Sub-rule (4) to Rule 36 restricting input tax credit (“ITC”) has been inserted with effect from 09.10.2019 vide Notification No. 49/2019 – Central Tax dt. 09.10.2019. Said sub-rule reads as under:

(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.” 

Many issues would arise in the mind of the readers concerning the above change. Circular No. 123/42/2019 – GST dt. 11.11.2019 (hereinafter referred as “circular”) has also been issued throwing some light on the said change. Present article seeks to analyze the change in detail.

Basic understanding

Bare reading of the above sub-rule will entail that a registered person is restricted from availing ITC in respect of invoices for which details have not been uploaded by the suppliers beyond 20% of the eligible ITC the details of which have been uploaded by the suppliers. Circular gives an example as under for the month of October, 2019:

Case Eligible ITC as per books Eligible ITC reflected in 2A Permissible ITC (Eligible ITC in 2A + 20%) Actual ITC which can be claimed
I 10,00,000/- 6,00,000/- 7,20,000/- 7,20,000/-
II 10,00,000/- 7,00,000/- 8,40,000/- 8,40,000/-
III 10,00,000/- 8,50,000/- 10,20,000/- 10,00,000/-*

*Actual ITC which can be claimed cannot exceed the eligible ITC as per books.

Which eligible ITC as per books is to be compared with the permissible ITC as per the new sub-rule ?

Circular clarifies that the ITC in respect of IGST paid on import, documents issued under RCM, credit received from ISD etc. is outside the ambit of the sub-rule. This is because matching of ITC for such transactions cannot be done. Therefore full ITC can be taken with respect to such transactions.

From which date will the restriction be applicable ?

Circular states that the restriction would apply only on the invoices / debit notes on which credit is availed after 09.10.2019. Hence the application of the restriction is qua the date of availment of ITC and not qua the date of the invoice for which ITC has been availed. Therefore returns filed after 09.10.2019 would be subject to the said sub-rule as ITC can be availed only through the returns.

Whether the ineligible ITC reflected in GSTR – 2A would also be considered for deriving the permissible ITC ?

The sub-rule intends to restrict availment of ITC beyond 20% of the eligible ITC reflected in GSTR – 2A. Hence the ineligible ITC reflected in GSTR – 2A would not form part of the calculation of the permissible ITC.

Whether the restriction is to be calculated supplier wise or on consolidated basis ?

Circular clarifies that the calculation would be on consolidated basis for the given tax period. Hence the same would not apply supplier wise.

On which date the eligible ITC in 2A is to be seen to calculate the permissible ITC ?

GSTR – 2A is a dynamic statement which would change from time to time based on uploads by the concerned suppliers of their GSTR – 1 (including modifications). Circular clarifies that the amount of eligible ITC for computing the permissible ITC has to be seen as per GSTR – 2A available on the due date of filing of the returns in FORM GSTR-1 of the concerned suppliers. Hence amount of eligible ITC should be seen based on the GSTR – 2A as reflected on 11th day of the succeeding month. Hence as per the circular if the eligible ITC is Rs. 6,00,000/- on 11th of November, 2019, permissible ITC for October, 2019 would be Rs. 7,20,000/- even if the amount of eligible ITC in GSTR – 2A on 19th November, 2019 changes to Rs. 9,00,000/-.

How to subsequently avail the ITC restricted in a particular tax period ? 

Circular clarifies that the restricted ITC in a particular tax period can be claimed in the subsequent tax period in proportion to the missed invoices getting reflected in GSTR – 2A. As an example a registered tax payer intends to avail ITC as per books of Rs. 10,00,000/- (excluding imports, RCM, etc. as full ITC is available). However eligible ITC in GSTR – 2A on 11th is Rs. 6,00,000/-. Hence in the given tax period the tax payer can avail ITC of Rs. 7,20,000/- (i.e. 6,00,000 + 20%). Now in the subsequent tax period the restricted ITC can be availed only proportionate to the reflection of the missing invoices as under:

Tax period Oct, 19 Nov, 19
ITC as per books 10,00,000 12,00,000
Eligible ITC as per 2A 6,00,000 2,00,000 (for Oct 19) & 9,00,000 (for Nov 19)
Permissible ITC 7,20,000 (6,00,000 + 20%) 2,40,000 (for Oct 19 – 2,00,000 + 20%) & 10,80,000 (for Nov 19 – 9,00,000 + 20%)
Restricted ITC 2,80,000 40,000 (for Oct 19) & 1,20,000 (for Nov 19)

In other words the restricted ITC can be availed in the subsequent tax period in proportion to reflection of the missing invoices i.e. eligible ITC subsequently reflected/1.2.

Whether time dimension is relevant for implementing the said sub-rule ?

