Who should handle a GST ITC reversal dispute: a CA, an advocate or both? What each does at each stage, the defences that work and how to choose well.
As per Section 116 of the CGST Act, 2017, the registered person may be represented before the proper officer and the first Appellate Authority by an authorised representative, which term inter alia includes a chartered accountant, an advocate, a cost accountant, a company secretary in practice and an enrolled GST practitioner, whereas a writ petition or appeal before the Hon'ble High Court can be argued only by an advocate, and as regards the GST Appellate Tribunal the rules in force for the time being are to be referred to. In practice, an ITC reversal matter is best led by a chartered accountant, who undertakes the reconciliation and compiles the evidence, alongwith an advocate in the event the case turns on a question of law.
Take the case of a Gurugram based distributor which has received a notice for FY 2022-23 proposing reversal of input tax credit of Rs. 8.5 lakh on the allegation that three of its suppliers had collected GST on the invoices but had not deposited the same with the Government, notwithstanding that the distributor had paid the full invoice value inclusive of tax to the said suppliers through the bank, whereafter the department seeks recovery of the credit alongwith interest and penalty.
The reversal of credit is in most cases proposed on the allegation that the supplier has not paid the tax to the Government and the condition laid down in Section 16(2)(c) is therefore not satisfied, or that the ITC availed in GSTR-3B is in excess of that reflected in GSTR-2B, or that the supplier had filed the returns belatedly, and in some cases it is alleged that the credit was availed after the expiry of the time limit under Section 16(4) or that the same is blocked under Section 17(5), as in the case of certain motor vehicles, food and items meant for personal use. It may also be alleged that the common credit was not reversed in proportion to exempt or non-business use, or that the supplier was not paid within 180 days, in which case the credit is to be reversed alongwith interest, though the assessee is entitled to reclaim the same once the payment is made.
Read More: GST ITC Mismatches and Ineligible Credits
The first part of the defence is the proof that the purchase was genuine, i.e. the invoices, purchase orders, proof of delivery, e-way bills, transport receipts and stock records, and it is pertinent to note that the Hon'ble Supreme Court in the case of Ecom Gill Coffee Trading (2023), a matter arising under the Karnataka VAT Act, has held that the burden of proving the genuineness of the purchase lies upon the purchaser claiming the credit. The bank statements evidencing payment to the supplier, which also answer the 180 day condition, alongwith the registration status of the supplier on the date of supply, the returns filed by it and any subsequent payment of tax by it, are also to be placed on record.
A reconciliation is required to be prepared which ties the credit in GSTR-3B to GSTR-2B and the books of account and explains each difference therein. It may be noted that proper officers have denied genuine reversals on the ground that the same were netted off instead of being reported in the correct table of GSTR-3B, and the reversal ought therefore to be shown in the workings.
The question of limitation is to be examined with reference to two dates, i.e. the date on which the credit was claimed, as against Section 16(4), and the date on which the notice was issued, as against the time limit for demands. It is pertinent to note that for FY 2017-18 to 2020-21, Section 16(5) treats the credit claimed in returns filed up to 30th November 2021 as being within time, and for the first two years of GST, Circular No. 183/15/2022-GST has laid down the manner in which mismatches between GSTR-2A and GSTR-3B are to be verified, whereas for FY 2024-25 onwards the demand falls under Section 74A.
A notice which does not state the allegation, the amount or the provision invoked is liable to be challenged on that ground alone. In so far as default by the supplier is concerned, the GST Council in its 28th meeting held in July 2018 had recorded that there would be no automatic reversal of credit at the end of the recipient and that recovery ought in the first instance to be pursued from the supplier, though the courts are not unanimous on the extent to which a bona fide purchaser is protected, and the latest ruling of the jurisdictional High Court ought to be examined before reliance is placed on any case.
Read More: Section 74A Explained, Natural Justice in GST Adjudication
A chartered accountant is entitled to represent the assessee before the proper officer and the Appellate Authority and, subject to the rules in force, before the Tribunal. It is pertinent to note that an ITC dispute is in essence an exercise in reconciliation, wherein GSTR-2B, GSTR-3B and the books of account are required to be compared line by line, the reply to the show cause notice drafted, the evidence compiled and the demand, interest and penalty correctly worked out, and therefore the chartered accountant is ordinarily the first professional to be engaged, the personal hearing being in many cases attended by the chartered accountant as well.
