Bombay HC upholds levy of GST on advances and allows ITC in the hands of recipient basis receipt voucher

 This Tax Alert summarizes a recent ruling of the Bombay High Court (HC)1 on admissibility of input tax credit (ITC) w.r.t GST on advance paid for procuring services.

The issue in the writ petition was regarding non-admissibility of ITC as per Section 16(2)(a) and (b) of the Central Goods and Services Tax Act, 2017 (CGST Act), on advances paid by consortium (petitioner) to its member entities against receipt voucher. Consequently, petitioner challenged the above provisions together with Sections 7, 9, 12 and 13 in the context of levy of tax on advances.

The key observations of the HC are:

• The phrase “in course or furtherance of business” in Section 7 of the CGST Act encompasses advances which are received for supplies agreed to be made as well, thereby, would attract payment of tax on advances as per Section 13(2). The same is not unconstitutional.
• Section 16(1) entitles a registered person to take ITC on any supply of goods or services which “are used” or “intended to be used” in the course or furtherance of his business. The word “intended” is required to be given its due meaning in applying the provisions of Section 16(2)(b), which prescribes condition for registered person to receive goods or services.
• If ITC is denied merely on interpretation that goods or services are not received but in the process of being received, the same would create a complete dichotomy, disturbance or friction in the interplay between Section 13(2) and Section 16.
• A receipt voucher is a valid tax paying document for claiming ITC under Section 16(2)(a). Merely reading Section 31(1) with Rule 36 of the Central Goods and Services Tax Rules, 2017 (CGST Rules) would not be correct in law for denying ITC. Rule 36 cannot control the operation of Section 31 being the substantive statutory provision.

Accordingly, HC upheld levy of tax on advances while allowing ITC on the same at the time of payment of advance against receipt voucher.

Comments

• The Ruling clarifies the eligibility of ITC on advance payments and may facilitate easing working capital requirements of businesses where payment of advance is a common practice.
• Although the ruling refers to the peculiar facts in the given writ petition while deciding on ITC eligibility, the ratio of the same can be applied to all other business transactions involving advances.
• HC has analyzed Section 16(2)(a) and (b) and allowed ITC on advances, however, has not commented on applicability of Section 16(2) (aa) read with rule 36(4), imposing condition regarding furnishing and communicating details /documents by the supplier.