Clarification on Input Tax Credit (ITC) Differences in GSTR-3B & GSTR-2A

Navigating Input Tax Credit Discrepancies: Guidelines for Uniform GST Implementation (Detail analysis of Circular No. 193/05/2023-GST)

Introduction to the availability of Input Tax Credit (ITC) and restrictions under Section 16 of the CGST Act:

The introduction of Goods and Services Tax (GST) in India brought about significant changes in the indirect tax landscape. One of the key aspects of GST is the availability of Input Tax Credit (ITC), which allows businesses to claim credit for the taxes paid on their purchases and utilize it against their tax liabilities.

Under Section 16 of the Central Goods and Services Tax (CGST) Act, 2017, certain conditions and restrictions were laid down regarding the availment of ITC. These conditions include the requirement that the recipient of goods or services must possess a valid tax invoice or debit note, the tax charged must have been actually paid to the government, and the recipient must have received the goods or services.

• Evolution of restrictions on ITC availment under rule 36(4) of the CGST Rules:

While the availability of ITC was subject to the restrictions mentioned in Section 16 of the CGST Act from July 1, 2017, additional restrictions regarding the availing of ITC beyond the amount available as per FORM GSTR-2A were introduced through rule 36(4) of the CGST Rules. This rule came into effect from October 9, 2019.

• Explanation of the intended purpose behind allowing additional credits based on delayed supplier reporting:

The purpose of introducing rule 36(4) was to address situations where suppliers may have delayed furnishing the details of their outward supplies. This delay could result in discrepancies between the amount of ITC claimed by registered persons in their returns (FORM GSTR-3B) and the amount available in their FORM GSTR-2A, which contains details of inward supplies as reported by their suppliers.

To provide relief in such cases, rule 36(4) allowed registered persons to avail additional credit up to a certain percentage of the eligible credit available in respect of invoices or debit notes that were not reported by the suppliers. This measure aimed to ensure that businesses were not deprived of their rightful credit due to delays caused by their suppliers in reporting their supplies.

Clarification for the Period April 2019 to October 2019:

During the period from April 2019 to October 2019, the guidelines provided in Circular No. 183/15/2022-GST dated December 27, 2022, shall be applicable. This circular outlines the approach to be followed in cases where there is a difference in the Input Tax Credit (ITC) availed in FORM GSTR-3B compared to the details mentioned in FORM GSTR-2A.

The conditions and limitations on ITC availment during this timeframe are as follows:

• Application of Circular No. 183/15/2022-GST: The circular issued on December 27, 2022, provides comprehensive guidelines for dealing with ITC discrepancies. These guidelines should be referred to and followed for the period from April 2019 to October 2019.
• Conditions for ITC availment: As per the guidelines, businesses are required to fulfill certain conditions to avail ITC. These conditions include possessing a valid tax invoice or debit note, ensuring that the tax has been actually paid to the government, and receiving the goods or services.
• Limitations on ITC availment: It is important to note that the ITC that can be claimed during this period is subject to the limitations prescribed in rule 36(4) of the CGST Rules. The rule states that the registered person is not allowed to avail ITC in excess of 20% of the eligible credit available in respect of invoices or debit notes furnished by the suppliers.
• Maximum allowable ITC: To determine the maximum allowable ITC, businesses should consider the eligible credit available as per FORM GSTR-2A. The ITC availed in FORM GSTR-3B should not exceed 20% of this eligible credit, as per the provisions of rule 36(4).

Clarification for the Period October 2019 to December 2019:

During the period from October 2019 to December 2019, the guidelines provided in Circular No. 183/15/2022-GST dated December 27, 2022, shall be applicable. This circular offers guidance on resolving differences in Input Tax Credit (ITC) between FORM GSTR-3B and FORM GSTR-2A.

The application of Circular No. 183/15/2022-GST dated December 27, 2022T for this period includes specific considerations, which are as follows:

• Conditions for ITC availment: To avail ITC during this period, businesses must fulfill the conditions outlined in Circular No. 183/15/2022-GST dated December 27, 2022. These conditions include possessing valid tax invoices or debit notes, ensuring that the tax has been paid by the suppliers, and receiving the goods or services.
• Limitations on ITC availment: Rule 36(4) of the Central Goods and Services Tax (CGST) Rules specifies limitations on ITC availment during this period. According to the rule, registered persons were allowed to avail ITC in respect of invoices or debit notes that were not furnished by the suppliers, up to a maximum of 20% of the eligible credit available from invoices or debit notes that were furnished by the suppliers.
• Maximum allowable ITC: To determine the maximum allowable ITC, businesses should consider the eligible credit available as per FORM GSTR-2A during the period from October 2019 to December 2019. The ITC availed in FORM GSTR-3B should not exceed 20% of this eligible credit, as per the provisions of rule 36(4).

