Analysis of amendment in Section 16 of CGST Act, 2017 wef 01.01.2022

Section 109 of Finance Act, 2021 has come into effect from 1st January 2022. Section 109 of Finance Act 2021 relates to Amendment in section 16 of Central Goods and Services Tax Act, 2017. (Notification No. 39/2021–Central Tax | Dated: 21st December, 2021)

Section 109 of Finance Act, 2021

In this section, section 16 of CGST Act has been amended by inserting clause (aa) after clause (a) of Section 16(2).

Extract of Clause (aa) of section 16(2)

The details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37.

First let us understand the pre – budget status of section 16 to understand the nuances of insertion of new clause, i.e. Clause (aa) of Sub-section (2) of Section 16.

Pre-budget status of Section 16 of CGST Act

Extract of Section 16(1) of CGST Act

Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

Conditions are prescribed in Section 16(2).

Extract of Section 16(2) of CGST Act

Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,

a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;

b) he has received the goods or services or both.

Explanation. – For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services–

i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person;

c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and

d) he has furnished the return under section 39:

Extract of Section 41 of CGST Act: Claim of input tax credit and provisional acceptance thereof.

(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to take the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited on a provisional basis to his electronic credit ledger.

(2) The credit referred to in sub-section (1) shall be utilised only for payment of self- assessed output tax as per the return referred to in the said sub-section.

The Assessee is eligible to avail ITC even if the respective supplier has not actually paid the same to the Government and it shall be credited on a provisional basis.

Let us analyse section 16(2)

Assessee was eligible to avail ITC once he satisfied all the conditions specified in this sub – section i.e.

a) Possession of Invoice or Debit notes

b) Receipt of Goods or Services

c) Furnishing of return under section 39

d) Subject to Section 41, payment of tax by the supplier to the Government. Section 41 allows the Assessee to avail ITC even if the same has not been paid by the Supplier to the Government and it will be accepted provisionally.

When we analyse carefully, we understand that there is no explicit condition that Supplier should have furnished the details of the invoices or debit notes in the statement of Outward Supplies under Section 37 i.e. GSTR 1.

Later in October 2019, Rule 36(4) was introduced vide Notification No. 49/2019 CT dated 9^th October 2019.

Extract of Rule 36(4) of CGST Rules

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.

Analysis of Rule 36(4)

Government through Rule 36(4) of CGST Rules restricted the Input Tax Credit of the recipient

i) by allowing him to avail eligible ITC in respect of only those invoices or debit notes, the details of which have been uploaded by the suppliers under sub-section (1) of section 37 (+) 20% of invoices or debit notes not uploaded by the suppliers

(or)

ii) The Actual eligible ITC as per Purchase Register

Whichever is lower.

Rule 36(4) was amended through Notification No. 75/2019 – CT dated 26^th December 2019.

Extract of Rule 36(4) of CGST Rules w.e.f. 01^st January 2020

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 10 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.

Analysis of Rule 36(4) after amendment through Notification No. 75/2019 – CT dated 26^th December 2019.

Government has further restricted the Input Tax Credit of the recipient by amending Rule 36(4) of CGST Rules

i) by allowing him to avail eligible ITC in respect of only those invoices or debit notes, the details of which have been uploaded by the suppliers under sub-section (1) of section 37 (+) 10% of invoices or debit notes not uploaded by the suppliers

(or)

ii) The Actual eligible ITC as per Purchase Register

Whichever is lower.

Earlier Matched eligible ITC + 20% eligible ITC relating to invoices or debit notes not uploaded by the suppliers was allowed. But w.e.f. 01^st January 2020, ITC is further restricted by allowing only Matched ITC + 10% of eligible ITC relating to invoices or debit notes not uploaded by the suppliers.

Rule 36(4) was further amended by Notification No. 94/2020 CT dated 22^nd December 2020.

Extract of Rule 36(4) of CGST Rules w.e.f. 01^st January 2021

Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been furnished by the suppliers under sub-section (1) of section 37 in Form GSTR 1 or using the invoice furnishing facility, shall not exceed 5 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.

Analysis of Rule 36(4) after amendment through Notification No. 94/2020 – CT dated 26^th December 2020.

Government has further restricted the Input Tax Credit of the recipient by amending Rule 36(4) of CGST Rules

i) by allowing him to avail eligible ITC in respect of only those invoices or debit notes, the details of which have been furnished by the suppliers under sub-section (1) of section 37 in Form GSTR 1 or using the invoice furnishing facility (+) 5% of invoices or debit notes not uploaded by the suppliers

(or)

ii) The Actual eligible ITC as per Purchase Register

Whichever is lower.

Earlier Matched Eligible ITC + 10% of eligible ITC relating to invoices or debit notes not uploaded by the suppliers was allowed. But w.e.f. 01^st January 2020, ITC is further restricted by allowing only Matched ITC + 5% of Eligible ITC relating to invoices or debit notes not uploaded by the suppliers.

