Bonus ITC – A Downward Slope

Introduction

GST law was introduced to simplify the business practice and Indirect Tax compliance thereof. But even after more than 4.5 years of GST implementation, the same seems to be screwed up. When it comes to tax compliance, the first question which comes to mind of every registered person is that eligible ITC needs to be availed properly & should not be lapsed. Under GST law from the recipient perspective, eligible ITC refers to the credit of tax paid on inputs, input services and capital goods that are used in the curse or furtherance of business subject to certain restrictions that can be taken by a registered person affecting taxable supplies and that eligible ITC used to the setting of the outward GST liability at large by taxpayers. Non-reporting of ITC by the supplier may bring hardship to a registered person resulting in the ITC becoming ineligible as all the other conditions fulfilled by the taxpayer except not reported in GSR-2A by the supplier. Form GSTR-2A or/and GSTR-2B is where prescribed Invoice details are reflected as the supplier file the GSTR-1.

Trouble Spot

Many suppliers of goods or services or both raise the invoices to the recipient but no invoice details have been reported in GSTR-1 on time, resulting in ITC shall not be eligible to the recipient despite other conditions fulfilled and no ITC reported in GSTR-2A of the recipient in a case where the recipient of goods or service already paid full consideration against said goods or services and the ITC if not reported in GSTR-2A up to September of the subsequent financial year, shall lapse in the full resulting decrease of profit.

Feasible Solution – Bonus ITC 20%

To resolve the issue GST council amended Rule 36(4) under CGST Rules 2017 called “Documentary requirements and conditions for claiming input tax credit” via N.No. 49/2019-CT dated October 09, 2019, effective from October 09, 2019, which means for tax period Oct 2019 and onwards said amendment shall be applicable without having reference with the invoice date. As per the amendment 20%, Provisional ITC can be claimed in a case the vendors have not reported the transaction in GSTR-2A of a tax period and said 20% ITC shall be computed of 100% of those transactions which is recorded in Books of account of a taxpayer and same has been reported in GSTR-2A.

Illustration on 20% Bonus ITC

This can be explained via the below illustration of cases:-

	Case I	Case II	Case III	Case IV
Particulars	Total ITC	Total ITC	Total ITC	Total ITC
(a) ITC as per books	1,00,000	1,00,000	1,00,000	1,00,000
(b) ITC matched as per GSTR-2A	50,000	83,000	83,333	90,000
(c) ITC matched with GSTR-2A plus 20% [20%*(b)]	60,000	99,600	1,00,000	1,08,000
(d) ITC to be availed as per Rule 36(4) [lower of (a) or (b)]	60,000	99,600	1,00,000	1,00,000

In the above three cases, we have computed the eligible ITC to be avail in a tax period.

Effect of 20% Bonus ITC

• In Case I maximum ITC can be claimed up to INR 60,000 and left the huge amount around 40% of the total ITC of INR 40,000 which can be claimable when the vendors report in GSTR-2A. This category of taxpayers needs continuous follow-ups if many vendors are involved resulting in admin cost and time. Further non-reporting of tax in GSTR-2A results in a tax loss to the recipient if same not reported by vendors up to September of the subsequent financial year.
• In Case II maximum ITC can be claimable of INR 99,600 which is a sufficient amount of tax claimable to the taxpayer which left the INR 400 which is claimable when the same was reported by the vendor in GSTR-2A. This category of taxpayers occupies a safe position where minor tax loss exists.
• In Case III a taxpayer is at the breaking point of an ITC claim, despite the fact INR 16,667 vendors not reported in GSTR-2A still ITC has been fully claimed which is the safest position for a taxpayer.
• In Case IV taxpayers can not eligible to claim the ITC of more than INR 1,00,000 where 120% of matched ITC is INR 1,08,000.

For the reference of taxpayers a circular no. 123/42/2019-GST dated 11^th Nov 2019 has been issued which clarified the above cases in detail.

Impairment of Bonus ITC 20% to 10%

The above mention provision has been continued till the time when said 20% was reduced to 10% via notification no. 75/2019-CT dated 26^th Dec 2019 effective from the same date which changes the claimable ITC chronology.

Illustration on 10% Impairment

Below is the updated scenario with the same example as stated below:-

	Case I	Case II	Case III	Case IV
Particulars	Total ITC	Total ITC	Total ITC	Total ITC
(a) ITC as per books	1,00,000	1,00,000	1,00,000	1,00,000
(b) ITC matched as per GSTR-2A	50,000	83,000	83,333	90,000
(c) ITC matched with GSTR-2A plus 10% [10%*(b)]	55,000	91300	91,666	99,000
(d) ITC to be availed as per Rule 36(4) [lower of (a) or (b)]	55,000	91300	91,666	99,000
Loss of ITC due to reduction of %	5,000	8,300	8,333	1000
Ranking as per major Impact	III	II	I	IV

Effect of Impairment 10%

Due to the reduction of provisional ITC percentage said ITC has been changed and reduced accordingly which has various implications which are specified below.

• In Case I where ITC claimable was INR 40,000 now changed to 45,000 which enhanced more amount to come under tax loss bracket.
• In Case II where ITC was claimable up to INR 99,600 now reduced to 91,300 which results in an ITC reduction of INR 9,300 now taxpayers of this category are moved from minor tax loss position to enhanced tax loss position by INR 8,300 ITC.
• In Case III where taxpayers was in a very safe position now moved to a tax loss position by INR 8,333 ITC.
• In case IV where taxpayers was having a provisional ITC margin of INR 8000 now move to a minor tax loss position by INR 1000 ITC in comparison to a total ITC of INR 1,00,000.

