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Supreme Court Tightens Conditions For Claiming Input Tax Credit

Purchasers would have to prove not just the existence of the transaction but its genuineness to claim ITC, says the apex court.

<div class="paragraphs"><p>Supreme Court. (Photo: Reuters)</p></div>
Supreme Court. (Photo: Reuters)

A recent Supreme Court ruling on the eligibility of the input tax credit may further increase the woes of businesses that already find it onerous to claim it. Though the ruling is in the context of Karnataka Value Added Tax, experts said it can have implications for Goods and Services Tax as well.

According to the latest order by the apex court, ITC can be claimed by the purchaser only if he is able to prove the genuineness of the transaction. Merely producing invoices and payment particulars would no longer be sufficient. Dealers must also produce materials that prove the actual movement of goods to qualify for credit, the apex court has said.

The ruling that addresses the Input Tax Credit under Karnataka Value Added Tax could have serious implications on the ease of doing business, if made applicable to the existing GST regime, experts said.

Since ITC provisions under GST are largely pari materia to the VAT regime, the impact of impugned judgment can have far-reaching impact on the present indirect tax regime as well.
Khushbu Trivedi, Associate Director-Indirect Tax, Nangia Andersen LLP

Though e-way bills—a document that proves the movement of goods—provisions are provided for under the GST to monitor the genuine movement of goods, it would be pertinent for taxpayers to maintain an adequate trail of goods to avoid ITC being denied, she said.

In this case, ECom Gill Coffee Trading Pvt., a company that deals in green coffee beans, was denied a tax credit on several purchases it made from 27 dealers.

The revenue department denied credit on the ground that a few of the sellers were de-registered and the others failed to file returns and taxes as required. The credit was denied despite the company presenting invoices, cheques and other particulars of the transaction.

While the first appellate authority concurred with the view of the revenue department, the second appellate authority as well as the High Court found the invoices and cheques sufficient to claim ITC.

But the Supreme Court found this position to be contrary to the provisions of KVAT and held that the genuineness of transactions is a key requirement for claiming ITC under the regime.

The GST Act already requires sellers and buyers to upload returns, invoices, and other necessary documents for the buyer to claim Input Tax Credit, M. S. Mani, partner at Deloitte India, said. The burden of proof is, and has always been, with the purchaser to prove the genuineness of the transaction, he said.

This is a necessary condition as GST can only be claimed for goods or services purchased for business purposes. However, at times, the rule can be prejudicial to the buyers as purchasers with non-compliant sellers won't be able to claim credit despite being eligible for it.
MS Mani, Partner, Deloitte India

Although troubling, this is necessary to ensure that they practice self-regulation and that dealers are cautious about the suppliers they are dealing with, Mani said.

However, according to Himanshu Sinha, partner at Trilegal, while reasonable restrictions on eligibility for ITC are understandable, onerous conditions imposed upon the purchaser defeat the intention of the legislation, especially when several disputes with regard to eligibility for ITC are pending before various high courts of the country.

The ruling could prove detrimental in circumstances where the supply has already taken place and the purchaser does not possess documents to establish the actual movement of goods, Sinha highlighted.

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