Landmark Decision by Calcutta High Court: Buyers’ GST Credits Safe Even Amidst Supplier Tax Defaults
In a significant legal ruling, the Calcutta High Court has taken a firm stance regarding GST input tax credit (ITC) under the Goods and Services Tax (GST) system. The court has decreed that the mere mismatch between GSTR-2A and GSTR-3B forms cannot lead to automatic denial of ITC, without a proper investigation into the supplier’s actions. This pronouncement is set to offer substantial relief to companies that have been grappling with demand notices triggered by discrepancies in tax reporting or non-payment by their suppliers.
Expressing its verdict on August 2, 2023, the Calcutta High Court emphasized, “There shall not be any automatic reversal of input tax credit from the buyer on non-payment of tax by the seller. In case of a default in payment of tax by the seller, recovery shall be made from the seller.” This unequivocal judgment was rendered by a two-judge Bench, presided over by Chief Justice T S Sivagnanam and Justice Hiranmay Bhattacharyya.
Nevertheless, the court acknowledged that the option to reverse GST input tax credit from the buyer will still remain at the disposal of revenue authorities, specifically in cases deemed “exceptional,” such as instances involving missing dealers, business closures by suppliers, or insufficient assets held by the supplier.
This landmark verdict emerged from the case titled ‘Suncraft Energy Private Ltd and Another Vs The Assistant Commissioner, State Tax, Ballygunge Charge and Others’. Here, Suncraft Energy had availed GST input tax credit for its procurement from a supplier. However, this credit was subsequently revoked by the revenue authority due to the supplier’s failure to fulfill tax obligations. Notably, certain invoices from the supplier were not reflected in Suncraft Energy’s GSTR 2A for the fiscal year 2017-18.
Relying on prior judgments by the Supreme Court in the Bharti Airtel and Arise India Ltd cases, the Calcutta High Court overturned the decisions of the Assistant Commissioner, State Tax, Ballygunge. This judgment reiterates that the imposition of demand notices on purchasing companies, despite these companies having fulfilled their payment obligations, is unjustified without a comprehensive inquiry into the suppliers’ conduct and without pursuing tax recovery measures against the suppliers themselves.
Niraj Bagri, a partner at Dhruva Advisors, applauded the ruling, stating, “The Calcutta High Court has provided substantial relief to companies facing unwarranted demand notices due to the suppliers’ non-compliance. This judgment asserts that purchasing companies cannot be held accountable without a thorough investigation into the suppliers’ actions or without recovering the tax dues directly from the suppliers.”
This verdict is expected to alleviate the woes of various industries that have been inundated with demand notices across different states, stemming from discrepancies in tax credit, even though the purchasing companies have fulfilled their tax obligations to the suppliers.
A previous ruling by the Punjab Authority for Advance Ruling (AAR) had rejected input tax credit for a taxpayer due to the default of its supplier. Despite the taxpayer’s argument that they lacked a mechanism to ensure compliance by their suppliers, the AAR invoked Section 16(2)(c) of the CGST Act to deny ITC. In light of the Calcutta High Court’s recent ruling, this kind of approach is now set to be reassessed, potentially reducing legal disputes and shifting the focus of inquiries to the defaulting suppliers rather than the genuine recipients.
Abhishek Jain, partner and national head (indirect tax) at KPMG, welcomed the principles upheld in this ruling, emphasizing the importance of pursuing recovery proceedings against defaulting suppliers rather than burdening bona fide recipients with unnecessary litigations. This approach, he noted, has the potential to streamline numerous cases and ensure that investigations are primarily directed at suppliers who fail to fulfill their tax obligations.