Input Tax credit is the heart and soul of GST, the reason for the existence of GST. Determining the admissibility of Input Tax Credit under GST has been a toiling task since beginning and is becoming more and more difficult due to the complexities and genuine bottlenecks/ gaps in the provisions and prescriptions under the law. A few simple case studies are being used for understanding the provisions as they exist and discussing them to highlight the genuine hardships of taxpayers in determining the admissible tax credit under the law.

CASE STUDY 1: A Company X Ltd. has purchased goods from another Company Y Ltd. on 29.04.2021 amounting to Rs. 1,18,000/-. A partial advance payment of Rs. 50,000/- was made to Y Ltd. on 29.04.2021. The goods were received by X Ltd. on 02.05.2021 at its factory site and the balance payment was made on the same date. The invoice was accounted for in the books of X Ltd. on the date of receipt, i.e. 02.05.2021. Y Ltd. filed its GSTR-1 for the month of April 2021 on 09.05.2021 and filed the GSTR-3B for April 2021 on 18.05.2020. When will X Ltd. be eligible to claim the ITC on the goods, in April 2021 or May 2021?

Sub-section (2) of Section 16 stipulates the conditions for taking input tax credit for registered persons. The sub section (2) of Section 16 starts with the words “Notwithstanding anything contained in this section” (i.e. Section 16) and lays down four primary conditions for taking credit of input tax in respect of any supply. The conditions are:

(a) Possession of tax invoice or debit note or valid tax paying document as prescribed;

(b) Receipt of the goods or services;

(c) Actual Payment of tax in cash or through utilization of admissible input tax credit by the supplier on such supply received by the recipient;

(d) Filing of Return under Section 39 by the recipient who intends to take the credit.

In view of the aforesaid provisions under Section 16 (2) (b), X Ltd. is eligible to claim ITC on such goods in the GSTR-3B for the month of May 2021, provided the other three conditions are satisfied. However, the supply will appear in its GSTR 2A and GSTR 2B of April 2021 on the portal for the recipient.

Input Tax Credit under Section 16(2)

Rule 36(4) of the CGST Rules has been inserted vide Notification No. 49/2019 Central Tax dated 09.10.2019 with effect from 09.10.2019 under section 164 of the Act, which restricts the credit relating to the invoices not uploaded by the suppliers in their form GSTR-1 to the extent of 20% (10% w.e.f. 01.01.2020) of such credit. Further w.e.f. 01.01.2021, said percentage was further reduced to 5%.

Surprisingly and ironically though, we all have been talking about the reconciliation and admissibility of Input Tax Credit in terms of Rule 36(4) with respect to GSTR 2A / 2B more often and more seriously than we talk about or refer to Section 16(2). Though Section 16(2) is the parent provision, it is sad to realize that the said provision tries to enforce conditions which are impossible to be met in ordinary course of business by any diligent taxpayer, and at the same time, this provision fails to lend any support to the requirement of matching of invoices with GSTR 2A or GSTR 2B and restriction of further credit to 20%/10%/5% beyond the credit appearing in the said GSTR 2A/ GSTR 2B being administered on the strength of the Rule 36(4).

It may be noted that the shortcomings are known to the lawmakers and consequentially, an amendment has been brought in by the Finance Act 2021 to insert one condition by inserting clause (aa) under Section (2) to compensate this lack of strength under Section 16 to the restrictions under Rule 36(4) which stipulates that the details of the tax invoice or debit note or valid tax paying document as prescribed on the strength of which the recipient is to take input credit has to be furnished by the supplier in GSTR 1 and the details have to be communicated to the recipient, i.e. in GSTR 2A/ GSTR 2B. However, the amendment though done, the effective date of it being enforced is yet to be notified. The issue of legal force / tenability of GSTR 2A or GSTR 2B is an issue which also needs detailed deliberation and critical study, however it has been kept out of this discussion as the subject matter for discussion in this study paper are the provisions of Section 16(2) as they exist on this date and the said provision do not accommodate either GSTR 2A/ GSTR 2B as such. A study of Section 16(2) (aa) may be taken up in detail once the provision is notified to be in force on the statute book.

Coming back to the case study under concern, let us discuss a few variations in the same case study for applying the provisions and determining the eligibility for input tax credit accordingly for understanding and discuss the implications and hardships arising in each situation:

CASE STUDY 1 : Variation 1: In the above situation, let us say Y Ltd. does not file its GSTR-1 and GSTR-3B for the month of April 2021, can X Ltd. avail the Input Tax Credit. What will be the situation then?

