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Before denying credit to the buyer, catch/enquire the Supplier at first place

Input Tax Credit – Section 16 of CGST Act – Non-Payment Of Tax By Supplier

Before denying credit to the buyer, catch/enquire the Supplier at first place – Madras High Court

1. Section 16(2)(c) of the CGST Act, provides that tax has been actually paid to the Government as a condition for claiming Input Tax Credit by the buyer.

2. During the VAT regime multiple High Courts have held that if the seller has not paid the tax, credit cannot be denied to the buyer especially where the transaction is bonafide.

3. Recently the Hon’ble Madras High Court in the matter of D.Y. Beathel Enterprises, 2021-TIOL890-HC-MAD-GST has held as under:

a. Proposition laid down in the context of the previous tax regime may not be straight-away applicable to the current tax regime.

b. If the tax had not reached the kitty of the Government, then the liability may have to be eventually borne by one party, either the seller or the buyer.

c. Order demanding reversal of ITC from purchaser must be quashed due to the following reasons:

  • Non-examination of Supplier in the inquiry
  • Non-initiation of recovery action against Supplier in the first place

Author’s Comment

4. Two important observations are given by the Hon’ble High Court:

o The Court has not straight-away accepted the proposition laid down by the Courts during the VAT regime. Further, the Court after reading Section 16 has held that if the tax is not paid to the Government, that has to be borne by either of the party i.e. seller or buyer.

o Nonetheless the Court has given relief to the buyer that the seller must be examined in such cases and recovery proceedings must be initiated against the seller in the first place.

5. The relief given in the judgment is one step in favour of genuine buyers.

6. Food for thought: How to enforce this judgment in case of Inter-State transactions where the Supplier will be under different jurisdictions of the SGST department?

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Before denying credit to the buyer, catch/enquire the Supplier at first place – Madras High Court

Profile photo of Adv. Pawan Arora Adv. Pawan Arora

Adv. Pawan Arora, Partner at Athena Law Associates Experience of Advisory and Litigation of GST, VAT, and Service Tax to more than 25 Reputed Real Estate and Infrastructure Construction Companies. 10 Years of relentless and steady experience of Advisory and Litigation in GST and other Indirect Taxes and handled matters of clients from diverse industries and field of specialization is Indirect Taxes.

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