Top Stories Reversal of ITC in the Absence of E-Invoice: How to Draft Reply towards Show Cause Notice [Read Draft Reply] The Article details on why mere procedural lapses should not always prejudice business owners, with reference to denial of Input Tax Credit when all other statutory requirements have been fulfilled By Avinash Kurungot – On November 21, 2024 2:21 pm – 3 mins read The Input Tax Credit ( ITC ) mechanism is a cornerstone of the Goods and Services Tax ( GST ) regime in India. ITC allows businesses to reduce their tax liability paid on inputs from the tax payable on outputs, effectively minimizing the cascading effect of taxes.

However, business owners should note that availing ITC is subject to strict compliance with the provisions of the Central Goods and Services Tax Act, 2017 (CGST Act). One of the compliance requirements under the CGST Act is the issuance of an e-invoice by suppliers who cross a prescribed turnover limit. Applicability of E-Invoicing Under GST law, e-invoicing was introduced as a method to streamline invoicing processes, reduce tax evasion, and enable real-time reporting. The system mandates that registered taxpayers whose aggregate turnover exceeds a specific threshold in any financial year beginning 2017-18 must generate invoices through the Invoice Registration Portal (IRP). Initially, the threshold for mandatory e-invoicing was ₹500 crore, which has been progressively reduced over time. Raise Funds Smarter – Your Guide to SME IPO Success- Click here to enroll The notice in question pertains to the reversal of ITC claimed by a recipient due to the absence of e-invoices for transactions, raising critical concerns about compliance responsibilities and procedural fairness. Section 16(2) of the CGST Act, 2017 Section 16(2) of the CGST Act lays down the conditions for availing ITC.

It begins with a non-obstante clause, which overrides other provisions in the section. The essential requirements for claiming ITC include: Possession of a valid tax invoice. Receipt of goods or services. Payment of tax by the supplier to the government. Filing of the recipient’s returns under Section 39. Raise Funds Smarter – Your Guide to SME IPO Success- Click here to enroll While the statutory provisions place the above obligations on the recipient, it does not explicitly mandate recipients to verify the e-invoicing compliance of their suppliers. This ambiguity has become a point of contention in cases where ITC is denied solely due to non-compliance by the supplier. The Madras High Court, in M/s. D.Y. Beathel Enterprises v. State Tax Officer (Data Cell) (2021) by the Hon’ble is pivotal to the arguments presented. The court held that recovery action for tax defaults should be initiated against the supplier, rather than penalizing the buyer. The Madras High Court acknowledged the principle that recipients often lack the means to verify their compliance by the supplier beyond the details available on the GST portal. Read More: If Tax has not reached Govt, then the Liability may have to be borne by One Party, either the Seller or the Buyer: Madras HC The GST Council has also issued clarification on the issue, claiming that no automatic reversal of ITC shall be effectuated in cases where tax has not been duly paid by the supplier. Exceptional circumstances, such as missing dealers or fraudulent practices, may warrant recovery from the recipient, but these must be addressed through a due process, including personal hearings. Practical Challenges A recipient has the sole means of knowing financial details or compliance information about suppliers through the GSTR-2B Statement; there is no statutory law or mechanism in place permitting recipients to ensure that their supplier complies with e-invoicing norms. Raise Funds Smarter – Your Guide to SME IPO Success- Click here to enroll Moreover, as clarified in GST e-invoice/IRN System FAQs (Version 1.3), there is no time limit for reporting invoices to the IRP, allowing suppliers to rectify their non-compliance even at a later date. This procedural flexibility reinforces the argument that ITC should not be denied if the supplier generates an e-invoice belatedly. Present Scenario

Although recent advisories from GST authorities have imposed a 30-day limit for reporting invoices on the IRP for taxpayers with an aggregate annual turnover of ₹100 crores or more. However, this rule does not retroactively apply to periods when such restriction was non-existent, Additionally, no guidelines mandate recipients to verify whether a supplier is liable for e-invoicing. Read More: Who is supposed to bear Liability of Non-Payment of GST to Government, Whether Seller or Buyer? As businesses navigate the evolving GST framework, clarity and consistent enforcement of laws are crucial for maintaining compliance and fostering trust between taxpayers and authorities