Claiming ITC if supplier has not filed his returns

 

While there is no apparent solution for claiming ITC at the moment, in the event a supplier has not filed his returns,  A delay caused by the supplier in this regard could result in an unnecessary and additional output tax liability through no fault of the recipient. 

The instinctive reaction of a businessman in such a situation would be to hold his vendor’s payment until he files his return and the credit gets reflected on the common portal.

However, this may not be ideal, Holding payments could also lead to lawsuits as payments are to be made on the basis of goods/services received, and not on the basis of tax compliances done.

When it comes to suppliers that are small and medium-sized businesses, holding vendor payments will be an expensive option since the Micro, Small and Medium Enterprises Development Act (MSMED), 2006 requires the debtors of such MSMEs to make payments within 45 days, after which such payments made will attract a very high cost of interest.

The suppliers who commit such compliance defaults repeatedly could be boycotted – either by restricting their trade or by refusing to deal with them altogether. However, this option could hamper business relationships

Hence, considering the points above, holding vendor payments or boycotting defaulting suppliers is not a feasible option in case a supplier does not file his returns.

Conditions and eligibility for availing Input Tax Credit as per Section 16 of CGST Act, 2017

As per the provisions,

Registered person shall be entitled to avail the ITC on satisfying below mentioned conditions 1 He is in possession of a Tax Invoice or debit note issued by a supplier.

2 He has received the goods or services or both.

3 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 utilization of input tax credit admissible in respect of the said supply; and

4 He (Recipient) has furnished the return under section 39

As per this condition, unless and until supplier has paid the tax which was collected from the recipient and also supplier filed the return u/s39 i.e GSTR3B; Recipient is not eligible to take input tax credit

The government has inserted Rule 86A in the CGST Rules, 2017 vide Notification No. 75/2019- Central Tax dated 26.12.2019.

This rule lays down the conditions for availment of Input Tax Credit (ITC) by a taxpayer. If a supplier has not filed his GSTR-3B return then corresponding ITC will not be available to the buyer as per Rule 86A of the CGST Rules, 2017.

So, here it is interesting to note that this is against Article 265 of the Constitution of India and the basic legal principle that “Rules and Circulars can not override Act”

On one side they made the law that if the invoice raised by the supplier is available in GSTR-2A of the buyer then the buyer can take ITC of that invoice but on another side, they are talking about GSTR-3B. Is it not controversial?

 

In support of above 2 questions, I am sharing the judgement provided by the Gujarat High Court in the case of M/s Kalpsutra Gujarat versus The Union of India. The extract of judgement is as under :

 

“We would like to understand from the respondents whether the omission on the part of the third party (Seller) in filing the GSTR-3B for the relevant period would be sufficient to block the Input Tax Credit of the writ applicant. We would also like to understand whether for such action, the Department has invoked Rule 86A of the Central Goods and Services Tax Rules, 2017.“

 

Conclusion : From the above discussion and HC judgement, we can understand that Rule 86A can not restrict a buyer from taking ITC even if the supplier has not paid tax in his GSTR-3B return, unless any action is mala-fide in nature.

So, to avoid litigation issues and notices and penalties in future,

It is recommended to take Indemnity Bond/Undertaking from the supplier stating tax collected from recipient is deposited to the Government.

 

                                    INDEMNITY BOND CUM UNDERTAKING

Recipient Name: M/s

Address:

GSTIN No.

Sub : Payment of GST Amount and filing of GST Return for availing such tax

as Input Tax Credit (ITC) by you.

Sir/Madam,

With reference to payment of GST amount and filing of GST Return for availing Input Tax Credit (ITC) by you as per eligibility provisions for the identified Invoices raised

by us, we, M/s.____________________(supplier name) having our Registered

Office at ________________________________, possessing GST Identification

No.__________________________ hereby declare and undertake as follows:

1. We have disclosed all the facts relating to our Firm / Company to

Recipient name:

Address:

GSTIN:

2. We hereby declare that we have paid/agree to pay GST for the related invoices as

per details below to the respective GST Authorities.

Sl.No.	Order No.	Order Date	Invoice No.	Invoice Date	Assessable	Value	IGST	CGST	SGST

 

 In this connection, we hereby agree and undertake to furnish to you proof of

payment of GST, which includes above mentioned GST amount.

3. We hereby declare that we have filed GSTR 3B related to the above mentioned

invoices in time. In this connection, we hereby agree and undertake to furnish you proof of electronically filed GST Return to the authority.

4. We hereby agree and undertake to indemnify as under:-

i) The Firm / Company shall take all necessary safeguards to ensure availing of ITC

on above mentioned invoices as per eligibility by

Recipient name:

Address:

GSTIN:

within the time limit provided in the GST provision.

ii) In case of rejection of ITC by the concerned Tax Authority, for non payment of GST amount by us or for any other reasons attributable to us , we hereby undertake and agree to indemnify

Recipient name:

Address:

GSTIN:

in full against all consequences, liabilities of any kind whatsoever directly arising

from denial of ITC which includes interest and penalty arising out of such irregular

availment of ITC by you opined by GST Authority.

We hereby agree and confirm that –

any breach of the above indemnification or undertakings shall be construed as

breach of the terms and conditions for reimbursement of GST and RECEPIENT

NAME shall be at liberty to take such action against us including recovering of reimbursed GST amount from

a) any of our Bank Guarantee executed in your favour, if any,

b) Security Deposit paid for any of your work ,if any or

c) Other unpaid invoices, if any of us raised with recipient

I / We declare that I am empowered to execute this Indemnity Bond cum undertaking

and the same is given under the orders of proper authority as per the delegation of

power of the organization.

Place :

Date :

Authorised Signature of the Indemnifier

Name :

Designation :

Seal

 

 

 Note :

Update as on 3rd April 2020

The CBIC has notified that taxpayers can claim input tax credit in the GSTR-3B return from February 2020 to August 2020, without applying the rule of capping provisional ITC claims at 10% of the eligible ITC as per GSTR-2A. While filing the GSTR-3B of September 2020, the taxpayers must cumulatively adjust ITC as per the above rule from February 2020. 

Update as on 1st Jan 2020

The CBIC has revised the extent of provisional input tax credit claims from 20% to 10%.

Update as on 9th October 2019

The CBIC has notified that the input tax credit that can be availed by a registered person in respect of invoices or debit notes, will be restricted to 20% of of the eligible credit available in respect of invoices or debit notes as per details uploaded by the suppliers.