GST- Concept of Seamless Flow of ITC & Contradictions

India has gone through in absolutely bad phase in the year 2020-21, not only on account of pandemics of COVID-19 but number of aspects w.r.t. business and tax compliances. At present, trade & industries and professionals are struggling to revive their business and liquidity is the only oxygen for them for survival of the business. Collection of GST has drastically reduced during the lockdown period and started picking up only from last month and government has also detected certain malpractices of issuing the fake invoices without supply of goods and services and therefore, honest taxpayer have been axed on account of the bureaucratical thinking, which has killed the basic concept of seamless of input tax credit, which can be evidence from the following action taken by the government.

1. Rule 36 (4) of CGST Rules 2017 was inserted vide Notification No. 49/2019 dtd. 9^th October 2019 restricting the input credit to the extent of 120% of ITC reflected in GSTR-2A.

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(4) 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.

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Further, the said notification was amended vide Notification No. 75/2019 – Central Tax dtd. 26^th Dec 2019 restricting the ITC to the extent of 110% of ITC reflected in GSTR-2A.

Such amendments are contrary to the provisions of Section 16 of CGST Act 2017, but even though it is covered under provisions of Section 41.

2. Rule 86A of CGST Rules 2017 was inserted vide Notification No. 75/2019 Central Tax dtd. 26^th Dec 2019. This is contradictory with provisions of CGST Act 2017 and un-constitutional.

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“86A. Conditions of use of amount available in electronic credit ledger.

(1) The Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as-

a) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36- i.issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or

without receipt of goods or services or both; or

b) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or

c) the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or

d) the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36, may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount.

(2) The Commissioner, or the officer authorised by him under sub-rule (1) may, upon being satisfied that conditions for disallowing debit of electronic credit ledger as above, no longer exist, allow such debit.

(3) Such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.

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This rule is challenged in the Gujarat High Court in the case of Surat Mercantile Association Vs Union of India, on the following grounds and Gujarat High Court have issued the notice to the government.

a) Conditions under Section 16 of CGST Act restrict the availment of credit, and warrant reversal in cases where credit has been wrongly availed.

b) The right to avail and utilize ITC for discharging tax liability is a legal right arising from the statute and it is trite in law that this right can be curtailed only with the specific power of the law and not otherwise’. [Eicher Motors Ltd. v. Union of India – 2002-TIOL-149-SC-CX-LB

c) None of the provisions contained in Section 16 including the Proviso 2 to the said Section or any other sections under the CGST Act empower the government to block ITC unilaterally, under any circumstances.

d) The Act provides for the provisional taking of credit on a self-assessment basis, and the blocking of credit goes against the scheme of the Act.

Thus, Rule 86A does not draw strength from any provisions of the CGST Act. The powers prescribed vide Rule 86A does not flow from the CGST Act, and hence can be challenged on the ground that it is ultra vires the Parent Act.

e) The decision of the Court in a similar case namely Kalpsutra Gujarat v. Union of India – 2020-TIOL-1558-HC-AHM-GST is awaited.

f) A similar issue was also before the Gujarat High Court in the cases of Valerius Industries v. Union of India – 2019-TIOL-2094-HC-AHM-GST whether the ITC can be blocked by the Revenue authorities.

g) The Court held that blocking of ITC without issuing a show cause notice and opportunity of hearing, was patently illegal and arbitrary and therefore asked the Department to accordingly unblock the ITC so blocked.

h) However, above cases were decided prior to the introduction of Rule 86A in the CGST rules.

i) Under Rule 86A of the CGST Rules, the empowered officer is not required to give the assessee an opportunity of being heard before blocking of their credit ledger.

Therefore, the operation of Rule 86A in itself is tantamount to violation of principles of natural justice, insofar as it does not mandate that an opportunity be given to the assessee to be heard before the credit ledger is blocked and therefore, any action taken by the revenue arbitrarily under the said Rule is in violation of Principle of Natural Justice.

j) Recipient should not suffer on account of a supplier’s default.

3. Further amendment was made in Rule 36(4) vide Notification No. 94/2020 – Central Tax dtd. 22^nd Dec 2020 which has been made effective from 1^st Jan 2020, whereby credit is restricted to the extent of 105% of ITC reflected in GSTR-2A and also GSTR-1 Return has been furnished by the suppliers.

Within the span of 1 year, government has restricted the credit 3 times. However, it is pertinent to note that the restriction is applicable only on those invoices or debit notes which are to be uploaded by the supplier under section 37(1) of CGST Act i.e., in his GSTR-1 but which have not been uploaded by him. Therefore, one could avail full ITC of the GST paid on the following:

• IGST paid on the import of goods;
• IGST paid on the import of services under RCM;
• ITC distributed by ISD availed on the basis of ISD invoice; and
• ITC of the GST paid under RCM by the recipient on the procurements which are taxable under RCM availed on the basis of RCM document i.e., self-invoice [for ex., legal services, GTA services, etc.].

