GST Non-Payment: Go After Sellers, Madras High Court Tells Tax Department
Photographer: Dhiraj Singh/Bloomberg

GST Non-Payment: Go After Sellers, Madras High Court Tells Tax Department

A recent Madras High Court ruling has come as a significant relief for genuine buyers under the Goods and Services Tax regime. The decision will help buyers who’ve paid tax on the goods or services availed but the sellers haven’t deposited it in the government’s kitty.

As per GST law, buyers can avail input credit based on the tax invoice which has details such as the amount of tax charged, description of goods or services, the total value of supply of goods or services, GSTIN of the supplier and recipient, etc. And one more condition is that tax has to be paid by the supplier.

Tax Department’s Approach Is Flawed, High Court Says

17 traders of raw rubber sheets had moved the high court against the GST department’s decision to deny them the benefit of the input tax credit. The tax department sought to recover the input credit availed by these traders since the seller had not deposited the tax with the government.

The GST department argued that the traders had availed input credit on the premise that tax had already been remitted to the government by their sellers. When it turned out that the sellers have not paid any tax and the traders could not furnish any proof for the same, the department was entirely justified in proceeding to recover the tax from them. And so the department cannot be faulted for having reversed input credit already availed by the traders.

The high court dismissed the tax department’s contentions.

It pointed out a fundamental flaw in the revenue department’s approach i.e. no inquiry against the defaulting sellers and non-initiation of recovery action against them. Once the department realised that the sellers have collected tax from the traders and not deposited it, strict action should’ve been taken against the former. Even more so, since the department believes there was no movement of goods, the high court said.

The judgment is important as it casts an obligation on the revenue authorities to catch hold of the seller if it has collected tax from the buyer but not deposited with the government, Abhishek Jain, partner at EY, said. The authorities cannot singularly take action against the buyer, he added.

There are many cases where the buyer genuinely buys goods or services and makes payment for the same along with GST to the supplier. In such cases, if the supplier has not paid GST to the government, the ask of the buyers is that instead of denying input credit to them, the authorities should catch the suppliers and recover tax from them.
Abhishek Jain, Partner, EY

But the ruling isn’t clear as to what happens in cases where recovery action was initiated against the seller but tax could not be recovered.

Businesses should be able to prove that they are a bona fide buyer and the transaction was not a fraudulent purchase so as to argue credit eligibility basis recent judicial rulings, Ritesh Kanodia, partner at Dhruva Advisors, pointed out.

There’s no way for buyers to know whether the tax paid by them to the seller has been deposited by the seller with the government except for the entry in GSTR-2A. Hence, most businesses have put in the process of putting on hold GST payments unless vendors can show proof of tax paid.
Ritesh Kanodia, Partner, Dhruva Advisors

Business should also initiate legal proceedings against their vendor if tax hasn’t been paid because it could impact their input credit in the future and do constant follow-ups on emails to nudge their vendors to deposit the tax, Kanodia said. This will also help establish that the purchases were bona fide and  they have taken reasonable efforts to ensure tax payment by the seller, he added.

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