GST RULE 36(4) – ITC availment Restriction– Issues & way Forward

RULE 36 (4)

As you are aware, Rule 36(4) of the CGST Rules 2017 notified w.e.f. 09.10.2019, restricts availment of credit to 120% of the eligible credit based on invoices/debit notes uploaded by the supplier in their GSTR-1. From 1^st January 2020, the eligibility has got reduced to 110% of such eligible credit.

2. Records indicate that in your GSTR-3B return for Dec-2019 you have availed credit of Rs. ___ more than the credit admissible under Rule 36(4) of the tax reflected in your GSTR 2A for the said period.

3. You are advised to reverse the amount of credit availed in excess. In case such credit has been utilised for paying tax, the same may be deposited through FORM DRC-03 with applicable interest.

4. In case the opportunity for voluntary compliance as suggested is not availed, appropriate action for recovery of excess ITC availed with interest and imposition of penalty shall be initiated as per the law

INTRODUCTION

Rule 36(4) is introduced through Notification No. 49/2019 dt. 09th October 2019 issued with the object to restrict allowance of ITC which is not appearing in 2A.

Through this PPT/webinar we will discuss about its implementation and not its validity, though notices has been issued by Hónble Delhi and Gujarat High Court on its legal validity.

Rule 36(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 [10 percent] 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.”

Rule 36(4) explained

In simple words rule says

Input Tax Credit to be availed

Related to invoices/Debit Notes not appearing in 2A

Shall not exceed 10 % of eligible credit uploaded by supplier

example

Invoices uploaded by Supplier	1,00,000/-
Total ITC with Recipient	2,00.000/-
10 % of ITC Uploaded	10,000/-
Maximum ITC can be availed	1,10,000/-

ANALYSIS

Thus following facts emeres:

Rule restricted to – Input Tax Credit relating to B2B invoices.

ITC Appearing in 2A shall be eligible one

Invoices/Debit Note to be considered those filed on or before its due date.

Notification does not restrict on the brought down/deferred/un availed ITC, it simply says “… input tax credit to be availed ….”. Recording of ITC in books of accounts is always based on certain scenario like passing of purchase invoices on different dates, receipt of goods on different dates and the like. Thus total un availed ITC at the time of filing of return (GSTR-3B) to be compared with 2A.

CIRCULAR 123/42/2019 DT. 11/11/2019

KEY HIGHLIGHTS OF THE CIRCULAR

Rule shall be implemented on self-assessment basis by tax payers.

Tax payer may avail full ITC in respect of IGST paid on imports, ITC under RCM, Credit received from ISD, etc which are outside the ambit of Sec 37(1).

Restriction imposed is not supplier wise. The credit available under rule 36(4) is linked to total eligible credit from all suppliers against all supplies. Thus to be considered on gross basis.

For taking advantage of rule 36(4) only those invoices to be considered which are uploaded by supplier as on due date of filing of the returns in Form GSTR-1.

The conditions and eligibility for the ITC that may be availed by the recipient shall continue to be governed as per the provisions of Chapter V of the CGST Act and the rules made thereunder.

Circular issued to explain Rule 36(4) by way of illustration also.

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Regarding Balance ITC

Circular 123 illustrate regarding balance of ITC un availed Rule 36(4) and Explanation in circular 123 restrict adhoc credit of 10% only for those invoices which are uploaded as on due date of filing. Whereas illustration 5 explain how the balance ITC can be availed. In simple words it says – taxpayer may avail ITC in respect of tax pero, i d as and when the invoice are uploaded by the suppers li to the extent eligible ITC/1.1 and to illustrate:

Balance of ITC (b/d)	(A)	280000
Invoices uploaded by supplier	(B)	254545
As per illustration may avail (B)+10% of (B) (254545 + 25455)	(C)	280000

Clarification Required:

Since invoices amounting to Rs. 254545 are uploaded belatedly (after due date of filing) still illustration says that taxpayer may avail balance ITC of Rs. 2.80 Lakhs in case suppliers upload details of some of the invoices for the tax period involving ITC of Rs . 2.54 Lakhs out of invoices involving ITC of Rs. 4 lakhs  details of which have not been uploaded by the suppliers.

