November 2023

Resolving the Conundrum of Input Tax Credit Under GST : Striking a Balance for Genuine Claimants

Priti Makhija, Chartered Accountant

The implementation of the Goods and Services Tax (GST) in many countries is aimed to streamline the tax regime and eliminate the cascading effect of taxes.

One of the fundamental concepts of GST is Input Tax Credit (ITC), which allows businesses to claim credit for the taxes paid on inputs or input services or capital goods. However, the interpretation and application of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (CGST Act), pertaining to the payment of tax by the supplier as a prerequisite for claiming such ITC, has sparked a debate regarding the denial of ITC to bona fide claimants, especially when such denial is not attributable to any lapse on the part of the claimant.  

This article explores the conflicting perspectives and proposes a balanced approach to ensure fairness for all stakeholders.

THE LEGAL PROVISION

Section 16(2)(c) stipulates that a recipient of goods or services can avail ITC only if the tax charged on the supply of goods or services has been actually paid to the Government by the supplier. The strict interpretation of this provision places an onerous burden on the claimant to verify whether the supplier has remitted the tax, potentially leading to the denial of ITC even to bona fide claimants who have already paid the tax to the suppliers. This raises concerns about the practicality and fairness of such a requirement.

Before the amendment to Section 41 of the CGST Act, recipients were allowed to claim ITC on a provisional basis. This meant that they could avail of ITC based on self-assessment, but it would only become final after the process of matching ITC through the filing of GSTR-2 and GSTR-3. Further, the disallowances proposed by the Department merely on the basis of the mismatch with GSTR-2A were easy to challenge. Sections 42, 43 and 43A, which were associated with the matching, reversal and reclaim of ITC, were omitted due to challenges in effectively implementing the matching process.

With the amendment introduced by the Finance Act, 2022, effective from 1st October, 2022, the concept of provisional ITC and matching was eliminated. The recipients are now required to self-assess and claim ITC in GSTR-3B based on credits in GSTR-2B. If a recipient claims ITC for GST that the corresponding supplier has not paid, they are required to reverse ITC along with applicable interest. The recipient can re-avail the reversed ITC once the supplier pays the GST.  

This change results in the disallowance of ITC to the recipient solely due to the non-payment of tax by the supplier, along with interest. However, there remains an open question regarding whether the authorities can impose a time limit on the re-availing of this credit by the recipient after the supplier has made the payment. Furthermore, there is a lack of clarity regarding the refund of

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