Impact Analysis & comments on critical Changes made in GST w.e.f. 1st January 2021 

1. Background

The year 2020 can be easily be labeled as ‘coming out of comfort zone’ year for the entire world. This year has seen series of changes in GST as well like E-Invoicing, proposed changes in GST Returns, Introduction of QRMP scheme, GSTR-2B and auto-populated GSTR-3B. Department has also come across large number of GST fraud cases involving the use of fake invoices for wrong availment of input tax credit (ITC), which is used to pay GST on outward supply since the rollout of GST by the Central GST authorities as well as State GST authorities. Many entities involved in availing and passing on input tax credit (ITC) fraudulently were booked. The Central Board of Indirect Taxes and Customs (CBIC) under the Department of Revenue (DoR) made several changes to deal with the menace of fraudsters who avail and pass on ineligible ITC by fake or fly-by night firms.

2. Restriction for payment of taxes through ITC – Rule 86B

Businesses with monthly turnover of over INR 50 lakh will have to mandatorily pay at least 1 per cent of their GST liability in cash, the finance ministry said as it moved to curb evasion by fake invoicing. The Central Board of Indirect Taxes and Customs (CBIC) has notified certain changes to the Goods and Services Tax (GST) Rules, bringing in stringent conditions on settlement of Tax liability using input tax credit.

The Government by way of Notification No. 94/2020 – CT dated 22nd December 2020 placed absurd restriction that payment of taxes through utilization of balance from electronic credit ledger cannot exceed 99% of such tax liability in case where the value of taxable supply in a month exceeds 50 Lakhs rupees [other than exempt supply and zero-rated supply] w.e.f. 1st January 2021.

It has to be noted that S. 49(4) of CGST act provides that “The amount available in the electronic credit ledger may be used for making any payment towards output tax….”

The section when clearly provides that credit could be used towards payments of any liability, it is well settled principle of law when section enables then rule which is subordinate to section cannot have an overriding effect, it could be said that placing restriction on utilization of credit to max 99% is ultra vires to the CGST Act and not required to be followed moreover such adverse rules are breaching the basic principles of Natural justice as ITC is the property of taxpayers. These principles have been confirmed in the past by the Supreme Court in various cases.

However, this restriction would not be applicable to the following where

(i) Paid Income Tax of 1 lakh or more in each of last two FYs by person or the proprietor or Karta or the MD or any of its two partners, whole-time Directors, Members of Managing Committee of Associations or Board of Trustees

(ii) Claimed refund of ITC on zero-rated supplies of 1 lakh or more in the preceding FY

(iii) Claimed refund of ITC on Inverted duty structure of 1 lakh or more in the preceding FY

(iv) 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, up to the said month in the current financial year; or

(v) the registered person is –

> Government Department; or

> a Public Sector Undertaking; or

> a local authority; or

> a statutory body:

The weirdest part is excluding themselves from applicability of such harsh rule is nowhere giving a satisfaction. The Government seems to assume that all taxpayers are availing ITC in fraudulent manner as they don’t have good measures to catch hold of fraudsters and hence even bona-fide persons would be harassed by these unreasonable and stringent provisions. 

Impact Analysis: Restriction of utilization of ITC up to 99% of the tax liability has been newly inserted under Rule 86B for which there is no restriction laid down in the Parent Act under GST. It is a well settled principle of law that if a delegated legislation goes beyond the power conferred by the statute, such delegated legislation has to be declared ultra vires. The delegated legislation is to supplant the statute and not to supplement in itself. It is also important to note that 1% of cash liability in terms of Rule 86B does not include payment made through cash liabilities in the nature of RCM transaction.

