GST Update on Reversal of ITC in case of supplier not filed GSTR-3B and Reversal of ITC Merely by Adopting Uniform or Ad-hoc Percentage is unsustainable 145/2020-21

GST Update on Reversal of ITC in case of supplier not filed GSTR-3B and Reversal of ITC Merely by Adopting Uniform or Ad-hoc Percentage is unsustainable

This update is being prepared in an interesting decision by Madras High court in a sales tax matter in case of Sri Ranganathar Valves Private Limited Vs Assistant Commissioner. The impugned decision has dealt two issues of reversal of credit on wastages as well as reversal of ITC on non payment by supplier of goods. High Court held that input tax credit cannot be disallowed merely on the ground that supplier has not paid tax to Government. Court has also set aside the demand confirmed by Assistant commissioner for reversal of ITC on normal loss issued to him. The Court has remanded the matter to adjudication officer to decide the matter afresh on the basis of decisions quoted in the judgement.

In this case, the petitioner contended that Input Tax Credit cannot be disallowed on the ground that the seller has not paid tax to the Government. The petitioner submitted that he is able to prove that the seller has collected tax and issued invoices to him.

The second point with regard to reversal of input tax credit claim on wastage under Section 19(9) of the State Act. There were two type of losses namely invisible loss and visible loss, the petitioner adopted a policy of normal loss upto 1% percentage and abnormal loss of 5% respectively.

Generally invisible loss is called as “normal Loss” and visible loss is called as “abnormal loss” and Input Tax credit is allowed for normal losses and it is to be reversed only in case of abnormal loss. The petitioner adopted the adhoc formula of 5% of raw material as normal loss and 1% for abnormal Loss. Here, Assistant Commissioner issued a SCN for reopening of cases and requires the assessee to reverse Input Tax Credit on the basis of 4% of raw material for visible (normal) Losses and 5% of raw material for invisible (abnormal) Losses.

After hearing the both the parties, the High Court observed that, in the case of Assistant Commissioner (CT), presently Thiruverkadu, Assessment Circle, Kolathur, Chennai Vs. Infiniti Wholesale Ltd., reported in [2017] 99 VST 341 (Mad), wherein it has held that Input Tax Credit cannot be disallowed on the ground that the seller has not paid tax to the Government, when the purchaser is able to prove that the seller has collected tax and issued invoices to the purchaser. As such, restriction of the amount of Input Tax Credit on this ground, cannot be sustained and requires re-consideration.

Further, with regard to the second issue where High Court set sides the SCN for reopening of cases and consequential order passed reversing the input tax credit to the extent of either four per cent or five per cent or on ad hoc percentage. The Honorable High Court directed the Assistant Commissioner to issue appropriate show cause notices to the petitioners clearly setting out under what circumstances they propose to revise or call upon the petitioner to refund sanctioned and after inviting objections proceed in accordance with law.

This is landmark decision as there is dispute on both issues in GST also. Section 16(2) requires that payment of GST should be made by supplier only then the credit is allowed to recipient. Hence, there is specific provision in this regard in GST. Whether the decision cited supra will be applicable in GST also? Moreover, the department will try to recover the tax amount from supplier also and meanwhile, it will try to disallow the credit to recipient as the supplier has not paid the tax. Will it not amount double recovery of tax. We do understand that there is joint responsibility of payment of tax on supplier and recipient but the prime recovery should be from supplier and if he fails then only recovery should be made from recipient.

On second point also, normally department tries to recover the ITC from the taxpayer if there is shortage in receipt of material. Even in Excise regime, there was larger bench decision that if it is normal loss (for which recipient does not raise debit note) then credit will not be recovered. But if it is abnormal loss then only credit should be reversed. But under GST, the department has once again started litigation and maintained that decisions of earlier regime are not applicable in GST. There will be another round of litigation.

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GST Update on Reversal of ITC in case of supplier not filed GSTR-3B and Reversal of ITC Merely by Adopting Uniform or Ad-hoc Percentage is unsustainable 145/2020-21

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