Input tax credit- New Rule 36(4) calculation -Important points

New Rule 36(4) has been inserted vide Notification no 49/2019 Central Tax dated 9-10-2019 which reads as under:

‘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.’

It simply means that those credits cannot be taken which are in excess of 20% of credit as appearing in GSTR-2A. 

For eg:

Credit appearing In GSTR-2A= 100

Credit appearing in Books= 150

Credit to be claimed in GSTR-3B after rule 36(4)= 100+20%of credit appearing in 2A= 120

Remaining credit of 30 is deferred to be taken later after applying the rule again in next month. Same can be transferred to differed GST account in current assets. 

ITC outside the purview of Rule 36(4) for calculation:

a) ITC available on the Bill of Entry against import of goods.

b) ITC available on RCM (including import of services/ 9(3), 9(4) etc)

c) Invoice issued by Input service Distributor since its credit appears In GSTR-6A.

d) Re-availment of credit under rule 37

e) re-availment of credit after year under calculation of Rule 42

f) ITC claimed through ITC-01, ITC02, TRAN-1, TRAN-2 and TRAN-3

 Practical Difficulties in implementation

a) Quarterly return filers: They will file their returns on last day of month following the quarter. Hence these invoices will auto populate in 2A of recipient after nearly 4 months. Till then such amount will be blocked in working capital cycle.

b) Ineligible Credit calculation: Calculation has to be done taking 2A as base. However 2A can have both eligible and ineligible credits. For this calculation we have to remove ineligible credits first. However from 2A itself it cannot be ascertained properly. It may require further digging in books of accounts to determine ineligible credits.

c) Exempt Supplies: ITC against inward supplies exclusively for exempt supplies will have to be calculated, application of rule 42 will have to be seen.

d) Goods in transit: If goods are in transit then condition of sec 16 doesn’t fulfil, hence its ITC cannot be claimed even if they are appearing in 2A.

e) Keeping record of B2BA: Calculation of 120% will keep changing month on month as 2A is a dynamic document as accepted by govt in circular no 123/42/2019 dt 11^th nov 2019. Since supplier has the right and option to amend invoices, ITC has to be seen carefully before applying the rule for calculation.

However above rule seems contradictory to below mentioned govt documents:

a) Press release dt 18.10.2018 “It is clarified that the furnishing of outward details in FORM GSTR-1 by the corresponding supplier(s) and the facility to view the same in FORM GSTR-2A by the recipient is in the nature of taxpayer facilitation and does not impact the ability of the taxpayer to avail ITC on self-assessment basis in consonance with the provisions of section 16 of the Act”

b) Circular 59/33/2018 dt 4/09/2018 para 2.3: ‘’It may be noted that there may be situations in which FORM GSTR-2A may not contain the details of all the invoices relating to the input tax credit availed, possibly because the supplier’s FORM GSTR-1 was delayed or not filed. In such situations, the proper officer may call for the hard copies of such invoices if he deems it necessary for the examination of the claim for refund.’’ Hence the essence is to grant refund on the basis of hard copies of invoices.

c) Section 43A of CGST Act: ‘’As per section 43A(3) for purpose of availing ITC, procedure for furnishing returns shall be prescribed. And Further as per Section 43A(4), where outward supplies are not furnished by the supplier u/s 43A(3), procedure for taking such ITC (on the basis of details not uploaded by the supplier) shall be prescribed and the procedure may include placing a maximum cap of 20% of the ITC available on the basis of details furnished by the supplier.’’

Credit restriction to be calculated Tax head wise or consolidated?

A question that is flowing persistently is that is this limit to be calculated Tax head wise i.e. IGST, CGST,SGST separately or on consolidated basis?

According to authors view the same should be calculated separately as all the taxes (acts) are passed through separate legislatures by Parliament. This new rule 36(4) has been brought separately in all Acts being IGST Act, CGST Act, SGST Act. Hence 20% rule will have to be seen head wise. This may result in further blockage of Working Capital.

Is restriction to be applied Supplier wise or on Consolidated basis?

It has been clarified in circular no 123/42/2019 dt 11^th nov 2019 that such restriction is to be applied on consolidated basis and not supplier wise. 

How to calculate availability of ITC?

According to authors view following formula can be applied for its calculation and a monthly record can be kept on a month-on-month basis. GSTR-2A will have to be downloaded since beginning as it’s a dynamic document and it keeps on changing. Thereafter following formula can be applied:

Ytd2A*(120%)(-) Ytd Books Credit

(Where YTD is year to date)

Hence credit restriction calculation can be done from 1^st April 2019 instead of 9^th Oct 2019.

Following are the authors view to support above point:

1)As per circular no 123/42/2019 dt 11^th nov 2019 point 1: It is mentioned ‘’The restriction of rule 36(4) will be applicable only on the invoices/debit notes on which credit is availed after 09.10.2019.’’

It doesn’t say that it is applicable on invoices which are dated after 9^th Oct 2019. It simply speaks that restriction will be availed on invoices on which credit is availed after 9.10.2019. However there may be an intention to restrict ITC on invoices dated after 9.10.2019, but same doesn’t seem to be articulated in words. For eg credit is availed on invoice dated 1^st August 2019 as on 20^th October 2019. Since it becomes an invoice on which credit is availed after 9^th October, restriction of rule 36(4) should be applicable on it as well.

2) The above view is also supported by point no 3 of same circular:  which says that the amount of input tax credit in respect of invoices/debit notes whose details have not been uploaded by suppliers shall not exceed 20% of eligible credit available to the recipient in respect of invoices the details of which have been uploaded by suppliers under sec 37(1) as on due date of filing of return in Form GSTR-1 of supplier for said tax period.

Hence it follows if invoice is dated lets say 1^st July 2019 is not appearing in GSTR-2A as on 9^th October 2019(Notif date) /11^th October 2019 (due date of filing return), will we ignore such invoice in above calculation? In authors view it should be considered, as language in point 3 of circular above clearly states that details not uploaded by supplier and not showing till due date of filing return under sec 37(1) which is 11^th October 2019.

3)Also in point number 4 of circular: example is mentioned. In 2^nd para illustration states as under:

‘’In the illustration, say a taxpayer ‘’R’’ receives 100 invoices (for inward supply of goods or service) involving ITC of Rs. 10 Lakhs from various suppliers during the month of Oct 2019 and has to claim ITC in his form GSTR-3B of October to be filed by 20^th Nov 2019.

Circular becomes contradictory in itself if we strictly read its applicability on those invoices which are dated after 9^th October 2019 as in above illustration itself example has been taken for the whole Oct month. It should otherwise be mentioned as ….various suppliers on or after 9^th Oct 2019….

Hence this new rule has created a storm in tax payers and tax consultants equally and will certainly increase compliance burden but will pave way for new return system yet to come from 1^st April 2020.