One may rely on the following principles

i. In case of Sukhdev Singh v. Bhagat Ram – AIR 1975 SC 1331, the Constitution Bench has held that the statutory bodies cannot use the power to make rules and regulations to enlarge the powers beyond the scope intended by the legislature. Rules and regulations made by reason of the specific power conferred by the statute to make rules and regulations establish the pattern of conduct to be followed.

ii. In case of State of Karnataka and Another v. H. Ganesh Kamath etc. – AIR 1983 SC 550, it has been stated that it is a well settled principle of interpretation of statutes that the conferment of rules making power by an Act does not enable the rule-making authority to make a rule which travels beyond the scope of the enabling Act or which is inconsistent therewith or repugnant thereto.

iii. The Apex Court in case of Union of India vs. S. Srinivasan 2012 (281) ELT 3 (SC) held that “If a rule goes beyond the rule making power conferred by the statute, the same has to be declared ultra vires. If a rule supplants any provision for which power has not been conferred, it becomes ultra vires. The basic test is to determine and consider the source of power which is relatable to the rule. Similarly, a rule must be in accord with the parent statute as it cannot travel beyond it.”

From the above cases, it could be said that since there is no power given under the Act Restricting the utilization of ITC up to 99% of the tax liability, the same usurp delegated legislation, ultra vires to the CGST Act, 2017 and hence unconstitutional – One may under intimation to department may not follow the said rule

For Genuine & Honest Taxpayers it is important to note that rule gives cumulation facility where a taxpayer has to keep a track each month that cumulative discharge of output tax liability in cash in the current financial year is more than 1% up to the filing of return.

However, in the beginning of the financial year, Rule 86B would be a hardship for even the Large and Genuine taxpayers and it is estimated such restriction would impact more than 45000 entities from date of its applicability.

In this regard Section 21(g) requires invocation of cancellation in case of non-compliance with Rule 86B and to monitor compliance would be a challenge for various Professionals.

CBIC so far have booked about 12000 cases and arrested 365 persons due to frauds in GST

[Source: https://taxguru.in/goods-and-service-tax/myths-vs-facts-cgst-notification-curb-fake-invoice-frauds.html ].

However, the actions of Government are not justified by bringing stringent provisions which will affect other 1.27 crores taxpayers. This clearly projects the lack of trust of the government on the taxpayers and creating the negative atmosphere in the business. These stringent provisions will have adverse impact on other initiatives of the government like Make in India, FDI policies, etc.

At this juncture the paper writer would remind that the Hon’ble Finance Minister of India Smt. Nirmala Sitharaman in the budget speech provided that, “Our government would like to reassure taxpayers that we remain committed to taking measures so that our citizens are free from harassment of any kind.”

3. Amendment in Rule 36(4) – Restriction on ITC to extend of 105% eligible ITC in GSTR-2A or BoA’s whichever is lower

Rule 36(4) was introduced to restrict the availment of credit on invoices and debit notes uploaded by the supplier in GSTR 1 up to 10% [20% for period 01.10.2019 – 31.12.2019] of the eligible credit available on invoices and debit notes details of which have been uploaded by the suppliers in GSTR 1.

Following are the amendment made to this provision w.e.f. 1st January 2021:

a. Recipient could avail the eligible credit on invoices and debit notes uploaded in GSTR-1 which has been furnished by the supplier. Earlier only uploading the details in GSTR-1 but GSTR 1 not furnished would suffice the compliance of such provision. However, now filing of GSTR 1 by the supplier has been mandated to avail the credit by the recipient.

b. Restriction on availment of ITC has been reduced from 10% to 5%. Recipient can take the credit up to 105% of the eligible credit available on invoices and debit notes which have been furnished by the supplier in GSTR-1. 

Impact Analysis: As we are aware one of the basic principles on which the idea of implementation of GST was floated in India was ‘seamless flow of credit’ and but Govt with its unwarranted restriction has vanished the word seamless Due to various restrictions in law, as of now, seamless flow of input tax credit does not seem to be a reality.

In addition to apportioned credits, restricted credits and blocked credits, rule 36(4) has been a major night mare to all the tax payers and is continuing to be worse.

To add insult to the injury, the Government has issued Notification No. 49/2019 – Central Tax on 9th of October 2019 amending CGST Rules 2017 with Central Goods and Services Tax (Sixth Amendment) Rules, 2019 and added a sub-rule 4 to Rule 36  which states that ‘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 (Further amended to 10% w.e.f. 1st January 2020 and now 5% w.e.f. 1st January 2021) 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’.

