Executive Summary: Goods and service tax, being a tax on the value addition made by suppliers, is paid by netting off the tax receivable from customers (Output GST) with the tax payable to suppliers (Input GST). Pursuant to 37th GST council meeting, CBIC has released a new notification1 inserting sub-rule 36 (4) to the CGST Rules, 2017, (‘Rules’) which curtails the maximum amount that a taxpayer can avail as Input tax credit (‘ITC’). The new sub-rule does not restrict the entire ITC as such, but only restricts ITC on those invoices which are not uploaded by the suppliers in their GSTR 1 return. The intention of the sub-rule is to create a more compliant supply chain where all taxpayers upload their invoice details correctly in their GST return. However, the sub-rule is ambiguous in its interpretation and poses many practical challenges which are not yet addressed.
Introduction:
According to section 16 (1) (c) of CGST Act, taxpayers could avail ITC only if the tax is actually paid to the government. However, this ‘actual payment’ condition is subject to section 42, which permits taxpayers to avail ITC on a provisional basis, subject to such conditions and restrictions as may be prescribed. Prior to the insertion of this new sub-rule, no restriction was prescribed on the amount that can be provisionally availed on invoices not uploaded by the suppliers. However, Rule 36 (4) now restricts such provisional ITC, and the text of the sub-rule is reproduced below:
“(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.”
Briefly, the following points could be inferred from the sub-rule:
- The restriction is only on the ITC ‘to be availed’ by a registered person (and not for ITC availed prior to 9th October 2019).
- The said restriction is in respect of all suppliers who are required to submit details of outward supplies under section 37 (1) of CGST Act (All suppliers other than suppliers under composition scheme / Input Service distributors/ Non-resident taxable person, import of goods, RCM) .
- The provisional credit on non-uploaded invoices shall not exceed 20% of the ‘eligible credit’ of the uploaded invoices.
Compliance makes the difference:
With the introduction of the above sub-rule, input tax credit to be availed can be bifurcated into the below categories:
a) ITC for which invoices has been reflected in GSTR 2A (uploaded by suppliers u/s 37 (1)) – 100% ITC eligible to be availed in the same tax period
b) ITC for which invoices has not been reflected in GSTR 2A (Not uploaded by suppliers u/s 37 (1)) – Provisionally available as ITC, subject to maximum of 20% of reflected invoices
For the purpose of understanding the intent and implication of the sub-rule, let us initially consider two scenarios where taxpayers Mr. A and Mr. B have the same amount of ITC (Rs.200) but different portfolio of compliant suppliers:
Scenario I – Mr. A, having a well compliant supply chain (80% suppliers upload their invoices)
Scenario II – Mr. B, having a less compliant supply chain (40% suppliers upload their invoices)
| S.No | Particulars | Mr. A – Scenario I
(80% Compliant suppliers) |
Mr. B – Scenario II
(40% Compliant suppliers) |
||||||
| IGST | CGST | SGST | Total | IGST | CGST | SGST | Total | ||
| 1 | ITC reflecting in 2A | 80 | 40 | 40 | 160 | 40 | 20 | 20 | 80 |
| 2 | ITC not reflecting in 2A | – | 20 | 20 | 40 | 20 | 50 | 50 | 120 |
| 3 | Total | 80 | 60 | 60 | 200 | 60 | 70 | 70 | 200 |
| 4 | ITC provisionally eligible u/ Rule 36 (4) – 20% of (1) | 32 | 16 | ||||||
| 5 | Restricted ITC [2 – 4] | 8 | 104 | ||||||
| 6 | ITC % provisionally availed out of the total non-uploaded invoices [4 / 2] | 80% | 13.3% | ||||||
As we can see from above, Mr. A who has a more compliant supplier chain was able to avail 80% (Rs.16) of the total non-uploaded invoice value (Rs.40), whereas Mr. B was able to avail only 13.3% (Rs.16) of the total non-uploaded invoices (Rs.120). Thus, it is very important to have a well compliant supply chain in order to avail the maximum benefit under this sub-rule.
