The linkage of a recipient’s input tax credit (ITC) with the outward supplies disclosed by the supplier is one of the intrinsic principles of the GST law. However, due to the absence of adequate IT capacity in the initial stages of implementation of the GST law, the government suspended the relevant provisions and allowed ITC on a self-declaration basis by the recipient through GSTR-3B.
Recently, the government, vide Notification No. 49/2019-Central Tax dated 9 October 2019, inserted Rule 36(4) to the CGST Rules, 2017 whereby ITC with respect to invoices or debit notes, the details of which were not uploaded by the supplier, is restricted to 20% of the ITC with respect to invoices or debit notes uploaded by the supplier, i.e., appearing in GSTR-2A. The provision can be understood through the following illustration:
|Particulars||Actual ITC||Eligible ITC as per amendment|
Eligible ITC pertaining to invoices/debit notes uploaded by the supplier, i.e., appearing in GSTR-2A
100 [No change post amendment]
Eligible ITC pertaining to invoices/debit notes not uploaded by the supplier, i.e., not appearing in GSTR-2A
100*20% = 20; or 200; whichever is lower i.e. 20
|Total eligible ITC to be claimed in GSTR-3B||120|
|Restricted ITC under Rule 36(4)||200-20 =180|
Government forced to introduce clarifications
The 37th GST Council meeting was held less than a month before the amendment was notified. However, no announcement was made post the council meeting in relation to its plans of implementing a restriction on ITC availment. Further, the amendment lacked clarity on various aspects such as the periodicity for which the restricted ITC had to be computed which led to confusion within the industry. Therefore, the government, vide circular No. 123/42/2019-GST dated 11 November 2019, issued the following clarifications:
- The restriction should be applicable only to invoices/debit notes on which ITC is availed after 9 October 2019.
- The restriction is imposed on the consolidated ITC, and not supplier-wise ITC.
- The calculation would be based on only those invoices which are otherwise eligible for ITC. Accordingly, those invoices on which ITC is not available, like, blocked credits under Section 17(5), would not be considered for calculating 20% of the eligible credit available.
- A taxpayer can avail ITC in respect of invoices/debit notes uploaded by the supplier only up to the due date of filing of GSTR-1 (i.e., taxpayers should download GSTR-2A on the 11th of every month to determine the amount of eligible ITC available for that month.)
- Taxpayers may avail full ITC in respect of a tax period, as and when the invoices are uploaded by the suppliers to the extent of ‘Eligible ITC divided by 1.2.’ This can be understood through the following illustration:
|Particulars||Month in which eligible ITC is being computed|
|Dec 2019||Jan 2020|
|Total ITC as per books||10,00,000||10,00,000|
|ITC in respect of invoices appearing in GSTR-2A||6,00,000||Say, 10,00,000/1.2=8,33,333|
|ITC in respect of invoices not appearing in GSTR-2A||4,00,000||1,66,667|
|Eligible ITC to be claimed||6,00,000 + 20% of 6,00,000 =7,20,000||8,33,000 + 20% of 8,33,333 =10,00,000|
Issues faced by taxpayers
While the above clarifications have answered some questions, there are certain inherent issues with the entire mechanism.
Technical limitations of the GSTN portal
- The government in its clarification stated that taxpayers must download GSTR-2A on the due date of filing monthly GSTR-1, i.e., the 11th of every month, to determine the amount of ITC available in that month.
- On most due dates, the GSTN portal is already overburdened with taxpayers filing monthly returns, which results in technical issues on many occasions.
- Adding the requirement to download GSTR-2A on the same day is an added and avoidable hassle for taxpayers.
Postponement of ITC resulting in working capital blockage
- Considering that most taxpayers file their GSTR-1 on the 10th or 11th of the month, it is unclear whether such data will be reflected on a real-time basis in GSTR-2A of the recipient.
- Further, certain suppliers are required to file GSTR-1 on a quarterly basis. Thus, supplies received from such suppliers would reflect in GSTR-2A of the recipient only on a quarterly basis.
- In these cases, there would be blockage of bona fide ITC otherwise available to the recipient taxpayers.
- Taxpayers have to undertake the tedious task of invoice level reconciliation every month to identify invoices/debit note not uploaded by suppliers.
- According to the Rule, taxpayers can avail 20% over and above the eligible ITC appearing in GSTR-2A. However, in such cases, reconciling such excess availment of 20% ITC against the corresponding invoices appearing in next month’s GSTR-2A can turn into a herculean task. This can be further complicated by the fact that such invoices may be spread across GSTR-2A of 3-4 months.
- The government has simply mentioned that a taxpayer would be able to avail ITC in respect of invoices and debit notes only if the details of such invoices and debit notes are uploaded by the supplier in their GST returns.
However, in a practical scenario, there are several reasons for deviation between ITC register and GSTR-2A such as slight mismatches between document number, document date, taxable amount and tax amount. The government has failed to clarify whether ITC would be available in such cases.
Rule applicable individually for each tax type or total ITC
- The rule is silent on whether the eligible ITC has to be determined on a consolidated basis, or for IGST, CGST, and SGST/UTGST separately. Logically, the eligible ITC should be determined individually for each type of tax. The relevance of this issue can be demonstrated through the following illustration:
|Administrative Offences||Scenario 1 - Eligible ITC is computed separately for each tax type||Scenario 2 - Eligible ITC is computed on total ITC|
|ITC as per purchase register||400||400||1000||1800|
|Invoices appearing in GSTR-2A||200||200||1000||1400|
|Total eligible ITC to be claimed in GSTR-3B as per Rule 36(4)||200 + 200*20% =240||200 + 200*20% =240||1000||1400 + 1400*20% = 1680|
Thus, it can be seen that the eligible ITC can vary based on the approach adopted by the taxpayer. This can result in heavy interest liability if such an approach is disputed by the authorities at a later stage.
Eligibility in respect of invoices ‘not submitted’
- There are cases when the invoices are uploaded by the supplier, but the GSTR-1 is not filed. Such invoices appear in GSTR-2A of the recipient, but their status is denoted as ‘not submitted’. There is no clarification on whether ITC in respect of such invoices can be claimed.
Can authorities demand an invoice wise matching of ITC availed during assessment?
- The Rule allows an ad hoc claim of ITC. However, at the time of assessment/audit whether taxpayers would be required to provide an invoice-wise reconciliation of the ITC availed with the GSTR-2A of every month remains unclear.
The linking of ITC of the recipient with the disclosure of invoices by the supplier is an integral part of the new return filing system to be implemented from April 2020. Therefore, the introduction of this rule provides an opportunity for businesses to amend their processes to ensure that there is constant communication with the suppliers for the timely filing of their GST returns.
However, the wide ambit of the rule has resulted in various practical and interpretational issues. Blockage of working capital of the recipient due to non-compliance of the supplier remains a key bone of contention. Further, considering that the interest on the wrong availment of ITC stands as high as 24% per annum, there is a risk that businesses will incur heavy costs for bona fide mistakes in the reconciliation of ITC with GSTR-2A.