Top Stories Supplier Default & GST ITC Reversal: what Businesses Need to Know [Find Draft Reply to SCN Here] This article explains the complexities of GST ITC reversal in cases where suppliers fail to pay taxes, highlights legal precedents, and underscores the need for refined GST processes to protect compliant taxpayers By Avinash Kurungot – On October 31, 2024 9:05 pm – 3 mins read

In India, the Goods and Services Tax ( GST ) system provides a mechanism for businesses to claim Input Tax Credit ( ITC ) on purchases made, provided the tax has been paid by the supplier to the government. However, recent trends show ITC reversal demands in cases where suppliers fail to remit taxes on time.  A typical scenario involves authorities issuing a Demand and Recovery Certificate ( DRC-01 ) to a taxpayer for reversing ITC when the supplier has not paid GST, imposing potential financial burdens on the taxpayer due to circumstances beyond their control. Complete Draft Replies of GST ITC Related Notices, Click Here

Grounds for Objection to ITC Reversal Many businesses argue that holding them accountable for a supplier’s non-compliance is unjust, as they have limited control over the supplier’s tax submission process. When a business pays for goods or services, its responsibility is deemed to end with remitting the supplier’s fees, including GST. It is then the supplier’s legal duty to file returns and pay the collected tax to the government. The lack of a system to confirm whether suppliers have paid their dues further complicates the issue, making it difficult for taxpayers to ensure compliance beyond checking the supplier’s filed GSTR-3B summary return, which does not provide any confirmation regarding Suppliers’ payment of tax.

Legal Standpoints and Case Laws Several legal principles and court cases support the argument that taxpayers should not be held liable for suppliers’ defaults. For example, the legal maxim lex non cogit ad impossibilia, meaning “the law does not compel a man to do that which cannot possibly be performed,” suggests that a taxpayer cannot be penalized for circumstances beyond their control. This concept was echoed in D.Y. Beathel Enterprises v. State TLV Officer (2021), where the Madras High Court observed that recovery should be sought from the supplier and not the buyer in cases of non-compliance by the supplier. Complete Draft Replies of GST ITC Related Notices, Click Here The Punjab & Haryana High Court in Geru Lal Bal Chand v. State of Haryana (2011) and the Karnataka High Court in M/s. Onyx Designs Vs The Assistant Commissioner Of Commercial Taxes (2019), have ruled in favor of purchasers in similar matters. The courts emphasized that input tax credit should not be denied if the buyer has paid the necessary tax to the supplier. The judgments, while delivered under different tax regimes, underline a common principle that innocent buyers should not be penalized for non-compliance by suppliers.. Policy and Practical Concerns The GST Council’s guidance and policies also indicate that automatic ITC reversal should not be the default action in cases of supplier non-compliance. A press release from May 2018 clarified that tax recovery should primarily target the supplier, with ITC reversal being an exceptional recourse. Moreover, mechanisms like the GSTR-2 form, which would allow taxpayers to verify supplier compliance at an invoice level, have not yet been implemented further trodding the ability of taxpayers to verify if a supplier has remitted tax for specific transactions. Complete Draft Replies of GST ITC Related Notices, Click Here Conclusion The lack of an effective system to track suppliers’ tax payments directly impacts the fair treatment of taxpayers under GST law.

Holding taxpayers liable for suppliers’ non-payment without robust mechanisms in place could discourage businesses from utilizing ITC, a fundamental GST benefit designed to avoid tax cascading. In order to ensure equitable treatment, it is crucial that authorities refine GST processes and systems, enabling taxpayers to make well-informed compliance decisions. Until then, it is reasonable for businesses facing ITC reversal demands due to supplier default to seek legal redress based on established precedents and principles of natural justice. Click the Blue Button below to Access A Draft Reply Format against the Disallowance of ITC when Supplier has not paid due Tax to the Government.