Recently, CBIC has issued a circular (Circular No: 123/42/2019-GST) wherein it has clarified by way of illustrations that, the restriction need not be computed supplier-wise for each tax-head but could be computed on a consolidated basis (total of CGST, SGST and IGST) for all suppliers.
Key Practical challenges in implementation:
Although, the government has issued a circular attempting to clarify the notification, there are certain unaddressed practical challenges in its implementation. We will be discussing the below key challenges in this article:
- Period of restriction – ‘20% of the eligible credit’ is to be restricted for each tax period or on a cumulative basis?
- Is it mandatory to maintain monthly GSTR 3B vs 2A reconciliation?
- Invoices may contain ITC’s used exclusively for taxable supplies (100% eligible credits) and used for both taxable and exempt supplies (common credits) subject to reversal under Rule 42 – 20% is to be calculated on ‘eligible credit’ before reversal or after reversal?
- Other practical challenges and shortcomings
Period of restriction:
The circular provides that the ‘restricted ITC’ of a particular tax period can be availed in subsequent tax periods, provided the details of requisite invoices are uploaded by the suppliers. Also, it clarifies that he can claim proportionate provisional ITC as and when the supplier uploads the invoices subsequently, provided that the credit on invoices not uploaded remains under 20% of eligible credits, uploaded by the suppliers.
It is to be noted that the sub-rule does not explicitly mention the word ‘tax period’, but only mentions that ITC on non-uploaded invoices shall not exceed 20% of the eligible credit on uploaded invoices. Thus, neither the sub-rule nor the circular clarifies whether the 20% restriction is to be calculated on the amount reflected for each tax period independently (or) cumulatively on a year-to-date basis. If the value of reflected invoices are calculated on a cumulative basis, then the excess or shortfall of threshold limit (20%) for a particular tax period could be adjusted in the subsequent tax periods.
To understand the impact of the above, let us consider simulating two scenarios in Month 2 for two different cases:
Case I: Not reflected invoices is more than 20% of reflected invoices (therefore, ITC on non-uploaded invoices is restricted to 20% of uploaded invoices in Month 2)
Case II: Not reflected invoices is less than 20% of the reflected invoices (Thus, 100% ITC is available in Month 2, since non-uploaded invoices is less than limit of 20% of uploaded value)
Scenario I – Where 20% limit for non-uploaded invoices has to be calculated for each tax period;
Scenario II – Where 20% limit has to be calculated cumulatively on all invoices reflected till date.
No. |
Particulars |
Month 1 |
Month 2 |
||||||
Reflected |
Not reflected |
Scenario I – 20% month-wise |
Scenario II – 20% on Cumulative basis |
||||||
Month 1 invoices |
Month 2 Invoices |
||||||||
Reflected |
Not reflected |
Reflected |
Not reflected |
Reflected |
Not reflected |
||||
Case 1 – Month 2’s non reflected invoice (Rs.30) is more than 20% of Month 2 reflected invoices (20% of Rs.70) |
|||||||||
Total ITC |
40 |
60 |
30 |
30 |
70 |
30 |
100 |
60 |
|
A |
100% eligible to be availed |
40 |
30 |
70 |
100 |
||||
B |
Provisional ITC to be availed on ‘not reflected’ invoices [Minimum of not reflected amount or 20% of reflected] |
8 |
6 |
14(Min. of Rs.30 or Rs.14) |
20 |
||||
ITC eligible to avail |
40 |
8 |
30 |
6 |
70 |
14 |
100 |
20 |
|
C |
Total ITC availed at end of Month 2 |
48 |
120 |
120 |
|||||
Case 2 – Month 2’s non reflected invoice (Rs.10) is less than 20% of Month 2 reflected invoices (20% of Rs.90) |
|||||||||
Total ITC |
40 |
60 |
30 |
30 |
90 |
10 |
120 |
40 |
|
A |
100% eligible to be availed |
40 |
30 |
90 |
120 |
||||
B |
Provisional ITC to be availed on ‘not reflected’ invoices [Minimum of ‘not reflected amount’ or 20% of reflected] |
8 |
6 |
10(Min. of Rs.10 or Rs.18) |
24 |
||||
40 |
8 |
30 |
6 |
90 |
10 |
120 |
24 |
||
C |
Total ITC availed at end of Month 2 |
48 |
136 |
144 |
|||||
Note: The above amounts do not include ITC from ISD / NRTP and are all eligible input credits (However, if there are ineligible credits, then 20% is to be calculated only on the portion that is eligible)
Analysis of the above table:
| Case 1 – Month 2’s non reflected invoices (Rs.30) is more than 20% of Month 2 reflected invoices (20% of Rs.70 – Rs.14) | ||
| Particulars | Scenario I (20% on each tax period) | Scenario II (20% on cumulative basis) |
| Invoices of Month 1 reflected subsequently | 100% ITC can be availed on Month 1 invoices uploaded subsequently (Rs.30).
