By Ritesh Kanodia
Goods and Services Tax (GST) is deemed a landmark reform replacing a number of indirect taxes. One of the essential options of GST is it getting a correct Value-Added Tax (VAT), supplying for the seamless flow of credit across goods and services.
However, whilst that may possibly be so, the eligibility of credit has been a continual matter of dispute (a) wherever there is a non-payment of GST by the supplier and (b) on account of the restriction imposed by Rule 36(4) of the CGST Rules. Per the stated Rules, the credit of GST charged on invoices which have not been reported by the vendors can be taken only to the extent of 5% of cumulative GST charged on reported invoices.
Against such a background, the Budget FY22 has proposed an amendment to Section 16 of the Central Goods and Services tax Act, 2017 (CGST Act), introducing a new situation that (a) the specifics of the invoice ought to be furnished by the supplier in the statement of outward supplies and (b) that such specifics ought to be communicated to the recipient of such invoice.
The objective of the proposed amendment, as we comprehend it, is to counter the menace of fake invoices. However, merely reporting invoices in the GST returns and communicating the identical with the recipient (by way of GSTR-2A) does not necessarily imply that the tax will get paid on such invoices.
It may possibly also be noted that presently there is no mechanism in location whereby a recipient of supplies can confirm the payment of tax by the vendor for a specific invoice issued. What can only be confirmed (via the newly introduced GSTR-2B) is that the vendor has filed the returns for the month (GSTR-3B) and paid the net tax.
Needless to say, the bigger situation of no matter whether the recipient of services can be penalised for non-compliance by the vendor remains open and unanswered. The Delhi High Court, in Arise India Limited vs Commissioner of Trade & Taxes, has not too long ago held that credit can’t be denied to a getting dealer who has entered into a bona fide transaction with a registered promoting dealer who has issued a tax invoice reflecting the VAT registration quantity, and the only remedy is to proceed against the defaulting promoting dealer.
However, till there is a judicial certainty on the situation beneath the GST regime, businesses can anticipate notices to be issued for mismatched credit soon after the Finance Bill receives presidential assent.
The provision becomes more onerous thinking of a different proposed amendment in the Budget of 2021 whereby, provisional attachment of home or bank accounts can be initiated for any proceedings that get initiated beneath the GST law, if the Commissioner has ‘reasons to believe’ that it is needed to do so to safeguard interests of income.
The icing on the cake is that there is no provision which supplies for credit to be re-availed or demand notices to be dropped on the basis that the authorities could have
initiated proceedings or recovered the unpaid tax from the vendor, of which the recipient would under no circumstances grow to be conscious.
Does this not lead to double jeopardy? Should the tax authorities not attain out to the recipient as a final resort exactly where the taxes are not recoverable from the vendor?
In conclusion, whilst judicial certainty will emerge, it is critical for businesses to take concrete measures to make certain that the vendor complies.
Some of the essential elements, such as vendor diligence, month-to-month reconciliation, withholding of GST, debit to vendor accounts, situation of legal notices recovery of unpaid GST, communicating specifics of non-compliant vendors to the division, and so forth, becomes critical. Technology implementation comprising a mix of technologies tools, robotics and AI, could be used to far better handle the aforesaid elements.
The author is Partner
Dhruva Advisors LLP