Vendor Evaluation and proper Selection: Peace in GST compliance

Background

Input tax credit is sole of any indirect tax law. It is property of the assessee which accrues to him on fulfilment of conditions specified in the law for availment of ITC. It has been held in case of Eicher Motors by Honourable Supreme Court that the ITC is nothing, but tax paid to the Government and hence the same is legitimate right of the assessee.

However, the statute inbuilds some checks on the right to make sure that it is not abused. One of such checks is ensuring that the supplier pays tax to the Government and make all the compliances under the law to enable the ITC to the recipient. Failure of supplier to do so could jeopardize the ITC availability for the recipient.

There have been legal precedents[1] in the past where it has been held that the right of buyer to avail the credit cannot be denied on account of non payment of tax by the supplying dealer, however, in case of collusion between the supplier and buyer or where the fraudulent intentions exist among the parties, the benefit may be subject to examination of the Courts.

Possible risks of non compliant vendors:

This requires business to seriously consider the vendor mix and screen them thoroughly before onboarding in the business. Following possible risks could arise in the business on account of improper selection of vendors.

1. Non-payment of tax by vendor leading to the risk of denial of credit. Though there are legal arguments to claim the recipient credit cannot be denied for wrong done by the suppliers, nonetheless, this could result in long drawn legal battle.
2. Non filing of GSTR-1 by vendor may disentitle claiming the credit in view of Rule 36 (4).
3. Under GST system the rate of tax on supply of particular goods/services depend on the classification of goods or services. Similarly, exemption have to be claimed by making appropriate classification. There could be possibility of vendor classifying the goods under the wrong classification and charging wrong tax. Due to wrong classification there may be significant effect.
   1. Higher tax rate to be charge and result of this may be loss of customers.
   2. Lower tax rate to be charge and result of this may be less recovery from the customers and in future the company pay taxes along with interest.
4. The implications could be higher where vendor has claimed exemption, though ineligible, and the assessee also continues to claim exemption while supplying goods to the customers. Many-time this could lead to complete closure of business if detected by department after some years that the exemption was not available for such products/services.
5. There could be mention of wrong HSN on the invoice raised by the supplier. Manytimes, the revenue authority attempts to establish the nexus of input viz a viz output or coverage under blocked credit based on HSN of the invoice. Moreover, it has been provided for exporters of goods that they have to submit the HSN/SAC of goods/services in respect of which the refund is claimed. In order to ensure that there is no disallowance of ITC or rejection of refund etc, it becomes imperative to have correct HSN on the invoice.  It could be possible that due to such wrong HSN, the dispute could arise with department.
6. Invoice issued by vendor may not be contain all essential requirements of the tax invoice and the credit could be questioned by department due to this technical point.
7. Manytimes, the vendor may have raised E-way Bill with incorrect details. Moreover, it could be possible that the sale of goods have taken place ex-factory and the goods are detailed in the course of transit. There could be liability of payment of tax and penalty for wrong E-way Bill and such liability comes to the owner of goods. The recipient may have to unnecessarily bear the burden of this additional cost for the wrong done by the supplier.
8. There could be possibility of goods returned to the vendor on account of quality issues etc. The goods may be returned either on the basis of the tax invoice to be issued by the buyer to the seller or issuance of GST credit note by supplier to the buyer. Manytime, it happens that both parties raises above documents disregarding the document raised by other side. This could lead to the wrong tax treatment in the books of account and GST return by either/both the parties.
9. There could be understanding between parties whereby discount is given to the customer by issuing the commercial/financial credit note for price difference, promotional material etc. However, the amount is retained by the customer and there is no corresponding commercial credit note issued by the vendor. There could be some challenges as to the full availment of ITC on account of no credit note/acknowledgement available with the buyer.
10. Instances have been seen where tax is charged by the supplier on supplies liable to tax under RCM. There could be risk of department denying ITC of such tax and ask the assessee to pay the tax under RCM. There could be defence on the revenue neutrality etc, but the matter could go under litigation.
11. Blocking of credit in case of admission by vendors in the course of proceedings by department that there have been clandestine removal of goods or issuance of invoice without supply of goods/ services. It could be difficult for the buyer to know the non compliant vendor due to which such action has been taken by the department.
12. Rejection of refund claim as there have been many instances of fraudulent claims based on wrong ITC. If it is found that the suppliers are non compliant and such suppliers have made supplies to many exporters, they may be put in the watch list by the department. This could lead to delay in sanction of refund.

