GST Input Tax Credit- shifting of onus for Tax Deposit

It is widely believed that GST will streamline the taxation system and do away with the multiple types of taxes. The approach by the government agency is truly in that direction with an emphasis on avoidance of double taxation and facilitating seamless flow of credit. In today’s situation, the variety of tax variations like Octroi, different VAT rates, and CST etc. are causing the buyer to lose out on the input tax credit. With the inter-state taxation getting captured in IGST and the whole of India becoming a single market, the supply chains are expected to benefit with regard to input tax credit.

The industry that buys the material from its vendors will get the input tax credit when it deposits tax on the sale of goods with the government. This is what the expectation is, and ok from the industry perspective. However, there is a catch when one goes into the details mentioned in section 16 of the GST Model law. The sub-section 11 under this section states that the purchasing dealer will not be entitled to the credit of input tax till the supplying dealer deposits the tax paid by him in the government account.

Section 16(11) of Model GST Law state that ” no registered taxable person shall be entitled to the credit of any input tax in respect of any supply of goods and/or services to him unless  –

  • buyer is in possession of a tax invoice, debit note, supplementary invoice
  • buyer has received the goods and/or services
  • the tax charged in respect of such supply has been actually paid by seller
  • buyer has furnished the return”

The intention of the GST committee enacting the GST law seems to be bonafide. It wants to ensure compliance towards payment of the taxes by all members in the supply chain. However, the GST law is putting the onus of the payment of taxes by the supplying dealer on the purchasing dealer. In fact, it is tantamount to penalising the purchasing dealer by denying him the benefit of input credit. The genuine purchasing dealer, who has deposited his share of taxes with the authorities, is being targeted for no fault of his. As per the principle of natural justice, a person cannot be punished for a fault of another person.

In the industry, there are multiple vendors who provide the goods and services to them. The default in the deposition of taxes by any one of them will lead to denial of input credit to the industry when it deposits its taxes. Again, the onus of identifying the defaulting supplier and ensuring that he pays his share of tax to the government lies with the purchasing industry. It may so happen that the supplier may be a temporary taxpayer, who does not have a fixed place of business and occasionally engages in supplies of goods and services. All this makes the position of the purchasing industry a bit daunting.

The finance ministry released the Model GST law on the 14th of June and may have based the Section 16(11) on its experience in ensuring compliance in areas like Income Tax and PF. In the case of Income Tax it has made the deduction of TDS mandatory and it reflects in the Form 26AS. The assesse has to comply by the payment of taxes at the time of filing his return. Similarly, in the case of PF, the contractors supplying the manpower to the industry do not get their due payment till they attach proof of deposit of PF (of the manpower supplied) with the PF office.

In an exactly similar situation, the supplier will have to attach the proof of deposition of taxes when his invoice payments are due from the industry. Once the purchasing industry confirms the proofs online it is assured of the input tax credits and can release the invoice payments. Though the business community is likely to resist any compliance and bounding instructions, but this seems to be the order of the day, given the rampant tax evasion in the country.

One thought on “GST Input Tax Credit- shifting of onus for Tax Deposit

  • This is ridiculous!! How can a buyer, who has 100s of suppliers, ensure that each of the suppliers has paid the tax collected by them into the Govt treasury?? And whether they have accounted for each transaction (including the supply to the given “buyer) and calculated his tax liability properly, etc, etc. A lot of times, supplier could be much larger in size and the buyer is not in a position to demand the details/proof of his tax payment in time to be able to file his own GST return in time. There could be instances where the buyer has made an advance payment of goods to his supplier (obviously including GST) and the supplier has not deposited the tax to Govt due his genuine liquidity issues or intentionally. What happens in such a case, where the buyer has genuinely paid his tax and yet cannot get input credit?? The buyer cannot be expected to ensure a third party compliance. That is the job of Tax Administration…

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