CBIC Circular On ITC Mismatch For FY 2017-18 & 2018-19 – Solving A Problem That May Not Exist
1. Peter Drucker has remarked that there is nothing so useless as doing efficiently that which should not be done at all. The recent CBIC Circular No. 183/15/2022-GST dt. 27.12.2022 dealing with the issue of mismatch of the input tax credit (ITC) claim made in GSTR 3B with GSTR 2A for FY 2017-18 & FY 2018-19 demonstrates the same mindset as it seeks to do something which should not be done at all. In the present article, we examine the statutory provisions and the interpretation or misinterpretation by the CBIC thereof which led to the issuance of the Circular. We also examine the guidelines given by the Circular as well as possible ramifications.
Statutory provisions and the interpretation thereof
2. The Circular is issued on the premise that the mismatch of the ITC claims with GSTR 2A for FY 2017-18 & 2018-19 is a valid ground to deny the ITC. We, therefore, must first consider the validity of the said proposition. We must then consider whether CBIC addresses the various contentions refuting the said proposition before assuming that the mismatch with GSTR 2A can be a valid ground to recover ITC and hence provide an administrative remedy.
3. Sec. 16 and Sec. 17 of the CGST Act, 2017 contain provisions related to the claiming of the ITC by the recipient of the tax charged by the suppliers (vendors) on the inward supplies used in the business. Sec. 37 of the said Act mandates the furnishing of the details of the outward supplies by the vendors in GSTR 1. Sec. 38 mandates furnishing of the details of the ITC claimed by the recipient in GSTR 2 by allowing amendments/additions to the auto-populated information in GSTR 2A. The requirement of filing GSTR 2 however was not operationalized in FY 2017-18 & 2018-19 and now stands removed from the statutory provisions. In view of the said fact, the matching of the ITC as envisaged in law is also not operationalized. Therefore, GSTR 2A remains only in the nature of information communicated with no legal consequence. It is for this reason that CBIC on 18.10.2018 via Press Release rightly observed that FORM GSTR-2A ‘is in the nature of taxpayer facilitation and does not impact the ability of the taxpayer to avail ITC on self-assessment basis in consonance with the provisions of section 16 of the Act’. It can therefore be contended that a mere mismatch cannot be the ground to deny the ITC.
4. Sec. 16(2)(c) of the CGST Act, 2017 states that the recipient shall not be entitled to the ITC on inward supply unless the tax charged has been actually paid to the Government, either in cash or through utilization of input tax credit admissible in respect of the said supply. The said clause is made ‘subject to the provisions of section 41’. Sec. 41 as applicable during FY 2017-18 and FY 2018-19 provided for allowing ITC on a provisional basis as it was subject to the mechanism of matching. Further, the scheme permitted the recipient to report the missing invoice in GSTR 2. Hence a harmonious construction of Sec. 16(2)(c) of the CGST Act, 2017 r/w Sec. 41 entails that the recipient was permitted to avail of the ITC on a provisional basis subject to the matching that would eventually confirm the factum of actual payment of tax as envisaged in the scheme. Therefore, it can be contended that the rigours of Sec. 16(2)(c) for the given years (17-18 and 18-19) cannot apply in absence of the envisaged mechanism.
5. There is yet another issue that merits consideration. Whether the provisions of Sec. 16(2)(c) can be said to violate Article 14 (equal protection right) of the Constitution if the same is applied to a genuine transaction as such application will entail an unequal treatment where the genuine recipient, as well as fraudulent recipient, meet the same fate when the tax has not been actually paid by the vendor. In the pre-GST era, the Courts have read down such restrictions in case of genuine transactions on the ground that it otherwise violates Article 14 (see R. S. Infra-Transmission Ltd.v. State of Rajasthan [D.B. Civil Writ Petition No. 12445 of 2016, dated 11-4-2018] [Raj.] and Arise India Ltd. v. Commissioner of Trade & Taxes [W.P.(C) No. 2106 of 2015, dated 26-10-2017] [Del.]].
6. There is also yet another issue. Rule 36(4) of the CGST Rules, 2017 introduced w.e.f. 9th October 2019 permitted availment of the ITC upto a limit of 20% over the ITC reflected in GSTR – 2A. Therefore, to say that prior to 9th October 2019 the law envisaged complete matching or proof confirming the payment of tax by the vendor seems to run counter to the delegated executive action.
7. With the aforesaid contentions in play and yet to reach finality, CBIC in the recent Circular treats a mismatch of the ITC for FY 2017-18 & 2018-19 as a genuine legal issue and seeks to provide a remedy.
Defense by the CBIC
8. CBIC defends the issuance of the Circular to provide the remedy by merely stating that the ‘the availability of ITC was subjected to restrictions and conditions specified in Section 16 of CGST Act from 1st July, 2017 itself’. In our view, the premise for the issuance of the Circular appears to ignore the four fundamental contentions expressed above. This is more so as CBIC expressly states that the given Circular shall apply to ‘bonafide errors committed in reporting during FY 2017-18 and 2018- 19’. The case of determining the validity of a claim of the ITC in the context of bonafide errors stands on a far stronger footing considering the provisions of law as well as past judicial approaches. We all agree that the situation alleging fraudulent availment of the ITC stands on a completely different footing and, in any way, involves the breach of several conditions in law and not just Sec. 16(2)(c). Such cases are therefore rightly not covered by the CBIC Circular. But the issue remains as to whether bonafide claims really needed a remedy as provided in the given Circular given that the defense by CBIC fails to consider all the contentions emanating from the reading of the law.
