Section 16(2)(c) of GST

Introduction

Section 16 of the Central Goods and Services Tax Act, 2017 outlines the criteria and requirements that a registered taxpayer must meet to claim input tax credit on goods and services used for business purposes. Input Tax Credit (ITC) refers to the claiming of credit for the GST paid on goods and services purchased for business use. This mechanism is accessible to registered entities such as manufacturers, agents, suppliers, aggregators, and e-commerce operators.

According to Section 16(2)(c) of the CGST Act, 2017, a buyer can claim input tax credit on purchased goods and services only if the supplier has paid the GST on those supplies. The supplier must settle the tax either in cash or through allowable ITC. The supplier must upload their Business to Business (B2B) transactions on the common portal in GSTR-1. This allows the buyer to verify whether the supplier has reported and registered the transaction on the portal. If the supplier fails to upload the transaction, the buyer cannot claim the ITC for that purchase.

The registered person can claim ITC within a specified time limit. For example, ITC for a financial year can be claimed till the due date of filing the GST return on 30th November of the following year or filing of the annual return, whichever is earlier.

Issue with this Provision

The issue lies in the interpretation of Section 16(2)(c) of the CGST Act, which specifies that a recipient can claim ITC only if the supplier has deposited the tax levied on the supply of goods with the government. The provision becomes problematic if the phrase “has been actually paid to the Government” is interpreted to mean that it is the recipient’s responsibility to ensure that the tax they paid on goods supplied by the supplier is actually transferred to the government by the supplier. This interpretation would impose an additional burden on the claimant to verify that the supplier has paid the tax to the government. If the supplier fails to do so, the claimant would be denied ITC under the law. This situation jeopardizes the position of a bona fide purchaser, who is unable to claim ITC due to the supplier’s default and not of their own.

Under the current GST system, it is extremely challenging for businesses to ascertain whether the supplier has filed the tax with the government. This puts businesses in a difficult position, requiring them to judge the reliability of their suppliers’ intentions. Furthermore, the requirement to reverse ITC along with interest exacerbates the problem, contradicting the GST’s aim to promote ease of doing business in the country.

In the case of Nahasshukoor v. Assistant Commissioner, this provision was challenged on the grounds that it violated the Article 14 of the Indian Constitution. The court heald that strict principles should be applied to test the taxing statute. It held that this provision cannot be challenged merely on the ground of arbitrainess but manifest arbitrainess should be proved. 

In the case of Pinstar Automotive India Pvt. Ltd. v. Additional Commissioner, Madras High Court ruled that the condition laid down in section 16(2)(c) of the CGST Act needs to be interpreted strictly and the mandate is upon the claimant to ensure compliance with the provision, failing which it would not be entitled to ITC.

Consequences of Violation

If a taxpayer claims Input Tax Credit (ITC) without adhering to Section 16 of the Goods and Services Tax Act, several consequences may follow:

• ITC Reversal: The tax authorities can reverse the ITC if it is found that the taxpayer has not complied with Section 16. This requires the taxpayer to repay the ITC already claimed, along with any applicable interest or penalties.
• Interest and Penalties: The taxpayer may be required to pay interest on the reversed ITC amount, calculated from the date of availing the ITC until the date of reversal.
• Reputational Damage: Non-compliance with tax laws can harm the taxpayer’s reputation, affecting relationships with suppliers, customers, and other stakeholders, and potentially leading to a loss of trust and business opportunities.
• Audit and Scrutiny: Non-compliance may attract increased attention from tax authorities, resulting in more audits and scrutiny of the taxpayer’s records and transactions.

Conclusion

It is evident that Section 16(2)(c) of the CGST Act 2017, in its current form, can be interpreted to place a duty on the recipient to verify whether the supplier has remitted the GST to the government for the invoice on which the recipient has claimed ITC. Therefore, it is crucial for the government to reassess these provisions and amend the GST law to alleviate the difficulties recipients face when claiming ITC. Additionally, a mechanism should be established to track supplier payments for specific invoices to prevent undue hardships on recipients. In the meantime, it is hoped that the judiciary will take measures to ensure that ITC is not denied to bona fide purchasers.

FAQs

What is Section 162 of the CGST Act?

Section 162 of the Central Goods and Services Tax (CGST) Act, 2017 deals with the protection of action taken under the Act in good faith. It provides legal immunity to officers and other persons empowered under the Act for actions taken in good faith. This section states that no suit, prosecution, or other legal proceedings can be instituted against the government or any officer for any action taken in good faith under the provisions of the CGST Act or rules made thereunder. This protection aims to ensure that officials can perform their duties without fear of legal repercussions.

What are the eligibility and conditions for ITC?

Eligibility and conditions for Input Tax Credit (ITC) under GST include:

1. Registered taxpayer status
2. Possession of valid tax invoice or debit note
3. Receipt of goods or services
4. Payment of tax to the supplier
5. Filing of returns
6. Use of goods or services for business purposes
7. No restriction on claiming ITC for specific items
8. Matching of supplier and recipient details
9. Time limit of one year from invoice date for claiming ITC
10. Proportionate ITC for partial business use

What is the Rule 16 of the CGST act?

Rule 16 of the CGST Rules, 2017 pertains to “Credit and debit notes.” It outlines the procedures for issuing credit and debit notes under the GST regime. Key points include:

1. Specifies format and content requirements for credit/debit notes
2. Mandates sequential numbering of these documents
3. Requires linking to original invoice
4. Sets time limits for issuing credit notes
5. Outlines conditions for adjusting tax liability
6. Prescribes reporting in GST returns

Who is eligible for ITC under RCM?

Eligibility for Input Tax Credit (ITC) under Reverse Charge Mechanism (RCM) in GST applies to:

1. Registered taxpayers who are recipients of goods or services
2. Entities liable to pay tax under RCM
3. Businesses that have paid tax on RCM supplies
4. Companies that have filed returns and reported RCM transactions
5. Organizations using these goods/services for business purposes

To claim ITC, the recipient must possess a valid tax invoice, make the payment within 180 days, and comply with all other ITC conditions. This provision allows businesses to recover tax paid on RCM supplies, maintaining the GST chain.

What is ineligible ITC?

Ineligible Input Tax Credit (ITC) refers to GST paid on certain goods or services that cannot be claimed as a credit. Key ineligible items include:

1. Personal use goods/services
2. Food, beverages, outdoor catering (except specific cases)
3. Beauty treatments and health services
4. Membership of clubs, health/fitness centers
5. Rent-a-cab services (except specific cases)
6. Life/health insurance (except when mandatory)
7. Travel benefits for employees on vacation
8. Goods lost, stolen, destroyed, or given as gifts
9. Works contract services for construction of immovable property (except plant and machinery)
10. Goods or services used for personal consumption