GST Credit not available to purchaser on supplier's default - Patna HC

 

It is to apprise you about an important Patna High Court (‘HC’) decision in case of Aastha Enterprises v. State of Bihar, 2023-VIL-546-PAT, wherein it is held that the recipient cannot claim Input Tax Credit (‘ITC’) where its supplier has not paid GST to the Government.

 

Facts of the case

 

·            The Petitioner claimed ITC based on tax invoices issued by supplier. The assessee established movement of goods and their receipt along with the bank statements evidencing the consideration (including taxes) paid to supplier.

 

·            However, GST Department denied the ITC and initiated the recovery proceedings against Petitioner on the ground that supplier had not paid the GST to Government. For this, the Department placed its reliance on Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’).

 

HC Decision

 

The HC held:

 

·            That the conditions mentioned in Section 16 of the CGST Act are to be satisfied together and not separately i.e., the existence of a tax invoice issued by supplier; proof of receipt of goods and tax has actually been paid to the Government.

 

·            That ‘Tax discharged to the Government’ is a burden of proof cast on recipient who claims ITC, which is a right created under statute and can sustained only under specific terms of the statute.

 

·            That the Government definitely could use its machinery to recover amounts from supplier and if such amounts are recovered at a later point of time, the recipient who paid the tax to its supplier could possibly seek for refund. However, till the tax is not paid to the Government by supplier, recipient cannot claim ITC.  

 

 | Insights

 

·            What we are witnessing in GST is opposite to what many High Courts decided in VAT regime on almost identical provisions. Under VAT regime, barring two or three High Courts, all the High Courts had taken consistent view that ITC is available to genuine recipients even if supplier has not deposited the VAT to the Government.

 

·            Under VAT regime, the Hon’ble Supreme Court dismissed two appeals on this matter, one in favour of taxpayer under Delhi VAT and one against taxpayer in Maharashtra VAT.

 

·            Under GST, we already have two High Court decisions (Patna and Madras) against the taxpayer and one High Court decision (Calcutta) in favour of the taxpayer. It will be interesting to see how the Hon’ble Supreme Court sees the provisions under GST.

 

·            For now, taxpayers in Patna and Madras atleast will have a hard time facing these notices.

 

·            In our view, for past matters, taxpayers should keep on litigating the same. For present and future, the taxpayers should build certain internal checks for compliance with Section 16(2)(c) as well as external checks on the Supplier.