It is a well stated principal that substantial benefit of credit should not be denied due to the default by vendors. Similarly, provisions/ disputes in Central Excise, Service Tax and VAT have been held to be unreasonable in the past in the following decisions wherein held credit cannot be denied when the vendor did not deposit taxes:

a. The Honorable Supreme Court in the case of Commissioner of Trade & Taxes, Delhi and others Vs. Arise India Limited and others [TS-2-SC-2018-VAT], has dismissed the Special Leave Petition filed by the Revenue against the decision of the Honorable High Court of Delhi in the case of Arise India Limited and others Vs. Commissioner of Trade & Taxes, Delhi and others [TS-314-HC-2017(Del)-VAT] (“Arise India case”). The Honorable High Court of Delhi held Section 9(2)(g) of Delhi VAT Act to the extent it disallows Input tax credit(“ITC”) to purchaser due to default of selling dealer in depositing tax, as violative of Articles 14 and 19(1)(g) of the Constitution of India.

b. In Commissioner of CE vs Kay Kay Industries (2013-TIOL-41-SC-CX) that the manufacturer cannot determine whether his supplier has discharged excise duty on the goods which are supplied to the manufacturer by him.

c. In the case of Bharti Telemedia Ltd. Vs. Union Of India & Ors. – [Appeal Number : W.P.(C) 6293/2019], the Delhi High Court has issued a notice to the UOI stating that Input Tax credit (GST) cannot be denied to recipient for default on part of the supplier as the Department has been vested with all the powers to recover any revenue lost owing to non-payment of taxes by erring suppliers. However, the above is not a final decision and such view could be validated under GST once there is a final decision in this regard from the Apex Court of India.

Seeing the earlier trend there could be possibility that credit would not be allowed in future if supplier has not uploaded details in GSTR 1 and filed the same. Recipient of supplies shall ensure that all the vendors upload the invoices in GSTR 1 and file the returns which will ensure compliance of this Rule. 

Further, the restriction placed in Rule 36(4) is ultra vires CGST Act, 2017, as it appears to have been inserted in Rules in accordance with Section 43A of CGST Act, 2017. Section 43A was inserted by CGST Amendment Act, 2018, which is however, not notified as of date. Where section is not yet notified, the above rule would be ultra vires the law.

Further one may need to appoint one executive exclusively for the purpose for doing the reconciliation of ITC between books of accounts & GSTR-2A/2B in GSTN Portal. His job would only be to follow up with vendors for continuous filing of GSTR-1 Returns. Instead of doing business one may need to be behind vendors for filing the GSTR-1 returns from their end which is against article 19(1) (g) of the constitution. 

4. Hurdles to be crossed for availing ITC

> Section 16(1) and (2) – Check condition for availment of ITC

> Section 17(5) Check eligibility

> GSTR-2A/2B invoice details reconciliation

> Payment by vendor – Follow up with vendor whether he filed GSTR-3B and paid GST of invoice issued

> Rule 36(4) restriction 105% of eligible ITC in GSTR-2A

> Rule 42 and 43

> Rule 86B Restriction for payment of taxes through ITC maximum 99%

> Rule 86A Check whether ITC is blocked or not

> Appoint an entire team for above procedure instead of doing business

Isn’t it’s so easy to avail ITC? One may think to expense the ITC itself, it has become more direct tax rather than indirect tax – Credit has lost its presence itself under GST. 

5. Communication between Recipient and Supplier Taxpayers on GST Portal

A facility of ‘Communication Between Taxpayers’ has been provided on the GST Portal, for sending a notification by recipient (or supplier) taxpayers to their supplier (or recipient) taxpayer, regarding missing documents or any shortcomings in the documents or any other issue related to it. This facility is available to all registered persons, except those registered as TDS, TCS or NRTP.

