Calcutta High Court’s Landmark Decision on GST Credit Denial Due to Supplier Tax Non-Payment

In a groundbreaking ruling, the Calcutta High Court emphasized that the denial of input tax credit (ITC) under GST cannot occur automatically solely due to discrepancies between GSTR-2A and GSTR-3B. This verdict underscores the necessity for an investigation into the supplier’s tax situation before rejecting ITC. This judgment brings substantial relief to companies grappling with demand notices stemming from the supplier’s failure to report or pay taxes.

The Calcutta High Court stated firmly in a verdict dated August 2, 2023, “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 declaration was made by a two-judge Bench composed of Chief Justice T S Sivagnanam and Justice Hiranmay Bhattacharyya.

Nevertheless, the court also outlined that the revenue authorities retain the option to reverse GST input tax credit from the buyer in specific instances such as a missing dealer, supplier business closure, or inadequate supplier assets.

The court’s deliberation was prompted by the ‘Suncraft Energy Private Ltd and Another Vs The Assistant Commissioner, State Tax, Ballygunge Charge, and Others’ case. This case revolved around GST input tax credit obtained by Suncraft Energy for purchases from a supplier. The revenue authority later overturned the ITC due to the supplier’s tax non-payment, citing some invoices not being reflected in Suncraft Energy’s GSTR-2A for the 2017-18 financial year.

In this recent judgment, the Calcutta High Court drew on the precedents set by the Supreme Court in cases like Bharti Airtel and Arise India Ltd, leading to the reversal of orders by the Assistant Commissioner, State Tax, Ballygunge.

Niraj Bagri, a partner at Dhruva Advisors, expressed, “The Calcutta High Court’s decision comes as a huge relief to companies besieged by demand notices resulting from supplier tax non-payment. These notices were served despite the purchasing companies fully compensating the supplier for goods and taxes.”

Bagri added that the court firmly held that demand notices cannot be issued to compliant purchasing companies without proper investigations at the supplier’s end or attempts to recover the tax dues from the supplier.

“This ruling will notably alleviate the plight of industries facing demand notices across various states due to tax credit mismatches, despite companies duly paying taxes to the supplier,” Bagri remarked.

Notably, last month, Punjab AAR’s advance ruling denied ITC to a taxpayer due to its supplier’s default. Despite the taxpayer’s assertion that they lacked mechanisms to ensure the supplier’s compliance, the authority interpreted Section 16(2)(c) of the CGST Act strictly, resulting in ITC denial.

Abhishek Jain, partner and national head (indirect tax) at KPMG, highlighted, “The upheld principles in this ruling are warmly welcomed, particularly the initiation of recovery proceedings against defaulting suppliers concerning legitimate recipients. This principle’s overall affirmation will substantially reduce litigation, as investigations will be directed solely toward defaulting suppliers in relation to numerous recipients.”