Case Study – Illustration given in the Circular

When there is Deferred of ITC
	Eligible ITC	Appearing in 2A	ITC not appearing
ITC	1 000 000 00	600 000 00	400 000 00
Ad hoc @ 20%	ITC availed as per Calculation	Maximum Allowed	Balance
120 000 00	720 000 00	720 000 00	280 000 00
Succeeding Month
Deferred ITC	ITC for the Month	App g earing in 2A	ITC not appearing
280,000.00	–	233,333.00	–
Ad hoc @ 20%	ITC availed as per Calculation	Maximum Allowed	Balance
46,667.00	280,000.00	280,000.00	–

Refer Illustration-5 of Circular-123/42/2019

Rule restricts for adhoc (2010%/ %) availment on late filer from due date u/s 37(1).

Case Study – Illustration given in the Circular Contd.

Refer Illustration-5 of Circular-123/42/2019

Rule restricts for adhoc (20%/10%) availment on late filer from due date u/s 37(1) .

In illustration 5, circular says that “…he can claim proportionate ITC as and when details of some invoices are uploaded by the suppliers…”.

Further it explains for Case I “… “R” may avail balance of ITC of Rs. 2.8 Lakhs in case suppliers upload details of some of the invoicesfor the tax period involving ITC of Rs. 4 Lakhs details of which had not been uploaded by the suppliers. Rs. 6 Lakhs (already appeared)+2.33 Lakhs (80% of 2.80 lakhs – Un availed ITC) = Rs. 8.33 Lakhs.

Restriction imposed is not supplier wise

Talks about “requisite invoices” and not “balance of the invoices”

Some of the invoices and not same invoices

ISSUES-IF RULE 36(4) NOT FOLLOWED A TYPICAL EXAMPLE

Month	ITC appearing	ITC not appearing	ITC availed [As if, ITC availed to the extent appeared]	TOTAL ITC IN BOOKS
July	150000	120000	150000	270000
August	150000		150000	150000
September	150000		150000	150000
October	150000		150000	150000
November	150000		150000	150000
December	150000		150000	150000
January	150000		150000	150000
February	150000		150000	150000
March	150000		150000	150000
In the above cited example if Rs. 120000/- not appeared at all and recipient going to reconcile in September next year then he can only avail 10% of the ITC appearing in such month and remaining ITC is going to be lapsed forever

ISSUES-IF RULE 36(4) FOLLOWED A TYPICAL EXAMPLE

Month	ITC appearing	ITC not appearing	ITC availed [As if, ITC availed to the extent appeared]	If Rule 36(4) followed	Balance of Unavailed ITC
July	150000	120000	150000	165000	105000
August	150000		150000	165000	90000
September	150000		150000	165000	75000
October	150000		150000	165000	60000
November	150000		150000	165000	45000
December	150000		150000	165000	30000
January	150000		150000	165000	15000
February	150000		150000	165000	0
March	150000		150000
In the above cited example if Rs. 120000/- not appeared at all and recipient going to reconcile in September next year then he can only avail 10% of the ITC appearing in such month and remaining ITC is going to be lapsed forever

ISSUES

Ineligible Credit

• Whether ITC which is required to be reversed under Rule 42/43, is ineligible credit for the purpose of Rule 36(4).

Contention against – at the time of availing credit; it is not possible to determine ineligible amount there-under, so at first instance entire ITC to be availed na d later as per Rule 42/43, to be reversed.

However, under certain circumstances, ITC is not eligible ab -. initio

OTHER ISSUES

• Recipient forced to face consequences of supplier’s default
• Amount of tax appearing in 2A as on due date of its filing – how to ascertain.
• Problem when procurements from quarterly filers. May involve working capital.
• Cumbersome Task as GSTR-2A gets updated on real-time basis.
• Deferred ITC in Books ..how to avail ..a big task. Accounting pattern has to be chang Un availed ITC required to be accounted for separately or some trail to be maintained.
• Additions in invoices in previous period/months in 2A is a big challenge to reconcile.
• External software required to quick download 2A for reconciliation.
• Supplier has filed GSTR-1 in time but reported in B2C.

OTHER ISSUES ….. Contd.

• Not Supported from GSTN common Portal
• Additional Cost to SME
• Interest implication, if excess taken but otherwise eligible U/s 16(2)
• ITC not availed upto September 2020 on account of not appearing in 2A, now in a pa rt ilr cu a case, difficult to avail.
• Input tax credit may accumulate which remains unclaimed for the multiple months.
• Uploaded Vs. Filed of GSTR-1

CONCLUSION

• Suggested that invoice wise ITC to be availed and not in terms of percentage. Keep proper record of reconciliation using some smart tools.
• Do not take 110% of the invoice added for the previous period.
• Do not tae k 110% of the invoice uploaded after due date.
• As a measure of precaution take screenshot of 2A as on due date to avoid possible litigation.