No ITC claim if vendors of suppliers of company don't pay GST: Punjab AAR

Experts disagree with ruling and say it could be reviewed at higher judicial forums

The Punjab authority for advance ruling (AAR) has denied input tax credit (ITC) under the goods and services tax (GST) system to a company for purchases made by a seller which has discharged its tax liability but the preceding seller has not.

Experts said the ruling seemed “far-fetched” and may be reviewed at higher judicial forums.

The ruling was given on the application of Vimal Alloys, which runs a furnace in Punjab and procures ferrous alloys, scrap, gas and other materials from suppliers in the state.

The company said it is procuring returns from its immediate vendors in order to make sure that they have discharged their tax liabilities and the purchases made by the company have been entered in the books of accounts of the seller.

 

The company wanted to know if it can claim ITC if the company's vendors had paid their taxes but the preceding sellers had not discharged their tax liability.

The authority said the company is not entitled to claim ITC in this regard under the provisions of the section 16(2)(c) of the central GST Act read with the state GST Act.

According to this section, a buyer can avail the input tax credit on the purchase of goods and services, but such ITC will depend upon the payment of GST by his supplier on the said supply.

Abhishek Jain, national head of indirect tax at KPMG, said the ruling, while only binding on the applicant, could open a Pandora ’s Box for businesses if followed by ground-level authorities.

"Given the practical impossibility of verifying compliances of supplier's vendors, this ruling seems a little far-fetched and is expected to be reconsidered at higher judicial forums," he said.

Vimal Alloys also wanted to know that in case payment of taxes by the supplier of its vendors is required to claim ITC, how will it ensure that the tax liability is discharged by all the sellers falling in the queue of all the transactions. It said no infrastructure is provided by the government to ensure this kind of tax compliance throughout the chain of the transaction.

The AAR did not give any ruling on these questions, saying they do not fall under its ambit.