Mystery of ITC eligibility unveiled!

The eligibility to Input Tax Credit (ITC) has always been a bone of contention between the taxpayers and the Revenue under the indirect tax legislation. The GST regime promised to transform the indirect taxation landscape by ensuring a seamless flow of credit at each stage of the supply chain. However, the reality appears to be a bit different, considering the restrictions prescribed and the strenuous reconciliations to be maintained. Six years have gone by and we have already seen a barrage of litigation over GST credit, ranging from GSTR-2A vs. GSTR-3B reconciliation and credit eligibility vis-à-vis Section 17(5), to the interpretation and constitutional validity of the time limit prescribed under Section 16(4) of the CGST Act, 2017.

As per Section 16(4) of the CGST Act, 2017, availment of ITC for a particular financial year is restricted beyond the 30th day of November of the subsequent financial year (earlier it was limited up to the "due date of furnishing of the return under Section 39 for the month of September"). Owing to such limitation clause, the taxpayers availing ITC in the GSTR-3Bs filed beyond the November/September timeline, as the case may be, received notices for reversal of ITC on the ground that the same is not availed in accordance with the law.

The demands/decisions of the jurisdictional authorities have been challenged before the High Courts by way of writ petitions on the following grounds:

  • The provisions of Section 16(4) are in violation of Articles 14, 19(1)(g) and 300A of the Constitution of India.
  • Section 16(4) is purely procedural in nature and cannot override Section 16(2). The two sub-sections appear in conflict with each other and these cannot be read in conjunction if one prevails over the other. The taxpayers have argued that since sub-section (2) begins with a non-obstante (notwithstanding) clause, it will override all other sub-sections in the said Section, including the time limit prescribed under sub-section (4). Hence, the argument raised is that ITC should be allowed once all the below-mentioned conditions have been satisfied:
    • The taxpayer is in possession of the tax invoice.
    • The goods and/or services have been received.
    • Tax charged on the inward supply has been duly paid by the supplier to the government.
    • GSTR-3B is filed (although belatedly, along with late fees).
    • Payment is made to suppliers in respect of which ITC is being claimed.
    • Details of such ITC are duly reflected in the GSTR-2A/2B.
  • The taxpayers have accorded an alternate interpretation to Section 16(4), which would restrict ITC only for invoices received after the prescribed timeline.

Given this backdrop, in two recent cases, we have seen negative verdicts from the Andhra Pradesh High Court1 and Patna High Court2, thereby disallowing the ITC claim vis-à-vis GSTR-3Bs filed beyond the September/ November timeline. The Courts held that:

  • ITC is a mere concession/rebate/ benefit provided under the GST law and not a statutory/constitutional right. A registered person becomes entitled to credit only subject to the statutory framework, whereby Section 16(4) serves as a condition precedent for claiming ITC and does not infringe upon the constitutional principles. Accordingly, the time limit prescribed for claiming ITC does not violate the Constitution of India.
  • Section 16(2) has no overriding effect on Section 16(4) as both are not contradictory to each other, and they operate independently. Section 16(2) conditions override assertive provisions on the eligibility of ITC and not the overall time limit for claiming the same.
  • Mere acceptance of GSTR-3B returns with late fee will not exonerate the delay in claiming ITC beyond the period specified. The language of Section 16(4) is plain and unambiguous, with the clear stipulation that a registered person cannot avail the benefit of ITC in respect of any invoice or debit note for the supply of goods or services or both after the due date of furnishing the return beyond the prescribed period.

There is no doubt that the legislature is empowered to impose such conditions and restrictions on the eligibility of ITC as it may deem fit. Such comprehensive analysis and validation of Section 16(4) highlights the importance of adhering to the statutory prerequisites of ITC. In fact, these two decisions reinforce the notion that ITC is not an absolute entitlement but must be claimed in strict accordance with the conditions and restrictions thereto.ot availed in accordance with the law.

However, the extant language of the statutory provisions still leaves room for varied construction, and considering that the validity of Section 16(4) has been challenged before several High Courts, more rulings on this subject are likely in the future. It won't be too long before this issue is tested before the Apex Court.ot availed in accordance with the law.

Until then, it would be imperative to comply with the return filing deadlines, as it is pivotal to mitigate any loss of eligible ITC owing to time-lapse. Additionally, it would be worthwhile if the government issues clarification on the applicability of such restriction to 'All other ITC' in lieu of ITC related to imports and tax paid under the Reverse Charge Mechanism by the taxpayers.

1. Thirumalakonda Plywoods vs. Assistant Commissioner (Andhra Pradesh High Court) dated 18 July 2023 [W.P. No. 24235 of 2022]
2. Gobinda Construction vs. Union of India (Patna High Court) dated 8 September 2023 [W.P. No. 9108 of 2021]

Tax Street September 2023