Output Supplier Acting in ‘Good Faith’ Not to Be Penalized Even Where Input Supplier Violates Law : European Court of Justice

In its decision rendered recently, the European Court of Justice (‘ECJ') in the case of Litdana UAB (C-624/15, decision dated 18.05.2017) has dealt with a crucial issue as to the position of the right of output supplier in the context of his compliance vis-à-vis the non-compliance on the part of input supplier. In this decision, broadly, the ECJ has ruled that even in a case where the input supplier has not completely followed the applicable regulations the output supplier cannot be punished unless it is shown that the output supplier has not acted in ‘good faith'. The ECJ has further declared that denial of input tax deduction to output supplier is in fact a punishment to him and therefore held that right of input tax deduction available to output supplier cannot be denied even if input supplier has not complied with the legal provisions excepting a case where output supplier is involved in such non-compliance. This article discusses this decision in the Indian context of service tax and ‘Goods and Services Tax' (GST) laws