By S Sivakumar, LL.B, FCA, FCS, MBA, ACSI, Advocate
IF you are a GST assessee located in Karnataka and assigned to the jurisdiction of the State GST Department, it is very likely that you would have received a standard notice in FORM ASMT- 10 from the State Government, asking you to pay up the difference between the ITC claimed in the 3B returns and the total ITC reflected in the 2A returns filed by your suppliers, for the period October to December 2017. I also understand that several other States have sent similar notices, asking assesses to pay up the excess ITC claimed in their 3B returns, as compared to the ITC reflected in the GSTR 2A returns filed by their suppliers.
In a state like Karnataka, assessees are being given a week’s time in many cases (3 days in some cases) to explain the difference in ITC, failing which, they are asked to pay up the differential ITC, for this period. The typical statement/threat used in these notices is “If no explanation is received by the aforesaid date, it will be presumed that you have nothing to say in the matter and proceedings in accordance with law may be initiated against you without making any further reference to you in this regard”.
It does seem that these notices are automatically generated by the GST software and are mailed to the registered mail ids of the assessees. Very unfortunately, these notices have also been sent to services exporters who have no domestic sales. In most cases, a lumpsum figure of ITC, as reflected in the 2A returns filed by the assessee’s suppliers is given in these notices, with no break up for the individual months constituting the quarter.
It does seem that these notices are not being issued by the Central GST officers to assessees falling under their jurisdiction and to this extent, the assessees assigned to the State GST seem to be unfairly targeted.
Be that as it may…as we know, the differences in ITC between the 2A returns filed by the supplier and the 3B returns, for any tax period or quarter, could arise due to a host of reasons. The assessee could have availed ITC pertaining to the earlier tax periods, which he is legally entitled to. The assessee could be claiming ITC of the GST paid on supplies that are covered under Section 9(3), under ‘Reverse Charge Mechanism’. There could be ineligible credits contributing to the difference in the ITC figures. Moreover, ITC can be claimed by the assessee only after the incoming goods or services have been received and accepted, on the basis of invoices received by him.
Of course, the main reason could be the non-compliance on the part of the supplier on account of non-payment of the tax, incorrect uploading, data entry mistakes in figures or GST numbers, classifying at B2C instead of B2B, which are absolutely not attributable to the assessee.
From a legal perspective, as per Section 61(1) of the GST Act, 2017 “the proper officer may scrutinize the return and related particulars furnished by the registered person to verify the correctness of the return and inform him of the discrepancies noticed, if any, …and seek his explanation thereto”;
Per se … it does seems that the state GST officer can scrutinize only the “returns” filed by the assessee and the related particulars, which indicates that the assessee cannot be faulted, in respect of figures appearing in the 2A returns filed by his suppliers, as these returns are not furnished by the assessee. Asking the assessee to explain the ITC figures appearing in the 2A returns filed by his supplier would violate the well established legal principle contained in the Latin legal maxim Lex Non Cogit Ad Impossibilia, in terms of which, the GST assessee cannot be expected to do the impossible.
Taking this discussion forward…. as we know, Section 16(4) of the GST Act, 2017 allows the assessee to claim credit for transactions relating to the financial year ended March 31, 2017, up to the month of September 2018, which is to be filed on or before October 20, 2018. Where then is the logic of asking the assessee to pay up the differential ITC, for a particular tax period?
As we know…Section 41 of the CGST Act, 2017 provides that the credit claimed by the registered person shall be credited to his electronic credit ledger on a provisional basis. Further, Section 42 of the CGST Act, 2017 provides that the credits availed by the recipient shall be matched with the details of the corresponding outward supplies filed by corresponding recipient and following action will be taken, viz.
a. Credits availed by the recipient which match with the outward supplies filed by the supplier – Finally accepted and such acceptance will be communicated ;
b. Credits availed by the recipient is in excess of the tax declared by the recipient for the same outward supply or where the outward supply is not declared by the supplier – Discrepancy shall be communicated to both such persons. In case the discrepancy communicated to the supplier is not rectified in the return to be filed for the month in which such discrepancy has been communicated, the amount of discrepancy shall be added to the output tax liability of the recipient;
c. Rule 71 provides that such discrepancies will be communicated to the supplier in Form GST MIS-2 and recipient in Form GST MIS-1. In case the supplier fails to rectify the returns then the amount of discrepancy shall be added to the output tax liability of the recipient in Form GSTR 3.
The above referred statutory provisions clearly provide for communication of discrepancy at invoice level and the first communication is to be made to the supplier and not the assessee who is the recipient of the supply. And, in a case where the supplier fails to rectify the discrepancy, the tax can be added to the outward liability of the supplier. The State GST officers who issue these notices are blissfully ignorant of these provisions, as no notices are being issued to the selling suppliers/vendors. Neither is there any attempt to report the ITC discrepancy at the invoice/transaction level. Further, the difference in the credits can be added only in Form GSTR-3 and there is no provision for issuance of a notice in Form ASMT 10.
These notices from the SGST officials are also against the decision of the GST Council taken in their meeting held on May 4, 2018 viz. –
“There shall not be any automatic reversal of input tax credit from buyer on non-payment of tax by the seller. In case of default in payment of tax by the seller, recovery shall be made from the seller however reversal of credit from buyer shall also be an option available with the revenue authorities to address exceptional situations like missing dealer, closure of business by supplier or supplier not having adequate assets etc.”;
There is yet another legal angle to this…Rule 69 of the GST Rules, 2017 provides that in case of extension of returns to be filed in GSTR 1 / GSTR 2, the due date for matching of input tax credits shall also be extended. Since, the filing of GSTR 2 has been deferred indefinitely, the matching of input tax credit also gets extended indefinitely, in a legal sense.
My humble submission is that t here are no provisions under the GST law to demand for reversal of credits by comparing the details appearing in Form GSTR 2A filed by the suppliers, with the Form GSTR 3B filed by the assessee and consequently, these notices which are being issued by the SGST officers are illegal and unsustainable.
Giving 3 days’ time to an assessee to explain the ITC difference between 3B and 2A and threatening him of recovery action…. could be nightmarish for most assessees, who have only to curse their fate for being assigned to the state GST law. Thankfully, the CGST officers have not emulated the State counterparts on this issue!
For exporters, these notices are coming as a big headache and asking them to pay up the differential ITC would go against the fundamental principles governing the levy of indirect taxes on exports.
Given the legal position that ITC pertaining to the financial year could be claimed till September 30 of the succeeding year and also given the requirement for the specified assessees to undergo GST audit and file audit reports on or before December 31 of the succeeding financial year, can’t the SGST officers wait for the assessees to file these audit reports?
These notices have all the potential to become a terrible nuisance value and the Central Government should step in before all hell breaks loose!