However, with regard to pending non-uploaded invoices of Month 1 (Rs.30), the maximum provisional amount that can be additionally availed would be the proportionate 20% increase on the invoices uploaded subsequently. (20% of Rs.30 – Rs. 6) |
100% ITC can be availed on Month 1 invoices uploaded subsequently (Rs.30). 20% limit is calculated cumulatively (Rs.70+30) on the total reflected eligible ITC till the end of Month 2 viz., Rs.100 (Rs.20) |
| Provisional availment of Month 2 Invoices not reflected in GSTR 2A | 20% limit is calculated only on the ITC reflected pertaining to Month 2 (20% on Rs. 70 – Rs.14) | |
| Implication of the above | In subsequent months, when the non-reflected invoices are more than 20% of reflected invoices, then both the scenarios would provide the same net impact (i.e.) ITC of Rs.120 in Month 2. | |
| Case 2 – Month 2’s non reflected invoices (Rs.10) is less than 20% of Month 2 reflected invoices (20% of Rs.90 – Rs.18) | ||
| Invoices of Month 1 reflected subsequently | Same as Scenario I above | 100% ITC can be availed on Month 1 invoices uploaded subsequently (Rs.30).
20% limit is calculated cumulatively (Rs.90+30) on the total reflected eligible ITC till the end of Month 2 (20% of Rs.120 – Rs.24) |
| Provisional availment of Month 2 Invoices not reflected in GSTR 2A | 20% limit is calculated only on the ITC reflected pertaining to Month 2 – Rs.10 (Minimum of Rs. 10 or Rs.18) | |
| Implication of the above | Month 2’s ITC Availed in Scenario I – Rs.136 and Scenario II – Rs.144;
Thus, in subsequent months, when the non-reflected invoices (Rs.10) is less than 20% of reflected invoices (Rs.18), then Scenario II would be more beneficial since the unexpired limit of Rs.8 in month 2, could be used against the pending non-uploaded invoices of previous periods (Month 1). It is also to be noted that the total provisional availment (Rs.32) on non-uploaded invoices is still within the 20% limit on the total uploaded invoices (Rs.160). |
|
Further, it is rational to read the law to permit provisional ITC on a cumulative basis, since taxpayers have time limit to avail ITC till the fling of September month return of subsequent financial year or Annual return whichever is earlier. Hence, artificially restricting the provisional availment for each tax period is an impediment for businesses which may entail higher cash outflows.
GSTR 3B vs 2A monthly reconciliation:
Although, the circular clarifies that the 20% restriction need not be calculated for each tax head and for each supplier, this method practically does not provide any relaxation, but rather complicates the computation, since it would be mandatory to carry out a vendor-wise monthly reconciliation (books vs GSTR 2A) for the below reasons:
- To keep track of the invoices which are reflected and 100% ITC is availed
- To keep track of those non-reflected invoices on which 20% has been availed
- To keep track of those non-reflected invoices on which no ITC has been availed
- To identify those credits in GSTR 2A which are used for effecting exclusively taxable supplies and those used for both taxable and exempt supplies (i.e. common credits), since only common credits are subject to reversal under Rule 42
- To keep track of invoices not reflected but reflected in subsequent period
Companies having common credit reversal under Rule 42 / 43:
In a case where companies have common credits which are subject to reversal as per Rule 42, there is no clarity on how the restriction has to be computed. Whether ‘eligible ITC’ has to be computed after reversal of Rule 42 or before reversal has not been considered by the circular.