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There could be many other similar consequences which could arise on the business for wrong/non compliances done by their vendors.

Possible Safeguard:

     In order to mitigate the risk, there is need for the business to screen the vendors carefully and continuously to ensure that the vendor mix is correct and there are no such unwarranted issues. Following could be suggested course of action:

1. Before onboarding any supplier, check his goodwill in the market.
2. If possible, make a visit to his place of business to understand the nature of operations carried out and whether it has potential to make the committed supplies.
3. Seek his GST registration certificate to confirm that all place of business have been included in the registration certificate.

4. Vendor should be asked to update for any change in the registration certificate especially place of business to ensure that these are timely updated on the GST portal and supplies are made from the registered place of business only.

5. Department suo moto cancel the registration on account of non filing of registration, non carrying on the business from the registered premises. It is suggested to frequently check the registration status of the vendor on the GST portal to ensure that they are registered during the relevant period.

6. Purchase order issued to vendor should have clear references that:

   • Invoice issued by them should be strictly in accordance with the provision of the GST Law
   • Invoice should be declared by them within due date in GSTR-1
   • Tax must be paid by them within due date of payment of tax
   • Any loss of ITC to the recipient on account of non compliance of the provision of the law should be made accountable to the supplier.
7. Classification of goods and services should be analysed and evaluated in advance at the time of entering into agreement/purchase order and receiving the invoice. Any changes in the classification by vendor should be communicated. If required, past decided case laws under erstwhile indirect tax laws may be referred to for determination of correct classification.

8. Wherever exemption is claimed by the vendor, it should be ensured that there are entitled to claim the exemption. If wrong exemption is claimed by the vendor, there should be proper documented understanding that in case the exemption is denied by department, the supplier shall not come back to the recipient for the purpose of claiming differential tax, interest and penalty.

9. Similarly wherever the supply made by the vendor is unconditionally exempted but the tax is charged by the vendor, there could be question as to the credit eligibility at the department level though may be favourable at the higher level. In order to reduce the risk of loss of credit, vendor should be asked not to forego unconditional exemption.

10. Wherever supplies are liable to tax under RCM, vendor should be asked not to charge GST under forward charge mechanism.

11. There should be proper understanding in the agreement as to the place where ownership in the goods would get transferred and accordingly the responsibility should be fixed for raising of E-way Bill. Further, the understanding should clearly delineate the liability of each of the parties i.e. supplier, buyer and transporter in case of wrong E-Way Bill.

12. E-way bills raised by vendor should be reconciled with the inward supply register to ensure that:

    • All inward supplies are backed up with E-way bill, wherever applicable
    • There are not E-way bills appearing on the portal in respect of which supplies have not been received

13. There should be proper documentary evidence of receipt of goods. Following could be possible documentations to establish the receipt thereof:

    • Copy of invoice issued by the supplier
    • Copy of E-way Bill
    • Copy of consignment note or builty
    • Toll slips
    • Entry in the security register at gate inward
    • If possible, video camera could be installed to take the picture of receipt of goods and uploaded in the ERP system

14. In case of services, it becomes difficult to establish the receipt of service. This could be ensured by way of ensuring that there are service deliverable provided by the supplier in terms of the invoice, service report, email communication or any other similar documents.

15. An indemnity bond may require to be executed by the supplier to compensate the recipient for any loss of GST to the buyer on account of non-compliance by the supplier.

16. System may be implemented to make payment of GST to the vendor only if the invoice raised by them appear on the GST portal i.e. GSTR-2A. However, it should be ensured that there are no legal consequences under other laws for such stipulations and criticality of the vendor in the business set up should be evaluated.

17. Considering present economic turmoil on account of COVID-19 where the delay in payment of tax by vendor could be more prevalent, it is necessary to have proper designed policy in place to strike a proper balance between the commercial interest of the supplier (including their survival) and consequences arising on the entity on account of their non-compliance.

18. Reconciliation of GSTR-2A should be done on continuous basis to ensure that erroneous vendors are identified instantaneously and proper communication is made to them.

19. Continuous training and awareness program for the vendors should be organised to sensitize them the role of proper compliance of the law and consequences on your business due to compliance gap at their end. Role of professional could be very vital in this.

Conclusion: Above highlights critical points in vendor selection and possible measures for the risk mitigation in GST so that the entity is able to take all possible benefits and safeguarded against any unwarranted outcomes. There could be few other important aspects similar to such based on nature of actual composition of vendor base of the company.

Author could be reached at [email protected] , [email protected]