Matching of Credit Or Putting the Horse Before The Cart?

We are approaching three years since GST law has been implemented in India.  The law has been comprehensive and the idea of One Nation – One Tax has largely been successful; thanks to the co-operative federalism displayed by both the central and state governments.

However, with the general slowdown in the economy and the anticipated reduction in the tax collection, the government has introduced, rather suddenly, certain rules which have a large and practical bearing on the manner in which the assessees are going to comply with the law. One such amendment is the introduction of a new rule - Rule 36(4), which restricts the overall eligibility to avail credit by an assessee in a particular month to 20 per cent of the credit, which is reflected in GSTR 2A of a particular month (restricted further down to 10 per cent now).

This article is being attempted after a whole-hearted conversation occurred between a good friend and me.

This friend’s business qualifies as an MSME. He seeks my refuge when he requires some solace in taxation matters. He never had keen interest in taxation prior to GST but after the increase in compliances under GST, he, owing to his limited resources, has rather been forced to start understanding the finer nuances of the law by himself.

As I wished him on new year, I rather innocuously enquired as how he is coping with the challenges in the GST law, especially on the matching front. At first, he said he was made aware of the change in the tax law only in December.  He was not aware that from January 1, 2020, the provisions of matching have been made more stringent by restricting the credit to 10 per cent.

He made a more emotional pitch that he was genuinely compliant in business, issuing GST invoices to all his customers, was making payments to all vendors on time and also filing all his returns and paying taxes. That being the case, why was he to be put to task by denial of credit.

Being a self-proclaimed tax expert, I explained the law stating that the government has every right to impose conditions relating to availment of credit and that the Supreme Court has on certain occasions held that granting of the credit was not a right in itself and the government is free to even restrict or reject the credit. Further, these conditions relating to restricting of the credit was only to ensure fraudulent credits are barred and only genuine cases are taken.

After patiently bearing with me, he exclaimed if the laws are framed keeping the genuine businesses in mind and not fraudsters in mind.  He stumped me further by stating that there was another amendment brought in the Rule 86A, which was effective from December 26, 2019, where powers were granted to officers for blocking the utilisation of ITC in certain circumstances, which include bogus credits, taken without deposit of tax to the government. and credit availed without invoice. Once such power exists with the officers, shouldn’t that be enough to deny credit for fraud cases?

He further emphasised that there were powers under law for survey, search, issuance of SCN and recovery. He prodded that once there was enough ammunition with the department to recover taxes from sellers, why was there a need to control credit when it was clear that he had reimbursed the tax component.  

The next day at work when a case law popped up about a decision of the Hon’ble Jharkhand High Court in the case of M/s Tarapore & Company. The case pertained to the interpretation of Section 18(8) of the Jharkhand VAT Act, which is similar to the provisions of GST Act. The section stated that the amount of input tax credit, which will be allowed to a registered dealer shall not exceed the amount of tax actually paid to the government treasury. The petitioners here were bonafide purchasers who paid the tax to the seller but the seller had not reflected such sale in his returns and did not consequently deposit the tax with the government treasury. The Hon’ble High Court held that any punitive action must be undertaken only against defaulting dealers and not against bonafide dealers. The court went on to hold that the intent of the legislature cannot be to punish a dealer acting in a bonafide manner. Holding so, the high court had quashed the demand order made by the assessing officer.  After a little effort, I recalled that Delhi High Court had also taken a similar position.

After reading these cases, I got some hope that even under the GST Act, once a recipient has paid the entire tax to the supplier, he can hope to legally avail and retain the credit of taxes paid; though that may not reflect in his Form 2A, albeit after knocking the doors of the high court.

To part with, in the interest of businesses, large and small, it is hoped that the government would reconsider the immediate implementation of a system of matching, especially till a point where systems are fully in place to enable a real time check of tax compliances by the vendor and establishment of a compliance rating mechanism. This is already contemplated in the Act but shelved till date for unknown reasons. If such ratings are publicly made available, it would assist businesses to be informed and at the same time cautious in effecting their purchase and they are sensitised to the attendant risks involved in trading with less compliant sellers.

If matching is deferred now, it would go a long way in instilling business confidence and trust and ensure ease of doing business.

The author is Joint Partner, Lakshmikumaran & Sridharan Attorneys