Proposed Section 38 under CGST Act in Budget 2022-23 - ‘A Punitive Tax Provision’

[Anuj Bansal]

Proposed Substitution of Section 38 in CGST Act 2017:

In regard to proposed changes in GST Law in Budget 2022-23, most important change is substitution of Section 38 under CGST Act. Presently, Section 38 relates to ‘Furnishing Details of Inward Supplies in Return’, which never came into effect. Purpose of the Section was empowering recipient of goods to change the details furnished by supplier through GSTR 2. Now, proposed Section is ‘Communication of details of Inward Supplies and Input Tax Credit’.

The objective of proposed change is to do away with two -way communication process in return filing. Effect of this would be communication of details of Inward Supplies and Input Tax Credit to recipient of goods or services through an auto generated statement which would be generated on the basis of details filed by supplier u/s 37 (i.e., GSTR- 1). At present, similar statements are generated in the form of GSTR 2A and GSTR 2B.

Point to be noted here is that through the proposed Section vide statement generated, the recipient of goods or services shall get following two details:

1. Details of Inward Supplies on which ITC may be claimed and                                             
2. Details of Inward Supplies on which ITC which cannot be claimed wholly or partly.

Following are the class of suppliers, on whose supplies, ITC cannot be claimed by recipient, subject to such circumstances and conditions as may be prescribed (Such conditions would be prescribed by the Government) :

1. In case of newly registered supplier.
2. In case supplier has defaulted in payment of tax.
3. In case supplier has done short payment of tax.
4. In case supplier has taken wrong credit.
5. In case supplier has not paid tax from electronic credit ledger as proposed u/s 49(12)
6. Such other class of suppliers as may be prescribed.

Effect of proposed Section 38 on claim of ITC by the recipient:

As the effect of proposed change, recipient of supplier shall be wholly dependent on tax compliances done by supplier for claiming ITC. At present, recipient of supply gets the details of inward supply and ITC on the basis of which can be claimed. Now, he will also get the details of supplies on which ITC cannot be claimed wholly or partly.  

Section 16(2) enumerates the qualifying conditions for claiming ITC. Initially, four conditions where necessary for registered person to claim ITC on supply which were as follows:

1. He must be in possession of Tax Invoice.
2. He must have received the goods or services or both.
3. Tax has been paid on such supply by the supplier.
4.  He is regularly filing GST return.

Through Finance Act 2021, Clause (aa) after Section 16(2)(a) was inserted which recently came into force from 01/01/2022 vide Notification No. 39/2021-CT. Through this change, fifth condition for claim of ITC is made effective which is that supplier has mentioned details of Invoice and Debit Note in GSTR- 1 or Invoice furnishing facility and same has been communicated to recipient of such Invoice or Debit Note, which means unless the ITC gets auto populated in GSTR 2B, as per amended Rule 36 (4)(b), credit cannot be claimed.

Now further, a sixth condition has been proposed in budget. Clause (ba) has been inserted after Section 16(2)(b). The newly proposed clause reads as “the details of input tax credit in respect of the said supply communicated to such registered person under Section 38 has not been restricted”. Accordingly, the claim of ITC is restricted to the amount available as per Section 38.

How far proposed Section 38 is justified?

It is the responsibility of the Government to make sure correct enforcement of Law and order in the country. Through proposed Law it seems that Government wants to fix the responsibility on recipient of supplies to make sure that its supplier is tax complaint. A person can either do business or keep an eye on his supplier. In past there has been many Supreme/ High Court’s decisions where it has been held that once the registered person has done all the compliances on his part, ITC can not be denied for the mistake of Supplier. The Government is trying to unsettle the settled position of Law.

Reference can also be made to the following legal propositions which are relevant for above discussion:

1. Under Erstwhile (VAT) Tax Laws:

Under the VAT / Sales Tax, there were similar issues. But the courts have held as follows:

1. For Non-reporting of sales by the selling dealer, demand shall not be raised on the purchasing dealer:

The Hon’ble Supreme Court in the case of COMMISSIONER OF TRADE AND TAXES DELHI VERSUS ARISE INDIA LIMITED [2018 (1) TMI 555 - SC ORDER], has held that disallowing the Input tax credit(“ITC”) of the purchasing dealer due to default of selling dealer in depositing tax, is violation of Articles 14 and 19(1)(g) of the Constitution of India.

Further, in the case of TVL. MURUGAN GARMENTS VERSUS THE ASSISTANT COMMISSIONER (ST) KONGUNAGAR CIRCLE, TIRUPUR. [2021 (10) TMI 845 - MADRAS HIGH COURT], Madras High court held that the “Counsel for the petitioner, in my view, correctly argues that reversal of ITC, on the basis of a mere mismatch in information, could not have taken place, and that, this issue is covered by various judgments passed by this Court.”

