Denial of Input Tax Credit: Upholding Fiscal Responsibility under GST

The Goods and Services Tax (GST) regime was introduced in India with the aim of simplifying
the indirect tax structure and creating a seamless nationwide market. One of the key
components of GST is Input Tax Credit (ITC), a mechanism that allows businesses to offset the
tax they paid on input goods or services against their output tax liability. However, a recent
judicial decision has shed light on the importance of adherence to the conditions laid down
in Section 16 of the GST Act, especially concerning the failure of the supplier to remit the
collected tax to the government.
Input Tax Credit is a fundamental concept in the GST framework, designed to eliminate the
cascading effect of taxes. It grants businesses the ability to claim credit for the tax paid on
inputs, ensuring that taxation only occurs at the final point of consumption. The supplier, upon
collecting tax from the purchasing dealer, is obligated to remit this amount to the government.
The denial of Input Tax Credit comes into play when the supplier fails to fulfil this crucial
The recent judicial decision highlights the legal intricacies surrounding Input Tax Credit. The
court ruled that the denial of the petitioner’s claim was justified on the grounds that the selling
dealer, responsible for collecting the tax, had not remitted the amount to the government.
The court emphasized the literal interpretation of the statutory language, emphasizing that the
credit must be available in the purchaser’s ledger for a valid claim.
One of the arguments raised in defense of the petitioner was the specter of double taxation.
However, the court dismissed this contention, asserting that taxation is a compulsory extraction
for the greater public good. The obligation to pay tax to the government is inherent in the
collection process, and without such payment, there can be no acknowledgment of the tax
liability being fulfilled.
The court underscored the independent nature of contracts between buyers and sellers,
separate from the government’s involvement. While the government mandates the collection
of tax on supplied goods and services, it is the duty of the seller to ensure that these collected
taxes are remitted to the state. The court’s decision reinforces the notion that the responsibility
lies with the seller to fulfill their tax obligations for the Input Tax Credit to be valid.

SW Point of View:

From a legal perspective, taxpayers should build certain checks for compliance with Section 16(2)(c) as well as external checks on the supplier. The denial of Input Tax Credit due to the failure of the supplier to pay the collected tax to the government underscores the importance of fiscal responsibility in the GST framework.

Source: 2023 (8) TMI 1038 – PATNA HIGH COURT

Aagam Jain, Associate- Indirect Tax, SW India