The Circular does not expressly mention the time dimension while making the comparison. It is quite possible that the GSTR – 2A could report the invoices of preceding period as well as the current period GSTR – 2A can get updated on the basis of filing of GSTR – 1 after the due date. Even GSTR – 3B for the relevant tax period may contain the availment of ITC of the preceding tax periods.

Circular however states that the ITC restricted for missing invoices can be claimed in the subsequent tax period only in proportion to reflection of the missing invoices. Therefore the Circular does bring the time dimension in the comparison. If it would not have been so, the relation of claiming the restricted ITC subsequently only based on proportionate reporting of the missing invoices should not have been there.

Thus the Circular provides for the invoice level matching for computing the restricted ITC and its subsequent availment with 20% tolerance limit. Hence the circular in a way reintroduces the matching principle with a tolerance for 20% deviation.

How will the said restriction be enforced ?

Circular states that the said restriction shall be enforced on self-assessment basis. This is more so as the GSTN portal under the current return filing system (GSTR – 1 & 3B) would not permit online enforcement of the given restriction (as the eligible ITC in 2A as well as relevant ITC in 3B for comparison cannot be discerned by the GSTN portal).

Till now we have discussed the position emanating out of the circular. Let us now discuss the legal position emanating out of the rule as well as circular when read with the provisions of the Act and settled judicial precedents.

Vires of the sub-rule

Vires of the sub-rule can be challenged on the following grounds:

a. Delhi High Court in the case of Arise India Limited and Ors. vs. Commissioner of Trade and Taxes (MANU/DE/3361/2017) in the context of restrictions on availment of VAT credit on failure of the seller to pay the tax held that the said restrictions violate Article 14 of the Constitution of India which grants equality before the law. Court observed as under: 

“42. All this points to a failure to make a correct classification on a rational basis so that the denial of ITC is not visited upon a bonafide purchasing dealer. This failure to make a reasonable classification, does attract invalidation under Article 14 of the Constitution, as pointed out rightly by learned counsel for the Petitioners.”

Moreover, Departmental special leave petition no. 36750/2017 against the above order was also dismissed by the honorable Supreme Court upholding the order of the Delhi High Court.

Applying the above ratio to the present issue, the arbitrary restriction of ITC beyond 20% without making a reasonable classification to identify the bonafide recipient’s vis-à-vis a fraudulent recipient’s can be said to violate Article 14 of the Constitution.

b. It may be noted that the restriction has been brought by way of an insertion of a sub-rule. Now the rule making power of the Central Government flows from Sec. 164 of the CGST Act, 2017. As per said provisions a rule can be formed by the Central Government only for carrying out the provisions of the Act or for which the Act expressly requires the formulation of the rules. Therefore we need to now consider whether any of the provisions of the Act permit the restriction of ITC beyond the 20%. Sec. 16(1) of the CGST Act, 2017 provides that every registered person shall be entitled to take ITC of the input tax charged on any supply subject to such conditions and restrictions as may be prescribed. The word “restriction” would imply “limitation” or a “negative obligation” to be fulfilled for availing the ITC. However close reading would suggest that such “restrictions” have to be qua the ITC charged on “any” supply. Consider a situation wherein the permissible amount of ITC works to Rs. 7,20,000/- whereas different combinations of cumulative ITC of invoices do not yield Rs. 7,20,000/-. Still as the restriction is with respect to the cumulative ITC, ITC of Rs. 7,20,000/- can be claimed without identifying the exact invoices. Hence the open issue to address is whether the restrictions can be imposed on the cumulative value of ITC charged on all the supplies as Sec. 16(1) permits imposition of restriction only qua the tax charged on a particular supply.

c. Sec. 43A has been inserted vide CGST (Amendment Act), 2018 under which sub-section (4) grants power to the Government to provide for a similar restriction with respect to availment of ITC beyond 20% on cumulative basis. Now Sec. 43A has not yet been notified. Thus it can be contended that insertion of Sec. 43A(4) granting power to restrict ITC on cumulative basis presupposes that said restriction could not have been imposed u/s 16(1) and hence unless Sec. 43A is notified, present sub-rule cannot be made to restrict the ITC in such manner. It must be remembered that legislators do not use the words superfluously and hence Sec. 43A(4) cannot be read to be redundant if the said restriction could also have been imposed vide Sec. 16(1).

d. Notification No. 49/2019 – Central Tax has retrospectively amended Rule 61(5) of the CGST Rules, 2017 to provide that GSTR – 3B would be considered as GSTR – 3 (i.e. a return u/s 39(1)). Now perusal of Sec. 41 read with Sec. 42 & 43 of the CGST Act, 2017 would show that the same deals with the matching of the transactions. Further the final result of the matching would get reflected in the return filed u/s 39. As GSTR – 3B is considered as GSTR – 3, it shall be deemed that the matching visualized u/s 41, 42 & 43 has been done away with. Therefore as the statutory provisions of matching has been done away with, a Rule cannot be inserted to restrict ITC on the basis of any matching.