We all are aware that the information about filing of GSTR 1 and GSTR 3B by the supplier is available to view on the GST Portal, though it was not available in the initial tax periods. Due to non filing of GSTR 1, the invoice will not be communicated to X Ltd in GSTR 2A/ 2B, but since filing of GSTR 1 by the supplier is not a condition till date under Section 16 (2) and hence the Input tax credit of X Ltd. should be admissible, on filing his return under Section 39, i.e. GSTR 3B of X Ltd., if goods are received and tax invoice is available with him as such. But, the non filing of GSTR 3B indicates that the condition under clause (c ) is not satisfied and hence, credit may not be availed by the recipient. But this mandate gives rise to sincere hardship to the recipient, where due to fault on part of the supplier, recipient needs to suffer though he has paid the tax in full to the supplier, yet the supplier has actually not paid his due tax and not filed the GSTR 3B.

CASE STUDY 1 : Variation 2: What if the portal shows that Y Ltd. has filed GSTR 1 but not GSTR 3B for the month of April 2021?

The filing of GSTR 1 has made the invoice available to the recipient in GSTR 2A as well as GSTR 2B in April 2021 itself. But the recipient cannot take input tax credit in April 2021 but has to explore in May 2021 for taking the input tax credit as goods were received on 2nd May 2021. But in spite of appearing in GSTR 2A/ GSTR 2B, X Ltd. cannot take input credit even in May 2021 due to non filing of GSTR 3B by Y Ltd. which creates a similar hurdle and hardship as discussed in the first variation discussed above.

Similarly, if Y Ltd. uploaded the invoice in GSTR-1 but did not FILE GSTR 1, it should not make a difference to the admissibility, because whether the condition is tenable or not, but the condition under Section 16(2) is concerned with payment of appropriate tax by supplier and uploading or filing of GSTR 1 is not a condition for admissibility of credit as such.

CASE STUDY 1 : Variation 3: What if the portal shows that Y Ltd. has filed GSTR 1 as well as GSTR 3B for the month of April 2021?

Apparently, it seems there should not be any issue after this and input tax credit should be clearly admissible and there is no reason X Ltd. will not take the Input Tax Credit in good faith in its GSTR 3B for May 2021.

With a plain reading of the Section, it is clear enough that ITC can only be claimed if all the four conditions are fulfilled, but the fact that X Ltd. made the full payment including GST to Y Ltd. and is in possession of the valid invoice could not be denied. If tax is collected from the recipient, the liability of the supplier is not absolved in any way, so in reality, the Government would be attempting to collect tax on the same supply from both the supplier and the recipient, which is unjust enrichment. Therefore, X Ltd. should be allowed the ITC on the goods in cases (i) to (iv) above as it has made the payment in full to Y Ltd. Actually, the intent of clause (c ) under Section 16(2) is much bigger and this provision is actually draconian for obvious reasons. It does not get satisfied merely by filing of GSTR 3B by supplier but requires assurance to the extent that supplier pays the tax through cash or admissible credit at his end, which is an impossible task for any purchaser to verify or ensure unless the two parties are closely related or associated with each other’s business. Such a condition being enforced upon a bona fide buyer deserves to be reviewed and provisions deserve suitable amendment to safeguard the bona fide input tax credit in a seamless manner.

CASE STUDY 1 : Variation 4: Another interesting variation comes up for discussion when we consider a situation where X Ltd. has not made any payment to Y Ltd. and consequentially Y Ltd. has not filed its returns GSTR 1 and GSTR 3B. In this situation, what should happen.

According to the second proviso under Section 16(2), recipient can avail input tax credit according to aforesaid conditions if payment for the supply is made by him within one hundred and eighty days from the date of invoice. Thus, the non payment by X Ltd. does not give any right to Y Ltd. to not file the returns but the consequences will definitely fall upon X Ltd. due to non satisfaction of condition under clause (c) as discussed above. The terms and conditions between parties as mutually agreed will deal with the payment but input tax credit will not become available if Y Ltd fails to pay due tax and file GSTR 3B.

