Friends, Government has recently issued Notification 49/2019 dated 9th Oct 2019 and a Circular dated 11th Nov 2019 restricting the Input Tax Credit (ITC) where GSTR1 has not been filed by the supplier.

In this blog, we tried to present the law/circular/notification in respect to Input Tax Credit (ITC) post amendment in a simple manner and also have used a practical illustration to explain how this mechanism will work. We believe after reading this Blog, the mechanism of claiming Input Tax Credit (ITC) would be crystal clear as the government has made it clear that GST Portal will provide no help in the calculation of Input Tax Credit (ITC) and everything has to be done manually as far as ITC is concerned. So, give it a read for conceptual understanding.

Happy Reading!!!!!!!!

Check Out | GST Amendments November 2019

Notification No. 49/2019- Central Tax

Dated 9 October 2019 seeks to make amendment in Rules 36 of CGST Rules which states:

Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 20 per cent of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37.

Decoding Rule 36(4) of CGST Rules

1) Rule 36(4) has been inserted vide Notification No. 49/2019 dated 9th October 2019 with regard to restriction on the availment of ITC in cased where GSTR-1 has not been filed by the supplier. This newly inserted rule is a substantive condition to be fulfilled for the availment of ITC in addition to conditions prescribed u/s 16 of CGST Act.

2) Rule 16 of CGST Rule provide the following

A) Only Registered person will be eligible to take credit of ITC paid on inward supplies of goods or service or both, which are used in the course or furtherance of business.

B) As per subsection (2) of section 16, four conditions need to be fulfilled which are:

i) Possession of tax invoice, debit note or such other tax paying document which includes invoice issued by Input Service Distributor (ISD) and bill of entry as prescribed under Customs Act, 1962

ii) Goods or services have been received. If goods or services have been received in lots then it will be assumed that the goods or services have been received at the time when the last lot is received. If the supply is made on the bill to ship to model then it will be assumed that the goods or services have been received by the registered person at the time when goods or services have been received by the person on behalf of the registered person.

iii) Tax on supply is actually paid to the Govt.

iv) The recipient shall furnish the return under section 39.

C) The recipient shall make the payment for the supply of taxable goods or services or both within a period of 180 days. Payment for both values for goods or services and tax thereon shall be paid within a period of 180 days from the date of issue of invoice by the supplier.

D) The maximum time period within which an ITC pertaining to an invoice can be claimed is up to the due date of furnishing of return u/s 39 for the month of September, following the end of the financial year to which such invoice relates OR the Actual date filing of annual return, whichever is earlier.

3) Now, ITC to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the supplier, shall not exceed 20 per cent of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the supplier. The new ITC availment mechanism can be explained with the help of below illustration.

Illustration

In this illustration, the total no. of Invoices received for the purchases made by the taxpayer is assumed to be 1000 and the corresponding GST paid on the same is assumed to be Rs. 10 lacs.

Particulars No. of Invoices Eligible ITC Amount Ineligible ITC Amount ITC Allowed as per new Mechanism
Invoices appearing in GSTR-2A 800 700000 100000 700000
Invoices not appearing in GSTR- 2A 200 200000         – (20% of 700000) or 200000 whichever is Lower = 140000
Total 1000 900000 100000 840000
ITC t/f to the subsequent Tax period 60000

Treatment in the Second Tax Period

In the next tax period, the taxpayer receives 1200 new invoices for the purchases made and the corresponding GST paid on the same is assumed to Rs. 1200000. Out of 200 Invoices not appearing in GSTR-2A in the 1st Tax Period, 160 invoices are now appearing

Particulars No. of Invoices Eligible ITC Amount Ineligible ITC Amount ITC Allowed as per new Mechanism
Invoices appearing in GSTR-2A 240 240000           – 240000
Invoices not appearing in GSTR- 2A 960 960000           – (20% of 240000) or 960000 whichever is Lower = 48000
Total 1200 1200000           – 288000
ITC t/f to the subsequent Tax period 912000

ITC Computation of 1st Tax Period in 2nd Tax Period

Particulars No. of Invoices Eligible ITC Amount ITC Allowed ITC Balance
Invoices not appearing in GSTR- 2A in the first Tax Period 200 200000 140000 60000
Invoices appearing in the GSTR-2A in 2nd Tax Period 160 160000
Additional ITC Allowed (ITC of Invoices appearing in GSTR 2A minus ITC Already Allowed) 32000
(860000*20%-140000)
28000

The above process of reconciliation shall be done on a regular basis until all invoices of the relevant tax period appear in GSTR-2A.