The main features of this facility are summarized as below:

A. How to use the facility on GST Portal: Taxpayers can send notification, view notification, send reply and view replies to the notifications on their dashboard after login.

a. To send notification navigate to – Services > User Services > Communication between Taxpayers > and select Compose

b. To view any new notification received or any reply received select Inbox (Notification & Reply Received)

c. To view any new notification sent or reply sent select Outbox (Notification & Reply Sent)

B. How to send a Notification

a. While composing a notification under Send New Notification tab, select the Supplier option to send notification to a Supplier, otherwise select Recipient.

b. In the Document Details section, select the Action Required by Supplier/ Recipient from the drop-down list and enter required details.

c. Up to fifty documents can be added in a notification.

The sender can also add Remarks (up to 200 Characters) in the box provided for the same.

C. Some other features

The counter party taxpayer will receive an e-mail on their registered e-mail address and an SMS on his registered mobile number for all notifications received.

a. An alert will also be given to Recipient/Supplier on logging into the GST portal.

b. A taxpayer is allowed to send up to 100 notifications to a single GSTIN for a particular tax period.

c. The recipient can upload the details of missing documents (not uploaded by their supplier in his Form GSTR-1) and send a notification to their supplier, using this facility. Supplier can then add such documents directly in their Form GSTR-1, if not reported earlier.

d. The functionality to upload and download the documents is not available as on date and will be made available soon.

6. Amendments in registration provisions:

(i) Amendment in Registration under GST Law:

A. Addition to procedure of verification: Earlier registration under GST could be made either after Aadhaar authentication or after physical verification of place of business. However, amendment has been made to provide additional option before registration along with additional requirement as follows:

Application shall be followed by:

a. biometric-based Aadhaar authentication and taking photograph, unless exempted under subsection (6D) of section 25, if he has opted for authentication of Aadhaar number;

b. taking biometric information, photograph and verification of such other KYC documents, as notified, unless the applicant is exempted under sub-section (6D) of section 25, if he has opted not to get Aadhaar authentication done;

Of the applicant where applicant is individual or such individual in relation to the applicant as notified under sub-section (6C) of section 25 where the applicant is not an individual as notified under notification 19/2020 dated 23rd March 2020.

Also, verification of original copy of the documents uploaded would be done with the application in FORM GST REG-01 at one of the Facilitation Centers notified by the Commissioner and the application shall be deemed to be complete only after completion of the process laid down under this sub-rule.

B. Additional time provided in the process of granting registration of the applicant:

a. Department shall be required to review and grant registration within 7 days against 3 days as provided earlier from the date of filing of registration application.

b. Where the applicant fails to undergo Aadhaar authentication or does not opt for Aadhaar authentication or where department feels fit to carry out physical verification the time limit for grant of registration shall be 30 days instead of 7 days.

c. Where the application submitted is found to be deficient, either in terms of any information or any document required to be furnished or where the proper officer requires any clarification of information provided or documents furnished therewith, he may issue a notice to the applicant electronically in FORM GST REG-03 within 7 working days instead of 3 working days.

d. Where the applicant fails to undergo Aadhaar authentication or does not opt for Aadhaar authentication or where department feels fit to carry out physical verification the time limit for grant of registration shall be 30 days instead of 7 days the notice in FORM GST REG-03 may be issued not later than thirty days from the date of submission of the application.

In case within above timelines actions are not taken then the application for grant of registration shall be deemed to have been approved. 

Impact Analysis: This additional procedure has mainly added to curb the fake registration which has increased in last few years. The registration process will now be longer and more time consuming. Further Biometric verification and physical verification of documents at facilitation centres made mandatory will make it cumbersome specially in case of big companies where every new registration will require authorized signatories to visit facilitation centres for biometric verification along with physical verification of documents.

(ii) Amendment in Cancellation of Registration:

A. Following amendments have been made to provisions under cancellation of registration under Rule 21:

a. Registration would be liable to be cancelled if the registered person issues invoice or bill without supply of goods or services or both in violation of provisions of the Act, or the rules made thereunder. The word “both” was missed to be added which has now been added.

b. Rule has mainly focused on various scenarios where registration could be cancelled. Now, following additional reasons have been added where registration could be cancelled:

    • Avails input tax credit in violation of the provisions of Section 16 and the rules made thereunder.
    • Furnishes the details of outward supplies in FORM GSTR-1 for one or more tax periods in excess of the details of outward supplies declared by him in FORM GSTR-3B u/s 39 for the said tax periods.
    • Violates the provisions of Rule 86B.

