In a significant legal battle, M/S M. Trade Links brought forth a challenge against specific provisions of the Central Goods and Services Tax Act (CGST) and the State Goods and Services Tax Act (SGST) in the Kerala High Court. The core of the dispute centers on Sections 16(2)(c) and 16(4) of the CGST and SGST Acts, which stipulate the prerequisites for claiming Input Tax Credit (ITC).
M/S M. Trade Links argues that the current conditions under Section 16(2)(c) unfairly restrict the ability to avail ITC, creating undue hardships for businesses. Additionally, they contend that the retrospective application of Section 16(4) presents further complications and financial burdens. By challenging these provisions, they seek a more favorable interpretation that aligns with the broader goals of tax reform and business facilitation.
The Kerala High Court’s decision on this matter could have far-reaching implications, potentially reshaping the ITC landscape and providing much-needed clarity for businesses operating under the CGST and SGST frameworks. This case highlights the ongoing tension between tax authorities and businesses striving for a fair and equitable tax regime.
India introduced the GST regime to simplify indirect taxes, lessen cascading tax impacts, and unify the national market. The GST Council’s efforts, along with various amendments, have shaped the present tax structure. While the regime offers significant advantages, some provisions, notably those concerning Input Tax Credit (ITC), remain controversial.
Key Provisions in Question
Section 16(2)(c) of the Central GST Act, 2017, is crucial for taxpayers to understand. It mandates that a registered person can claim Input Tax Credit (ITC) only if the tax charged on the supply has been actually paid to the government by the supplier. This ensures that ITC claims are valid and that the tax cycle is complete and accurate. On the other hand, Section 16(4) sets a strict deadline for claiming ITC. It states that the ITC must be claimed by the earlier of two dates: the due date for filing the return for September of the following financial year or the date of filing the annual return. This provision ensures that ITC claims are timely and within the financial year’s purview.
Issue
The core of the issue was the petitioner’s challenge to the provisions of Sections 16(2)(c) and 16(4) of the Central GST Act, 2017. The petitioner contended that denying ITC based on the suppliers’ non-payment of GST was unfair and restrictive. This case underscored the ongoing debate over the balance between enforcing compliance and protecting taxpayer rights within the GST regime. The court’s ruling had significant implications for how ITC claims are managed and how taxpayers navigate compliance requirements.
Argument or Ground of Appeal by the Petitioner
The petitioner has put forward a compelling argument that denying Input Tax Credit (ITC) based on the suppliers’ failure to remit GST is fundamentally unfair, especially when the petitioner possesses valid tax invoices and has made the required payments. They assert that it is impractical for recipients to ensure their suppliers’ compliance with tax remittance.
01. Unfair Burden on Recipients
The core of the petitioners’ argument is the unfair burden placed on recipients. They argue that it is unjust to deny ITC to those who have fulfilled their tax obligations by paying their suppliers, simply because the suppliers did not remit the tax to the government. This policy forces recipients to monitor and enforce their suppliers’ compliance, which is unreasonable and impractical.
02. Violation of Constitutional Rights
Denying ITC due to supplier default is more than just unfair; it is also a violation of constitutional rights. Specifically, it infringes on Article 19(1)(g), which guarantees the right to practice any profession, trade, or business, and Article 14, which ensures the right to equality. This denial adversely affects business operations and undermines the right to property as protected under Article 300A of the Constitution of India.
03. Doctrine of Impossibility
The petitioner invokes the doctrine of impossibility, encapsulated in the maxim “lex non cogit ad impossibilia” (the law does not compel a person to do what is impossible). It is unreasonable to expect recipients to ensure their suppliers’ tax compliance, a task beyond their control and capability.
04. GSTR-2A and ITC Eligibility
Finally, the petitioners highlight issues with the GSTR-2A form, an auto-populated document that should not be the sole criterion for ITC eligibility. They argue that technical glitches or delays in updating this form should not affect the entitlement to ITC, emphasizing that reliance on a dynamic and sometimes flawed document is unjust.
Respondent’s Perspective on ITC Claims
The respondent asserted that claims for Input Tax Credit (ITC) should be valid only if the suppliers have actually paid the taxes to the government. This standpoint hinges on the principle that the law mandates recipients to ensure their suppliers’ compliance with tax payments. The argument emphasizes the responsibility of recipients to verify that their suppliers have fulfilled their tax obligations before claiming ITC.
Precedent Analysis
The petitioners brought forward Circular No.183/15/2022-GST along with a CBIC press release to emphasize that any discrepancies between GSTR-2A and GSTR-3B should not affect the entitlement to Input Tax Credit (ITC).
To bolster their argument, the petitioners cited several key cases:
- Godrej & Boyce Manufacturing Company Pvt. Ltd. v. Commissioner of Sales Tax [(1992) 3 SCC 624]: This case examined tax credits as concessions, highlighting that these benefits are conditional.
- Union of India v. VKC Footsteps (India) Pvt. Ltd. [(2022) 2 SCC 603]: This case tackled the issue of refunds for unutilized ITC, underlining the restrictive conditions imposed by GST laws.
- Willowood Chemicals v. Union of India [2018 58 GSTR 310 (Guj)]: This judgment stressed that claims for tax credits must adhere to prescribed time limits to ensure no disruption to revenue.
By leveraging these precedents, the petitioners aimed to strengthen their position that discrepancies between GSTR-2A and GSTR-3B should not hinder ITC entitlement.
Court Judgment: A Landmark Ruling by the Kerala High Court
The Kerala High Court has delivered a significant ruling, emphasizing fairness in the GST regime. The court stated that it is unjust to deny Input Tax Credit (ITC) to genuine recipients simply because their suppliers did not comply with tax regulations. Instead, the court insisted that actions should target the defaulting suppliers, not the innocent recipients.
ITC as a Right
The court firmly recognized that ITC is a right for registered persons under GST, as long as they adhere to the Act’s conditions. This right should be upheld without unfairly shifting the compliance burden onto recipients.
Compliance Burden
The ruling highlighted that the compliance burden should not fall on the recipients who have already met their obligations by paying the necessary taxes to their suppliers. Penalizing these compliant recipients for the suppliers’ faults is inequitable.
Need for Equitable Measures
The judgment called for measures that ensure compliance without punishing bona fide recipients. It urged tax authorities to take stringent action against defaulting suppliers rather than denying ITC to those who have complied with their tax responsibilities.
The Kerala High Court’s decision addresses critical issues raised by the petitioners, emphasizing a fair and just tax system. The court underscored the importance of a balanced approach in implementing GST provisions, ensuring that genuine taxpayers are not unduly burdened by others’ defaults. This ruling aims to protect the constitutional rights of taxpayers while upholding the integrity of the GST framework.