When Your Supplier’s Mistake Costs You Money: The Hidden Risks of Late GSTR-1 Filing in GST

Introduction

The Goods and Services Tax (GST) regime in India has made Input Tax Credit (ITC) both a major compliance driver and a point of litigation. A recurring issue faced by businesses is denial of ITC due to delays by suppliers in filing GSTR-1, resulting in the transaction's details appearing in the recipient's returns for a subsequent year. This article explores relevant case law, clarifies the statutory provisions around the timing and conditions under which ITC can be availed, and addresses critical issues around interest liability and misclassification of sales.

Understanding Input Tax Credit (ITC) and Its Timing

ITC allows businesses to offset the tax paid on inputs against their output tax liability. However, availing ITC is conditional upon strict statutory compliance.

Section 16 of the CGST Act, 2017

Section 16 mandates the basic eligibility and timing for availing ITC:

Section 16(2):
"Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless 
(a) he is in possession of a tax invoice or debit note...
(b) he has received the goods or services...
(c) subject to Section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilization of Input Tax Credit...
(d) he has furnished the return under section 39."

The critical time limitation is prescribed by Section 16(4):

"A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for the supply of goods or services or both after the 30th day of November following the end of the financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier."

This means ITC cannot generally be claimed if the supplier files the relevant details in their GSTR-1 after this deadline even if the actual transaction was genuine and tax was paid.

Key Case Laws on Delay in Filing GSTR-1 by Supplier

1. Unity Ooh Media Solutions Pvt. Ltd. vs Deputy State Tax Officer (Kerala HC, 2024)

• The High Court remanded the matter to the tax department, questioning whether ITC should be denied solely because the supplier delayed GSTR-1 filing, despite the assessee meeting all other requirements.

2. Eastern Coalfields Ltd. (West Bengal AAR, 2021)

• Here, the supplier filed GSTR-1 belatedly, so credit was reflected in the recipient's returns for the next year. The authority noted that statutory timelines are crucial, and once lapsed, the department is generally justified in denying ITC.

3. Abdul Mannan Khan v. GST Council (Calcutta HC, 2021)

• The court underlined that even genuine difficulties or mistakes cannot override hard deadlines set by Section 16(4); once the statutory period expires, ITC cannot be claimed.

Interest Liability When Supplier Defaults in Filing GSTR-1

Who Bears the Interest Burden?

The supplier is primarily liable for interest when there are delays in GST compliance. Under the GST regime, the supplier has the fundamental responsibility for charging, collecting, and remitting GST to the government. This means:

• Supplier's Primary Obligation: Once an invoice is raised and goods/services are supplied, it becomes the supplier's duty to pay the tax, irrespective of whether payment has been received from the buyer

• Interest Rate: If the supplier delays filing their GSTR-3B return or delays paying GST collected from customers, they become liable to pay interest at 18% per annum under Section 50(1) of the CGST Act, 2017

• Late Fees for GSTR-1: Additional late fees apply for delayed GSTR-1 filing, ranging from Rs. 2,000 to Rs. 10,000 depending on annual turnover

Interest Calculation Methodology

The Finance Act, 2021 retrospectively amended Section 50(1) to clarify that interest is levied only on the net tax liability that requires payment through the cash ledger, not on the gross tax liability. This means interest applies only to the balance portion after utilizing available input tax credits.

Buyer's Limited Liability

The buyer is not directly responsible for the supplier's GST filing obligations. However, buyers may face indirect consequences:

• Loss of ITC: Buyers cannot claim Input Tax Credit if suppliers fail to file returns properly

• Contractual Arrangements: In some cases, purchase agreements may include clauses requiring buyers to compensate suppliers for penalties arising from delayed payments

Issues When Supplier Treats B2B Sales as B2C

The Critical Distinction

The misclassification of Business-to-Business (B2B) sales as Business-to-Consumer (B2C) transactions creates significant compliance and financial issues:

B2B Transactions:

• Involve registered businesses with valid GSTINs

• Allow buyers to claim Input Tax Credit (ITC)

• Require detailed reporting in GSTR-1 with buyer's GSTIN

B2C Transactions:

• Involve sales to end consumers (unregistered persons)

• Do not qualify buyers for ITC claims

• Require simplified reporting without buyer identification

Consequences of Misclassification

For the Buyer:

• Loss of ITC: The most significant impact is the inability to claim Input Tax Credit. B2C sales do not allow buyers to claim ITC, but once correctly classified as B2B, buyers can claim the tax credit, leading to significant cost savings

• Cash Flow Impact: Loss of ITC affects working capital and financial planning

• Compliance Issues: Creates reconciliation problems between purchase records and supplier's GSTR-1 filings

For the Supplier:

• Penalties and Interest: Incorrect classification can result in penalties under GST law

• Tax Liability Adjustments: Converting B2C to B2B sales may require adjustments to tax calculations and payments

• Compliance Burden: Requires maintaining accurate records and documentation to support any amendments

Amendment Challenges

Limited Amendment Options: Once a transaction is reported as B2C in GSTR-1, it cannot be easily amended to add GSTIN and convert to B2B in subsequent returns. This creates a permanent disadvantage for the buyer who loses the right to claim ITC.

Documentation Requirements: Any amendments require comprehensive documentation, including:

• Original invoice corrections

• Communication records with buyers

• Supporting evidence for the classification change

Practical Implications and Judicial Attitude

• Strict Adherence to Timelines:
  Courts have consistently emphasized statutory deadlines over equitable arguments. While genuine buyers may suffer due to supplier non-compliance, ITC cannot be granted beyond the period prescribed by law.

• Substance vs. Procedure:
  Even if procedural delay (late GSTR-1) is due to the supplier, not the buyer, the loss generally falls on the purchaser unless strong equitable grounds exist.

• CBIC Circulars and Departmental Guidance:
  The CBIC issued clarifications (e.g., Circular No. 193/05/2023-GST) for certain transition years, but the general principle remains the date of invoice and deadline in Section 16(4) govern eligibility.

How Businesses Can Mitigate Risk

• Monitor Supplier Compliance:
  Regularly review GSTR-2A/GSTR-2B to track supplier filings and ensure timely GSTR-1 submissions.

• Obtain Vendor Declarations:
  Secure written assurance from suppliers regarding timely GST compliance and proper classification of sales.

• Prompt Follow-up:
  Act quickly to have any delayed GSTR-1 filings corrected before the Section 16(4) deadline.

• Contract Clauses:
  Include specific terms in purchase agreements addressing GST compliance responsibilities and penalties for misclassification.

• Invoice Verification:
  Ensure all B2B transactions are properly classified with correct GSTIN details from the outset.

Conclusion

The denial of ITC due to delays in supplier GSTR-1 filings—resulting in the credit reflecting in the subsequent financial year—remains a significant challenge. Despite sympathetic courts, statutory language under Section 16(4) of the CGST Act prevails i.e. timely compliance is essential. Additionally, the supplier bears the primary responsibility for interest payments on delayed filings, while misclassification of B2B sales as B2C can permanently deny buyers their ITC rights. Businesses must actively monitor supplier compliance and ensure accurate transaction classification to avoid these costly pitfalls.