Clarification of GST Rule 36(4)- Input Tax Credit

Clarification of GST Rule 36(4)- Circular No.123/42/2019 dated 11/11/2019 – Central Tax

The newly inserted Rule 36(4) provides that a taxpayer can avail ITC pertaining to outward supplies not declared by his supplier in Form GSTR-1 only to the extent of 20% of the eligible credit available in respect of invoices declared by his supplier in Form GSTR-1 which is reflected in Form GSTR-2A.

This rule was inserted w.e.f 9-10-2019 but created lot of confusion among taxpayers in respect of its practical implications.

• How the calculation of 20% ITC will be done ?
• How the balance ITC shall be availed ?
• What will be the treatment of ITC in case of taxpayers whose suppliers file quarterly return, etc.?

• Restricted credit to be calculated on self – assessment basis

It has been clarified that the ITC restriction is not imposed through the it is the responsibility of the taxpayer to ensure that the credit is availed in terms of the said rule. Hence, the availment of restricted credit in terms of Rule 36(4) is required on self-assessment basis by the taxpayers.

• Date of the applicability of Rule 36(4)

The circular has stated that the restriction of the Rule 36(4) will be applicable to the invoices/debit notes on which credit is availed after 09-10-2019. Accordingly, the ITC availed till 09-10-2019 will remain unaffected by the restriction of this new rule.

• Some of the Invoices not under the ambit of Rule 36(4)

This restriction of ITC is only applicable to invoices or debit notes which are required to be uploaded by suppliers in Form GSTR-1 and taxpayers can avail of full ITC of those invoices which are not required to be reported in Form GSTR-1 i.e IGST paid on import, documents issued under RCM, credit received from ISD, etc.

• How the calculation of 20% ITC will be done?

The calculation of limit of 20% of the eligible credit available in Form GSTR-2A for the invoices not uploaded by the supplier in Form GSTR-1.

Example, where a registered person ‘XYZ’ receives 20 invoices for inward supplies involving ITC of Rs. 4 lakhs during the month of Oct 2019. Suppliers have furnished only 10 invoices involving ITC of Rs. 2 lakhs in Form GSTR-1 and Rs. 20K ineligible credit also reflected in GSTR-2A

Then, eligible ITC as per Rule 36(4) is to be taken in GSTR-3B to be filed by November 20, 2019 = ITC in respect of details of invoices uploaded + 20% of the eligible ITC in GSTR-2A for in respect of invoices not furnished in Form GSTR-1 and ineligible credit Rs. 20K not to be taken for calculation.

= Rs. 2,00,000+20% of Rs. 2,00,000 =Rs. 2,40,000/- 

• How the balance ITC shall be availed?

The balance ITC can be claimed in any of the succeeded months provided details of requisite invoices are uploaded by the suppliers. In simple words, taxpayer may avail full ITC in respect of a tax period as and when the invoices are uploaded by the suppliers to the extent of Eligible ITC.

Example, if the suppliers of ‘XYZ’ upload the details of balance 10 invoices in the subsequent month, i.e., November’s month GSTR-1 involving ITC of Rs. 2 lakhs, then ‘XYZ’ may avail balance ITC of Rs. 1.60 lakhs (Rs. 4 lakhs – Rs. 2.40 lakhs).

The credit available under Rule 36(4) is linked to total eligible credit from all the suppliers against all supplies whose details have been uploaded by the suppliers in Form GSTR-1 and which are reflected in Form GSTR-2A. Hence, the restriction of credit is not supplier-wise, It is on consolidated basis. Ineligible credit available in GSTR -2A, not to be considered for calculation of credit.

• Cut-off date for ITC calculation

The taxpayer needs to ascertain the ITC from the auto-populated Form GSTR 2A as available on the due date of filing of Form GSTR-1, i.e., 11^th of the succeeding month for monthly return filers and for quarterly return filers last day of the month succeeding the end of the quarter.

• What will be the treatment of ITC in case of taxpayers whose suppliers file quarterly return, etc.?

This circular has failed to address the situation where suppliers have opted for quarterly filing of GSTR-1 while the recipient files monthly GSTR-1. 

This will create hardship for small taxpayers as recipients would try to get supplies from the dealers (big dealers) who opt for monthly filing of GSTR-1.  

• Impact on working capital

Restriction imposed in Rule 36(4) will certainly impact working capital of taxpayers as they must pay more taxes when suppliers file belated returns in Form GSTR-1.

Further, the taxpayer would not be able to claim refund of excess tax paid by them due to default of the suppliers.

Also, this reconciliation exercise of ITC is going to consume lot of man hours every month.

Disclaimer: The views presented are in personal & in generic form and not as a legal advice. Users of this information are expected to refer to the relevant existing provisions of the applicable laws.