GST ITC Mismatch: Can Officers Demand Reversal from Recipients?

 

When the Supplier Defaults: Can GST ITC be Denied to a Bona Fide Recipient? A Deep Dive into Key High Court Rulings

The intricate landscape of the Goods and Services Tax (GST) in India is designed around the seamless flow of Input Tax Credit (ITC) to eliminate the cascading effect of taxes. A core principle of the GST law is that a registered person is entitled to claim ITC on purchases, provided certain conditions are met. However, a recurring and contentious issue arises when the supplier, after collecting the tax from the recipient, fails to remit it to the government or fails to upload the invoice details in their GSTR-1 return, leading to mismatches in the recipient's GSTR-2A/2B.

In such scenarios, GST officers often issue demand notices to the recipient for the reversal of ITC. The crucial question that numerous High Courts have addressed is: Should a bona fide recipient be penalised for the default of the supplier, or should the GST authorities first pursue the defaulting supplier?

This blog post provides a comprehensive analysis of the legal position, examining landmark judgments from the Calcutta, Kerala, Gujarat, Madras, and Bombay High Courts, and the impact of the Supreme Court's stance on this issue.

The Legal Framework: Section 16(2) of the CGST Act, 2017

Section 16(2) of the CGST Act, 2017 outlines the fundamental conditions for a registered person to be eligible for ITC. These conditions include:

• Possession of a valid tax invoice or debit note.
• Receipt of the goods or services.
• The tax charged on the supply has been actually paid to the Government, either in cash or through utilisation of ITC.
• The recipient has furnished their return under Section 39 (GSTR-3B).

The third condition, Section 16(2)(c), is the primary point of contention. It mandates that the tax must have been actually paid to the government. If the supplier fails to pay, the department argues that this condition is not met, and thus the recipient is ineligible for the credit.

Landmark Judgments: Protecting the Bona Fide Taxpayer

The Calcutta High Court in Suncraft Energy Private Limited

The case of Suncraft Energy Private Limited vs. Assistant Commissioner, State Tax stands as a cornerstone in this legal debate.

These resources discuss key High Court decisions regarding GST ITC eligibility for recipients, emphasizing the legal implications of supplier non-compliance and the protection of genuine buyers.

Facts of the Case:
Suncraft Energy purchased goods/services, paid the full value including GST to the supplier, and claimed the corresponding ITC in its GSTR-3B returns. However, the supplier did not upload some of these invoices in their GSTR-1, so they did not appear in Suncraft Energy's GSTR-2A. The Assistant Commissioner issued a demand notice for the reversal of this ITC due to the mismatch.

Court's Ruling:
The Calcutta High Court set aside the demand order. It made several critical observations:

• GSTR-2A is only a facilitation tool: The court clarified that GSTR-2A is a document for the taxpayer's reference and does not have the force of law to determine the eligibility of ITC. The right to avail ITC is a vested right upon fulfillment of the conditions in Section 16(2).
• Action must be taken against the supplier first: The court ruled that the department should first proceed against the defaulting supplier to recover the unpaid tax. Penalizing the recipient for the supplier's default is arbitrary unless collusion or fraud is proven.
• Reliance on CBIC Clarifications: The court noted that press releases from the Central Board of Indirect Taxes and Customs (CBIC) in 2018 had already clarified that automatic reversal of ITC from the buyer for the seller's non-payment is not permitted, except in exceptional situations like a missing dealer or closure of business.

Supreme Court Affirmation:
The State tax department filed a Special Leave Petition (SLP) against the Calcutta High Court's order in the Supreme Court. The Supreme Court dismissed the SLP, thereby upholding the Calcutta High Court's decision. While the Supreme Court's dismissal was based partly on the low demand value, it reinforced the High Court's principle, giving it persuasive value across the country.

The Kerala High Court Rulings

The Kerala High Court has consistently followed and expanded upon the principles established in the Suncraft Energy case.

In a key judgment, the Kerala High Court held that the department cannot issue a notice to a recipient under Section 73 of the CGST Act for an ITC mismatch without first initiating proceedings against the supplier. The court emphasized that the failure to follow the statutory stipulations under Section 42 (which deals with ITC matching and reversal) is a procedural error by the department.

