GST: Need A Solution For Double Benefit To Government, Says Madras High Court
There is double, unjust enrichment to the government is some cases of denial of input tax credit, experts say.
The Madras High Court recently addressed a curious situation that isn't envisaged under the Goods and Services Tax law. Specifically, what happens when the government denies input tax credit to the buyer on grounds that the seller hasn't paid GST but later recovers the tax from the seller?
This double benefit to the GST department needs a solution, the high court said. Currently, there is no mechanism that makes sure that ITC benefits are restored to the purchaser once tax is recovered from the seller, according to the court. This leads to a situation where the revenue department gets taxes not just from the supplier but also from the purchaser, it noted.
The issue is extremely relevant, says Rajat Bose, partner at Shardul Amarchand Mangaldas and Co. Currently, there is no mechanism that enables purchasers to avail ITC outside the mechanism of the GST portal.
The purchaser can claim credit only if the supplier files returns to that effect in the GST portal. But there are times when the GST paid isn't shown on the returns, like when the tax is recovered from the supplier after the returns have been filed. Under such circumstances, the purchaser is often unable to avail of ITC benefits.Rajat Bose, Partner, Shardul Amarchand Mangaldas and Co.
To address this, the high court has called for setting up a mechanism to ensure that the purchaser gets input tax credit benefits as long as GST is recovered from the supplier. The revenue department, it said, should use its powers to reverse ITC benefits to a purchaser only as a protective measure. The primary liability, according to the court, should be on the supplier, and the liability of the purchaser should only be a protective one.
The observation was made in a writ petition filed by Pinstar Automotive Pvt. against the revenue department's decision to deny ITC benefits to the company despite fulfilling its tax liability.
The order is merely a reiteration of the principle of restitution, said Ashish Abraham, partner at Lakshmikumaran and Sridharan.
The court has suggested a remedy against the unjust enrichment of the government and has restricted its opinion to the limited issue of restoring ITC benefits to the purchaser. "It has not questioned the strict application of ITC provisions", Abraham said.
The mechanism suggested is a procedural relief based on common law that does not alleviate the pain of bonafide taxpayers in availing of ITC. This is a departure from the past Value Added Tax jurisprudence of various high courts.Ashish Abraham, Partner, Lakshmikumaran and Sridharan Attorneys
The order can potentially impact several pending writ petitions that challenge the denial of ITC benefits to purchasers based on any non-compliance by the seller, Abraham said.
Bose, however, believes that there is a quick fix to the problem. According to him, the government can issue a circular that enables purchasers to claim ITC on a seller's declaration that he has made good on his tax liabilities. This will enable purchasers to claim a tax credit regardless of any mismatch in the portal, he said.