B. Following amendments have been made to provisions under suspension of registration under Rule 21A:

a. Where the proper officer has reasons to believe that the registration of a person is liable to be cancelled u/s 29 or u/r 21, he may suspend the registration without affording the said person a reasonable opportunity of being heard, pending the completion of the proceedings for cancellation of registration.

b. A new sub-rule shall be inserted after sub-rule 2, namely (2A): Comparison of the details furnished in FORM GSTR-3B u/s 39 could be taken place with

a) The details of outward supplies furnished in FORM GSTR-1; or

b) The details of inward supplies derived based on the details of outward supplies furnished by his suppliers in their FORM GSTR-1 i.e., GSTR 2B, or such other analysis, could be carried out on the recommendation of the Council.

Where such comparison shows that there are significant differences or anomalies indicating contravention of the provisions of the Act or the rules made thereunder, leading to cancellation of registration, his registration shall be suspended and the said person shall be intimated in FORM GST REG-31, highlighting the said differences and anomalies and asking him to explain, within a period of 30 days, as to why his registration shall not be cancelled. 

For the said sub-rule (2A), following additional provision has been imposed:

  • The said person shall not make any taxable supply during the period of suspension and shall not be required to furnish any return u/s 39.
  • The suspension of registration under sub-rule (2A) shall be deemed to be revoked upon completion of proceedings of cancellation u/r 22.
  • No refund shall be granted u/s 54, during the period of suspension.
  • The proper officer shall issue an order in FORM GST REG-19 within 30 days from the date of reply to the show cause notice intimated through FORM GST REG-31, cancel the registration with effect from date determined by him and notify the taxable person.
  • In response to the notice issued under sub-rule (2A), if the proper officer is satisfied, he may drop the proceedings.
  • The suspension of registration u/r 21A may be revoked by the proper officer anytime during the pendency of the proceedings for cancellation. 

Impact Analysis: Clarification has been issued by CBIC stating that where there is clerical error in filing of return, GSTIN will not be cancelled. Only in fraudulent cases where there are significant discrepancies based on data analytics and sound risk parameters, and not mere clerical errors, the action of suspension and cancellation will be taken up.

In case, where the amount of GST paid by the recipient to the supplier is ultimately not paid to the Govt., the department may invoke Rule 21. Furthermore, Rule 21A (2) provides that at least suspension of GST Registration may be done in case of violation of Rule 21. The suspension can now happen even without a hearing. The vires of Rule 21A (2) with Article 14 of The Constitution may be tested in time to come.

Again, Rule 21A(2A) is a stringent Rule whereby in case of significant differences between GSTR 2A & GSTR 3B or between GSTR 1 & GSTR 3B, suspension of GST Registration can be invoked immediately and in future cancellation of GST Registration too can be Invoked.

Further no explanation has been provided as to how much variation may be considered significant.

It is also important to note that Clarification has been issued by CBIC stating that GST laws passed by the Parliament and state legislatures provide that GST registration is liable to be cancelled for those who have not filed 6 or more returns. It is therefore wrong to say that the cancellation will be done without reasons. To protect the interest of revenue, this provision has been put in the law so that fraudsters do not run away with GST collected from their customers.

It may be further noted that no cancellation of registration would be done without giving proper opportunity of hearing to the taxpayer. Immediate action for suspension is necessary in cases where unscrupulous operators seek to pass on huge fake credit by gaming the system. It is specifically given that such action will not affect genuine taxpayers and will provide them a level playing field. Moreover, suspension may be revoked by the officer based on the taxpayer’s representation.

7. Amendments in E-way Bill provisions:

Validity of E-Way Bill: Earlier one day was permitted for transportation of goods under cover of E way bill for 100km. Now the same has been increased to 200km w.e.f. 1st January 2021. This would be very difficult for the transporter to ensure that this time limit is met for compliance for validity of E way Bill.

