GST Update No 142 on amended Section 41 of CGST Act, 2017

The Union Budget 2022 announced on 01.02.2022 has made substantial amendments in various sections of CGST Act, 2017. Certain changes being made are beneficial to the assessees while others are detrimental to the smooth functioning of the business. One of the unfriendly amendments has been made in Section 41 of CGST Act. The provision earlier was based on provisional availment of credit. However, since the matching concept as proposed in the GST Law is omitted, the credit is now proposed to be taken on by the assessee on self-assessment basis. The detailed analysis of this amendment is subject matter of discussion of our present update. Section 41 of CGST Act, 2017, is substituted so as to do away with the concept of “claim” of eligible input tax credit on a “provisional basis” and to provide for self-assessment input tax credit subject to prescribed restrictions. The substituted provision is reproduced hereunder: (1) Every registered person shall, subject to such conditions and restrictions as maybe prescribed, be entitled to avail the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited to his electronic credit ledger. (2) The credit of input tax availed by a registered person under sub-section (1) in respect of such supplies of goods or services or both, the tax payable whereon has not been paid by the supplier, shall be reversed along with applicable interest, by the said person in such manner as may be prescribed: Provided that where the said supplier makes payment of the tax payable in respect of the aforesaid supplies, the said registered person may re-avail the amount of credit reversed by him in such manner as may be prescribed. The above provision is draconian in nature as it seeks to compel the recipient to reverse the input tax credit along with interest if the supplier has failed to pay tax to the government. It is settled principle of law that in indirect taxation, the primary liability to collect and pay tax to the government is that of supplier and if the supplier is absconding, then the government may approach recipient. However, as per the above provision, the recipient is made liable to reverse the input tax credit if the supplier has not paid taxes to the government which is totally unjustifiable. It is pertinent to mention here that the GSTR-3B is a summary return which is to be filed for payment of taxes by the supplier that does not contain invoice wise details of the taxes paid. Moreover, GSTR-1 is only a summary of outward supplies which does not ensure tax payment by the supplier. Consequently, as of now, there is no mechanism available with the recipient to ensure that the taxes collected by the supplier has been duly paid to the government. As such, the provision requiring the recipient to reverse input tax credit along with interest for default in payment of taxes by the supplier is an impossible compliance which is practically not feasible that needs to be re-considered by the government. The above provision will adversely effect the working capital requirement of the recipient for no fault on their part which is not justifiable. In this context, it is worth mentioning here that the validity of provision contained in section 16(2)(c) of the CGST Act, 2017 requiring payment of taxes by the supplier as one of the conditions for availment of input tax credit by the recipient of service has been challenged before various High Courts in the GST regime as follows:- • LGW INDUSTRIES LIMITED AND OTHERS VERSUS UNION OF INDIA [CALCUTTA HIGH COURT] • BHARTI TELEMEDIA LTD. VERSUS UNION OF INDIA AND OTHERS [DELHI HIGH COURT] • SAHIL ENTERPRISES VERSUS UNION OF INDIA AND OTHERS [TRIPURA HIGH COURT] The above petitions are pending on the grounds that in the erstwhile indirect taxation regime, it was concluded by courts that the VAT authority does not have jurisdiction to reverse the input tax credit already availed by the assessee on the ground that the selling dealer has not paid the tax. Reference may be made to the following judicial pronouncements:- • Sri Vinayaga Agencies v.s The Assistant Commissioner, CT Vadapalani [2013 60 VST page 283 Madras High Court] • Assistant Commissioner (CT), presently TAC, Kolathur, Chennai vs. Infiniti Wholesale Ltd., reported in [2017] 99 VST 341 (Mad) • Ranganathar Valves (P) Ltd. vs. The Assistant Commissioner (CT) (FAC) [W.P. Nos. 38488 to 38493 of 2015], • Quest Merchandising India Pvt. Ltd. vs. Government of NCT of Delhi and others [W.P.(C) 6093/2017] • Arise India Limited vs. Commissioner of Trade & Taxes, Delhi & Others [W.P.(C) 2106/2015] Therefore, the above decisions clearly depict that imposition of condition on the recipient to ensure that supplier has paid taxes to the government exchequer is highly unreasonable. Hence, the present provision will also definitely be challenged before the Courts of law. It is also submitted that as per the proviso, the recipient will be permitted to re-claim the credit when the taxes are paid by the supplier to the government. The above provision needs clarity as regards the applicability of the time limit for availment of re-credit by the recipient as the only exception provided in GST law is in case of re-availment of credit by the recipient on payment made to supplier after 180 days from the date of invoice. The government needs to explicitly provide that the time limit for availment of credit would not apply in above cited cases. As there is no mechanism available with the recipient to track payment of taxes to the government by the supplier, the practical implementation of this provision is also a question that needs to be answered by the government. Well, it can be said that this provision is extension of harassment to the assessees thereby defeating the motto of simple and easy tax compliance.

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GST Update No 142 on amended Section 41 of CGST Act, 2017

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