THE POLICY LAB (TPL) - 54
NOVEMBER 04, 2024

By J B Mohapatra

(A) INPUT Tax Credit (ITC) under the GST laws is a lynchpin of the indirect tax system founded on the object to eliminate the cascading effect of taxes. Operational knock-on effects of the ITC regime are provisions for a degree of liquidity for the businesses and augmentation of their tax efficiency while ensuring fullest compliance of the regulations. Since the rate of success of a seamless ITC mechanism depends much on documentary support that a registered person is needed to have for example, the invoice, receipts etc including the supplier's name and GSTIN and description of goods or services, it is statutorily obligatory for compliance to the requirements as established in the statute, more particularly section 16 of the CGST Act, 2017, before a ITC claim can be lodged and entertained.

(B) Section 16 of CGST Act, 2017 reads as follows:

"Eligibility and conditions for taking input tax credit.- (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,-

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;

(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;

(b) he has received the goods or services or both.

[Explanation.- For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services-

(i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person;

(ba) the details of input tax credit in respect of the said supply communicated to such registered person under section 38 has not been restricted;

(c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and

(d) he has furnished the return under section 39:

Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:

Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed:

Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.

(3) Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income- tax Act, 1961, the input tax credit on the said tax component shall not be allowed.

(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the thirtieth day of November following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.

Provided that the registered person shall be entitled to take input tax credit after the due date of furnishing of the return under section 39 for the month of September, 2018 till the due date of furnishing of the return under the said section for the month of March, 2019 in respect of any invoice or invoice relating to such debit note for supply of goods or services or both made during the financial year 2017-18, the details of which have been uploaded by the supplier under sub-section (1) of section 37 till the due date for furnishing the details under sub-section (1) of said section for the month of March, 2019."

(C) Two of the strongest arguments against the current dispensation of ITC claims and how these are addressed flow from the language of section 16(2)(c) requiring that tax charged on the supply of goods must actually be paid to the government by the supplier before a ITC claim can be entertained in the hands of a registered person, and in that view, the burden of establishing or otherwise whether or not the supplier has paid the tax to the government falls on the registered person/ ITC claimant- thus establishing a statutory dispensation which is said to be arbitrary and excessive. The second of the 2 arguments is by drawing a parallel between section 16(2)(c) of CGST Act and section 205 of the Income Tax Act (ITA) and demonstrate a clear departure in approach between the 2 statutes. Section 205 of ITA reads as follows:

"Bar against direct demand on assessee.

Where tax is deductible at the source under the foregoing provisions of this Chapter, the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income."

Thus, the amount of direct tax deducted and not paid to the government, from any amount payable to a person, whether the nature of payment is salary, or commission, or for rendering professional / technical support etc is not recoverable from the recipient himself under the ITA. This apparently stands in contrast to the indirect tax dispensation where ITC claim would be denied to the registered person/ ITC claimant if taxes paid by the claimant on the supplies he has received are not made over to the government by the supplier.

(D) While one cannot deny many causative factors in ITC mismatch cases to issues such as systemic lag and glitches or faulty documentation at the supplier or claimant level, equally true is a motivated attempt to defraud revenue through fake invoices and false claims of ITC. DGGI in its Annual Report of 2023-24 analysing the typology of cases which necessitated enforcement actions (for clandestine supply and under valuation, or misclassification, or non-payment of tax under RCM or non-reversal of ITC or blocked credit), notes that fake ITC claims comprised 20% of all cases with an estimated revenue implication of Rs 21,000 Cr. Operative parts of that report read as follows:

"3.7 Fake Invoicing, fraudulent availment of ITC across various sectors of Goods and Services:

DGGI has been a leading force in identifying and dismantling networks involved in fraudulent ITC schemes across the country. The details regarding the same since April, 2020 is as under:

Fake ITC networks have evolved from being typically controlled by masterminds to new age specialization by way of developing a larger and more complex web of layers to effect fraudulent transactions. From the creation of the fake firms and passing the fake ITC to the end beneficiaries, the intermediate layers have become multi-layered, and it has been observed that fraudulent ITC ecosystem has evolved into a marketplace. Fake firms, fake invoices and fake KYCs (Aadhaar, Mobile Numbers, PAN Card, Address proofs etc.) are created fraudulently and sold in the market through intermediaries on a commission basis. Sector specific and HSN specific fake invoices are created and sold on demand from end beneficiaries and buyers.

The principal motive of fraudulent entities is to generate fake invoices and to accumulate fake ITC, which in turn are used to reduce the tax liability through cash. Other motives that drive unscrupulous entities to generate of use fake invoices include clandestine supply without invoices and without payment of taxes; monetization of Fake ITC through GST Refunds; Inflating turnover for the purpose of availing higher Credit Limit/ Overdraft from Banks and obtaining contracts including Government contracts; booking fake purchases for getting Income-tax benefits by showing reduced profit margins and higher expenses; and Laundering of money."

(E) The most precipitate reason for detection of larger number of fake ITC cases should logically lie with the initiation of legislative and administrative efforts at formalisation of the whole-of-the supply chain under an overarching indirect tax system and more particularly, ensuring compliance to the mandatory credit matching norms for the ITC claims under the new laws.