The dynamics of Section 16(2) are expected to change once again, due to the proposed new clause (aa) under Sub Section (2) which is amended in the law by Finance Act 2021 and is pending to be notified after all States pass it in their Assembly. After the implementation of GST on the loud promise of seamless credit in the GST regime, the constantly increasing number of seams in the Input Tax Credit provisions is academically interesting but highly depressing at the same time in practicality. We hope the nuances of fake invoicing across the country can be controlled by the Government and the Council with more effective laws and administration without constantly hurting the genuine taxpayer. Unfortunately though, the landmark position of law that ‘Let Hundred Guilty Be Acquitted But One Innocent Should Not Be Convicted’ has been absolutely reversed in our country for tracing and punishing fraudsters and the era of seamless credit under GST is being administered on the principle “’Let Hundred Innocent Be Convicted, But One Guilty Should Not Be Acquitted”. Let us hope the original principle stands re-instated soon for the better. Let us look forward to a compliant business environment and a just administration.


CA Raginee Goyal And CA Monita Khemka

This article is a study paper written by CA Raginee Goyal, Guwahati with CA Monita Khemka, Guwahati jointly for purely academic reasons without any commercial association. This is for information of the readers.

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  1. Pankaj Bansal says:

    The recipient is also eligible to take ITC during filing of APRIL month return 3B in relation to case study 1 when payment have already either been made or accepted to make on due date on dispatch of material in April and tax invoice + R/R is e-mailed to recipient, though material is received in May month before filing of GSTR -1 by supplier , being passing Goods- in – transit entries in books of accounts at the closing of month of April . In above scenario the Recipient shall be eligible for ITC in the m/o April after fulfilling all conditions of 16(2) as well as the condition of rule 36(4) could also be complied.

    1. raginee says:

      I am unable to agree with your view as you are considering it as constructive receipt of goods while in transit, which is not allowed in my view

  2. Om Prakash Jain says:

    If a registered person has furnished returns &/or rectified any return belatedly, he is entitled to ITC irrespective of section 16(4) CGST Act, 2017 due to “notwithstanding clause”, in the section 16(2). Refer Skill Lotto Solutions Pvt. Ltd. v. Union of India (2021) 35 J.K.Jain’s GST & VR 167 (SC).
    Non filing of GSTR 3B does not indicate that the condition under clause (c) is not satisfied. Clause (c) indicates “Payment of tax in cash or through utilization of admissible ITC”. Timely payment of tax is not stipulated in the condition. For delayed payment of tax Intt. on tax is attracted u/s 50. Similarly for late filing of return Late Fee is attracted u/s 47.
    The rules, which are procedural in nature and can not be construed as a mandatory provisions per decisions of the case in (2019) 32 J.K.Jain’s GST & VR 485 Adfert Technologies Pvt. Ltd. v. Union of India (P&H), which has been endosed by the SC in (2020) 33 J.K.Jain’s GST & VR 147 Union of India & Ors. v. Adfert Technologies Pvt. Ltd.(SC). As such, in my view the Rule 36(4) of the CGST Rules, is constitutionally invalid.
    CA Om Prakash Jain s/o J/K/Jain, Jaipur
    Tel 9414300730

  3. s.s.vijayakumar says:

    In the case study, variation 3, how the govt. will be enriched unjustly both from the supplier and from the buyer – I do not understand. The buyer pays the amount incl. gst to the supplier, who has duly filed gstr 1 and 3b. this means, the buyer has paid gst to the supplier, who has in turn paid to the govt. Of course it is subject to verification. However there is no unjust enrichment. In any case the buyer should not suffer, if he has paid the payment. He should be allowed to take ITC.

  4. sanjoy raychaudhuri says:

    what happens if i want to give an appliction for cancellation of gst no because no transactions are happening in the last 2 years what will be effect on the stocks last declared .will i have to pay tax on the same please

  5. Arvind Ramachandran says:

    There is one more practical difficulty in Variation 4 above where the Department(under the old regime) is enforcing payment of Service Tax upon the SUPPLIER even when the said payment is to be made only by the BUYER. There is a double jeopardy upon the Supplier in such a case where he not only fails to get payment from the Buyer for the supplies made but also is made to cough up the Service Tax which is to be paid by the Buyer only. I think the same position continues in the new GST regime too. There is no clarity on this aspect.

    1. raginee says:

      True but the provisions under Service tax and GST are not identical. The research for service tax issue mentioned by you is to be done separately

  6. Vishal Patil says:

    Very nice article madam. The concept is very well explained with the help of Variations in Case Study. As mentioned in the article, the legality/tenability of GSTR-2A & GSTR-2B is a separate topic of discussion. Hope you will share your views on the topic through a separate article.

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October 2021