An advocate is entitled to appear at every stage of the proceedings and is the only professional who can appear before the Hon'ble High Court. The contribution of the advocate is the greatest where the dispute is in substance a legal question, such as whether a bona fide purchaser ought to be denied credit on account of default by the supplier, whether the notice is valid in law, or whether the period of limitation has been correctly computed.
A cost accountant and a company secretary in practice are both valid authorised representatives, and the cost accountant is of particular use where the dispute pertains to the apportionment of common credit between taxable and exempt supplies, that exercise being based on costing records. An enrolled GST practitioner can appear before the proper officer and the first Appellate Authority subject to the conditions of enrolment, which is adequate for routine or smaller matters, whereas the accounts team of the assessee, though in possession of the facts and documents, ought not to conduct the entire dispute alone, more so where the time for reply is short and a weak first reply is difficult to cure subsequently.
Read More: CA vs Advocate vs Authorised Representative
At the stage of the notice and the show cause notice, the chartered accountant is generally the appropriate choice inasmuch as the reply consists mainly of facts, figures and documents, whereas at the adjudication hearing either a chartered accountant or an advocate may appear and the advocate ought to be associated alongwith the chartered accountant where the proper officer relies upon a legal interpretation such as the liability of the purchaser for default by the supplier. At the first appeal either professional may appear, the grounds requiring both a clean factual record and the legal submissions, and in respect of the Tribunal the rules for the time being in force are to be checked before the choice is made. Before the Hon'ble High Court an advocate is required, and a writ may be considered where the notice is in breach of the principles of natural justice, the order is without jurisdiction or the period of limitation has been ignored.
Also Read: Replying to a GST Show Cause Notice, GST Appeal Procedure, GSTAT Complete Guide
In certain cases the prudent course is to reverse the credit alongwith interest and reclaim the same subsequently, as for instance where the supplier is about to pay the tax or the amount involved is small and the cost of litigation would exceed it. In other cases reversal blocks working capital and may be construed as an admission of liability, and therefore the representative ought to weigh the cost, the interest, the cash flow and the realistic prospects of success before recommending either course, and ensure that any payment so made is recorded as having been made under protest.
It is often noticed in these matters that the reply is filed late or without the supporting documents, that the credit is reversed before examining whether the notice is valid in the first place, or that reliance is placed on the word of the supplier instead of its filed returns and the proof of payment. Equally common are cases wherein the matter is entrusted to a person having no experience of GST litigation, wherein the first reply is treated as a mere formality and new facts are raised only at the appellate stage, and wherein the date for filing appeal is missed since nobody had checked the portal on which the order was uploaded.
Also Read: How to Handle GST Litigation, Types of GST Notices Explained
It is advisable that prior to the appointment the assessee ascertains whether the professional has handled ITC disputes at the relevant stage and who in the firm would actually prepare the file and appear, alongwith whether a line by line reconciliation would be carried out at the outset, who would deal with the question of law, if any, and what fee would be payable for each stage.
Disclaimer: The contents of this article are for general information only.
A chartered accountant in practice is an authorised representative under Section 116 of the CGST Act and can appear before the proper officer and the first Appellate Authority, however the rules for the time being in force are to be checked as regards the Tribunal, and before the High Court an advocate is required.
In a plain mismatch or documentation matter a chartered accountant may be sufficient, whereas an advocate ought to be associated in the event the dispute turns upon a question of law or is likely to be carried before the Hon'ble High Court by way of writ or appeal.
The proper officer is entitled to pass an order on the basis of the material available on record, confirming the tax alongwith interest and penalty, whereafter the period of limitation for filing appeal begins to run, and in such cases the cost to the assessee is almost always higher.
Credit reversed for non-payment to the supplier within 180 days can be reclaimed upon payment being made thereafter, and where the assessee succeeds in appeal the credit can be reclaimed and a refund of the pre-deposit can also be sought.
The representative ought to be appointed as soon as the notice is received, inasmuch as the period for reply is usually 30 days and at times shorter, and a delayed start leaves very little time for carrying out the reconciliation.
DSRV & Co. LLP has handled tax disputes since 1987. We're an ICAI-registered, peer-reviewed CA firm in Gurugram. Send us the notice with your GSTR-2B and GSTR-3B, and we'll reconcile the numbers and tell you plainly whether to reverse, contest or do a bit of both.
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