Hence we conclude that during Pre – Budget 2021,

Matched Eligible ITC + 5% of eligible ITC relating to invoices or debit notes not uploaded by the suppliers was allowed.

Analysis of ITC Post Budget 2021

In Union Budget 2021, a new clause i.e. Clause (aa) after clause (a) of Section 16(2) has been introduced through section 100 of Finance Bill, 2021

This clause is notified vide Notification No. 39/2021 CT dated 21.12.2021.

Extract of Clause (aa) of section 16(2)

The details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37.

Impact of insertion of Clause (aa) of sub-section (2) of Section 16

Government has further restricted the Input Tax Credit of the recipient by insertion of Clause (aa) after Clause (a) of Sub – section (2) of Section 16.

Analysis of Section 16(2)(aa) of CGST Act

Earlier there were only 4 conditions, on satisfaction of which ITC was allowed to be availed by the recipient i.e.

a) Possession of Invoice or Debit notes

b) Receipt of Goods or Services

c) Furnishing of return under section 39

d) Subject to Section 41, payment of tax by the supplier to the Government. Section 41 allows the Assessee to avail ITC even if the same has not been paid by the Supplier to the Government and it will be accepted provisionally.

But now, one additional condition is added to the list which states that ITC shall be availed by the recipient subject to satisfaction of the condition “Supplier has furnished the details of Invoices or Debit Notes referred to in Section 16(2)(a) in Form GSTR 1”.

This means that Recipient is eligible to avail only those eligible ITC which is matched with GSTR 2B.

This creates lot of burden on the taxpayers as the Working Capital is blocked due to the restriction of ITC only to the extent of Invoices and Debit Notes furnished by the Supplier in Form GSTR 1 / IFF

Further Rule 36(4) is amended vide Notification No. 40/2021 CT dated 29.12.2021.

Extract of amended Rule 36(4)

No input tax credit shall be availed by a registered person in respect of invoices or debit notes the details of which are required to be furnished under subsection (1) of section 37 unless,

(a) the details of such invoices or debit notes have been furnished by the supplier in the statement of outward supplies in FORM GSTR-1 or using the invoice furnishing facility; and

(b) the details of such invoices or debit notes have been communicated to the registered person in FORM GSTR-2B under sub-rule (7) of rule 60

Thus taxpayers will be allowed to avail ITC of only those invoices which are uploaded by Supplier in GSTR 1 / IFF and communicated to the registered person in Form GSTR 2B.

Author’s take on insertion of Clause (aa) of sub – section (2) of Section 16

Let’s discuss the pros and cons of insertion of this new clause

Pros

i) Availment of ITC on fake invoices will be reduced to a larger extent

ii) Sense of discipline will be emerged in the minds of Suppliers as Recipients will be insisting the suppliers to furnish the statement in GSTR 1 within the due date as only then they will be allowed to avail the ITC

iii) Filing of returns will be stream lined and defaulters in relation to filing of returns will be reduced to a greater extent.

Cons

i) Increased Compliance

Compliance will be increased as only those ITC which is matched with GSTR 1 furnished by the supplier shall be allowed. So constantly defaulters (Suppliers) in filing returns has to be identified and communication has to be sent for furnishing return within the due date.

ii) Blockage of Working Capital

Creates a lot of burden on taxpayers as the insertion of new clause i.e. Clause (aa) of sub – section (2) of section 16 restricts ITC only to the extent of Invoices and Debit Notes furnished by the Supplier in Form GSTR 1.

Due to the default of suppliers, genuine taxpayers has to shed out extra Cash which will block the working capital for that tax period.

Author’s note

Insertion of Clause (aa) of sub – section (2) of Section 16 is a welcome move by the Government which will help in

• Reducing availment of ITC based on Fake Invoices
• Reduction of defaulters in filing returns

But before this Clause was given effect, Government could have taken the below steps so that genuine taxpayers are unaffected.

Steps which could have been taken by the Government

1. Goods and Services tax compliance rating score as per Section 149 of the CGST Act should be given effect. This will enable the taxpayers to choose genuine and tax compliant vendors.

Section 149 of CGST Act

Every Registered Person may be assigned a goods and services tax compliance rating score by the Government based on his record of compliance with the provisions of CGST Act.

2. List of defaulters of GSTR 1 return filers (Vendors) should be available in the GST Portal on or before 14^the. 3 days after the due date for furnishing GSTR 1 for monthly filers and 1 day after the due date for furnishing GSTR 1 for quarterly filers and also an auto mail and SMS regarding the same should be sent to the registered mail id and mobile number of the taxpayer.

Conclusion

Finally, I would like to conclude that insertion of Clause (aa) of sub – section (2) of section 16 is a welcome move by the Government. But it could have been deferred until the above steps are taken by them.

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The author ‘ CA Deepika Ganesan’ can be reached at deepikaaganesan@gmail.com.