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GST reconciliation & the credit dilemma.

Date: 27-02-2021
Subject: GST reconciliation & the credit dilemma
The issue of whether the recipient of services can be penalised for non-compliance by the vendor remains open and unanswered

By Ritesh Kanodia

Goods and Services Tax (GST) is considered a landmark reform replacing multiple indirect taxes. One of the key features of GST is it being a true Value-Added Tax (VAT), providing for the seamless flow of credit across goods and services.

However, while that may be so, the eligibility of credit has been a constant matter of dispute (a) wherever there is a non-payment of GST by the supplier and (b) on account of the restriction imposed by Rule 36(4) of the CGST Rules. Per the said Rules, the credit of GST charged on invoices which have not been reported by the vendors can be taken only to the extent of 5% of cumulative GST charged on reported invoices.

Against such a background, the Budget FY22 has proposed an amendment to Section 16 of the Central Goods and Services tax Act, 2017 (CGST Act), introducing a new condition that (a) the details of the invoice must be furnished by the supplier in the statement of outward supplies and (b) that such details must be communicated to the recipient of such invoice.

The objective of the proposed amendment, as we understand it, is to counter the menace of fake invoices. However, merely reporting invoices in the GST returns and communicating the same with the recipient (by way of GSTR-2A) does not necessarily mean that the tax will get paid on such invoices.

It may also be noted that currently there is no mechanism in place whereby a recipient of supplies can confirm the payment of tax by the vendor for a particular invoice issued. What can only be confirmed (through the newly introduced GSTR-2B) is that the vendor has filed the returns for the month (GSTR-3B) and paid the net tax.

Needless to say, the larger issue of whether the recipient of services can be penalised for non-compliance by the vendor remains open and unanswered. The Delhi High Court, in Arise India Limited vs Commissioner of Trade & Taxes, has recently held that credit cannot be denied to a purchasing dealer who has entered into a bona fide transaction with a registered selling dealer who has issued a tax invoice reflecting the VAT registration number, and the only remedy is to proceed against the defaulting selling dealer.

However, until there is a judicial certainty on the issue under the GST regime, companies can expect notices to be issued for mismatched credit after the Finance Bill receives presidential assent.

The provision becomes more onerous considering another proposed amendment in the Budget of 2021 whereby, provisional attachment of property or bank accounts can be initiated for any proceedings that get initiated under the GST law, if the Commissioner has ‘reasons to believe’ that it is necessary to do so to safeguard interests of revenue.

The icing on the cake is that there is no provision which provides for credit to be re-availed or demand notices to be dropped on the basis that the authorities might have

initiated proceedings or recovered the unpaid tax from the vendor, of which the recipient would never become aware.

Does this not lead to double jeopardy? Should the tax authorities not reach out to the recipient as a last resort where the taxes are not recoverable from the vendor?

In conclusion, while judicial certainty will emerge, it is important for companies to take concrete steps to ensure that the vendor complies.

Some of the key aspects, such as vendor diligence, monthly reconciliation, withholding of GST, debit to vendor accounts, issue of legal notices recovery of unpaid GST, communicating details of non-compliant vendors to the department, etc, becomes important. Technology implementation comprising a mix of technology tools, robotics and AI, could be used to better manage the aforesaid aspects.


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