Seamless flow of credit. Myth or Reality? [Sec 16(2)(aa)]

Seamless flow of credit
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Seamless flow of credit. Myth or Reality?

In July 2017, GST was rolled out with a robust return filing system which would have resulted in a seamless flow of credit. Government has time and again introduced various new forms & scrapped the old forms in order to address the technical glitches, the preparedness of the GST portal, and hardships faced by the taxpayers.

Numerous amendments, substitution, and omission to GST Law & GST Rules have been made by way of notification, orders and circulars. Any such change in Act or Rules would have multiple effects that need to be taken proper care otherwise it results in an anomaly.


Insertion of new clause (aa) after clause (a) in section 16(2)

“(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;”

Note: It is inserted by Finance Act 2021, but the same shall come into force/effective only after a relevant notification is issued in the Official Gazette in this regard. It will be interesting to note the date from which it is made effective (retrospectively/prospectively).


What will change when the above clause (aa) is notified?

Clause(aa) of sub-section (2) in Section 16 will put an additional condition for claiming the input tax credit.

The taxpayer (recipient) will be eligible to claim the input tax credit of taxes paid to the supplier ONLY if the supplier files the return of outward supplies in Form GSTR-1 in the manner specified under section 37.

In other words, the recipient will not be permitted to take credit of taxes paid based on tax invoice or debit note unless the supplier files the details of the tax invoice in Form GSTR-1 which will then reflect the credit of taxes in GSTR 2A/GSTR 2B of the recipient.

According to this provision, now the taxpayer will have to be mindful about the timely return filing of their supplier in order to claim the input tax credit timely.

Whether the recipient should be denied credit of taxes paid for the fault of the supplier?

There is no denial to the fact that the menace of tax evasion, fraud, claiming an ineligible input tax credit, or ineligible refund has increased drastically after the rollout of GST. But does that warrant the Government to deny the credit of taxes paid to the recipient for the fault of the supplier? It has been a matter of discussion and debate from day one.

The government gets the opportunity of thoroughly verifying and scrutinizing the documents & place of business before granting registration to any person. A similar opportunity of verifying & scrutinizing documents will not be given to any businessmen before entering into any transaction. Rather, GSTIN becomes a benchmark of assurance.

BUT If such a person who was granted registration by the Government turns out to be a fraudster/tax evader, Shouldn’t Government reconsider the process of granting registration?

If such tax evader/fraudster could manipulate the Government even after such thorough verification then business counterparts can be easily made a victim of their fraud/tax evasion. (In simple words, if they could fool Govt they can fool others too)

Unless the Government has any valid proof that the recipient and the supplier have entered into a transaction with an intent of tax evasion/ fraud then the recipient should not be denied the input tax credit for the fault of the supplier.

There is a famous quote “You reap what you sow”. But with the introduction of the above clause, it will be “You only reap what your supplier sows” 


Unanswered Questions…

Why Government blocks the credit of the recipient for the fault of the supplier?

Why Government has indirectly put the onus on the recipient to make sure that their supplier’s file return and pay tax?

Why Government doesn’t bring back Form GSTR-2 or allow the taxpayer to key in details of missing inward supplies in GSTR 2A & GSTR 2B or any other form for that sake?

If the supplier files the late return and pays the tax liability subsequently, will the recipient be allowed to claim the credit of input tax credit?

Will this clause make it mandatory to furnish details of outward supplies using the invoice furnishing facility for the taxpayers who have opted for quarterly returns under the QRMP Scheme. It will become difficult to survive in the market if they don’t file, the credit will not reflect in GSTR 2A & GSTR 2B of their recipient which will result in blocking of working capital and excess credit in the month in which return is furnished.

In my opinion, it is very likely that this clause will be challenged in the near future. As one can be held responsible for their own deeds or misdeeds and not for the deeds of people they enter into business.

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About CA Ankita Khetan 163 Articles
Ankita is a Chartered Accountant in practice and holds a Diploma in IFRS (from ACCA, UK). She is also a Commerce PG and Certified Independent Director (from IICA). She holds a certification in Forex and Treasury Management. Her area of expertise is GST and Income tax. She is passionate about reading, writing, and sharing knowledge on areas related to finance and taxation.

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