[Opinion] Liability of Purchasers and Denial of Input Tax Credit | Analyzing the Impact of Non-Existent Suppliers Under the GST Act, 2017

Neha Gupta & Jahnavi Khattar – [2024] 166 taxmann.com 461 (Article)

1. Introduction

The introduction of the Goods and Services Tax in 2017 revolutionised India’s indirect taxation system, bringing multiple taxes under a single regime. A key element of the GST framework is the mechanism for claiming Input Tax Credit (“ITC”), which allows businesses to offset the taxes paid on inputs against their tax liability on output. This system is designed to ensure that tax is levied only on the value added at each stage of production or distribution. However, complications arise when a purchaser, acting in good faith, claims ITC on supplies made by a supplier who later turns out to be non-existent or whose GST registration is retrospectively cancelled. The GST authorities have increasingly scrutinised such transactions, issuing notices for the reversal of ITC and demanding penalties.

The central question in this paper is whether a purchaser can be held liable for supplies made by a non-existent supplier and whether the ITC claimed on such supplies can be denied. This paper explores the relevant legal provisions, the role of the tax authorities and analyses key judicial precedents to provide a comprehensive understanding of the issue. The thesis is that bona fide purchasers who have exercised due diligence should not be penalised for the supplier’s default or non-existence, as denying ITC in such cases may contradict the principles of fairness and justice inherent in GST law.

2. Legal Provisions Related to ITC

Under the GST regime, ITC is a critical component that ensures the smooth flow of tax credits across the supply chain. Section 16 of the Central Goods and Services Tax Act, 2017 (“CGST Act”), provides that a registered person is entitled to claim ITC on the supply of goods or services if certain conditions are satisfied. These conditions, specified under section 16(2) of the CGST Act, include the possession of a tax invoice or debit note issued by a registered supplier, receipt of goods or services, and the payment of tax to the government. Additionally, the recipient must have filed the required returns under Section 39. In this regard, the relevant provision of law is reproduced hereunder:

“Section 16(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;

(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 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;

(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.”

A key provision that has sparked controversy is Section 16(2)(c), which mandates that ITC can only be claimed if the tax charged by the supplier has been paid to the government. This places an implicit responsibility on the purchaser to ensure that the supplier complies with its tax obligations, raising concerns about the extent of the purchaser’s liability in cases where the supplier defaults or is found to be non-existent. Section 155 further empowers the tax authorities to demand proof from the purchaser regarding the eligibility of their ITC claim since the burden of proof lies upon the person claiming that he is eligible for ITC under the CGST Act, leading to the reversal of ITC, along with penalties and interest under the relevant provisions, if the conditions are not met. In such cases, tax authorities may initiate demand and recovery proceedings against the purchaser by serving notice upon the taxpayer under section 73 or 74 of the CGST Act, arguing that ITC cannot be availed on fraudulent or non-genuine transactions.

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