Clarification for the Period January 2020 to December 2020:

During the period from January 2020 to December 2020, the guidelines provided in Circular No. 183/15/2022-GST dated December 27, 2022, shall be applicable. This circular provides clarification on handling differences in Input Tax Credit (ITC) between FORM GSTR-3B and FORM GSTR-2A.

The application of Circular No. 183/15/2022-GST dated December 27, 2022 for this period involves specific considerations, which are as follows:

• Conditions for ITC availment: To avail ITC during this period, businesses must fulfill the conditions specified in Circular No. 183/15/2022-GST dated December 27, 2022. These conditions include possessing valid tax invoices or debit notes, ensuring that the tax has been paid by the suppliers, and receiving the goods or services.
• Limitations on ITC availment: As per the provisions of rule 36(4) of the Central Goods and Services Tax (CGST) Rules, registered persons were permitted to avail additional ITC up to a maximum of 10% of the eligible credit available from invoices or debit notes furnished by the suppliers during this period.
• Maximum allowable ITC: The maximum allowable ITC during the period from January 2020 to December 2020 is determined based on the eligible credit available as per FORM GSTR-2A. Businesses should ensure that the ITC availed in FORM GSTR-3B does not exceed 10% of this eligible credit, in accordance with the provisions of rule 36(4).

Clarification for the Period January 2020 to December 2020:

During the period from January 2020 to December 2020, the guidelines provided in Circular No. 183/15/2022-GST dated December 27, 2022, shall be applicable. This circular provides clarity on the resolution of differences in Input Tax Credit (ITC) between FORM GSTR-3B and FORM GSTR-2A.

The application of Circular No. 183/15/2022-GST dated December 27, 2022 for this period involves specific considerations, which are as follows:

• Conditions for ITC availment: To avail ITC during this period, businesses must fulfill the conditions specified in Circular No. 183/15/2022-GST dated December 27, 2022. These conditions include possessing valid tax invoices or debit notes, ensuring that the tax has been paid by the suppliers, and receiving the goods or services.
• Limitations on ITC availment: As per the provisions of rule 36(4) of the Central Goods and Services Tax (CGST) Rules, registered persons were allowed to avail additional ITC up to a maximum of 10% of the eligible credit available from invoices or debit notes furnished by the suppliers during this period.
• Maximum allowable ITC: To determine the maximum allowable ITC during the period from January 2020 to December 2020, businesses need to consider the eligible credit available as per FORM GSTR-2A. This eligible credit represents the ITC available on invoices or debit notes furnished by the suppliers.
• The maximum allowable ITC for this period is calculated as follows: Maximum Allowable ITC = 10% of the eligible credit available as per FORM GSTR-2A
• Businesses should ensure that the ITC claimed in FORM GSTR-3B does not exceed this maximum allowable amount. This restriction is in accordance with the provisions of rule 36(4) of the CGST Rules.

Clarification for the Period January 2021 to December 2021:

During the period from January 2021 to December 2021, the guidelines provided in Circular No. 183/15/2022-GST dated December 27, 2022, shall be applicable. This circular offers clarification on handling differences in Input Tax Credit (ITC) between FORM GSTR-3B and FORM GSTR-2A.

The application of Circular No. 183/15/2022-GST dated December 27, 2022 for this period involves specific considerations, which are as follows:

• Conditions for ITC availment: To avail ITC during this period, businesses must fulfill the conditions outlined in Circular No. 183/15/2022-GST dated December 27, 2022. These conditions include possessing valid tax invoices or debit notes, ensuring that the tax has been paid by the suppliers, and receiving the goods or services.
• Limitations on ITC availment: According to the provisions of rule 36(4) of the Central Goods and Services Tax (CGST) Rules, registered persons were permitted to avail additional ITC up to a maximum of 5% of the eligible credit available from invoices or debit notes furnished by the suppliers during this period.
• Maximum allowable ITC: To determine the maximum allowable ITC during the period from January 2021 to December 2021, businesses need to consider the eligible credit available as per FORM GSTR-2A. The eligible credit represents the ITC available on invoices or debit notes furnished by the suppliers.
• The maximum allowable ITC for this period is calculated as follows: Maximum Allowable ITC = 5% of the eligible credit available as per FORM GSTR-2A
• Businesses should ensure that the ITC claimed in FORM GSTR-3B does not exceed this maximum allowable amount. This limitation aligns with the provisions of rule 36(4) of the CGST Rules. 

