Supplier will have to pay GST even on fraudulent orders, says Gujarat Authority for Advance Ruling

The Gujarat Authority for Advance Ruling (AAR) has clarified a crucial issue — a supplier is liable to pay GST even if the order turns out to be fraudulent.

Just as illegal income is still taxed under the Income Tax Act and the Customs Act, similarly, under the GST law as well, even if the buyer commits fraud and fails to make payment after receiving the goods, the supplier is mandatorily required to pay Goods and Services Tax (GST).

The AAR has clarified that under Section 20 of the IGST Act, 2017, and read along with Sections 12 and 7 of the CGST Act, the goods sent by the supplier will be considered as a supply made by them. 

These three sections of the GST Act define the time of supply. If a fraudulent buyer, i.e., a cheating purchaser, deceives the supplier after receiving the goods, then in such cases, the supplier is not provided with any legal protection. Therefore, the supplier is not entitled to any tax waiver.

Whether or not the supplier receives payment from the buyer is not something the department (i.e., the GST authority) takes into account.

Even if the supplier is defrauded, under the provision of Section 7 of the GST Act, the transaction is still considered a supply. Such supply cannot be categorised as outside the scope of supply.

 Hence, the argument from the supplier that the buyer was fraudulent and didn’t make any payment, and therefore GST should not be levied, is not acceptable.

If GST waiver is allowed, it opens the door to tax evasion

If the buyer places an order, receives the supply, and then fails to make payment, and GST is waived on that unpaid amount, then any company could claim that buyers failed to pay them and seek GST exemption on that basis. 

Chartered Accountant Hem Chhajed stated that the petition filed in this case was baseless. If this petition were accepted, even street vendors could start demanding tax refunds. 

After a cash transaction between a seller and a buyer, they might create a dispute just to avoid paying GST. 

Similarly, if there are disputes between the seller and buyer regarding product quality or other issues, and payment is withheld as a result, they too might seek GST waivers. Furthermore, if two parties privately agree not to pay the supplier, they could repeatedly misuse this system to evade GST.