(F) While inter-departmental sharing of fake ITC data with CBDT, among the many agencies that CBIC has chosen to share the data with, should help, equally helpful would be 2 other efforts: (a) a concomitant legislative change in ITA in sync with the larger legislative intent underpinning the ITC architecture and (b) redesigning the reporting formats under the ITA

(G) With respect to the possible legislative changes to the ITA for the purposes of ITC, section 43B of ITA is relevant. For the purposes of determining income from business or profession, this provision allows for expenditure of any sum payable by the taxpayer by way of tax, duty, cess or fee etc under any law for the time being in force. Purpose of introducing section 43B in the ITA through Finance Act 1983 as explained in FM's budget speech is as follows:

"100. Several cases have come to notice where taxpayers do not discharge their statutory liability such as in respect of excise duty, employer's contribution to provident fund, Employees' State Insurance Scheme, for long period of time. For the purpose of their income-tax assessments, they nonetheless claim the liability as deduction even as they take resort to legal action, thus depriving the Government of its dues while enjoying the benefit of non-payment. To curb such practices I propose to provide that irrespective of the method of accounting followed by the taxpayers, a statutory liability will be allowed as a deduction in computing the taxable profits only in the year and to the extent it is actually paid. This would result in a revenue gain of Rs.100 crores in a full year and Rs.80 crores in 1983- 84."

Thus an eligible tax expenditure under ITA is the one which is actually paid by the tax payer. Making a claim in any other manner or an indirect rerouting the modality for payment taxes without establishing the actual payment of taxes thus would not suffice.

That said, the difference in the language employed in section 43B of ITA and in section 16(2)(c) of CGST Act should hardly go unnoticed.

Operative parts of section 43 B of ITA reads as below:

Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of-

(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or

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shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him :

On the other hand, section 16(2)(c) of the CGST Act, 2017 which lays down one of the many conditionalities for availment of ITC reads as follows:

"(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,-

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(c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply;"

Since payment of GST to the government in respect of supplies is the cornserstone for establishing eligibility to ITC by a registered person under the CGST Act, the debate whether the existing language in section 43B of ITA would support such an interpretation synchronous with the CGST Act would be contentious. Simply because section 43B of ITA does not lay down any such requirement of payment of tax 'to the government' for substantiating a claim u/s 43B of ITA, unlike under the CGST Act.

Under a reasonable construction of law therefore, one may be persuaded to accept a view that it is statutorily impermissible under the provisions of ITA to assume that payment of GST on inputs and paid to the supplier is an allowable expenditure, if the GST so paid has not been made over by the supplier to the government either through cash or further utilisation of ITC lying in credit with the supplier. That unreconciled ITC which the taxpayer fails to establish as statutorily claimable under the CGST Act is in the same measure not allowable within the meaning of section 43B of the ITA.

A liberal interpretation on the same set of propositions though can adduce enough number of arguments to arrive at an exactly opposite view.

On both sides of the aisle though, none should be quibbling on the larger legislative intent that CGST Act aims to achieve through the ITC architecture- that is near real-time verification of taxes at every stage of the supply chain to eliminate cascading effects of tax. If this proposition alone is made to work for purposes of ITA as well, then to my mind, the language employed and processes mandated u/s 43B of the ITA should be needing an overhaul.

(H) Now, the reporting requirements of taxes etc paid under the ITA and the Rules thereunder. The existing format for Form 3CD under section 44AB of the ITA contains the following for reporting purposes of taxes paid and unpaid:

"26.In respect of any sum referred to in clause (a), (b), (c), (d), (e), (f) or (g) of section 43B, the liability for which:-

(A) pre-existed on the first day of the previous year but was not allowed in the assessment of any preceding previous year and was

(a) paid during the previous year;

(b) not paid during the previous year;

(B) was incurred in the previous year and was

(a) paid on or before the due date for furnishing the return of income of the previous year under section 139(1);

(b) not paid on or before the aforesaid date.

(State whether sales tax, customs duty, excise duty or any other indirect tax, levy, cess, impost, etc., is passed through the profit and loss account.)

27. (a) Amount of Central Value Added Tax credits availed of or utilised during the previous year and its treatment in the profit and loss account and treatment of outstanding Central Value Added Tax credits in the accounts."

The 3CD format intended to capture the level of compliance of a taxpayer to the requirements under section 43B contains the data whether the taxpayer has made a claim for a tax expenditure without making an actual payment, and in that eventuality guide the auditors and the tax authorities to proceed for considering the sum for disallowance. Current design of Form 3CD evidently does not capture the ITC components among the data submitted by a registered person and how much of the claims have been made and accepted and how much of ITC claims have been denied. Under the GST laws, GSTR 9C being the reconciliation statement provides the unreconciled differences in ITC and reasons thereof including the amount payable and additional liabilities due to non-reconciliation. If ITA were to purposively align with the CGST Act in the manner GST including the ITC regime is administered and to accurately capture and trigger the consequences that unreconciled ITC should entail in determination of total income under ITA, then 3CD format needs to include the information contained in GSTR 9C as well.

(I) Enforcement actions by DGGI on fake ITC cases and CBDT-CBIC exchange of information on fake ITC claims notwithstanding, a greater degree of congruence in executing the objects that ITC regime seeks to achieve is possible on a larger system-level space by rejigging the substantive law and practices prevalent in administration of ITA to appropriately reflect the current law on ITC and the legislative intent behind that law.