ITC denial: Bonafede purchaser due to seller non-compliance

ITC denial to Bonafide purchasers due to sellers’ non-compliance

The Gauhati High Court’s ruling in the case of National Plasto Moulding Pvt. Ltd. vs. State of Assam & Ors. is a critical development in GST law, addressing the denial of Input Tax Credit to bona fide purchasers due to non-compliance by sellers. This ruling is a pivotal step toward protecting honest taxpayers and fostering trust in the GST system. It ensures that the compliance burden is placed appropriately, avoiding undue hardship on purchasers acting in good faith. Here’s a detailed summary:

Issue Raised :

Whether Input Tax Credit claimed by a purchasing dealer can be denied if the selling dealer fails to deposit the tax collected with the government, despite the purchasing dealer having acted in good faith and paid the tax to the seller.

Case Facts :

National Plasto Moulding purchased goods and claimed Input Tax Credit based on valid tax invoices issued by the supplier.the supplier failed to deposit the tax with the government, leading tax authorities to deny Input Tax Credit to National Plasto Moulding. The purchasing dealer argued that they had fulfilled their obligation by paying the tax to the supplier and should not be held liable for the seller’s non-compliance.

Court Ruling

The Gauhati High Court ruled in favor of National Plasto Moulding, with key observations:

• Input Tax Credit Denial is Unjust for Bona Fide Dealers: Bona fide purchasers should not be penalized for the selling dealer’s failure to deposit tax.
• Recovery Actions Against Defaulting Sellers: Tax authorities should pursue the defaulting seller for recovery of unpaid taxes rather than deny Input Tax Credit to the genuine purchaser.
• Alignment with Legal Precedent: The court cited the Delhi High Court’s decision in On Quest Merchandising India Pvt. Ltd. vs. Government of NCT of Delhi, which upheld similar principles of fairness.

Key Takeaways of case of National Plasto Moulding Pvt. Ltd. vs. State of Assam & Ors

• Protection of Bona Fide Purchasers: Genuine taxpayers who pay tax to suppliers should not bear the burden of compliance failures by sellers. This ruling strengthens the principle of fairness in the GST framework, ensuring honest taxpayers are not unduly penalized.
• Encouraging Recovery from Sellers: Tax authorities are directed to target recovery actions against defaulting sellers rather than shift responsibility to innocent purchasers. The judgment sets a strong precedent for future cases, supporting bona fide taxpayers across jurisdictions.

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