Additional reason has been added for blockage of E way bill facility: The following are the reasons:

a. a person, whose registration has been deemed to suspended on submission of application of cancellation under the Rule 21(A)(1) or

b. where proper officer has reason to believe that registration needs to be cancelled under Rule 21(A)(2) or

c. Sub-rule (2A) of rule 21A which is discussed above.

Change of wording in Rule 138(E): It is important to note that no person shall be allowed to furnish E way bill in case such person has not furnished returns for a consecutive period of two months. Such provision has been amendment to restrict generation of E way bill in case returns have not been furnished for two tax periods.

This provision has been amended to accommodate the new scheme introduced i.e. Quarterly return monthly payment (QRMP) where registered person having turnover less than INR 5 crores are allowed to file GSTR 3B Quarterly effective from 1st January 2021. Even E way bill shall not be generated for the persons following QRMP scheme if 2 consecutive quarterly returns are filed.

8. Restrictions in filing of GST returns:

Following are the tax payers have been restricted for filling GSTR 1 or invoice furnishing facility (IFF) under Rule 59(5).

a. Taxpayer has not filed GSTR 3B for preceding two months.

b. Taxpayer required to furnish GSTR 3B for every quarter, has not filed GSTR 3B for preceding tax period.

c. Taxpayer who is restricted from using the amount available in electronic credit ledger to discharge his liability towards tax in excess of ninety-nine per cent of such tax liability under rule 86B, has not filed GSTR 3B for preceding tax period. 

Impact Analysis: In this case it is important for recipients to ensure that the GSTR 3B of their suppliers is filed and the amount of GST is reflecting in their GSTR 2A before they may payment of the GST amount to the suppliers. It is important to take a declaration from all the vendors that GST in respect of amount collected has been actually paid to the Government. However again restriction have not been provided through parent law but provided as notified through rules which is against the objective of GST “Seamless credit” and principles laid down by the Apex courts various times.

9. Delinking of ITC on Debit note with Invoice Date:

In terms of Section 16(4) the registered person would not be entitled to take ITC in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing 3B for the month of September following the end of financial to which such invoice or invoice relating to such debit note pertains or furnishing of relevant annual return, whichever is earlier.

It may be noted that the time limit to avail ITC with respect to the tax charged on the debit note before the amendment u/s 16(4) of the CGST Act, 2017 was linked to the invoice date and not the date of the debit note. This has resulted in hardships to the industry especially cement industry where retrospective price increase is a very common feature.

However, in recent Finance Bill, 2020, clause 118 seeks to amend section 16(4) of the CGST Act so as to delink the date of issuance of debit note from the date of issuance of the underlying invoice for purposes of availing input tax credit. Hence the time limit for availment of credit based on the debit note would be computed from the date of the debit note and not based on the invoice related to such debit note. 

After the amendment, section 16(4) would read as follows: 

A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier. 

The amendment proposed by the Finance Bill, 2020 by way of amendment of section 16(4) seems to be clarificatory in nature to clear the ambiguity in enforcement of the provisions of the GST law which is new and developing. Therefore, the amendment could be applied retrospectively w.e.f. 1st July 2017 onwards. However, Notification No. 92/2020-CT dated 22nd December, 2020 has notified that the same would be effective from 1st January 2020. 

Example: If an invoice was issued, say during Feb ’19 and a debit note pertaining to such invoice is issued during Sep ’19 then, prior to this amendment, the last date for taking credit in respect of this debit note would have been the due date of filing Form GSTR-3B for the month of September 2019. However, post this amendment, the last date for taking such credit would be the due date of Form GSTR-3B for the month of September 2020 as the debit note was issued in the FY 2019-20.

Therefore, we can take a view that ITC in respect of debit note issued now with respect of invoices issued for 2017-18 can b availed by the recipient.

Special thanks to CA Mayank Jain and Harish P Devda for vetting this article and valuable suggestions.

For any further clarifications reach at Mail – [email protected]

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