However, there is no clarification issued by the department including its press release clarifying the myths & facts, whether such restriction on overall amount of ITC or supplier wise.

In our opinion, the restriction imposed is not supplier wise. Therefore, one would be required to consider the above restriction on a consolidated basis i.e., on the basis of total eligible ITC appearing in its GSTR-2A and total eligible ITC as per its books of accounts. It would not be required to do the comparison supplier wise or invoice wise.

4. Similarly, Rule 86B has been inserted vide Notification No. 94/2020 – Central Tax dtd. 22^nd Dec 2020, which stipulates that

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86B. Restrictions on use of amount available in electronic credit ledger.-Notwithstanding anything contained in these rules, the registered person shall not use the amount available in electronic credit ledger to discharge his liability towards output tax in excess of ninety-nine per cent. of such tax liability, in cases where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees:

Provided that the said restriction shall not apply where –

(a) the said person or the proprietor or karta or the managing director or any of its two partners, whole-time Directors, Members of Managing Committee of Associations or Board of Trustees, as the case may be, have paid more than one lakh rupees as income tax under the Income-tax Act, 1961(43 of 1961) in each of the last two financial years for which the time limit to file return of income under subsection (1) of section 139 of the said Act has expired; or

(b) the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilised input tax credit under clause (i) of first proviso of sub-section (3) of section 54; or

(c) the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilised input tax credit under clause (ii) of first proviso of sub-section (3) of section 54; or

(d) the registered person has discharged his liability towards output tax through the electronic cash ledger for an amount which is in excess of 1% of the total output tax liability, applied cumulatively, upto the said month in the current financial year; or

(e) the registered person is –

(i) Government Department; or

(ii) a Public Sector Undertaking; or

(iii) a local authority;or

(iv) a statutory body:

Provided further that the Commissioner or an officer authorised by him in this behalf may remove the said restriction after such verifications and such safeguards as he may deem fit.”.

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Admittedly, less taxpayers will be affected but there is no guarantee for the government that this will not be extended to other taxpayers removing the exclusions. Such provisions provide the directions of thinking of government, which will cause hurdles.

5. Similarly, the provisions of suspension of registration and cancellation of registration has been amended, which is definitely add harassment to the taxpayer and raise the questions on faceless working of the government providing very high powers without providing natural justice, which will definitely hamper trade & industry adversely.

a) Now the officer can proceed for cancellation of GSTIN where a taxpayer avails Input Tax Credit (ITC) exceeding than that permissible in Section 16. Clause (e) has been inserted in Rule 21 of CGST Rules 2017.

b) Now where the liability declared in GSTR 3B is less than that declared in GSTR 1 in a particular month, department may now proceed with cancellation of GSTIN. There might be some practical difficulties in implementing such a provision as there are number of corrections which are made in GSTR 3B which may result in lower tax liability as compared with GSTR 1. The clause (f) newly inserted talks about details of outward supply to which we understand that Taxable value and tax both should be in synchronization between GSTR 1 and GSTR 3B.

c) Now, no opportunity of being heard shall be given to a taxpayer for suspension of GSTIN, where the proper officer (PO) has reasons to believe that the registration of person is liable to be cancelled. The words “opportunity of being heard has been omitted from clause (2) of Rule 21A.

d) Where there are significant deviation/anomalies between details of outward supply between GSTR 3B and GSTR1 or inward supplies (ITC) between GSTR 3B and GSTR 2B which indicate contravention of Act, department shall now serve a notice in FORM GST REG 31 to call explanation as to why GSTIN should not be cancelled. Taxpayer shall be required to submit his reply within 30 days of such notice being served to him.

During the period of suspension and cancellation of registration taxpayer will adversely suffer not only in the business for making outward supplies but also for availing input tax credit, since one cannot stop the business on account of no fault of him. Such type of rules / prohibitions were not in existence even in the British Raj.

Unfortunately, such type of amendments are made on the eve of birthday of Late Arun Jaitely, who has built up the concept of “One Nation- One Tax” for providing seamless credit and hassle-free business without interface of the officer, but his dream is shattered by the bureaucracy.

All such amendments are not only unconstitutional and contradictory to the basic provisions of the CGST Act but detrimental to the growth of trade and industry and will be the big hurdle for ease of doing business.

Appeal to be made by each citizen to Hon Prime Minister Shri Narendrabhai Modi and Finance Minister Smt Nirmala Sitharaman to withdraw such notifications.