Observation on impairment 10%

As we can see the huge impact due to the reduction of provisional ITC percentage lie to the taxpayer who has a very safest position Case II, then Case II where the taxpayer shifted from a minor tax loss position to tax loss position by 8,300, thirdly taxpayer in Case I was already in tax loss position has enhanced the tax loss by INR 5,000. And lastly, Case IV entered into the minor tax loss risk position who enjoyed the margin ITC by INR 8,000 entered into a minor tax loss of INR 1,000.

Further Impairment to 5% with illustration

Later in May 2021 said ITC was further impaired by the GST council via notification no. 13/2021-CT dated 1^st May 2021 to 5% with similar computation which is specified below:-

	Case I	Case II	Case III	Case IV
Particulars	Total ITC	Total ITC	Total ITC	Total ITC
(a) ITC as per books	1,00,000	1,00,000	1,00,000	1,00,000
(b) ITC matched as per GSTR-2A	50,000	83,000	83,333	90,000
(c) ITC matched with GSTR-2A plus 5% [5%*(b)]	52500	87,150	87,500	94,500
(d) ITC to be availed as per Rule 36(4) [lower of (a) or (b)]	52,500	87,150	87,500	94,500
Loss of ITC due to reduction of %	2,500	4,150	4,166	4,500
Ranking as per major Impact	IV	III	II	I

Effect of further impairment to 5%

• As we can see the huge impact due to the reduction of provisional ITC percentage lie to the taxpayer in Case IV who was earlier had a minor tax loss position now comes under the tax loss position by INR 4,500.
• Then Case III which was already in tax loss position has been enhanced the tax loss by INR 4,166.
• Then in Case II who was already in a tax loss position has been enhanced the tax loss by INR 4,150 which is similar to Case III taxpayer.
• Lastly, a very low but effective impact has been occurring to the taxpayer in Case I who need to bear INR 2,500 tax loss.

Vertical issue of Bonus ITC due to vendor slowdown

Due to the reduction in the percentage of provisional ITC from 20% to 10% and 5% thereafter, a major loss also occurs to those taxpayers whose vendors have reported the ITC in GSTR-2A but post change the rate of provisional ITC.

Illustration of vertical issue

Below can be illustrated with the reference of Case I:-

	Case I	Amount	20%	10%	5%
A	Total ITC	1,00,000
B	Matched with GSTR-2A	50,000
C	Not Matched with GSTR-2A	50,000
D	Provisional ITC already claimed due to 36(4)		10,000	5,000	2,500
E	Unclaimed ITC [A-B-D]		40,000	45,000	47,500
F	ITC reported by vendor thereafter		30,000	30,000	30,000
G	Claimable ITC with 36(4) [F*20%, 10% or 5%]		36,000	33,000	31,500
H	Actual ITC not reported in GSTR-2A		20,000	20,000	20,000
I	Actual Remaining ITC unclaimed due to 36(4) [E-G]		4,000	12,000	16,000

Discussion on the vertical issue

As it is seen, if the vendor has reported the pending ITC or unclaimed ITC post change in the reduction of provision ITC percentage then it also results from tax loss by INR 4,000 if vendor report in 20%, if vendor report in 10% then tax loss can be INR 12,000 and if vendor report in 5% then tax loss can be INR 16,000. Here a doubt arises about the loss of ITC which occurs due to the reduction of the percentage of provisional ITC and whether the government will compensate those taxpayers who are now burdened due to percentage change remains unclarified.

Wrap up of 5% petty Bonus to Zero% resulting 100% matching

In Dec 2021, CBIC has further amended rule 36(4) via notification no. 39/2021-CT dated 21^st Dec 2021 wherein said 5% provisional ITC has been removed and now ITC has been following the rule of 100% matching the ITC with GSTR-2B which results in one to one matching of transaction in books of account and GTTR-2B. Said matching has been applicable from Dec 2021 and onwards GSTR-3Bs. If in case any transaction or ITC is belatedly reported by the vendor then the same can be claimable in the month to which it reflects in the said month of GSTR-2B.

Ilustration on 100% matching

E.g., if any ITC pertains to Dec 2021 and is not reported by the vendor in Dec 2021 GSTR-2B and reported in Jan 2022 GSTR-1 and same reflected in GSTR-2B of the similar month then taxpayer who has not claimed the ITC can claim now at 100% GST value.

Mystery spot

Due to removal of 5% provisional ITC via amendment in rules, another issue arises which states what if taxpayer already availed the provisional ITC of 5% in Nov 2021 and now reported by the vendor in GSTR-2B of Dec 2021, whether provisional ITC of 5% needs to be reversed as 100% matching rule shall be followed or remaining ITC can be claimable after reduction of 5%. This issue has not yet been clarified by the government. Thereby we need to wait for further clarification.

Windup

As per above mention discussion, It is observed that after the introduction of provisional ITC in percentage and subsequent reduction over 4.5 years of GST, the government is likely to take back off decision which was given to the taxpayers as a bonus started with 20% which can not disown immediately as a huge population of taxpayers already used-to bonus ITC mechanism.

Hope you may find this article useful.