JANUARY 08, 2020

By R Sridhar, Consulting Editor, TIOL

Background

THE issue of ITC continues to occupy centre stage of the controversies between Indian Revenue and the assessees. It is a fact that taxpayer and professionals support the government action against those who indulge in Invoice trading without goods or services or those who avail credit fraudulently. However, the recent amendment as elucidated above has again stirred the hornet's nest by including an action against those whose purchase is genuine, but the credit is refused because the supplier did not remit the tax to the account of the GOI.

Crucial Issues on the amendment

Let us first analyse the structure of Rule 86A and what it intends to overcome-

"Conditions of use of amount available in electronic credit ledger.-

(1) The Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as

a) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 -

i) issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or

ii) without receipt of goods or services or both; or

b) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or

c) the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or

d) the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36,

may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount.

(2) The Commissioner, or the officer authorised by him under sub-rule (1) may, upon being satisfied that conditions for disallowing debit of electronic credit ledger as above, no longer exist, allow such debit.

(3) Such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction."

A perusal of the Rule conveys two-fold actions which are a) actions against fraudulent credit b) actions against ineligible credit. As mentioned earlier, the Industry or Trade welcomes actions against fraudulent credits. However, the new Rule is contentious because of clause (b) of sub rule (1) of Rule 86A. From a basic interpretation of the Rule, non-payment of tax may happen in the following cases -

1) Invoices not uploaded by Suppliers

2) Invoices uploaded but returns and payment of taxes not made/uploaded.

In this regard, it is pertinent to peruse Clause (c) of sub section (2) to section 16 which conveys that the tax charged in respect of the supply has to be paid to the GOI. While the force of Section 16 read with Rule 86A appears well intended let us look at the following arguments cumulatively -

A) In tax system working mainly on forward collection basis, the responsibility lies on the supplier/service provider to pay taxes collected on time with the authority concerned.

B) The recipient pays the supplier always under the contractual terms which includes Supplier paying the GOI on time as per law

C) As the E-way bill system prevents, suppliers from raising E way Bills if their returns and payments are overdue as per Rule 138E, where was the special need for this power under Rule 86A, at least as regards goods.

D) In the light of powers under section 76 available with GOI, one fails to understand as to why two remedies for one default of the supplier is required for the GOI.

E) Considering that Rule 36(4) addresses the limitation of credit (of invoices not uploaded) to 10% of the eligible credit uploaded by suppliers, one fails to understand as to how a separate restriction on debit will be made through Rule 86A.

F) The GOI should publish list of GST registered persons with their credit rating as envisaged under section 149 on which there is no information as of now. The compliance rating can be made available to any registered person who wants to deal contractually with the other person.

F) From a compliance perspective, to punish a recipient for the default of a supplier appears illegal and illegitimate.

G) The taxpayer fails to appreciate the status of this new Rule post E-Invoicing when electronic evidence is available with the GOI on trading between large suppliers and recipients.

Legal Difference to remedies in Section 76 and Rule 86A

The new Rule also is contentious because what is prevented is the debit as per force of sub rule 2 of Rule 86A. Secondly if a proper comparison is done between Section 76 and Rule 86A, one finds that the notice procedure is available in Section 76 while under Rule 86A the concept of notice and showing cause has been done away with.

In the light of the above, recipients are bound to challenge action taken on their E Ledgers before competent court and hence the process of notice and showing cause should be inserted in Rule 86A.

Credit is indefeasible

In a transaction falling under a Value added tax system, credit of tax on inputs or input services and capital goods is a vested right and the spirit of Eicher Motors decision - 2002-TIOL-149-SC-CX-LB has not been diluted even under the GST law. The vested credit is valid provided the recipient follows the process of law. It is surprising that the GOI and the Council decides to punish those who follow the law rather than take action against those who do not comply.

2A Reports downloading - Assessees efforts

It is relevant to note that in each month before returns are finalized (under 3B), all assessees download their 2A credit and start corresponding on a timely basis with the suppliers. However, the process of rectification may spill over to future calendar periods. Hence the Rule 86A should also spell out when action will be taken with clear time tables.

Summary

In the run up to the third anniversary of GST it appears the GOI and the authorities want to arm itself with as many powers as possible to prevent misuse of ITC by fraudulent transactions. The actions taken on this front is undoubtedly justified and required. However, the amendment in 86A has certain unforeseen implications which, the tax paying fraternity, earnestly hopes, does not affect credit of genuine purchases.

[The views expressed are strictly personal.]