GST - An agenda for reforms - Part - 72 - ITC restrictions - GST at crossroads
FEBRUARY 11, 2020
By Dr G Gokul Kishore
INPUT tax credit restriction has become one of the major topics of discussion today. Into third year with the proclamation of seamless credit as the guiding motto, GST is suddenly at crossroads as new provisions are being brought to restrict ITC. When GDP is tottering at 4% and when industrial downturn is yet to get over, suspecting the members of trade and industry of bogus ITC claims for lower than expected GST collections, cannot be countenanced. This 72 nd part is devoted to the recent restrictions on ITC.
Blocking fraudulent ITC for one year
Taxpayers invoke writ jurisdiction of High Court challenging validity of provisions when they perceive discrimination and arbitrariness. One of the grounds taken is violation of Article 14 of the Constitution of India. Ironically, when it comes to drafting restrictive and penal provisions, the draftsman treats everyone equally. Rule 86A was inserted in CGST Rules recently after GST Council in its meeting in December, 2019 recommended "suitable action to be taken for blocking of fraudulently availed input tax credit to check the menace of fake invoices" (as per the press release). The intention of the Council was to curb the problem of bogus invoices which are used for availing input tax credit. To implement this recommendation, Rule 86A seeks to block ITC in certain situations for a period upto one year. If the officer concerned is satisfied, then the restriction can be lifted. The bar is on tainted credit amount and not the entire ITC per se.
When tax invoices are issued fraudulently, the recipient may or may not be aware of the fact that it is not genuine. When the recipient is hand in glove with the supplier in a fraud, then the invoices can be termed as fake and the availment can be stigmatised as fraudulent. If the credit availing recipient of supply has entered into a commercial transaction, has entertained bona fide belief that the supplier is a trustworthy person and, therefore, contracted for the supply and has availed ITC, neither such recipient can be painted black along with the supplier when an evasion case is booked against the latter nor does the credit becomes tainted. This is better explained when the scenarios contemplated and categories covered in Rule 86A are analysed.
The officer empowered to block can act when he has reasons to believe that ITC has been availed fraudulently or ineligible credit has been availed. Fraudulent credit is to be distinguished from ineligible credit but such distinction may not be relevant as the rule itself lists five types of cases for such purpose. If the person is non-existent (in the eyes of GST law) or not conducting business from the registered premises, invoice issued by him will be considered as fake. If the recipient has not exercised due diligence to check such 'existential' questions about the supplier, then he has to face the axe as credit would be blocked once he touches the proscribed document. A parallel scenario has been covered as the bar applies when recipient is non-existent or not doing business as per registration. A recipient not in existence as per GST law is a person who has not obtained registration or whose registration has been cancelled. In both the cases, taking credit in the electronic credit ledger may not be feasible. This may be possible if the recipient is merely a link in the chain of circular trading, passing only ITC without even being in business. There cannot be any dispute over coverage of such suppliers and recipients under Rule 86A.
Treating both good and bad at par
One of the cases covered pertains to availment of credit on invoices wherein tax amount has been charged but not paid to the government. This means the supplier has pocketed the tax amount charged and collected from the recipient. But, because recipient is not manipulative like the supplier, he has to bear the sentence provided under Rule 86A. How a recipient will come to know that the tax charged from him through an invoice has not been credited to the exchequer, is a question generally raised but most such questions remain unanswered and are reserved for courtroom battles. Treating at par a non-existent but invoice issuing supplier and a recipient who can hardly check supplier's tax compliance, is the kind of equality handed out by the draftsman. This provision has to be read with its counterpart Rule 36(4) which restricts credit, in respect of invoices (details thereof) not uploaded by supplier in GSTR-1 and, therefore, not displayed in recipient's GSTR-2A, to the extent of 10% of the uploaded invoices.
The tax department treats members of industry as partners and hence, to ensure tax compliance also, taxpayers have been made to shoulder responsibility of tax administration in ensuring that taxes are properly paid as per invoices by the suppliers and they are properly reported in the GST portal. If the recipient shirks such responsibility, then he has to be prepared for restrictions under Rule 86A and Rule 36(4). If such processes are system-driven and the recipient is alerted through appropriate flags on at least compliance behaviour of the supplier, if not transaction-wise, the severity of these restrictions may get softened and instances necessitating applicability may get minimised. In the absence of such solutions, expecting recipients to be astrologers to visualise the tax-discipline of suppliers and take preventive measures, is not fair.
When provisions exist to seek reversal of fraudulently availed ITC or availment of ineligible ITC and when provisions exist to provisionally attach any property even during pendency of proceedings and when provisions exist to even restrict movement of persons charged with fraud, by arrest, coupled with seizure of the goods, one may wonder the real purpose behind enacting rules like Rule 86A and Rule 36(4). Even if Rule 86A does not provide for extending an opportunity of hearing, the same is to be read into the rule. Therefore, when all such provisions do require observance of certain procedures and ultimately may not result in significantly increasing tax revenue, there can be two possible conclusions. First, the taxpayer-friendly regime of GST is changing and the industry is now suspected. Second, even before the IT systems are fully ready and several provisions had to be kept in abeyance, the tax administration expects every taxpayer to ensure compliance by others. GST is certainly at crossroads. It will be better for both the industry and economy if it takes the correct direction on ITC.
[To be continued…]
[The author is an Advocate. The views expressed are strictly personal]
See Part 71
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