Claiming the right amount of Input Tax as credit is an essential aspect of the Goods and Service Tax regime. In simple words, Input Tax Credit (ITC) reduces the tax paid on inputs from the tax to be paid on output. Section 16 of the CGST Act, 2017 expressly lists the various conditions applicable for the availment of Input Tax Credit by the buyer of goods. In this article, we will briefly list down the relevant sections and rules that will help us understand the buyer’s right to claim ITC when the seller has not deposited the due tax.
Sub Section 2 of Section 16 of the CGST Act reads:
Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,––
- He is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;
- He has received the goods or services or both;
- Explanation.- For the purposes of this clause, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;
- Subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through the utilisation of input tax credit admissible in respect of the said supply; and
- He has furnished the return under section 39.
In simpler words, Section 16(2) says, to claim ITC, the buyer should:
- Possess a valid tax invoice/debit note that is issued by the supplier.
- Have received the goods and/or services,
- Ensure that the seller has paid the tax amount to the Government.
- Have furnished the required GST returns.
Note GST is a tax on the event of ‘supply’. Every supplier making taxable supplies has to pay GST (except in RCM cases) to the Government. Generally, recovery of tax paid is the responsibility of the supplier.
The amended Rule 36(4) of Central Goods and Services Tax (CGST) Rules, 2017 reads:
‘Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 10 percent of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37.’
In simpler words, Rule 36(4) says:
- When the seller does not upload the required invoices on the GST portal, the buyer can only claim 10% of ITC reflected in the auto-populated GSTR 2A.
- The balance ITC can be claimed once the details are uploaded by the seller and are populated in the GSTR 2A.
On a co-joint reading of the above provisions, it can be inferred that a buyer cannot claim ITC for the tax paid when the seller has not deposited or reported the same.
However, various petitioners have approached the court with an appeal to consider the situation when it is not the fault of the genuine purchaser.
The Madras High Court in the case of Sri Ranganathar Valves Private Limited vs AC vide W.P.Nos.38488 to 38493 of 2015 dated 02.09.2020 held that ITC could not be disallowed to the purchaser if the seller has not paid the tax to the Government.
The court referred to the case of Assistant Commissioner (CT), presently Thiruverkadu Assessment Circle, Kolathur, Chennai Vs. Infiniti Wholesale Ltd. reported in  99 VST 341 (Mad) and concluded that if:
- The purchaser can prove that he/she has paid the due tax to the seller and
- The seller has issued proper invoices to the purchaser
the purchaser cannot be denied the Input Tax Credit.
In the case of Infiniti Wholesale Limited, the Madras High Court concluded that:
- When the purchaser can prove that he has paid the due tax for the purchases, the liability has to be fastened on the seller and not on the purchaser (when the seller has not deposited the due tax).
- ITC availed by the purchaser could not have been proposed to be reversed or reversed on the grounds stated by the respondent, i.e., the seller has not filed returns or not paid taxes, or they were unregistered dealers, or their registrations were retrospectively cancelled.
There are multiple similar judgements. However, this topic is still in the debate because the Assessing Officers are bound to follow the provisions of the law. The AO will not allow the purchaser to claim more than 10% of the eligible ITC. The taxpayer (purchaser) will have to knock the doors of the court to get a solution as of now.