Why Tripura High Court said Input Tax Credit provision in CGST not meant to punish taxpayers

“There is a failure by Parliament, while enacting Section 16 (2)(c) of the Act, to make a distinction between purchasing dealers who have bona fide transacted with the selling dealer by taking all precautions as required by the Act and those that have not,” the court observed.

Section 16(2)(c) of the CGST Act deals with eligibility and conditions for taking ITC, where the recipient’s ability to claim ITC is conditional on the supplier actually paying the tax to the government.

What is ITC

Input Tax Credit is a mechanism that allows a registered taxpayer to reduce the tax they owe on sales (output tax) by the amount of tax they have already paid on their business purchases (input tax).

Justices M S Ramachandra Rao and S Datta Purkayastha said that it would be extremely difficult for a purchasing dealer to ensure that the selling dealer deposits the GST collected from him with the government.(Image enhanced using AI)

ITC for avoiding double taxation

“It ought not to be interpreted to deny ITC to purchasers in a bona fide transaction and should be read down and applied only where the transaction is found to be not bona fide or is a collusive transaction or fraudulent transaction to defraud the revenue,” the court observed on January 6.

The court noted that the concept of ITC is to avoid the burden of double taxation on the taxpayer.

Highlighting that Section 16(2)(c) of the Act places an onerous burden on a bona fide purchasing dealer, the bench said that a purchaser can’t keep a check on the activities of its supplier or ensure that the latter makes over to the government the GST paid to it by the purchaser.

Intent not to punish taxpayers

1. Section 16(2) (c) allows availment of ITC to the purchaser only when the supplier has discharged the output liability through cash or by using ITC. But if the supplier has not paid the tax to the government, the purchaser is not eligible to avail ITC.
2. The fact that there is no mechanism with the recipient of goods to verify whether the supplier has discharged its liability to the government, or not, is not disputed by the tax authorities.
3. In view of this, it is impossible for the purchaser to check whether the supplier has deposited the tax paid by him to the government and then avail ITC.
4. Also, the supplier is not normally under the control of the purchaser.
5. We do not find anything in the language of the Act which expressly enables the state and the supplier to tax a purchaser who has already paid tax to the seller a second time, by denying him ITC in all situations.
6. The purchasing dealer cannot be asked to do the impossible, i.e., to identify a selling dealer who will not deposit with the government, the tax collected by him from purchasing dealers, and avoid transacting with such selling dealers.
7. It would be extremely difficult for a purchasing dealer to ensure that the selling dealer deposits the GST collected from him with the government.
8. If the law seeks to visit disproportionate consequences on a bona fide purchasing dealer, it will become vulnerable to invalidation on the touchstone of Article 14 of the Constitution.
9. Reading down a provision is undoubtedly an accepted method to save it from the vice of unconstitutionality.

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Background

The petitioner, who was a trader of rubber products, challenged the constitutionality of Section 16(2)(c) of the Central Goods and Services Tax (CGST) Act, 2017, as his Input Tax Credit (ITC) was blocked by the tax authorities and issued a demand for the reversal of the tax amount along with interest and penalties.

The trader purchased goods from the supplier between 2017 and 2019, and paid the requisite GST of over Rs 1,11 crore to the supplier.

This action was taken against the trader when an investigation by officers of the enforcement branch of the CGST commissionerate of Agartala, of the supplier company, discovered that the supplier was supplying rubber products to different traders, but failing to deposit the tax collected from the petitioner into the government treasury.

The tax authorities subsequently blocked the petitioner’s ITC and demanded the tax amount along with interest and penalty.

Therefore, the trader approached the high court and challenged the constitutional validity of Section 16(2)(c) of the Act, and sought to quash an order of the assistant commissioner, CGST, Tripura Division-I, Agartala.

Decision

The court held that the transaction between the petitioner and the supplier was a bona fide transaction and not a collusive transaction tainted by fraud, etc., and that the conduct of the supplier is blameworthy; therefore, the petitioner cannot be penalised by invoking Section 16(2) (c) of the Act and denied the ITC.

Referring to the top court, Laxmipat Singhania v. CIT decision, the court added that it is a fundamental rule of law of taxation that, unless otherwise expressly provided, income cannot be taxed twice.

“Section 16(2) (c) of the Act ought not to be interpreted to deny ITC to purchasers in a bona fide transaction like the petitioner, and it should be read down and applied only where the transaction is found to be not bona fide or is a collusive transaction or fraudulent transaction to defraud the revenue,” the court ruled.