When India introduced the Goods and Services Tax (GST), it was touted as a transformative reform that would streamline taxation and integrate technology seamlessly into the tax administration process. This new tax regime promised efficiency for the government and ease of doing business for taxpayers. However, the dream of a perfect blend of tax and technology is yet to fully materialize, and one critical issue stands out — the absence of an ideal matching concept that has been causing hardships for taxpayers.
The GST system being a significant overhaul of the country's indirect taxation structure, aims to create a unified and streamlined tax regime. One crucial aspect of the GST framework is the mechanism for matching Input Tax Credit (‘ITC’), ensuring that businesses are eligible for the credits they claim.
Section 34 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) acknowledges the practicality that the value of a supply can change over time. It inter alia allows for the adjustment of excess tax payments through the issuance of GST credit notes. Under the GST regime, there is a concept of matching ITC, wherein the output tax reported by the supplier should ideally align with the credit availed by the recipient. This was reiterated in Circular No. 72/46/2018-GST, dated 26 October 2018, issued by the Central Board of Indirect Taxes and Customs (‘CBIC’).
However, the practicality of this matching exercise has come into question in a recent case before the Hon’ble High Court of Rajasthan, Hindustan Unilever Ltd. v. Union of India [2023 VIL 626].
In this case, the petitioner has raised a fundamental concern regarding the workability of the GST matching exercise. The crux of the petitioner's argument is that in the absence of a proper mechanism for matching credit notes issued by the supplier with the ITC reversal by the recipient, it becomes practically impossible for businesses to comply with the requirement of submitting certificates as proof of ITC reversal. Consequently, this puts businesses at risk of reporting reductions in their tax liability, creating a challenging compliance landscape.
The petitioner's stance is that it should not be their responsibility to obtain certificates or proof of ITC reversal from the recipient. Instead, they contend that it should be the responsibility of the tax department to undertake the matching exercise and validate the claims. This contention raises important questions about the feasibility and practicality of effectively implementing some of the GST provisions.
The primary issue at hand seems to be the absence of a statutory obligation on the tax department to conduct the matching exercise. As per the GST framework, if a taxpayer wishes to claim a reduction in their output tax liability, then the corresponding ITC availed by the recipient should be reversed. However, the petitioner argues that collecting such certificates or proof from the recipient to show such alignment is a cumbersome task, leading to difficulties in compliance.
The case highlights the delicate balance between ensuring compliance and the practicality of doing so. On one hand, requiring suppliers to collect certificates or proof from recipients may lead to administrative inefficiencies and potential disputes between businesses. On the other hand, allowing businesses to claim reductions in tax liability without verification could lead to misuse of the system and revenue leakage.
The ideal balance would have been where the matching scheme functions smoothly, suppliers can monitor recipient actions and adjust excess tax accordingly in case of mismatches. However, in the absence of a functional matching system, suppliers remain uncertain about recipient actions and their compliance. Additionally, in the absence of a matching facility in the portal, it is impractical for suppliers to follow up with numerous customers to ensure desired results. Even if suppliers wish to do so, they cannot guarantee that ITC reversal relates to the specific credit note in question.
The case of On Quest Merchandising [TS-314-HC-2017(DEL)-VAT] also sheds light on the issue. It questioned whether recipients could avail ITC if they could not verify the tax payment by the supplier. The court noted the existence of matching provisions but highlighted the absence of a mechanism for genuine taxpayers to verify tax payments by their counterparts. The Court's stance was that taxpayers cannot be expected to perform the impossible.
The landmark decision in BC Srinivasa Shetty [1981 (2) SCC 460] further emphasizes that if machinery provisions fail, the levy of tax could also fail. In essence, if matching functionality practically does not exist, the demand of tax for mismatch scenarios results in unwarranted disputes and litigations.
The Hon’ble High Court in the case of Hindustan Unilever Ltd. v. UOI (supra), has not passed any ruling yet but has merely stated hereunder:
“We find that the validity of the provision is being challenged more on the ground of workability. For the present we find that in the absence of their being any statutory obligation cast on the respondent to undertake matching exercise, if the petitioner is willing to claim reduction in tax liability, proof of reversal by the recipient is to be provided by the supplier. In the present case, the petitioner has challenged the validity of the provision more on the grounds of difficulty in collecting such certificate / proof from the recipient. Even according to the petitioner he has been able to collect such certificate / proof in some cases.
Though we are not granting any interim order at this stage, learned counsel for Union of India is directed to place before the Court appropriate suggested mechanism.”
The Court's decision in the Hindustan Unilever Ltd. case may have significant implications for the GST framework. If the court upholds the petitioner's argument and directs the tax department to undertake the matching exercise, it could simplify compliance for businesses. However, it may also place additional administrative burden on the tax authorities.
Conversely, if the Court rules that the proof of reversal of ITC by the recipient is necessary, it may emphasize the importance of timely and accurate documentation in the GST system, albeit at the cost of added complexity for businesses.
In conclusion, the case of Hindustan Unilever Ltd. (supra) brings to the forefront a crucial issue in the GST framework: the workability of the matching exercise. Striking the right balance between ensuring compliance and reducing administrative burdens will be a key challenge for the Court. Regardless of the outcome, it is an opportunity for policymakers and stakeholders to restructure the GST framework and explore ways to make it more efficient and business-friendly while maintaining the integrity of the tax system. This case serves as a reminder of the ongoing evolution of India's GST regime and its impact on businesses and tax administration.
[The author is an Associate in the Indirect Tax practice at Lakshmikumaran & Sridharan Attorneys, Mumbai]