2. Department cannot ask Assessee to reverse the legitimate ITC:

In the case of SRI VINAYAGA AGENCIES VERSUS THE ASSISTANT COMMISSIONER (CT) [2013 (4) TMI 215 - MADRAS HIGH COURT] the Hon’ble Madras High Court held that the authority does not have the jurisdiction to reverse the ITC availed by the Assessees on the ground that the seller had not paid the tax. Similar view has been taken in the following decisions:

1. M/S. ONYX DESIGNS VERSUS THE ASSISTANT COMMISSIONER OF COMMERCIAL TAXES BANGALORE [2019 (6) TMI 941 - KARNATAKA HIGH COURT]
2. M/S. TARAPORE & COMPANY, JAMSHEDPUR VERSUS THE STATE OF JHARKHAND THROUGH THE SECRETARY, FINANCE DEPARTMENT, RANCHI., THE COMMISSIONER OF COMMERCIAL TAXES, DEPUTY COMMISSIONER OF COMMERCIAL TAXES, ASSISTANT COMMISSIONER OF COMMERCIAL TAXES, M/S SANATAN ENTERPRISES, JAMSHEDPUR, THE STATE TAX OFFICER, STATE BANK OF INDIA [2020 (1) TMI 414 - JHARKHAND HIGH COURT]
3. M/S. SHIV TIMBER INDUSTRIES VERSUS THE COMMERCIAL TAX OFFICER [2019 (1) TMI 162 - MADRAS HIGH COURT]

Therefore, in the similar kind of issues in the Erstwhile Tax Laws, the courts intervened and supported the bonafide buyers.

2. Legal Position under GST

Even under GST Law there are decisions wherein it has been held that genuine ITC cannot be denied to receiver of Supply. Following are the few important High Court decisions:

1. In the case of M/S. D.Y. BEATHEL ENTERPRISES VERSUS THE STATE TAX OFFICER (DATA CELL) , (INVESTIGATION WING) COMMERCIAL TAX BUILDINGS, TIRUNELVELI. [2021 (3) TMI 1020 - MADRAS HIGH COURT] it has been held by Hon’ble Madras High Court that if the default is made by non-payment of tax by the seller, the recovery shall be made from the seller and only in exceptional circumstances it can be from recipient. The Hon’ble court has given the finding “When it has come out that the seller has collected tax from the purchasing dealers, the omission on the part of the seller to remit the tax in question must have been viewed very seriously and strict action ought to have been initiated against him”. 

2. In ST. JOSEPH TEA COMPANY LTD., PARAMOUNT ENVIRO ENERGIES VERSUS THE STATE TAX OFFICER, DEPUTY COMMISSIONER, STATE GST DEPARTMENT, KOTTAYAM, STATE GOODS AND SERVICE TAX DEPARTMENT, GOODS AND SERVICE TAX NETWORK LTD. [2021 (7) TMI 988 - KERALA HIGH COURT], it is held that ITC could not be denied even if the ITC is not reflecting in 2A under certain circumstances.

3. In M/S LGW INDUSTRIES LIMITED & ORS. VERSUS UNION OF INDIA & ORS., ANMOL INDUSTRIES LTD. & ANR. VERSUS UNION OF INDIA & ORS., SURYA ALLOY INDUSTRIES LTD. & ANR. VERSUS UNION OF INDIA & ORS., RAJ METAL INDUSTRIES & ANR. VERSUS UNION OF INDIA & ORS. AND VICTORIA GLOBAL & ANR. VERSUS UNION OF INDIA & ORS. [2021 (12) TMI 834 - CALCUTTA HIGH COURT], the High Court remanded back the case on the grounds that if the transactions are genuine and supported by valid documents then the ITC cannot be denied.

3. Other important legal propositions which are relevant in the present article:

1. Substantive right cannot be denied:  Substantive right shall not be rejected on account of procedural lapse or technical issues. In regard to same, reference can be made to the decisions of COMMR. OF C. EX., DELHI-IV VERSUS SETHI INDUSTRIAL CORPORATION [2015 (2) TMI 132 - CESTAT NEW DELHI] in the said decision it has been observed by the Hon’ble Court that “Objections are of technical nature and cannot result in denial of substantive right of availment of credit in respect of inputs received by the assesse”.

2. Duplicate Demand: There cannot be duplicate demand i.e. demand on the buyer as well as on the seller. The legal provisions, empowers the government to raise demand on the seller and therefore, the demand shall be raised on the seller only i.e. the person who has defaulted in the transaction. Therefore, raising a demand or recovering tax through reversal of ITC or non-allowing ITC to receiver of supply is against the Natural Justice.

3. Against the Scheme of Indirect Tax Laws: The proposed Section is against the scheme of Indirect Tax Laws. As per scheme of Indirect Tax Laws, the Selling Dealer collect tax from the Purchasing Dealer and deposit to the government. In case demand would be raised on the purchasing dealers, despite of the fact that selling dealer has collected the tax, it disturbs the whole scheme of Indirect Tax laws. In case the government wants to impose such laws, the liberty should have been given to the purchaser to deposit tax directly to the government instead of giving to the seller, to avoid future liability.

Concluding the above discussion, proposed Section 38 of the CGST Act is against the provisions of natural justice and purely against the scheme of the law. Purchasing dealer is suffering instead of doing all the needful like checking the registration certificate, payment of tax to the selling dealer, receiving of supplies, etc. This may increase civil litigations among the Assesses. The government should realize that for the growth of the country, it’s laws should be citizen friendly and a genuine businessman & honest tax payer shall not be punished / penalized for the deeds / negligence of defaulting selling dealers / assesses.  Government should have stringent checks for the selling dealers to whom they are allowing to do business & issuing registration certificates and considerate towards bonafide buyers.