The Rajasthan High Court has in the case of M/s. Rahul Agencies, on the most contentious issue under GST law, issued the notices to the Government on a plea challenging the denial of ITC to the buyer of goods, services for default of the supplier.
The petitioner, M/s. Rahul Agencies challenged the vires of section 16 (2) (c) of the CGST Act, 2017 and section 16 (2) (c) of the Rajasthan GST, 2017 read with Rule 86A(1)(b) of the CGST Rules,2017 and Rule 86A (1) (b) of Rajasthan GST Rules, 2017.
It may be noted here that Section 16(2)(c) provides that input tax credit (ITC) must be allowed to the recipient only when the supplier has discharged the output liability through the utilization of the ITC admissible in respect of the supply or by cash.
The counsel for the petitioner urged that denying ITC to a buyer of goods and services would tantamount to treating both the ‘guilty purchasers’ and the ‘innocent purchasers’ at par whereas they constitute two different classes.
The petition further stated that denying ITC to a buyer of goods or services for default of the supplier of goods or services would tantamount to shifting the incidence of tax from the supplier to the buyer, over whom it has no control whatsoever, is arbitrary and irrational & therefore violative of the Article 14, Article 19(1)(g) and Article 300A of the Constitution of India.
It would also clearly frustrate the underlying objective of removal of cascading effect of tax as stated in the Statement of object and reasons of the Constitution (One Hundred And Twenty-Second Amendment) Bill, 2014.
Considering the arguments the division bench of Justices Sandeep Mehta and Devendra Kachhawaha issued the notice to the Government.
Our view:
In our view the issue of disallowing of ITC despite full payment being made by buyer to the supplier, due to non-deposition of tax/filing of returns by the supplier is cruel. The Government however is staunch very rigid in this regard and vide Section 109 of the Finance Act, 2021 it has inserted a new sub-clause (aa) to Section 16 (2) which reads as under:
“(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;”.
It is however pertinent to mention here that above sub-clause has not yet been enforced. Once enforced it is expected that this provision will also witness the judicial scrutiny.
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
