
Also, there was a provision under the erstwhile Cenvat Credit Rules, 2002 which used to place the onus on the buyer availing the input tax credit, to make sure that he takes reasonable steps (either through personal knowledge, or getting a certificate from the tax department having jurisdiction over the manufacturer) to ensure that the supplier / manufacturer had discharged appropriate duty on such goods.
However, seeing the practical difficulty in implementing and complying with such requirements faced by the business, the government removed such a cumbersome provision. If such action of removing the conditions which were practically impossible to comply with, was taken by government earlier, then it should rethink on priority as to whether they still want to impose such conditions on the businesses under the GST regime when the economy is making all attempt to bounce back to normalcy in the given Pandemic. It is high time that government should revisit such provisions which penalise the innocent and create hurdles in achieving the objective of implementing GST i.e. seamless flow of credit to recipient.
While delivering the verdict in favour of innocent buyers, the Courts have made specific remarks that if the revenue is able to demonstrate that the buyers and the selling dealers have conspired, then the tax department has all the right to initiate necessary steps against the both.
Further, since companies / buyers have started reaching out to Courts on the matter of reversal of input credit for no fault of theirs, the tax authorities have resorted to an alternate action plan of blocking the input credit as per the provision of Rule 86A of CGST Rules, 2017 thereby restricting the buyer to avail the input credit if there is mismatch in credit details on account of default or error made by the supplier. Again, many buyers have reached before the Courts and have received justice. Hence, it is important that the said issue is taken up by the GST Council for detail deliberation and a proper resolution is provided to the Industry.
It is interesting to note that there is no provision provided in the GST legislation which states that if the government is able to recover the tax amount from the seller basis the recovery proceedings initiated against such defaulter, they will pay back the input credit to buyer (which was recovered earlier). Hence, the business houses should make a representation before the government requesting to include a mechanism under the GST law to refund back the amount to the recipient (and consider the same as eligible credit to be utilised against any future output liability) if the government is able to recover the tax dues from the defaulting supplier. Such action from the government would really make the current GST legislation as – Good-Strong-Taxation structure contributing towards the economic growth of the Nation.
(Santosh Dalvi – Partner & Deputy Head – Indirect Tax, KPMG in India and supported by Kishore Purohit, Chartered Accountant)