The CBIC has introduced new Rule 36(4) vide Notification No: 49/2019-CT dt: 09.10.2019 which restricts Recipients from availing Input Tax Credit (ITC) over and above the ITC available in GSTR2A (Supplier Filed Data).

This Rule is somehow contradictory to the Section 16 and let us see briefly how:

Rule 36 (4) 

“(4) 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. 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.”

(Later this Sub-Rule was amended to reduce the tolerance limit from 20% to 10% and then now to 5% effective from 1st January 2020. So we consider 5% tolerance, or 105% of eligible ITC for our discussion.)

As per this Rule 36(4), the Recipient has to download GSTR2A / GSTR2B month on month to check what are the Invoices uploaded by his Suppliers and from that available ITC he has to find the Eligible ITC Amount by deducting Ineligible Credits, Supplies Not Received Bills etc. From this eligible ITC amount as per GSTR2A / GSTR2B, 5% increase is allowed and that is the maximum amount claimable as ITC by the Recipient for the month.

Even if the Recipient has received the supplies in full, have valid documents issued by the Supplier, made payments to the supplier, the Recipient cannot avail ITC for such Supplies if it is not appearing in his GSTR2A / GSTR2B report.

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Section 16(2)(c)

A Recipient Assessee when availing Input Tax Credit (ITC) he has to check and ensure certain conditions as prescribed in Section 16. On such conditions the Sec 16(2)(c) is important, which says:

“(c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply;”

As per this section, the Assessee can avail ITC of the Supplier Invoice ‘only if the tax of such supplies paid to the Government either in Cash or through utilization of Input Tax Credit’.

Which means, only after the Supplier has uploaded his Invoice in GSTR1 and also paid tax in his GSTR3B returns.

What if the Supplier Uploaded his Invoice in his GSTR1 and the same is reflecting in GSTR2A / GSTR2B but the Supplier has not filed his GSTR3B and paid tax??

In the GSTR2A / GSTR2B report, such Invoices will be reflected but the Filing Status will be shown as NOT FILED.

For those Invoices, the Recipient should not avail ITC as per the Section 16(2)(c)

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Contradiction of Rule 36(4) and Sec 16(2)(c):

Let us recap what we read above, in short here

  • As per Rule 36(4) the Recipient can avail ITC for the ‘Eligible ITC’ as per supplier GSTR1 which is shown in Recipient’s GSTR2A / GSTR2B for the month
  • As per Section 16(2)(c) Recipient cannot avail ITC for the Invoices for which Supplier has ‘NOT actually paid taxes to the Government’

Now let us discuss the Contraction of these provisions with an example

Assessee A made a supply to Assessee B in the Month of January 2021. Assessee B received the material also in January 2021 and booked in his accounts.

  • Assessee A will file his GSTR1 for the month of January 2021 on or before 11th February 2021.
  • Assessee B will claim his ITC for the month of January 2021 on or before 22nd February 2021.

Now as per Rule 36(4) Assessee B has to check whether this Invoice is appearing in his GSTR2A/GSTR2B for the month of January 2021. Certainly it will appear since Assessee A has filed his GSTR1.

Whether this is an eligible Credit for Assessee B? 

Yes, because he has received the supplies in full, having valid documents in hand and booked this transaction in his accounts.

Whether he can claim this ITC in his GSTR3B for the month of January 2021?

Logically YES but Legally NO, due to the condition laid by Section 16(2)(c), because, as per Section 16(2)(c), the Assessee B can avail ITC only after the Assessee A actually Paid the Tax to the Government.

Assessee A will pay his tax on or before 22nd February 2021 and Assessee B also need to claim his ITC on or before 22nd February 2021.

Practically if Assessee B wants to adhere compliance of GST Act, he CANNOT CLAIM ITC in GSTR3B of January 2021 and should wait for Assessee B to pay tax.

OK.. whether the Assessee B can avail ITC for this above transaction in his GSTR3B for the month of February 2021?

As per Rule 36(4), the Assessee B should check for GSTR2A/GSTR2B for the month of February 2021 whether this transaction is appearing or not. Definitely it will not appear, because it was already appeared in January 2021 GSTR2A/GSTR2B.

Hence, as per Rule 36(4) the Recipient CANNOT avail ITC in his February 2021 since this Rule is based on Month on Month Transactions and ITC Claim which is practically not possible, particularly in Manufacturing Sector. Also this rule cannot be adhered where the supplies are made during month end and the receipt of supplies in subsequent month.

Here straight away the Rule 36(4) contradict with Section 16(2)(c)

Now let us see what Section 16(4) says:

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 invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier”

As per Section 16(4), a Recipient is allowed to avail Input Tax Credit for the Invoices issued by his supplier in a Financial year, till September month of Subsequent Financial year.

The delay in availing Credit could be of various reasons which including quality approval of received material, accounting delays, approvals etc., So the GST Act allowed the Recipient to avail the Credit in later date also but not after September of the Subsequent Financial Year.

Now as per Rule 36(4), this Section is also becoming unusable, as the GSTR2A/GSTR2B for September of subsequent Financial year will not have this transaction.

Here the Rule 36(4) is also contradict with Section 16(4)

Assessees are the New GST Officers:

In the erstwhile regime of Central Excise / Service Tax / VAT / CST, the Recipient can claim ITC based on the legitimate documents in hand and the department will check for the Suppliers who has not filed the returns and initiate recovery from the defaulters.

Under the GST Act, the preliminary duties of the department officers are pushed to Recipient Assessees as the Recipient has to ensure their supplier filed returns before availing ITC. If the supplier not filed their returns, then the punishment is for Recipient by way of ITC reversal or not allowing to claim ITC.

This provisions overload the Recipients as they need to do the reconciliation, follow up with all default Supplier for their filings, ensure Supplier’s Compliance before claiming his legitimate ITC claim.

With these responsibilities, now the GST Tax Paying Assessees are deemed to be considered as GST officials mooting for fellow Assessee’s compliances. Also these provisions reduce Input Tax Credit claim and increase Cash Payment for Tax from the Recipient Assessee. This will also impact Ease of Doing Business by way of increased Cash out flow month on month.

What will be the probable and practical solution?

The Assessee should be allowed to avail ITC for the documents in hand and his Purchase register has to be reported to GST portal Invoice wise detail similar to sales reporting in GSTR1.

From this Purchase register report, department can do the reconciliation as earlier to find out the defaulting Suppliers and take action on them by way of recovery or blocking their further transactions.

The Rule 36(4) conditions need to be waived off till the original idea of Supplier Invoices popping up to the Recipient GST dashboard and Recipient can take actions on each Invoices.

Alternatively, If the CBIC wants to retain Rule 36(4) to put cap on ITC claimable by the Recipient and thus this Rule 36(4) is needed, then the department can amend the Rule 36(4) to consider accumulated unclaimed ITC also under Rule 36(4).

That is, ITC available in GSTR2B for the month & ITC Unclaimed in the Previous GSTR2B to be considered together and out of that ITC 105% claim can be allowed for the Assessee.

Wish CBIC will consider these practical difficulties of the Assessee and amend the Rules accordingly so that all eligible ITC for the Recipient will be legally available for him without deviating the GST provisions.

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