Recent Madras High Court Judgment- Eradicating the Hardships of Bonafide Recipients
In the Pre-GST era, many debatable issues had been settled by various high court judgments. Among the various issues, one of the burning issues, which was highly debatable even before GST came into the picture was whether ITC would be allowed to the recipient on default of the supplier for non-payment of tax to the Government.
The supreme court vide its judgment dated 26th august 2013, in the case of Commissioner of Central excise, Jalandhar Vs M/s Kay Kay industries, clarified and allowed the MODVAT credit to recipient M/s Kay Kay industries, even when the supplier M/s Sawan Mal Shibhu Mal Steel Re-Rolling Mills did not discharge its liability fully for the period covered by the invoices of which the recipient M/s Kay Kay industries had taken the MODVAT credit.
Further, in one similar case of Arise India Limited Vs Commissioner of Trade & Taxes, the Delhi High Court judgment also concluded that credit can’t be denied in the hands of the recipient for the default of supplier of non-payment of tax to the government.
Now under the GST regime as well, section 16 (2) (c) of the CGST Act 2017, mentions that the tax charged in respect of the supply for which ITC has been claimed by the recipient has to be paid to the government by the supplier. This sub-clause still creates a dilemma in the thought process of the readers whether the recipient would be able to claim ITC if the supplier defaults in payment of tax to the government.
Recently on 24th February 2021, the Hon’ble Madras High Court has pronounced its judgment in the case of M/s D.Y. Beathel Enterprises Vs the State tax Officer, in favour of the recipient and allowed the ITC to the recipient of goods, similarly as it was allowed through various judgments even in the Pre-GST era.
In the present case firstly, the state tax officer has passed the order against the recipient, without examining the supplier and without initiating any recovery action against the said supplier.
Due to this, Madras High Court has quashed the order passed by the State Tax officer and pronounced its judgment in favour of the recipient. Hence, this judgment of the Madras High court has provided certain clarity that recovery proceedings should firstly be initiated against the supplier instead of demanding the tax directly from the recipient.
Now Analysing the provision of Section 16(2)(c) of CGST Act 2017, the basic idea behind inserting this sub-section was to make it necessary for the recipient to crosscheck whether GST has been paid to the government by the supplier for the invoice on which ITC has been collected from the recipient.
This idea of crosschecking of payment by the supplier could have been possible if returns such as GSTR-2, GSTR-1A, and GSTR-3 had been introduced properly, which had helped in ITC matching and mismatching. But as these returns were never introduced, the recipient can’t crosscheck the tax has been submitted to the government by the supplier or not.
Even with the introduction of GSTR-2A in the year 2019, the recipient still cannot identify whether the supplier has submitted the tax to the government. Hence, Government should come up with a clear mechanism that would eradicate the hardship faced by the recipients in claiming the ITC of the tax paid to suppliers.
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Posted by:
CA Tarun Kapoor
AKGVG & Associates