For the above reasons the sub-rule is clearly travelling well beyond what has been prescribed by the Act as well as Article 14 of the Constitution of India and hence can be said to be ultra vires the Act.

Vires of the Circular

It is a settled legal position that a circular cannot travel beyond the provisions of the Act as well as the Rules (see Constitution Bench decision of SC in the case of CCE v. Ratan Melting & Wire Industries (2008) 231 ELT 22). A perusal of the new Rule 30(4) would show that the availment of ITC is restricted to 20% of the eligible ITC uploaded by the suppliers. Readers are aware that as per Sec. 37 of the CGST Act, 2017 a registered supplier can upload/modify the invoices relating to a particular financial year till the due date of filing the return of September of the subsequent financial year or furnishing of annual return, whichever is earlier.

Now the Rule per se does not provide for a specific date on which the status of eligible ITC uploaded by the suppliers in GSTR – 1 are to be seen to derive the permissible ITC. Sec. 16(1) of the CGST Act, 2017 pursuant to which if it can be said that the sub-rule has been inserted provides for the availment of ITC “subject to such conditions and restrictions”. The words “subject to” has been interpreted to mean “conditional upon” (see K. R. C. S. Balakrishna Chetty & Sons v. State of Madras (1961 AIR 1152)). Hence seen in this manner, the availment of ITC could be said to be conditional upon the new sub-rule. It would hence not mean that the said ITC can be availed only if the condition is compiled before the availment of the ITC. Moreover even the bare reading of the sub-rule does not envisage the comparison of ITC on every due date of GSTR – 1. It only provides that the availment of ITC would be conditional upon the reflection of the concerned transactions in due course with 20% tolerance. Hence if the concerned transactions on which ITC has been availed are eventually reflected by the last date for reporting or correcting any transactions in GSTR – 1 (i.e. 20th October of the subsequent financial year), ITC cannot be restricted.

The Circular therefore providing for the application of the sub-rule qua every tax period by considering the GSTR – 2A on the 11th of the concerned subsequent month is clearly going beyond the provisions of the sub-rule. Also the sub-rule does not provide for the availment of the restricted ITC in the subsequent month. This is so because the comparison has to be done after the end of the year when the final GSTR – 2A is made available. Therefore even on this ground, the circular has to be held to be ultra vires the sub-rule.

How to account for ITC flowing from quarterly filers ?

Circular states that the amount of eligible ITC to be derived for computing the permissible ITC shall be considered on the due date of filing of the returns in FORM GSTR-1 of the suppliers for the given tax period. Hence if the due date for filing GSTR – 1 for quarterly filers would not be on 11th of a given month, said ITC would hence not be considered as eligible ITC for computing the permissible ITC. Said conclusion seems to be unreasonable as a tax payer cannot be made to suffer for no fault (especially if the due date is prescribed by the Government itself). Hence a view can be taken that similar to ISD invoices (as permitted by the circular), even ITC pertaining to quarterly return filers can be fully taken.

In absence of a detailed log of GSTR – 2A, how to compute the eligible ITC ?

Circular states that the eligible ITC as reflected in GSTR – 2A on the due date for filing GSTR – 1 needs to be considered. Hence such date would be 11th day of a given month. Hence consider a situation wherein few of the suppliers file GSTR – 1 after the said due date. In such case also GSTR – 2A if downloaded at a date after 11th would reflect the revised figure of eligible ITC. Therefore in absence of any log, how will the tax payer (if forgets to download 2A on 11th) or the department enforce such restriction as the same is qua the eligible ITC as on the due date ?

Conclusion

It would thus have been observed that the new sub-rule has been brought in a haste without appreciating the concerns discussed above. Also it would be extremely difficult for the department to enforce. The correct way forward would have been to introduce the new return filing system which would have comprehensively dealt with the issue of matching. In absence of the same, current Sec. 16(2) of the CGST Act, 2017 is sufficient to deter fraudulent availment of ITC as it denies ITC if the goods or services mentioned in the concerned invoice have not been actually received from the given supplier. It is therefore hoped that the Government rethinks on the sub-rule and save countless hours and days of the trade and industry which would otherwise be spent on its compliance.

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5 Comments

  1. deepika says:

    hi,
    in 20% ITC Notification, if we take 20% of itc which shown in GSTR 2ie in portal, but how can we tally with our invoices with 20% ITC or how we can track that, this particular invoice which we take 20%. please suggest.

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