In another series of cases, including Diya Agencies vs. The State Tax Officer, the court reiterated that ITC denial solely based on GSTR-2A discrepancies is insufficient. It remanded matters back to the assessing officers, directing them to provide the taxpayer an opportunity to present evidence (invoices, proof of payment) to substantiate their genuine claims.

The Kerala High Court has also addressed government Circulars No. 183/15/2022-GST and No. 193/05/2023-GST, allowing bona fide taxpayers to benefit from them and rectify genuine errors, even retrospectively for initial GST years (2017-2022).

The Gujarat High Court Stance

The Gujarat High Court has generally aligned with the view that bona fide recipients should be protected but has made a crucial distinction regarding "non-genuine" suppliers.

In the case of R.V. Enterprises vs. State of Gujarat, the court upheld the demand for ITC reversal from the recipient. This was due to an investigation revealing that the supplier was "non-genuine" (minimal purchases against high supplies, non-functional business place, etc.). The court found that in cases where the genuineness of the transaction is unsubstantiated and the supplier has clearly not discharged their tax liability, the recipient is not eligible for ITC under Section 16(2)(c).

However, even in this case, the court quashed the penalty portion of the order because the mandatory pre-show cause notice intimation in Form GST DRC-01A was not issued, highlighting the importance of correct procedure.

Madras and Bombay High Courts

Other High Courts have also weighed in, reinforcing the protection for genuine taxpayers:

• Madras High Court: Has consistently held that a bona fide recipient cannot be penalised for the supplier's non-compliance if the recipient has fulfilled all statutory conditions. It has often set aside assessment orders for procedural lapses, such as not providing a proper hearing.
• Bombay High Court: Has ruled that technical or clerical errors in returns should be allowed to be rectified if there is no revenue loss and the error is bona fide..

The Procedure for GST Officers: A Mandate for Fairness

These judicial pronouncements place a clear onus on the GST authorities to conduct due diligence before targeting the recipient. The established procedure, as inferred from the judgments, is:

1. Identify Discrepancy: Note the mismatch between GSTR-3B and GSTR-2A/2B.
2. Investigate the Supplier: The primary step is to initiate recovery proceedings and investigation against the defaulting supplier, as they are the ones who collected the tax and failed to remit it.
3. Prove Collusion or Exceptional Circumstances: The authorities can only move against the recipient in "exceptional situations" (missing dealer, no assets, closure of business) or if they can provide concrete evidence of collusion between the buyer and the seller to evade tax.
4. Issue Proper Notice: All procedural requirements, such as issuing the correct forms (e.g., DRC-01A before DRC-01 for penalty cases), must be strictly followed.
5. Provide Opportunity to the Recipient: The recipient must be given a fair opportunity to provide evidence (invoices, proof of bank payments, e-way bills, etc.) to prove the genuineness of the transaction.

 

Conclusion: Upholding Justice in the GST Regime

The consistent stand taken by various High Courts and implicitly upheld by the Supreme Court provides much-needed relief and clarity for the bona fide taxpayer. The core message is that the administrative machinery of GST should not penalize an honest business for the defaults of a third party that is beyond the buyer's control.

While taxpayers have the burden of proof to establish their ITC claim is genuine, the mere technicality of a GSTR-2A mismatch is not a sufficient ground for denial. The law emphasizes substance over form, ensuring that the integrity of the ITC chain is protected, and that recovery efforts are directed at the actual defaulting party—the supplier—first. This judicial clarity reinforces the principles of natural justice and fairness inherent in the Indian tax system.

Disclaimer: The information provided in this blog post is for educational and informational purposes only. It does not constitute legal, financial, or tax advice. The content reflects our interpretation and analysis of recent judicial rulings and GST laws as of the date of publication. Tax laws and interpretations are subject to change and vary based on specific facts and circumstances. Readers are strongly advised to consult with a qualified Chartered Accountant, GST practitioner, or legal professional for advice tailored to their specific situation before making any decisions or taking any action based on this content. The author and publisher shall not be held liable for any loss or damage incurred as a result of relying on the information provided herein.