Introduction

In the realm of the Goods and Services Tax (GST) regime, a critical issue has emerged regarding the denial of credit to buyers for non-payment of taxes by suppliers, even after collecting the tax amount from the buyer. This article aims to shed light on this matter and provide clarity on the liability for non-payment of GST.

Relevant Provisions

Section 16 of the Central Goods and Services Tax (CGST) Act plays a crucial role in determining the eligibility and conditions for Input Tax Credit (ITC). It establishes the requirements for claiming ITC and acts as a vital compliance checkpoint for businesses. According to Section 16(2)(c) of the CGST Act, a buyer can claim ITC only if the tax has been paid to the government. ITC can be denied if the supplier fails to remit the tax amount to the government.

Case Law

A recent case, M/s. D. Y. Beathel Enterprises v. the State Tax Officer, brought the issue of denied ITC due to non-payment of taxes by the supplier to the Madras High Court. In this case, the buyer had claimed ITC based on the supplier's filed return, despite the supplier failing to remit the tax amount to the government, even though it had been collected from the buyer. The tax department initiated an investigation against the buyer, asserting that ITC was not available since neither the supplier nor the buyer had paid the tax. The department denied ITC to the buyer citing Section 16(2)(c) of the CGST Act. Additionally, the department alleged that there was a lack of movement of goods, rendering the buyer ineligible for claiming ITC.

However, the single judge bench of Justice G.R. Swamynathan quashed the order demanding the entire tax liability from the buyer, deeming it a violation of the principles of natural justice. The court raised questions about whether the department had initiated any investigation or recovery proceedings against the non-compliant supplier. As no examination or recovery proceedings had been initiated against the supplier, the court deemed the order unjust.

In another case, Bharti Telemedia Ltd. Vs. Union Of India & Ors., the Delhi High Court issued notices to the Centre and ruled that the recipient of goods or services cannot be denied Input Tax Credit (GST) due to the default of the supplier.

Similarly, the Madras High Court, in the case of M/s. Shri Ranganathar Valves Private Limited v. Assistant Commissioner (CT), (FAC), Velandipalayam Assessment Circle, Coimbatore, stated that the restriction on Input Tax Credit claimed by the buyer, based on tax collected but remaining unpaid to the government by the seller, "cannot be sustained" and "requires re-consideration."

Pre-GST Regime

During the Value Added Tax (VAT) regime, various High Courts and the Apex Court held that credit cannot be denied to the buyer if the seller has not paid the tax, particularly in cases where the transaction is genuine and without an intention to deceive. In the case of Arise India Limited and others Vs. Commissioner of Trade & Taxes, Delhi and others, the Delhi High Court held that Section 9(2)(g) of the Delhi VAT Act, which disallowed Input Tax Credit (ITC) to the purchaser due to the default of the selling dealer in depositing tax, was violative of Articles 14 and 19(1)(g) of the Constitution of India.

In conclusion, unless a proper investigation and recovery proceedings are initiated against the defaulting supplier, the tax department cannot demand any tax liability from the buyer of goods and services. The liability for non-payment of GST falls on the supplier, and the buyer should not be held accountable unless proven to be involved in fraudulent activities.]