This amendment would lead to additional compliances for the companies such as Monthly reconciliation of GSTR2A and Purchase register, follow up with Vendors, Impact on Working Capital and Cash Flows

The legality of this amendment is likely to be challenged on multiple grounds. There is a compelling argument that a bonafide taxpayer cannot be penalized by disallowing his eligible credits on account of non-compliance by the supplier.

Issues and Clarification Regarding Implementation in Rule

CBIC has issued Circular No. 123/42/2019–GST dated 11th November 2019 clarifying Restriction in availment of the input tax credit in terms of sub-rule (4) of rule 36 of CGST Rules, 2017. This is a clarification to the Notification No 49/2019-Central Tax dated 9th October 2019 and should be read in consonance with the said Circular.

Various issues relating to the implementation of the said sub-rule have been examined and the clarification on each of these points is as under: –

S. No.                  Issue             Clarification
1. What are the invoices/debit notes on which the restriction under rule 36(4) of the CGST Rules shall apply? The restriction of availment of ITC is imposed only in respect of those invoices/debit notes, details of which are required to be uploaded by the suppliers under sub-section (1) of section 37 and which have not been uploaded. Therefore, taxpayers may avail full ITC in respect of IGST paid on import, documents issued under RCM, credit received from ISD etc. which are outside the ambit of sub-section (1) of section 37, provided that eligibility conditions for availment of ITC are met in respect of the same. The restriction of 36(4) will be applicable only on the invoices/debit notes on which credit is availed after 09.10.2019.
2. Whether the said restriction is to be calculated supplier wise or on a consolidated basis? The restriction imposed is not supplier wise. The credit available under sub-rule (4) of rule 36 is linked to total eligible credit from all suppliers against all supplies whose details have been uploaded by the suppliers. Further, the calculation would be based on only those invoices which are otherwise eligible for ITC. Accordingly, those invoices on which ITC is not available under any of the provision (say under sub-section (5) of section 17) would not be considered for calculating 20 per cent. of the eligible credit available.
3. What would be the amount of input tax credit that is admissible to the taxpayers for a particular tax period in respect of invoices/debit notes whose details have not been uploaded by the suppliers? The amount of input tax credit in respect of the invoices/debit notes whose details have not been uploaded by the suppliers shall not exceed 20% of the eligible input tax credit available to the recipient in respect of invoices or debit notes the details of which have been uploaded by the suppliers under subsection (1) of section 37 as on the due date of filing of the returns in FORM GSTR-1 of the suppliers for the said tax period. The taxpayer may have to ascertain the same from his auto-populated FORM GSTR 2A as available on the due date of filing of FORM GSTR-1 under sub-section (1) of section 37
4. How much ITC a registered taxpayer can avail in his Form GSTR-3B in a month in case the details of some of the invoices have not been uploaded by the suppliers under subsection (1) of section 37. Sub-rule (4) of rule 36 prescribes that the ITC to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under subsection (1) of section 37, shall not exceed 20 per cent. of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under subsection (1) of section 37. The eligible ITC that can be availed is explained by way of illustration ABOVE
5. When can balance ITC be claimed in case availment of ITC is restricted as per the provisions of rule 36(4)? The balance ITC may be claimed by the taxpayer in any of the succeeding months provided details of requisite invoices are uploaded by the suppliers. He can claim proportionate ITC as and when details of some invoices are uploaded by the suppliers provided that credit on invoices, the details of which are not uploaded (under sub-section (1) of section 37) remains under 20 per cent of the eligible input tax credit, the details of which are uploaded by the suppliers.

To Sum up, the following points merit consideration

  • ITC, where GSTR 1 has not been filed, shall be restricted to 20% of total eligible credit as per GSTR2A.
  • The restriction imposed is not supplier wise.
  • The credit available under sub-rule (4) of rule 36 is linked to total eligible credit from all suppliers
  • This is another condition for availing ITC in addition to those mentioned in Rule 16.
  • This mechanism would involve reconciliation of GSTR 2A with Purchase Register regularly.
  • This restriction does not apply to ITC on Imports, under RCM, ISD etc.
  • ITC, where GSTR 1 has not been filed by the supplier, can be claimed in the subsequent period when filed.
  • In the subsequent period eligible, ITC of the previous period would be 20% of Total Eligible ITC minus ITC already claimed in respect of ITC not reflected in GSTR 2A.

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