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Tuesday, September 19, 2023


Since the inception of GST, it has always been the intention and endeavour of the Government to provide seamless flow of Input Tax Credit (“ITC”) and reduce cascading of taxes. In line with this intention, the Government has been making continuous changes to the provisions relating to ITC. One such notable change was made when the GST Council in the 48th Meeting held on December 17, 2022 recommended amendment to Rule 37(1) of CGST Rules with effect from October 1, 2022 to provide for reversal of ITC only proportionate to the amount not paid to the supplier, instead of in toto reversal, thereby providing relief to the taxpayers.

However, the eligibility, availment and utilisation of ITC under the CGST Act still remains a widely debated and disputed topic. Section 16 of CGST Act provides for eligibility and conditions for taking ITC encompassing a gamut of conditions which a registered person requires to comply with for the purpose of taking ITC. 

Recently, the Hon’ble Finance Minister of India presented the Union Budget 2023-2024 wherein various amendments have been proposed under GST. Amongst several other amendments, second proviso to Section16(2) of the CGST Act has been proposed to be amended to provide that where the recipient fails to pay to the supplier the amount towards value of supply along with tax payable within 180 days from issue of invoice by the supplier, an amount equal to ITC availed by recipient shall be paid by him along with interest payable under Section 50 in such manner as may be prescribed. Whereas the unamended provision required the amount to be added to output tax liability instead of payment/reversal.

Further, the third proviso to Section16(2) has been proposed to be amended to state that the recipient shall be entitled to avail ITC on payment made by him ‘to the supplier’ towards value of supply along with tax payable thereon. Whereas, in the unamended provision the payment was stated to have required to be made by the recipient.

While from a perusal of the memorandum issued it may appear that the intention of the amendment is only limited to aligning Section 16 (2) with the return filing system. According to ELP, one of the best tax firms in India, the actual impact of the amendment, however, might have a far-reaching impact. 

Under the CGST Act, “supplier” is defined to mean a person supplying the goods or services or both including an agent acting on behalf of the supplier. However, in actual business transactions, there may be instances and situations where payments are made to any other person other than the supplier. For example, payment made to any other person on the instruction of the supplier, payment made to the Government on receipt of a Garnishee notice, payment made to the Insolvency Professional (“IP”) where IBC proceedings are initiated against the supplier etc. (“any other person than the supplier”).

Therefore, question arises on whether the intention of the Government is to merely align the provisions of Section 16(2) with the return filing system or to further restrict availability of ITC in case where payment is made to any other person than the supplier? Also, whether bonafide recipients can also be denied ITC under the garb of payment not being made to the supplier?

Generally, in a contract between two parties, the receiving party promises to pay the supplying party an amount towards the supply of goods or services, or both so received. The contractual agreement obligates and makes the recipient liable to make payment to the supplier. Such a liability gets discharged only on payment made to the supplier as per the terms of the agreement. However, in cases where this amount is required to be paid to any other person than the supplier on the direction of supplier or on an obligation arising out of a direction from the Government, it is worth pondering whether the same would still be tantamount to have been made to the “supplier”. The recipient would treat such payments in his books as payment made to the supplier and thereby, completing the entire transaction of supply. In other words, the payment made to any other person would merely be a book adjustment.

In the case of Modern Food Industries (India), the Hon’ble CESTAT, Delhi has even gone to the extent of holding that even when there is no payment in cash or in case where there is book adjustment, it cannot be claimed that there has been no sale. Similarly, West Bengal Authority for Advance Ruling in the case of Senco Gold Limited has held that consideration paid by way of setting off book debt is proper payment and ITC shall be admissible even if consideration is paid through book adjustment. In view of these rulings, it can be said that payment made to any other person would still be construed as payment made to supplier. In other words, another person other than the supplier steps into the shoes of supplier.

In the case of Krishna Devloor (D.S. Krishna), the Hon’ble High Court of Delhi has observed that only when money is paid by one, to another, with a specific understanding, that it is the consideration for a contract, that the contract can be said to have come into existence. Hence, communication via E-mail or through proper modes should be made to the person other than the supplier informing that such payment is being made under the contract of agreement entered with the supplier. This would strengthen the position of the recipient for availing ITC. Further, in the contract for supply, specific clauses may also be inserted stating that in case value of supply/ consideration towards the supply is required to be paid by the recipient to any other person than the supplier, such payment for the purposes of commercial understanding be deemed to have been paid to the supplier.

Even viewed from a different angle, the restriction regarding availability of ITC only upon payment to the supplier seems incongruous as any other person to whom payment is made can set off the liabilities/ dues accrued on account of the supplier. As long as the payment is made and the circle of supply is completed, there is no logic behind denying ITC merely on account of payment not made to the supplier.

However, in hindsight, the Revenue may argue basis judgments passed by the Hon’ble Supreme Court in the cases of Jayam and Company, Godrej and Boyce Mfg. Co. Pvt. Ltd. And Ors, ALD Automotive Pvt. Ltd. that taxing statute must be strictly interpreted and ITC is only a statutory right subject to conditions and restrictions which the legislature may specify. Therefore, when the law requires payment to the supplier, payment made to any other person would not satisfy the proviso proposed to be inserted in Section 16(2)(c).

In view of the above it would be interesting to see how the amendment unfolds on actual implementation. Whether it leads to unnecessary litigation or not, only time will tell.

Economic Laws Practice (ELP) is one of the best tax law firms in India.

This Article is authored by Vivek Baj, Partner, Taxation and Sai Prasanna Dash, Senior Associate at Economic Laws Practice. The views are personal.

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