Can we claim ITC when Supplier fails to pay GST ?

What Happens If the Supplier Doesn’t Pay GST?

If a supplier fails to pay the GST collected on invoices, the recipient (buyer) may face issues in claiming ITC. As per Section 16(2)(c) of the CGST Act, 2017, ITC can be claimed only if the tax is actually paid to the government.

Consequences for the Buyer

1. ITC Reversal: If the supplier doesn’t pay GST, the buyer’s ITC claim may get denied or reversed.

2. Interest & Penalty: If ITC is wrongly availed and later reversed, the buyer may have to pay interest (18% per annum) and penalties as applicable.

3. Legal Action: The buyer may need to take legal action against the supplier for non-compliance.

How to Protect Yourself?

1. Verify GSTR-2B and GSTR-2A: Regularly check the supplier’s tax filing status and ensure the invoice details reflect in your GSTR-2B.

2. Work with Compliant Suppliers: Choose vendors who consistently file their GSTR-1 and GSTR-3B.

3. Use GST Payment Tracking: Implement agreements where payments are made only after verifying tax deposits.

4. Communicate with the Supplier: Follow up with non-compliant suppliers and request proof of GST payment.

Government Measures to Prevent ITC Fraud

• Rule 86A: Allows authorities to block ITC if they suspect fraudulent claims.

• GST Matching Concept: ITC is only available if the supplier reports the transaction in their GST returns.

• E-invoicing & GSTN Tracking: Helps prevent ITC fraud by ensuring transparency.

On the issue of reversal of ITC and recovery of dues from buyers, it is useful to refer to the Press Release issued by the Central Board of GST Council dated 4 May 2018 which clearly stated that in case where the supplier defaults in payment of tax, there shall not be any automatic reversal of input tax credit to the buyer unless an exceptional case can be made out. Instead, the recovery shall be made from the supplier first. The Government’s intention behind ITC has further clarified in the 28th GST Council Meeting where it recommended that recovery of unpaid tax be done from the defaulting supplier. Thus, in the present case, the petitioner was wrongfully denied ITC and instead charged with reversal of ITC and interest for no fault on its part.

The recent judgment of Madras High Court in Pinstar Automotive India Pvt. Ltd. v. Additional Commissioner (20 March 2023) is an example of the issue. The High Court ruled that the condition laid down in section 16(2)(c) of the CGST Act needs to be interpreted strictly and the mandate is upon the claimant to ensure compliance with the provision, failing which it would not be entitled to ITC.

As of now, it is important to protect your self from such incidents by retaining the GST amount or at least a portion of it till the instance the GST liability is paid by the supplier and is reflected in GSTR 2A and 2B.