However, if a credit is prima-facie ‘eligible’ and not disallowed by other provisions of the Act, then the entire eligible amount (common and 100% eligible credits) before reversal, should be considered for computing the 20% limit and not the net amount after reversal. It is because, the nature of such credit is ‘eligible’ for availment as per the provisions of the Act and only the usage of such credit in business for both taxable and exempt supplies makes it subject to reversal. Therefore, 20% needs to be applied on gross eligible amount before reversal and not on the net amount.
Also, with regard to those amount which is not reflected, it may contain both common credits and 100% eligible credits. Therefore, it would be necessary to carry out a monthly reconciliation to identify the reflected and not reflected common credits. Reversal under Rule 42 could be applied only for those common credits which are ‘availed’ in the tax period (in full or provisionally) used for effecting both taxable and exempt supplies of that period and not for the unavailed portion. Thus, if 20% restriction is applied on a consolidated basis as proposed by the Circular, then it would be very difficult to identify the common credits which are reflected and not reflected for that month and the amount which is subject to reversal under Rule 42 would be misleading.
Other practical issues:
Apart from the above mentioned issues, the below are certain key issues which needs attention:
- Taxpayers purchasing from small level suppliers who are filing quarterly GST returns, would be able to avail such ITC only on a quarterly basis, resulting in deferment of ITC. This creates hardships for both the supplier and the recipient and would also force the big players to limit transactions with small enterprises.
- The amount for a particular tax period keeps fluctuating as and when the supplier uploads the invoice details which needs to be monitored. Also, the circular has mentioned that GSTR 2A values has to be ascertained on the due date of filing GSTR 1 by the suppliers, which denotes that the invoices uploaded by suppliers who file their GSTR1 return belatedly would not be considered for calculating the 20% limit.
- Section 16 of the Act, read with Rule 36 (1) of the CGST Rules provides that a registered person can avail ITC only based on the documentary evidence of tax invoices issued by suppliers and not otherwise. Thus, ITC should either be wholly allowed or wholly restricted at an invoice level and not on an adhoc or partial value of the invoice.
- Allowing such partial amount creates ambiguity with regard to the documentary evidences for refund purposes to the extent of non-reflected invoices, as views could be taken that the 20% provisional ITC is availed on each non-reflected invoices or on the full value of few selected non-reflected invoices.
Conclusion:
In the current scenario, enforcing ‘actual payment’ condition itself is a practical challenge, since GSTR 2A is generated based on GSTR 1 details, whereas tax is actually paid by the suppliers based on summary GSTR 3B returns. Hence, until the new returns are implemented, the actual payment condition is inconsistent with the GST returns and should not be enforced. Therefore, as long as other conditions in section 16 are satisfied, the taxpayer should be eligible to avail full ITC on a provisional basis. It is also pertinent to note that the sub-rule does not provide any reference to section 42 (provisional ITC availment), which even raises a question on its power to restrict the provisional availment.
Although the intention appears to create more compliant suppliers in the supply chain, it creates more hardships to the taxpayers in terms of higher working capital, and only appears to be an impulsive measure to increase the governments revenue without considering a holistic approach. Statistically, Nov’19 GST revenue collection has been the third highest since implementation, and this sub-rule might have played a major role in this collection.
References:
Notification no 49/2019 – Central Tax dated 9th October,2019
Circular No. 123/42/2019– GST dated 11th November 2019
Note
Author Bio
Dear all, Please note that the maximum ITC that can be availed has been ammended w.e.f 01/01/20 as 110% of invoice value uploaded in 2A, instead of 120% of 2A value as above.