ITC in case of default in Payment of Tax to Government by Supplier
Goods and Services Tax (GST) have introduced the concept of one nation one tax. The main purpose of GST is to reduce the cascading effect of tax on the cost of goods and services. It aims to create a common, cooperative and undivided Indian market. GST has helped to make economy stronger and powerful.
Definitely, GST is a great step by the Government of our country. But, for anything to run smoothly all the parameters shall support it. The public at large need to support and follow the law for proper implementation.
In this article we are here to refer one such instance which has lead to cascading effect.
Take an example in which you have purchased the goods from Mr. A (Supplier). Supplier has charged GST in the invoice. You have given the complete details of your including the GSTN number so that you can claim the credit of GST. The invoice received is perfect just like an ideal invoice containing all the particulars that shall be there to claim deduction. Even, you have made the payment to the supplier within 180 days of receipt of invoice (one of the condition to reverse the ITC).
That is the above transaction is completely correct and the recipient shall be eligible for Input Tax Credit. But what happens is the supplier does not make the payment of tax to the Government. It creates all the mess. The recipient of supply becomes ineligible to claim the credit as per Section 16(2)(c) of CGST Act. May be the supplier has genuine reason for not paying the tax, but it does not matter
The recipient who has no mistake in this, who has paid the money remains ineligible to claim the credit. If the recipient takes ITC on this transaction being unaware that the payment of tax is not done to Government he shall suffer. He shall be liable to penalty on account of taking credit of ineligible ITC.
Have a look at Section 16(2)(c) that is being reproduced below:
(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,––
(c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply
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