By Santosh Dalvi and Kishore Purohit
Recently, India’s Goods and Services Tax regime, which has brought about a transformational change in the country’s overall tax structure, has enjoyed four years of success. While there were some initial hiccups or challenges that the industry faced in adopting the new regime, the government should be commended for its openness and responsiveness to listening and understanding the various concerns. encountered by companies and doing everything possible to address the issues even ensure a smooth transition.
Another area that needs immediate government attention is creating an ecosystem for transparent credit flow and addressing the various challenges facing businesses related to it. The main concern that assessors face today is that GST legislation only allows credit to be granted to the recipient if the supplier has paid the GST / tax to the government. If the supplier fails or fails to pay GST on the supply made by him, the recipient of that supply is not entitled to claim the credit of the GST charged, even if he has done everything. according to law and bore the tax cost. This is a clear case where for a mistake made by one person (i.e. the supplier) the other person (the recipient) is penalized or punished for no fault.
It is interesting to note that the judicial administration system across the world is based on certain fundamental philosophies, one of them being that “Let a hundred guilty be acquitted, but an innocent must not be convicted”. Said philosophy followed by justice (including Indian justice) is focused on the protection of the innocent. The Supreme Court and the High Courts have repeatedly held that it is the duty of the Court of Justice to ensure that no innocent person is punished.
Thus, from the above, an obvious contradiction can be found when the judiciary operates on the principle of protecting the innocent, while on the other hand, the GST legislation (enacted by the legislator) penalizes the innocent recipient for the fault of the supplier.
Since last year, the GST service began to issue notices to persons assessed (v. Paid by the supplier to the government. In the absence of options available, in order to avoid criminal consequences and incur cash losses, due to supplier default, buyers knocked on the doors of the Courts with great hope, and they were not disappointed.
The Madras High Court, in a recent case, ruled that if the seller collected tax from the buyer and did not pay the government’s pot, then the tax department should take strict action against the seller. The court disapproved of the Department’s action, where collection proceedings were brought against the buyer and no action was taken against the seller who was the real culprit. Protecting the innocent buyer, the High Court sent the case back for further investigation, directing the tax department to initiate collection proceedings against the seller.
In another case, the tax department issued a collection notice against a company denying credit on the grounds that the credit used in form GSTR-3B did not match details provided by vendors in form GSTR-2A – such mismatch occurred because the seller may not have filed their tax returns on time. With no other option left, the buyer contested the collection action in the Chhattisgarh High Court and, as expected, the High Court protected the innocent by staying the collection action and requesting a response from the department on said issue.
In another case, the High Court of Calcutta, protected the buyer by issuing a notice to the central and state government in response to the petition for brief filed, challenging the department’s action to freeze the credit due to an inconsistency in details reported in form GSTR-3B with details provided by suppliers in form GSTR-2A.
In addition, in one case, the VAT administration refused the input credit claimed by the buyer for purchases made from certain resellers on the grounds that the said resellers did not exist and that the transactions were fictitious. In addition to the denial of credit, they levied interest and penalties on the buyer. The buyer took the Karnataka High Court to seek justice, and the court ruled that the tax department cannot claim that just because the dealers did not file the VAT collected from the buyer, the transaction itself is wrong.
The High Court further held that the “The purchaser in good faith cannot be endangered, when he has done all that the law expects of him”. The court said the buyer had no way of verifying and ensuring sellers’ compliance with the provisions of the KVAT law. Finally, the High Court did justice by ordering the tax department to ensure that the amount of the loan is credited back to the buyer.
Although the above Karnataka High Court ruling concerns the old VAT regime, it is important to note that buyers faced difficulties even back in the day when they were penalized for the fault of the supplier. Even under the old regime, the courts came forward and protected innocent buyers from the action of the tax services. A decision similar to the above was issued by the Delhi High Court, in which it was held that in the event of non-payment by the reseller of the tax he collected from the buyer, the Department should sue the defaulting seller to collect this tax and not penalize the buyer by denying them credit. The Supreme Court has also confirmed similar views.
Surprisingly, the modus operandi for initiating recovery action from the innocent appraised against the main culprit is not only limited to the law on indirect taxes, but such cases have recently come to light even under income tax legislation, where the tax service has initiated a recovery procedure. against the appraised from the payment from which the TDS was deducted by the defaulter but was not paid by him to the Treasury. In that case, the Madras High Court ruled that collection should be made from the actual defaulter and not from the person who paid the tax to that defaulter, who in turn did not pay it to the government.
Interestingly, in May 2018, the government issued a press release, in which it was made very clear that there would be no automatic cancellation of the buyer’s input tax credit. in the event of non-payment of GST by the seller. In addition, the press release specifies that in case of default of payment of the tax by the seller, the recovery will be made from the seller. However, the cancellation of the buyer’s credit should also be an option available to the tax authorities to deal with exceptional situations such as the absence of a dealer, the closure of a business by a supplier or supplier. not having adequate assets, etc.
Thus, from the aforementioned press release, it was clear that the government and the tax authorities would take action against the defaulter and that no collection proceedings would be initiated against the buyer who is innocent and has done all that was necessary. required of him, under the law. The press release also specifies that the cancellation of the buyer’s credit would only be an option available to the authorities in the event of exceptional situations, as already listed above. However, from an administrative point of view, it seems that the tax department has no choice but to follow the optional mechanism as the default plan, and that too in all scenarios.
In addition, there was a provision in the old Cenvat Credit Rules, 2002 which required the purchaser receiving the input tax credit to ensure that he took reasonable steps (either by personal knowledge or by obtaining a certificate from the tax department having jurisdiction over the manufacturer) to ensure that the supplier / manufacturer has paid the appropriate duties on these goods.
However, seeing the practical difficulty in implementing and complying with such requirements faced by the company, the government removed such a cumbersome provision. If such a step of removing virtually impossible conditions had been taken by the government earlier, then it should consider as a matter of priority whether it still wishes to impose such conditions on businesses under the GST regime when the economy makes everything attempt to return to normal in the given pandemic. It is high time the government reconsidered these provisions which penalize the innocent and create obstacles to the achievement of the GST implementation goal of a continuous flow of credit to the recipient.
While rendering the verdict in favor of innocent buyers, the courts have made specific remarks that if the revenues are able to show that the buyers and dealers conspired, then the tax department has the right to initiate action. necessary against both.
In addition, since companies / buyers started to go to court over the no-fault cancellation of input credit, the tax authorities have resorted to another course of action of freezing the credit. of inputs in accordance with the provision of rule 86A of the CGST. Rules, 2017, thereby restricting the buyer to avail themselves of input credit if there is a mismatch in credit details due to a default or error made by the supplier. Again, many buyers have gone to court and obtained justice. Therefore, it is important that this matter be considered by the GST Council for detailed deliberation and that an appropriate resolution be provided to the industry.
It is interesting to note that there is no provision in the GST legislation which states that if the government is able to recover the amount of tax from the seller on the basis of the collection proceedings initiated against it. failing, it will reimburse the input credit to the buyer (which was recovered earlier). Therefore, business houses should make representation to the government to ask to include a mechanism under the GST law to reimburse the amount to the recipient (and consider the same as a qualifying credit to be used against any liabilities. future production) if the government is able to recover the tax due from the defaulting supplier. Such government action would truly make the current GST legislation a good-high-tax structure contributing to the nation’s economic growth.
(Santosh Dalvi – Partner & Deputy Head – Indirect Tax, KPMG in India and supported by Kishore Purohit, chartered accountant)