Changes from January 2022 Onwards:

Starting from January 2022, significant changes were introduced regarding the availment of Input Tax Credit (ITC). These changes were a result of the insertion of clause (aa) to sub-section (2) of Section 16 of the Central Goods and Services Tax (CGST) Act and the amendment of rule 36(4) of the CGST Rules.

The impact of these changes is as follows:

• Insertion of clause (aa) to sub-section (2) of Section 16: The insertion of clause (aa) to sub-section (2) of Section 16 of the CGST Act introduced a crucial condition for availing ITC. As per this clause, ITC can be availed only for supplies that are reported by the suppliers in their FORM GSTR-1 or using the Invoice Furnishing Facility (IFF).
• Amendment of rule 36(4) of the CGST Rules: Rule 36(4) of the CGST Rules was amended to align with the changes in clause (aa) of sub-section (2) of Section 16. The amended rule now mandates that ITC can only be availed for supplies reported by suppliers in their FORM GSTR-1 or using the IFF and communicated to the recipient in FORM GSTR-2B.
• Cessation of ITC availment for supplies not reported by suppliers: From January 2022 onwards, the availability of ITC is limited to supplies that are reported by suppliers in their FORM GSTR-1 or using the IFF and communicated to the recipient in FORM GSTR-2B. If a supplier does not report a supply in FORM GSTR-1 or IFF, the recipient cannot claim ITC for that particular supply.

This change emphasizes the importance of accurate and timely reporting of supplies by suppliers, as it directly impacts the ITC entitlement of the recipients. It encourages transparency and compliance in reporting transactions, ensuring that ITC is availed only for supplies that have been appropriately reported.

Provisions for Cumulative Adjustments:

The provisos to rule 36(4) of the Central Goods and Services Tax (CGST) Rules introduce provisions for cumulative adjustments of Input Tax Credit (ITC) for specific periods. These provisions are as follows:

• First Proviso: The first proviso to rule 36(4) of the CGST Rules, inserted through Notification No. 30/2020-CT dated April 3, 2020, states that the condition of rule 36(4) shall be applicable cumulatively for the months from February to August 2020. It further specifies that the adjustment of ITC shall be done on a cumulative basis for these months in the return for the tax period of September 2020.
• This proviso allows businesses to adjust the ITC for the cumulative period of February to August 2020 in the return filed for September 2020. It ensures that the restriction imposed by rule 36(4) is applied collectively for this period, rather than on a monthly basis.
• Second Proviso: The second proviso to rule 36(4) of the CGST Rules, substituted through Notification No. 27/2021-CT dated June 1, 2021, states that the condition of rule 36(4) shall be applicable cumulatively for the months from April to June 2021. It further specifies that the adjustment of ITC shall be done on a cumulative basis for these months in the return for the tax period of June 2021.

Similar to the first proviso, the second proviso allows businesses to cumulatively adjust the ITC for the period of April to June 2021 in the return filed for June 2021. This provision facilitates the collective application of the restriction imposed by rule 36(4) for this specific timeframe.

The introduction of these provisos aims to simplify compliance and minimize the administrative burden on businesses. By allowing cumulative adjustments, businesses can conveniently manage their ITC claims for the specified periods. It provides flexibility in meeting the conditions of rule 36(4) and ensures that the adjustment of ITC is carried out in a streamlined manner.

It is important for businesses to carefully consider these provisos while determining the amount of ITC eligibility for the respective tax periods. Adhering to the cumulative adjustment requirements mentioned in the provisos will help businesses maintain compliance with the CGST Rules and effectively manage their ITC utilization.

Application of Guidelines and Conclusion:

It is important to note that the guidelines provided in this circular are of a clarificatory nature and should be applied on a case-by-case basis. These guidelines serve as a reference for dealing with the differences in Input Tax Credit (ITC) between FORM GSTR-3B and FORM GSTR-2A for specific periods. They provide clarity on the conditions, limitations, and maximum allowable ITC based on the eligible credit available.

It is crucial to consider the actual facts and circumstances of each case while applying these guidelines. The unique nature of each business transaction may warrant specific considerations that align with the guidelines provided in this circular. By analyzing the specific details of each case, businesses can ensure compliance with the provisions of the law and make informed decisions regarding ITC availment.

Furthermore, it is important to understand that these instructions apply only to ongoing proceedings in scrutiny, audit, investigation, etc., for the period from April 2019 to December 2021. The instructions do not apply to completed proceedings. However, these instructions do apply to cases where any adjudication or appeal proceedings are still pending during the mentioned period.

