Challenging Section 16(2)(c) of GST: Legal Implications for Taxpayers in India

Introduction

Taxpayers across India are grappling with the implications of Section 16(2)(c) of the Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST) Acts, 2017. Recent assessments under Section 73 have led to the denial of input tax credit (ITC) to buyers due to suppliers' failures to file returns or remit taxes. This has resulted in legal challenges, with many writ petitions questioning the constitutionality of this provision.

Current Legal Landscape

In May 2019, the Hon’ble High Court of Delhi admitted a writ petition in Bharti Telemedia Vs. Union of India (W.P[C] No.6293 of 2019), which is still pending. As of September 20, 2021, a total of 36 writ petitions across nine High Courts were reported, leading the Union of India to submit transfer petitions to the Supreme Court. The apex court, however, declined to entertain these petitions, instead urging the High Court of Madhya Pradesh to expedite its hearing on the pending writ. Subsequently, the writ petition in Madhya Pradesh was rendered infructuous, leaving various High Courts to resolve the matter, including the Delhi High Court, where the hearing is progressing.

Constitutional Concerns Surrounding Section 16(2)(c)

A. Nature of GSTR-3B and GSTR-2A

GSTR-3B is a self-declared monthly return per Section 39, encompassing details of a taxpayer's transactions, including tax credits. In contrast, GSTR-2A is a read-only document auto-generated from suppliers' GSTR-1 filings. While buyers often claim ITC based on legitimate invoices, GST officers use mismatches between GSTR-2A and GSTR-3B to reverse credits without thorough investigation into actual tax payments, a practice viewed as unfair and unlawful.

B. Violation of Article 14

By applying Section 16(2)(c) indiscriminately, the GST administration treats innocent purchasers the same as those who fraudulently claim credits. This arbitrary treatment contradicts the equality principle enshrined in Article 14 of the Constitution, as it unjustly shifts the tax burden from the supplier to the purchaser, a situation beyond the buyer's control.

C. Impossibility Doctrine

GSTR-2A reflects supplier compliance, and buyers cannot alter its content if suppliers fail to provide necessary billing information. Section 16(2)(c) essentially imposes an obligation on buyers that is practically unfeasible, infringing upon established legal principles such as Lex non cogit ad impossibilia and Impotentia excusat legem. Courts have upheld that parties cannot be penalized for failures beyond their control.

D. Lack of Implementation for Credit Matching

Section 42 outlines the matching of ITC, operational contingent on the filing of returns, specifically GSTR-1 and GSTR-3. However, as of now, the requisite GSTR-2 and GSTR-3 are not operational, rendering any denial of credit based on mismatches arbitrary and illegal. Recent legislative changes aim to remove sections pertinent to credit matching, further complicating the matter.

E. Non-Retroactive Application of Amendments

The recent amendment adding clause (aa) to Section 16(2) became effective on January 1, 2022, with no retroactive effect. The corresponding rules limiting ITC based on GSTR-1 compliance commenced only in October 2019. These amendments cannot validly affect transactions from prior years.

Administrative and Judicial Guidelines

F. Supplier Accountability

The Madras High Court in M/s. D.Y. Beathel Enterprises v The State Tax Officer emphasized that the State should pursue suppliers for tax recovery before unjustly placing the burden on buyers. Previous directives from CBIC confirm that automatic ITC reversals should not occur due to supplier defaults without due diligence.

G. Unjust Enrichment

The scenario where buyers are made liable for tax defaults creates a situation of unjust enrichment, as the State benefits from both the buyer’s and seller’s taxation on the same transaction without granting buyers the opportunity to reclaim unduly collected taxes.

H. The Right to ITC as Property

ITC is recognized as a property right within various judicial precedents. Denial of ITC on arbitrary grounds is contrary to Article 300A of the Constitution, which safeguards property rights from state interference.

I. Violation of Article 19(1)(g)

By obstructing the availment of ITC, the government hampers taxpayers' ability to conduct business freely, infringing upon their rights guaranteed under Article 19(1)(g). The potential for penalties and coercive actions further exacerbates this limitation on business operations.

Conclusion

The provisions under Section 16(2)(c) of the GST Acts pose significant challenges to compliant taxpayers, raising constitutional questions about fairness and equity in tax administration. The current litigations across various High Courts represent an essential battle for the rights of taxpayers, striving to challenge arbitrary practices that jeopardize their business viability.