CBIC Circular
9. As discussed above, CBIC Circular seeks to address only situations where bonafide errors have been committed by the vendors in reporting during FY 2017-18 and 2018- 19. Specifically, it illustrates the following situations where the mismatch has arisen:
| Situation | GSTR 1 | GSTR 3B |
| 1 | Not filed | Filed |
| 2 | Filed but supply not reported | Filed |
| 3 | Filed but the supply reported as B2C | Filed |
| 4 | Filed but the supply declared with the wrong GSTIN of the recipient | Filed |
10. The CBIC Circular provides that in the aforesaid situations the officer can allow the claim of the ITC subject to verification of the following:
- Recipient is in the possession of a tax invoice or debit note issued by the supplier or such other tax paying documents.
- Recipient has received the goods or services or both.
- Recipient has made payment for the amount towards the value of supply, along with tax payable thereon, to the supplier.
- Reversal requirement u/s 17 or u/s 18 of the CGST Act.
- Claim has been made within the period specified u/s 16(4).
11. In addition to the above, the officer can allow the claim subject to the furnishing of the following certificate:
- Where the difference of ITC in respect of a particular supplier for the said financial year exceeds Rs 5 lakh, the proper officer shall ask the registered person to produce a certificate for the concerned supplier from the Chartered Accountant (CA) or the Cost Accountant (CMA), certifying that supplies in respect of the said invoices of supplier have actually been made by the supplier to the said registered person and the tax on such supplies has been paid by the said supplier in his return in FORM GSTR 3B. Certificate issued by CA or CMA shall contain UDIN.
- Where the difference of ITC is upto Rs 5 lakh, the proper officer shall ask the claimant to produce a certificate from the concerned supplier to the effect that said supplies have actually been made by him to the said registered person and the tax on said supplies has been paid by the said supplier in his return in FORM GSTR 3B.
12. Hence in case, the difference in ITC qua a supplier for the financial year exceeds Rs. 5 lakh, a certificate from CA or CMA of the vendor confirming the factum of supply as well as payment of tax shall be required. Where the difference qua a supplier for the financial year is upto Rs. 5 lakh, a certificate by the recipient shall suffice. It is paradoxical that the Circular covers only the situations where GSTR 3B has been filed but errors have been committed by vendors while filing GSTR 1 but still seeks a certificate evidencing the payment of the tax.
13. The CBIC Circular also clarifies in the context of the claim of ITC for FY 2017-18 which has been made between 26.10.2018 and 23.04.2019, that the same shall not be allowed if the vendors have not furnished details of the said supply in FORM GSTR-1 till the due date of furnishing FORM GSTR 1 for the month of March 2019 (i.e., till 13.04.2019). This is owing to the proviso to section 16(4) of the CGST Act.
14. The Circular in situation no. (4) supra where GSTR 1 has been filed but the supply has been declared with the wrong GSTIN of the recipient provides that the proper officer of the actual recipient shall intimate the concerned jurisdictional tax authority of the registered person, whose GSTIN has been mentioned wrongly, that ITC on those transactions is required to be disallowed, if claimed by such recipients in their FORM GSTR-3B. However, allowance of ITC to the actual recipient shall not depend on the completion of the action by the tax authority of such registered person, whose GSTIN has been mentioned wrongly, and such action will be pursued as an independent action.
15. The CBIC Circular also states that the given clarifications shall apply only to the ongoing proceedings in scrutiny/audit/ investigation, etc. for FY 2017-18 and 2018-19 and not to the completed proceedings. However, these instructions will apply in those cases for FY 2017-18 and 2018-19 where any adjudication or appeal proceedings are still pending.
Ramifications
16. We can foresee the following ramifications of the given Circular:
- The Circular seeks to legitimize the action of the department in terms of questioning the validity of the claim of the ITC based on a mismatch with GSTR – 2A in bonafide This appears to run counter to the statutory provisions.
- The Circular also implies that in absence of confirmation of the payment of tax, the mismatch ITC shall be recovered. It is settled law that the Circulars only bind the authorities and not the taxpayer. In fact, Sec. 168(1) of the CGST Act, 2017 pursuant to which the given Circular has been issued authorizes the issuance of the Circular only to the departmental officers. Hence the taxpayers shall have the right to contest the demands if they are unable to produce the requisite Certificates (e.g., the vendors are no longer in business).
- The Circular is silent on whether the recovered ITC (presuming that the factum of actual payment has not been established via certificate) will be allowed as a re-credit when the said tax stands recovered by the vendor.
- The Circular only considers four situations where bonafide errors have been made by the vendors. However, there will be situations not covered by the Circular where similar errors would have been committed (e.g., tax has been paid via DRC 03, tax credit note adjustments, etc.). They also deserve a similar approach.
Conclusion
17. The above analysis indicates that the Circular can certainly resolve situations where the taxpayer is able to follow the enlisted requirement and seek the certificate confirming payment of the tax. For all other cases, one will have to consider the specific facts and determine the way forward.
Author Bio
GOVT PROPOSE TO INTRODUCE RULE 37A IN WHICH ITC CAN NOT CLAIM IF SUPPLIER FAILS TO MAKE PAYMENT
IF BUSINESS MAN HAS TO CHECK WHETHER SUPPLIER HAS FILE THE RETURN AND PAY THE TAX THEN WHY GOVT SHOULD PAY HIGH SALARY AND PENSION TO OFFICER WHOSE DUTY TO CHECK DEALER HAS FILE THE RETURN AND PAY THE TAXES
IT IS NECESSARY TO RAISE POINT IN HIGH COURT OR SC WHEN GOVT WANTS TO DISALLOW THE ITC