Businesses are encouraged to seek compliance with these guidelines to effectively resolve pending adjudication or appeal proceedings. By aligning their actions with the guidelines provided, businesses can address any discrepancies in ITC availment and ensure compliance with the relevant provisions of the Central Goods and Services Tax (CGST) Act and CGST Rules.

In conclusion, the guidelines outlined in this circular offer clarity and guidance for dealing with ITC differences between FORM GSTR-3B and FORM GSTR-2A. The clarificatory nature of these guidelines emphasizes their case-specific application. Businesses should adhere to these guidelines and consider the specific circumstances of each case to determine the correct course of action. By doing so, businesses can maintain compliance with the law, effectively manage their ITC claims, and resolve any pending adjudication or appeal proceedings.

Few examples illustrating different scenarios:

Example 1: Case involving a taxpayer with a difference in ITC for the period January 2020 to December 2020

Suppose a taxpayer, ABC Ltd., had an eligible credit of Rs. 10,00,000 as per FORM GSTR-2A for the period January 2020 to December 2020. However, in FORM GSTR-3B, ABC Ltd. claimed ITC amounting to Rs. 12,00,000 for the same period.

According to the guidelines provided in Circular No. 183/15/2022-GST dated December 27, 2022, during this period, the taxpayer can avail additional ITC up to a maximum of 10% of the eligible credit available from invoices or debit notes furnished by the suppliers.

In this case, the maximum allowable ITC would be 10% of Rs. 10,00,000, which is Rs. 1,00,000. Therefore, ABC Ltd. can only claim ITC up to Rs. 1,00,000, and the excess amount of Rs. 2,00,000 (12,00,000 – 10,00,000) would not be admissible as per the provisions of rule 36(4) of the CGST Rules. 

Example 2: Case involving a taxpayer with pending adjudication or appeal proceedings

Let’s consider a scenario where XYZ Enterprises is facing pending adjudication or appeal proceedings for the period from April 2019 to December 2021. During this period, XYZ Enterprises has discrepancies in the ITC claimed in FORM GSTR-3B compared to the eligible credit available as per FORM GSTR-2A.

The guidelines provided in this circular will be applicable to resolve the discrepancies in XYZ Enterprises’ ITC claims. The company should analyze the specific facts and circumstances of each case within the given period and assess the maximum allowable ITC based on the eligible credit available.

By adhering to the guidelines and providing the necessary supporting documentation, XYZ Enterprises can seek compliance with the instructions and effectively resolve the pending adjudication or appeal proceedings. This will help ensure that the company’s ITC claims align with the provisions of the CGST Act and CGST Rules and demonstrate their commitment to maintaining compliance.

Example 3: Case where a taxpayer has excess ITC claimed in FORM GSTR-3B

Let’s consider a taxpayer named XYZ Traders who filed their FORM GSTR-3B for the period January 2021 to December 2021. As per FORM GSTR-2A, XYZ Traders had an eligible credit of Rs. 5,00,000. However, while filing FORM GSTR-3B, they claimed ITC amounting to Rs. 6,50,000 for the same period.

According to the guidelines provided in Circular No. 183/15/2022-GST dated December 27, 2022, during this period, the maximum allowable ITC is 5% of the eligible credit available. In this case, 5% of Rs. 5,00,000 is Rs. 25,000.

Therefore, XYZ Traders can only claim ITC up to Rs. 25,000, and the excess amount of Rs. 1,50,000 (6,50,000 – 5,00,000) would not be admissible as per the provisions of rule 36(4) of the CGST Rules.

Example 4: Case where a taxpayer has ITC availed within the maximum allowable limit

Let’s consider a taxpayer named ABC Manufacturing who filed their FORM GSTR-3B for the period October 2019 to December 2019. As per FORM GSTR-2A, ABC Manufacturing had an eligible credit of Rs. 2,00,000. While filing FORM GSTR-3B, they claimed ITC amounting to Rs. 2,00,000 for the same period.

According to the guidelines provided in Circular No. 183/15/2022-GST dated December 27, 2022, during this period, the maximum allowable ITC is 20% of the eligible credit available. In this case, 20% of Rs. 2,00,000 is Rs. 40,000.

Since the ITC claimed by ABC Manufacturing in FORM GSTR-3B is within the maximum allowable limit of Rs. 40,000, the entire amount will be admissible as per the provisions of rule 36(4) of the CGST Rules.

These examples highlight different scenarios where taxpayers either have excess ITC claimed or have availed ITC within the maximum allowable limit based on the eligible credit available. Businesses should carefully assess their ITC claims, ensuring compliance with the guidelines provided in the circular to avoid any inadmissible ITC and maintain compliance with the CGST Act and CGST Rules.

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