Bridging the Divide: Addressing Structural Asymmetries in India's GST and Income-Tax Frameworks

The Indian fiscal landscape has witnessed a monumental digital transformation over the past decade, aimed at fostering transparency and streamlining revenue administration. However, despite these technological leaps, inherent structural imbalances persist within the statutory frameworks of both direct and indirect taxes. These discrepancies often place a disproportionate burden on the honest assessee, severely impacting their working capital, operational fluidity, and the broader objective of ease of doing business.

In numerous scenarios, an assessee is forced to absorb the financial shock of taxes, compounding interest, steep penalties, and protracted litigation costs due to circumstances entirely beyond their operational control. Conversely, the financial accountability imposed upon the revenue authorities for delayed refunds or prolonged dispute resolution remains significantly lower. This article critically analyzes these systemic asymmetries and proposes actionable policy realignments to ensure fairness, proportionality, and economic neutrality for the compliant assessee.

1. The Conundrum of Input Tax Credit and Vendor Defaults

A cornerstone issue within the current indirect tax regime is the rigid tethering of an assessee’s Input Tax Credit (ITC) to the compliance behavior of their vendors. This friction point was recently cemented by the Supreme Court in the landmark ruling of Bhandari Scrap Traders v. Union of India, dated 24 July 2026. The apex court upheld the constitutional validity of Section 16(2)(c) of the CGST Act, affirming that the actual deposit of tax by the supplier is a mandatory statutory prerequisite for the recipient assessee to claim ITC.

This judicial affirmation creates a severe operational bottleneck for a bona fide purchasing assessee. Consider a scenario where an assessee executes a flawless transaction:

• They procure genuine goods or services.
• They possess a legally compliant tax invoice.
• They disburse the total invoice value, including the GST component, strictly through verifiable banking channels.
• The inward supply is properly accounted for in their financial ledgers and GST returns.

Despite fulfilling every compliance metric within their control, the purchasing assessee faces the draconian consequence of ITC reversal—along with interest and penalties—if the supplier maliciously or negligently fails to remit the collected tax to the exchequer.

Policy Disconnect: The purchaser and the supplier are distinct legal entities. Once the commercial transaction concludes, the purchasing assessee possesses no legal mechanism to compel the vendor to deposit the tax. Transferring the absolute financial liability of a vendor's default onto a compliant buyer contradicts the fundamental principles of equity.

Proposed Realignment:
The legislative framework must evolve to shield the bona fide assessee. If an assessee can conclusively prove the genuineness of the transaction, actual receipt of supplies, payment through banking channels, and absence of collusion, the revenue department's primary recovery mechanism should target the defaulting supplier. Denying substantive credit to the honest recipient should be an absolute last resort, not an automated first response.

2. TDS Mismatches: Penalizing the Deductee for the Deductor's Failures

A parallel asymmetry plagues the direct tax ecosystem through the Tax Deducted at Source (TDS) mechanism. TDS is intrinsically a tax collection strategy where the deductor acts as a statutory agent for the government. Unfortunately, systemic discrepancies frequently emerge when the deductor fails to file TDS returns, inputs incorrect PAN data, or misappropriates the deducted funds.