Analysis of CBIC Circular on 20% GST ITC restrictions

20% ITC restrictions clarified by CBIC Circular No. 123/42/2019– GST dated 11.11.2019

1. Clarification about the new rule 36(4) related to availing input tax credit under the GST.

2. The new rule 36(4) inserted vide Notification No. 49/2019 – Central Tax dated 09.10.2019, limits input tax credit claims to 20% of the “eligible amount” where in respect of invoices or debit notes, the details have not been uploaded by the suppliers in their respective GSTR-1s as required under section 37(1) of the CGST Act, 2017

3. Effectively ITC shall not exceed 20% of the eligible credit reflected in GSTR-2A

4. Rule 36(4) inserted in the CGST Rules, 2017

• 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 in their GSTR-1 under section 37(1), 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 section 37(1).

5. However, concerns were raised in the Notification no. 49/ 2019, dated 09.10.19, over the method of calculating this 20% amount, the cut-off date and also whether it was to be calculated supplier-wise or on a consolidated basis. Therefore, the circular clarifies all these aspects.

6. The restriction is not imposed through the common portal and it is the responsibility of the taxpayer that credit is availed in  terms of the said rule and therefore, the availment of restricted credit in terms of rule 36(4) of CGST Rules shall be done only on self-assessment basis by the tax payers.

7. The 20% cap on the eligible Input Tax Credit will not be calculated supplier-wise and GST payers can avail the input tax credit on a consolidated basis.

8. The provisions is applicable from 9th October, 2019. Invoices uploaded by the supplies can be seen by downloading GSTR-2A from GST Portal.

9. Rule 59(3) of the CGST Rules, 2017 specifies that the details of all outward supplies furnished by the supplier shall be made available electronically to the concerned registered persons i.e the recipients in Part A of GSTR-2A after the due date of filing of GSTR-1s.

10. Thus every registered person is required to view the GSTR-2A for determining the due ITC and for filing his GSTR-3B.

11. For example, if a buyer is entitled to avail input tax credit of Rs 10 lakh on inward supplies (purchases) in a month but if his suppliers have uploaded the correct invoices in respect of supplies only to the extent of Rs 6 lakhs in the GSTR1 forms uploaded by them, then the buyer can avail ITC of Rs 6 lakh plus 20% of the eligible amount ( 20% of Rs. 6 lakhs) that is Rs 1.2 lakh.

12. Therefore the buyer could claim a maximum ITC of Rs 7.2 lakh in the month. The balance can be claimed only after matching.

13. The total amount of ITC, even after the addition of 20% input tax credit over and above the eligible amount where invoice matching has been done, cannot exceed the total amount of input tax credit that can be claimed.

14. For example, if a buyer is entitled to ITC of Rs 10 lakh on inward supplies and invoice matching is done in case of Rs 9 lakh then as per the 20% cap rule, he is also entitled to avail 20% over and above the eligible amount of Rs 9 lakh, which is 1.8 lakh in this case (20% of eligible amount of Rs. 9 lakhs). However, this can take the total amount of ITC to be availed by him in the month to Rs 10.8 lakh, Rs 80,000 more than the total ITC amount that can be claimed. The new circular has clarified that in any case ITC claims will be restricted to the total amount due ie. Rs.10 lakhs only, obviously.

15. The cap of 20% on availing input tax credit under the GST rule 36 (4) introduced on October 9th 2019 will not be applicable on following three cases:

i. ITC in respect of the IGST paid on imports and these importers can directly avail the input tax credit;

ii. The cap of 20% will also not apply to those cases where GST has been paid under the Reverse Charge Mechanism (RCM) and;

iii. The ceiling of 20% on availing ITC will also not apply on Input Service Distributors (ISD), these are those businesses that receive invoices on behalf of the services used by their branches and subordinate offices.

16. 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 section 17(5) of CGST Act) would not be considered for calculating 20 per cent of the eligible credit available.

17. 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 section 37(1) 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 section 37(1).