1. Introduction
Input Tax Credit (ITC) is one of the cornerstones of the Goods and Services Tax (GST) regime in India. The basic principle of GST is to allow seamless credit across the supply chain to eliminate cascading taxes. However, in recent times, taxpayers across the country have faced a peculiar and unjust situation—denial of ITC to the recipient merely because the supplier has failed to file their GSTR-3B return, despite the recipient having paid tax and fulfilling other conditions.
This article explores the legality, fairness, and implications of such denial, scrutinising the current legislative provisions, judicial pronouncements, and practical challenges faced by the business community.
2. Statutory Framework Governing ITC
2.1. Section 16 of the CGST Act, 2017
Section 16 lays down the eligibility criteria for availing ITC. The following are the four primary conditions under Section 16(2):
- Possession of a tax invoice or debit note.
- Receipt of goods or services.
- Tax actually paid to the Government.
- Furnishing of return under Section 39 (i.e., filing of GSTR-3B).
Further, clause (aa) was inserted via the Finance Act, 2021 (w.e.f. 01.01.2022), which states:
“The details of the invoice or debit note referred to in clause (a) have been furnished by the supplier in the statement of outward supplies (i.e., GSTR-1) and such details have been communicated to the recipient in the manner specified under Section 37.”
This means, effective January 2022, the recipient must ensure that the invoice is reflected in their GSTR-2B for availing ITC.
3. GSTR-2A vs GSTR-2B: The Practical Implication
GSTR-2A is a dynamic report which gets updated as suppliers upload invoices, whereas GSTR-2B is a static statement generated monthly, based on suppliers’ GSTR-1 uploads.
The government’s reliance has gradually shifted from GSTR-2A to GSTR-2B for allowing ITC. However, neither GSTR-2A nor GSTR-2B confirms that tax has actually been deposited with the government. It merely confirms the reporting of the invoice.
4. Denial of ITC for Supplier’s Non-Compliance: A Legal Infirmity?
4.1. Violation of Natural Justice and Article 14
Denying ITC to a bona fide recipient merely because the supplier did not file GSTR-3B is arguably a violation of natural justice. The recipient has no control over the supplier’s actions. Penalising the recipient creates an unjust burden, especially when the recipient has:
- Received goods/services,
- Paid consideration along with GST,
- Possesses valid tax invoices.
This scenario also offends Article 14 of the Constitution of India, which guarantees equality before the law.
4.2. Judicial Precedents Supporting the Recipient
- Arise India Ltd. v. Commissioner of Tax (2018) [Delhi HC]
Under the VAT regime, Delhi High Court held that denying input credit solely because the seller failed to deposit tax was arbitrary and violative of Article 14. - Siddharth Enterprises v. State of Gujarat (2019) [Gujarat HC]
Held that denying ITC to the recipient for supplier’s default violates the recipient’s right and is unconstitutional. - Bharti Telemedia Ltd. v. Union of India (2020) [Delhi HC]
Reiterated that ITC cannot be denied to the recipient if the supplier has failed to upload invoices in GSTR-1.
5. Departmental Circulars and Clarifications
Circular No. 183/15/2022-GST dated 27 December 2022
The circular clarified that ITC should not be denied merely on the basis of mismatch unless a proper investigation establishes that:
- The recipient is involved in a fake transaction, or
- There is collusion with the supplier.
This supports the idea that bona fide recipients should not be penalised.
6. Challenges Faced by Recipients
- Burden of Compliance: Businesses are now forced to perform extensive vendor due diligence.
- Practical Impossibility: Small taxpayers find it hard to ensure every supplier files returns properly.
- Working Capital Blockage: Unjust denial of ITC affects cash flows and profitability.
- Litigation and Harassment: Even genuine taxpayers are pulled into litigation, leading to harassment and legal costs.
7. Recent Developments and Technological Push
- GSTR-2B-based ITC Matching: The system now increasingly relies on auto-drafted GSTR-2B.
- Compliance Rating System (Proposed): Future plans include rating taxpayers based on compliance, allowing ITC claims based on ratings.
- Invoice Matching under E-Invoicing Regime: E-invoicing ensures that once an invoice is uploaded to the IRP, it is auto-populated in GSTR-1, reducing discrepancies.
8. Recommendations and Way Forward
- Legislative Reform:
Amendments should be made to delink ITC eligibility from supplier’s GSTR-3B filing. Focus should be on actual tax payment and genuine transaction. - Recipient Protection Mechanism:
A mechanism should be created for the recipient to report defaulting suppliers and still claim ITC after proving genuineness. - System-Level Solutions:
The portal must generate alerts for mismatch in GSTR-1 and 3B by the supplier to help recipients take proactive steps. - GST Tribunal Activation:
The long delay in operationalising the GST Appellate Tribunal is causing hardship in obtaining relief for such issues.
9. Conclusion
The denial of Input Tax Credit to a buyer merely because the supplier defaults in GSTR-3B filing, despite tax being paid, is not only unfair but also contrary to the spirit of GST. A law that punishes one for the fault of another undermines the basic tenets of equity, justice, and the rule of law.
While the government’s intent to curb fake invoicing is valid, the solution must lie in robust backend verification, stricter enforcement on the defaulting suppliers, and not burdening genuine buyers with unjust denials. It’s time for policymakers to recalibrate the approach and ensure the GST system promotes business confidence and fairness.
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