ITC Mismatch Due to Non-Filing of GSTR-1 by Supplier Must Be Resolved as per Circular 183/15/2022-GST: Karnataka High Cour

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The issue of denial of Input Tax Credit (ITC) on account of mismatch between ITC claimed in Form GSTR-3B and ITC reflected in Form GSTR-2A has been a recurring dispute under the GST regime, particularly where the mismatch arises due to the supplier’s failure to file Form GSTR-1 or to correctly report supplies therein. In such cases, despite the recipient having received the goods or services and the supplier having discharged tax liability through Form GSTR-3B, tax authorities have often denied ITC solely on the basis of non-reflection of invoices in Form GSTR-2A.

To address this hardship, CBIC issued Circular No. 183/15/2022-GST prescribing a specific procedure for verification and resolution of such mismatches for earlier tax periods. In the present case, the Karnataka High Court examined the legality of ITC denial made without adhering to the procedure laid down in the said circular and emphasized that a mechanical reliance on GSTR-2A mismatch, without following the prescribed verification process, is unsustainable in law.

Background: Circular No. 183/15/2022-GST

  • CBIC issued Circular 183/15/2022-GST dated 27-12-2022 to provide a procedure for dealing with mismatches between ITC claimed in GSTR-3B and ITC reflected in GSTR-2A for FY 2017-18 and 2018-19.
  • It addresses situations where:
    1. A supplier did not file GSTR-1 but filed GSTR-3B, resulting in supplies not reflected in the recipient’s GSTR-2A.
    2. A supplier filed GSTR-1 but did not report certain supplies in GSTR-1.
    3. A supplier incorrectly reported B2B supplies as B2C or used wrong GSTIN in GSTR-1.
  • In such events, mismatch can be handled by a procedure where the registered person must:
    • Produce invoice details and satisfy all conditions of Section 16 of the CGST Act, including tax actually being paid.
    • If the mismatch amount with a supplier exceeds ₹5 lakh in a financial year → produce a CA/CMA certificate confirming supplies and tax paid.
    • If mismatch is up to ₹5 lakh → produce a supplier certificate/declaration confirming the same.

Karnataka High Court Case (Taxmann.com 389 / 181 Taxmann.com)

Key judicial outcome:

  • The High Court (Karnataka) set aside the order of denial of ITC where the tax authority refused credit on the basis of mismatch between GSTR-3B claimed ITC and the ITC reflected in GSTR-2A because the supplier failed to file GSTR-1 or failed to report supply details in GSTR-1.
  • The HC directed that the matter must be reconsidered and remanded to the tax authority to follow the procedure as per Circular No. 183/15/2022-GST.
    • The proper officer should ask the assessee to submit the necessary CA certificates or supplier declarations (depending on mismatch amount) and verify fulfillment of Section 16 conditions.
    • Mere mismatch per se cannot be the sole basis for denial of ITC if the taxpayer is otherwise eligible and has documented the supplies and payment of tax.
    • Legal principle applied: Taxpayers should be given the opportunity to present evidence and meet the requirements of the circular before denying Input Tax Credit solely on account of GSTR form mismatches.

Context in GST Law

  • Prior to January 1, 2022, absence of invoice details in GSTR-2A could arise from supplier errors (missing GSTR-1, misreported supplies etc.), and Circular 183 provided a rational mechanism to handle such mismatches.
  • From January 1, 2022, GST law (Section 16(2)(aa)) mandates that ITC can only be claimed for invoices whose details have been furnished by the supplier and communicated to the recipient (e.g., via GSTR-2B). This makes cases post-2022 different in statutory footing, but precedents like this still emphasize the need for evidence and fair procedure.

Takeaway for ITC Mismatch Due to Supplier’s Non-Filing of GSTR-1

  1. Mismatch itself is not automatic denial of ITC.
  2. Tax authorities must follow the Circular’s procedure:
    • Seek invoices/details from recipient, check Section 16 conditions.
    • If mismatch > ₹5 lakh → require CA/CMA certificate.
    • If mismatch ≤ ₹5 lakh → supplier’s declaration suffices.
  3. HCs (including Karnataka) have held that orders denying ITC without applying this procedure should be set aside and remanded for redetermination.

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